Westlake Chemical Partners LP (WLKP) 2021 Q1 法說會逐字稿

Good afternoon.

Thank you for standing by.

Welcome to the Westlake Chemical Partners First Quarter 2021 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, May 4, 2021.

I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer.

Sir, you may begin.

Thank you, Valerie.

Good afternoon, everyone, and welcome to the Westlake Chemical Partners First Quarter 2021 Conference Call.

I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and CFO; and other members of our management team.

During this call, we refer to ourselves as Westlake Partners or the Partnership.

References to Westlake or Westlake Chemical refer to our parent company, Westlake Chemical Corporation; and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake Chemical and the Partnership, which owns certain olefins assets.

Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners' MLP distributable cash flow.

Definitions of these terms are available on the Partnership's website.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management.

These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties.

Actual results could differ materially based upon many factors, including operating difficulties, the volume of ethylene that we are able to sell, the price at which we are able to sell ethylene, changes in the prevailing economic conditions, actual and proposed governmental regulatory actions, competitive products and pricing pressures, the COVID-19 pandemic, extreme weather events, our ability to borrow funds and access capital markets at a reasonable cost and other risk factors as discussed in our SEC filings.

This morning, Westlake Partners issued a press release with details of our first quarter 2021 financial and operating results.

This document is available in the Press Release section of our web page at wlkpartners.com.

A replay of today's call will be available beginning 2 hours after the conclusion of this call.

The replay may be accessed by dialing the following numbers: domestic callers should dial (855) 859-2056.

International callers may access the replay at (404) 537-3406.

The access code for both numbers is 3327838.

Please note that information reported on this call speaks only as of today, May 4, 2021, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our web page at wlkpartners.com.

Now I would like to turn the call over to Albert Chao.

Albert?

Thank you, Jeff.

Good afternoon, everyone.

And thank you for joining us to discuss our first quarter results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $77 million for the first quarter of 2021.

Westlake Partners' first quarter 2021 net income was $15 million or $0.43 per unit.

Ethylene production in the first quarter was impacted by the severe winter storm, and the ethylene sales agreement with Westlake Chemicals, again, this quarter provided significant benefits to our Partnership as we dealt with the unplanned production outages from the storm, supporting our earnings (inaudible).

The severe winter storm caused widespread power outages, disrupted feedstocks and utilities causing widespread industry ethylene outages, including OpCo.

I want to take this opportunity to thank our employees for their efforts, quickly responding to the disruptions caused by the severe winter storm and fully resuming operation by the end of the quarter.

The ethylene sales agreement with Westlake provides for recoveries of margins on committed production volumes and fixed costs associated with this unplanned outage.

Steve will discuss this in greater detail in just a moment.

Partners' financial results in the first quarter are a testament to the stability generated from our fixed margin ethylene sales agreement for 95% of annual planned production each year, which insulates us from market volatility and other production risks.

This certainty, combined with our investment-grade sponsor, Westlake Chemical, produces predictable earnings and stable cash flows.

I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the quarter.

Steve?

Thank you, Albert, and good afternoon, everyone.

In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $77 million on consolidated sales of $268 million for the first quarter 2021.

Westlake Partners' first quarter net income was $15 million or $0.43 per unit.

The Partnership had distributable cash flow for the quarter of $16 million or $0.46 per unit.

As Albert mentioned, provisions in the ethylene sales agreement commit Westlake to purchase and pay for a defined amount of ethylene from OpCo each calendar year, thus largely insulating us from the impact of these outages during force majeure events.

Through the protective provisions of this agreement, OpCo continues to receive a $0.10 margin per pound for ethylene volumes that would have been produced, plus production costs that were incurred, allowing OpCo and interim Westlake Partners to deliver consistent earnings during these unplanned events.

As a result of the ethylene sales agreement, net income in the first quarter of 2021 included a benefit of $10 million.

This revenue and cost recovery mechanism is an example of how our business model provides predictable earnings and cash flows, thus delivering value to our unitholders over the long term.

First quarter 2021 net income for Westlake Partners of $15 million decreased by $3 million compared to first quarter 2020 Partnership net income of $18 million.

The decrease in net income was primarily attributable to lower production that resulted from the winter storm.

Partially offsetting this decrease was higher earnings on third party sales, driven by the strong pricing environment in the ethylene market in the quarter.

Distributable cash flow of $16 million for the first quarter 2021 decreased by $2 million compared to first quarter 2020 distributable cash flow of $18 million.

The decrease in distributable cash flow was attributable to lower earnings resulting from the severe winter storm and contributions for turnaround reserves.

Turning our attention to the balance sheet and cash flows.

At the end of the first quarter, we had consolidated cash balance and cash investments with Westlake Chemical through our investment management agreement totaling $205 million.

At the end of the first quarter, Westlake Chemical had payment obligations to the Partnership of $10 million, representing margin from loss production and cost recovery due to the storm.

These payments will be received in 2022 under the terms of the ethylene sales agreement.

Long-term debt at the end of the quarter was $400 million, of which $377 million was at the Partnership and the remaining $23 million was at OpCo.

In the first quarter, OpCo spent $13 million in capital expenditures.

For the first quarter of 2021, we maintained our strong leverage metrics with a consolidated leverage ratio below 1x, and net debt-to-capitalization ratio near 15%.

Looking ahead, our planned turnaround of our Petro 2 ethylene unit will begin in September of this year and is projected to last approximately 60 days.

The cost of this turnaround has been included in the amount we charge Westlake Chemical and will be fully reserved for at the commencement of the turnaround.

The Partnership's predictable fee-based cash flow continues to be attractive attribute in today's economic environment and is differentiated by consistency of earnings and cash flows.

The structure of our ethylene sales agreement and the associated cash flows coming from this agreement allow the Partnership to continue distributions at our current level while sustaining our long-term target 1.1x distribution coverage, thus eliminating the need to access the equity capital markets.

Excluding the impact of the turnaround this year, we are expecting our full year 2021 coverage to be at this targeted level.

On May 3, 2021, we announced distributions of $0.4714 per unit with respect to the first quarter of 2021.

Since our IPO in 2014, the Partnership has made 27 consecutive quarterly distributions to our unitholders, and we have grown distribution 71% since the Partnership's original minimum quarterly distribution of $0.275.

For the 3 months ended March 31, 2021, distributable cash flow provided coverage of 1.05x the declared distribution.

First quarter's Partnership distribution will be paid on May 27, 2021, to unitholders of record of May 13, 2021.

Now I'd like to call -- turn the call back over to Albert to make some closing comments.

Albert?

Thank you, Steve.

We are pleased with the Partnership's financial performance.

The stability of our business model was well illustrated in 2021 as our ethylene sales agreement and its protective provisions provided us with the predictable earnings and cash flows despite the winter storm and associated unplanned production outages.

We remain optimistic about sustained demand for ethylene, driven by continuing downstream demand for polyethylene and PVC produced by our parent, Westlake Chemical, and continuing strong demand for ethylene to support our third-party sales.

Our ethylene sales agreement, that provides predictable fee-based cash flow structure from our take-or-pay contract with Westlake Chemical for 95% of OpCo's production, will continue to deliver stable and predictable cash flows.

We remained a strong balance sheet -- we maintained a strong balance sheet with conservative financial and leverage metrics.

As we continue to navigate market conditions, we'll evaluate opportunities via 4 levers of growth in the future, including increases of our ownership interest to OpCo; acquisitions of other qualified income streams; organic growth opportunities, such as expansions of our current ethylene facilities; and negotiations of a higher fixed margin in our ethylene sales agreement with Westlake.

We remain focused on ability to continue to provide long-term value to our unitholders.

As always, we will continue to operate safely, along with being good stewards of the environment in the communities in which we work and live.

Thank you very much for listening to our first quarter earnings call.

Now I'll turn the call back over to Jeff.

Thank you, Albert.

Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 hours after the call has ended.

We'll provide that number again at the end of the call.

Valerie, we will now take questions.

(Operator Instructions) Our first question comes from Mike Leithead of Barclays.

I guess, first question, I guess, if you look at the current unit price now over $27, obviously, much improved since you changed the distribution strategy in late 2019.

I think on an absolute price level, the last time you're sustainable here was, call it, 2015 or so.

Although I guess the yield was maybe a bit better at that time.

I guess my question is how, if at all, is your thinking on distribution growth evolving?

Or are you thinking about restarting that growth again?

Or maybe what's a few of the gating items that would need to be cleared up before restarting distribution growth?

Just any perspective there will be much appreciated.

Certainly.

So Mike, we paused distribution growth actually in early 2020.

The market really is indicating a preference really toward a value model versus a growth model.

But certainly, we'll continue to evaluate that investor interest and preference in the future and look to see what the investor is looking for.

As Albert outlined, we've got those 4 growth levers certainly available to us.

And should we see a switch back to a growth valuation -- a growth model from the valuation model, we certainly have those levers available to us to do so.

Great.

That's helpful.

And then just a quick follow-up.

For the Petro 2 turnaround this year, can you just briefly remind us how that should flow through Westlake Partners' P&L?

And so certainly, over the course of the period, we planned for this and the stated production.

And so we establish a production plan for the year.

And so there will be some loss of pounds relative to, say, a normalized year.

But we'll still get that $0.10 fixed margin and full cost recovery on the pounds that are produced over the course of 2021.

(Operator Instructions) Our next question comes from Steve Byrne of Bank of America.

I just want to say, we had a divide and conquer this morning.

So sorry, I wasn't on your earlier call, but I have a couple for you.

And maybe first up would be where your thinking is these days on whether the Partnership valuation is maybe sufficiently attractive to raise funds and transfer some of the ownership of the joint venture with Lotte, that cracker into OpCo?

So Steve, as I mentioned just a moment ago, the market really is looking more at value model than necessarily a growth-oriented model.

Certainly, the acquisition by OpCo of the ownership that Westlake has of the LACC ethylene unit, certainly is 1 of those 4 levers that we've talked about, an acquisition strategy, if you will.

And certainly, that could be one of the options to grow distributions over time, if the market moves more toward a rewarding for growth versus rewarding for value.

As you -- as Mike just mentioned a moment ago, we've seen valuations that have taken the yield to in the neighborhood of about 7%.

And certainly, as we think about the path going forward, we're certainly intentive to the investor interest and the value model or the growth model that they're interested in addressing.

We are well positioned to address either one of those given the tools and the levers that we have available to us.

And the hydrogen off gas from the crackers, just curious whether that is being used as fuel in the various furnaces?

And whether any of your ESG initiatives would lead you down the path of potentially using an electric source of heat for the furnaces or green hydrogen?

Any of those as potential implications on the operations of these crackers?

So Steve, from a Westlake Chemical perspective, certainly, we'll assess opportunities to take advantage of any of the byproducts that are available to improve the value proposition.

So if there's a higher valuation relative to the return of any investment that may be necessary to provide that higher, cleaner form of hydrogen, that certainly is our alternative.

So we're always interested in looking for ways to be more socially and environmentally friendly and at the same time, providing a good value or return to all of our investors.

Thank you.

At this time, the Q&A session has now ended.

I will now turn the call back over to Jeff Holy.

Thank you again for participating in today's call.

We hope you'll join us for our next conference call to discuss our second quarter results.

Thank you for participating in today's Westlake Chemical Partners First Quarter Earnings Conference Call.

As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 p.m.

Eastern Standard Time on Tuesday, May 11, 2021.

Replay can be accessed by calling the following numbers: domestic caller should dial (855) 859-2056.

International callers may access the replay at (404) 537-3406.

The access code is 3327838.

This concludes today's call.

Goodbye.