Q3 2019 Earnings Call

Ladies and gentlemen, please stand by your conference call will begin momentarily once again, ladies and gentlemen, thank you for your patience simply standby.

Listen only mode.

After the speaker's remarks, you will be invited to participate in a question and answer session. As reminder, this conference is being recorded today November 15, 2019, I would now like to turn the call over to todays host Jeff Holly Westlake.

Cool partners, Vice President and Treasurer Sir.

Again.

Thank you Michelle good morning, everyone and welcome to the Westlake Chemical partners third quarter 2019 conference call.

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

The conference call will begin with Albert who will open with a few comments regarding Westlake chemical partners performance in the third quarter as well as the current outlook on our strategy and opportunities.

Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and then we'll open the call up to question.

During this call we refer to ourselves as Westlake partners for the partnership references to Westlake or Westlake chemical referred 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're 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 the assumptions made by an 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 were able to sell the price at which we were able to sell ethylene changes in the prevailing economic conditions actual and proposed governmental regulatory actions.

Competitive products and pricing pressures, our ability to borrow funds that access capital markets and other risk factors discussed in or FCC filings.

This morning, Westlake partners issued a press release with details of our third quarter financial and operating results. This document is available in the press release section Upper web page at W. Ell K partners Dotcom.

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

The replay may be accessed by going to following numbers domestic callers should dial 8558, Fivenine to 056 International callers may access the replay at 4045373 406.

The access code as 9764456.

Please note that information reported on this call speaks only as of today November Fiveth 2019, and therefore, you're advised that time sensitive information may no longer be accurate as the time of any replay.

I would finally advise you that this conference call is being broadcast live through an internet webcast system that may be accessed honor web page at W. Okay partners Dot com.

Now I'd like to turn the call over to Albert Chao Albert Thank.

Thank you, Jeff Good morning, ladies and gentlemen, and thank you for joining us discuss our third quarter 2019 results.

In this mornings press release.

Reported consolidated net income including of course earnings of $82 million for the third quarter of 2019.

Westlake partners third quarter net income was $15 million.

The third quarter of 2019, we achieved strong financial performance and strong production volumes compared to the same period in the previous year.

These financial results well attributable to acquisitions on an incremental 4.5% interest I'll go into the partnership in the first quarter of this year.

We continue to evaluate all opportunities available to us.

Including growth through acquisition and margin expansion.

As a means to further grow our cash flows and continue to create value for unitholders.

We had excellent ethylene production this quarter.

Which drove our strong results.

We have demonstrated a sustained five year record outgrowing, our distributable cash flows provided historical 12% annual distribution growth, while delivering exceptional stable cash flows.

These cash flows are insulated from commodity price risk.

Sales agreement with our investment grade rated sponsor Westlake chemical.

Which we said it's incentive distribution rights withheld compensation.

In 2018.

Demonstrating excellent governance and the strategic alignment.

On October 31st 29 team.

We announced distributions of 46.46 cents per unit.

With respect to the third quarter of 29 team.

This represents a 6% annualized increase as compared to the second quarter 2019 distribution.

This is the 19th consecutive quarterly increase distributions to our unit holders and an increase of 69% over the partnership's minimum quarterly distribution.

For the 12 months ending September 30 is 29 team.

Distributable cash flow provided coverage of 1.11 times the declared distributions.

We intend to retain a sustainable top tier distribution growth rate to unit holders doesn't reflect underlying value of our business.

This top tier distribution growth rate will reduce our reliance on the equity capital market.

Got it aligns distributions grows to current market conditions and reduced unit holder dilution and extend the dropdown runway.

Before I turn the call with the Steve I would note that this distribution strategy provides us the ongoing flex flexibility for re evaluating all distribution growth rate should the MLP equity markets improve.

I would now like to turn our coal with the Steve provides more detail on the financial and operating results for the third quarter, Steve. Thank you Albert and good morning, everyone.

In this mornings press release, we reported consolidated net income, including Opcos earnings of $82 million on consolidated sales of 217 million for the third quarter 2019.

Westlake partners third quarter 2019, net income was $15 million or 42 cents per limited partner unit.

The partnership had distributable cash flow for the quarter of $20 million for 58 cents per limited partner unit.

Third quarter 2019, net income for Westlake partners, a $15 million increased by 3 million compared to third quarter 2018 partnership net income of $12 million.

Distributable cash flow of $20 million for the third quarter of 2019 increased 5 million.

Third quarter of 2018 distributable cash flow.

The increase net income and distributable cash flow was primarily due to the 4.5% increase in ownership interest in apco.

The partnership's third quarter 2019, net income of $50 million increased 1 million dollar from second quarter 2019, net income of 14 million, while third quarter 2019, distributable cash flow of $20 million increased 4 million from second quarter 2019, distributable cash flow of 16 million.

The increased net income and distributable cash flow for the third quarter was driven by a record quarterly ethylene production at Apco and lower SGN a expense.

For the nine months of 2019 net income for the partnership of $44 million increased 6 million from the first nine months of 2018 net income to the partnership of 38 billion.

Distributable cash flow a $54 million increased 8 million. The first nine months of 2018 distributable cash flow of $46 million.

The increases in net income and distributable cash flow word primarily due to the 4.5% increase in ownership interest of Opco.

And higher production of Opco, partially offset by the timing of maintenance capital expenditures onetime costs associated with the acquisition of an incremental interest in opco.

The benefit from the long term ethylene sales agreement with our sponsor Westlake chemical.

Who is short ethylene for their derivative production is a stable fee based cash flow to the partnership.

Let's take or pay agreement is 95% of our ethylene sales and protects the partnership's cash flow from the margin volatility that can be associated with the ethylene business.

The sales agreement, which is structured to generate a net margin of 10 cents per pound of ethylene to the partnership along with the take or pay provisions with Westlake chemical Incentivizes us to continue to look for opportunities to increase capacity and operating rates.

Turning our attention to the balance sheet in cash flows at the end of the third quarter, we've consolidated cash balance of $19 million from cash invested with Westlake chemical to our investment management agreement of $165 million.

And 165 million in cash invested through the investment management agreement includes cash generated from operations throughout the quarter and the reserve for turnaround expenditures.

Our next turn around is that our Petro two facility in Lake Charles Louisiana, which is currently scheduled for the second half of 2020.

I will give more specifics on the duration of the turnaround once we finalize our turnaround planning.

Long term debt at the end of the quarter was 400 million Dollarss of which 377 million was that the partnership and 23 was at Apco.

For the third quarter, 2019, Opco spent $6 million and capital expenditures.

For the third quarter 2019, we maintained strong leverage metrics with a consolidated leverage ratio between one although one times and a net debt to capitalization ratio below 20%.

On October 31, 2019, we declared a quarterly distribution to unitholders of 46.46 cents per unit. This was our 19th consecutive increase in quarterly distributions to unitholders.

This distribution we paid on November 26, 2019 to unit record to unit holders of record on November 12 2019.

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

Thank you Steve this quarter, we marked the fifth anniversary although IPO.

I'll take this time to reflect on the significant progress.

Partnership has made over the past five years.

We have provided is sustained and consistent distributable cash flow growth.

The cost of exceptionally stable earnings, although business, which are insulated from commodity risks due to the long term contractual arrangement and strategic alignment with our sponsor Westlake chemical.

Furthermore, we have continued to maintaining a strong balance sheet was conservative conservative funding show and leverage metrics.

We will continue to the top tier distribution growth strategy.

Through this alignment we will reduce unit holder dilution.

Further bolster our strong balance sheet and align with Cowen market conditions to deliver long term value to our unit holders.

Additionally, we continue to benefit from the stable fee based cash flow generated by the fixed margin take or pay exiting sales agreement with investment grade rated Westlake chemical our sponsor.

Along with a full leave us of growth, including organic expansions of our current ethylene facilities.

Continuation of periodic dropdowns optical into the MLP.

Acquisitions of other qualified income streams, either directly or jointly with our sponsor Westlake chemical.

And negotiating a higher fixed margin, it's something sales agreement with Westlake.

As an example of generic acquisition opportunity is Westlake interesting is 2.2 billion pounds ethylene cracker joint venture with allotted chemicals.

Which recently started up.

Were continuing to evaluate how this asset could be mutually beneficial to both Westlake chemical and Westwicke partners as well as the pot all day long term growth strategy for the ownership of the assets.

All of these libors coupal, but opportunities to continue to grow our distributions to unit holders.

Thank you very much flow listening to our third quarter 2019 earnings call.

Now I'll turn the call back over to Jeff. Thank you Albert before we begin taking questions I'd like to remind you that a replay of this teleconference will be available starting today at two PM Eastern time.

We will provide that number again at the end of the call. Please be aware that we have posted a presentation outlining our distribution philosophy, which is available on our partnership web site at W., Okay partners Dotcom, Michelle we will now take questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your telecom.

A question has been answered your question I Love yourself from the Q. Please.

Hi.

And any background noise, we ask that you. Please please your line on mute once your question has been stated.

Our first question comes from the line of Mike.

Your line is open. Please go ahead.

Thanks, and good afternoon now fellas.

I guess.

First could you just walk us through decision to reduce the distribution growth rate. This quarter, obviously the distribution yield today is much higher than maybe where it was three or four years ago and I agree you don't want to keep issuing new equity at evaluation that would be more dilutive. So I guess, how do you think about the current yield.

Versus distribution growth in today's capital environment, and really it into the day, how to optimize value for unit holders.

Mike with the adjustment in our distribution growth strategy. It reflects market conditions and as we noted we intend to retain as sustainable top tier distribution growth rate, which reduces our reliance on the equity capital markets and I think aligns well with.

The approach that we've taken.

I think given the balance sheet that we have any stable income stream that we have I think that we can continue to work on executing on those four levers that Albert just spoke to.

Got it Thats helpful and you talked about.

Westlake speak now in the low to Crocker cracker.

As a potential inorganic growth opportunity could you just talked about maybe how such transaction would potentially mechanically work does that get purchased and to the existing opco structure or would you need to set up a new ethylene sales agreement.

How that would work and I guess, how do you think about the relative attractiveness of such a transaction versus further opco purchases.

There are variety of ways to think about it but I think the most simplest way to consider it would be to provide the same stability that we have around the existing ethylene capacity that we have an opco.

And so in ethylene agreement that would provide that same degree of stability that we enjoy today would be structured.

And that would allow the westlake chemical to contribute that into a vehicle that would provide that ethylene offtake agreement with the same stability and therefore provide the master limited partnership the ability to benefit from those earning streams in the same way in which they are benefiting for.

Some opcos cash flow streams today.

Got it okay. Thank you.

Welcome.

Operator, we're ready for the next question. Thank you and our next question comes from the line.

Generic.

Your line is open. Please go ahead.

Hi, Good morning guide for.

Point.

Just wanted to sort of Scott.

The thought process on a go forward, but I appreciate you sort of answered the question different way.

Sure.

Question Mike.

I think about lower distribution growth rate.

Expectation or.

For.

Turning to equity on.

How do we think well.

Yes.

Assets too.

For me.

Do you do them on a smaller more frequent.

Four basis that we use.

Able to optimize the retain distributable cash flow.

Yes.

Okay.

Wondering how you're thinking about optimized.

Sure.

Requirement.

Im trying to.

Okay.

Yes, well the approach that you outlined is certainly one of the alternatives and that being smaller transactions.

That could be more frequent or transaction size to meet market conditions engineer a lot of this is a function of the shape of the market and the size the market at the time, but given the fact that we have significant flexibility with the levers that we have available to us we have the flexibility to really come.

Sidor, which approach and the timing of that approach to address the ability to reward those unit holders with growth while at the same time, adjusting the lever and the timing of that to meet market conditions.

Okay.

Talk about.

Great.

Yes.

Sure.

Ballpark.

Okay.

Right.

Okay.

Sure.

Yes, you are cutting out.

Cutting out a little bit its little bit hard could I get you to restate that again sorry.

The question.

As far as a top tier distribution growth rate.

A lot of top tier growth rates have been reset recently, so I was wondering which group of peers, you're looking at at this point right now as to how we should think about a growth rate that you would be targeting on a go forward based.

No you're right, you're absolutely right and so as we took a look at some of those that are growing at.

Mid double digits, we recognize that in this environment that's challenging for them.

And so I think if you take a look at our approach here. It is to be in that top tier and you're right. There are number that I believe are going to have too.

Think about their growth rates given the conditions in the market. So we want to beep.

We'll benchmark against those that are have the same kind of metrics that we have and that is stability and the capacity to grow that stability of earnings over time and there are a number of participants in the market that don't have the degree of stability or the ability to provide that stability over a very extended period of time.

And Thats the peer said that we're kind of looking at in being able to.

Continue to deliver that top tier growth rate.

That makes perfect sense. Thank you very much.

Thank you Shneur.

Thank you and our next question comes from the line of Matthew player with Tudor Pickering. Your line is open. Please go ahead.

Hey, good morning, Albert and Steve.

Good morning.

Given the low leverage ratio at the higher equity yield and the lower distribution growth going forward would you think about funding drops entirely with debt.

In the short term and remove this.

I guess is equity market overhang.

<unk>.

Well Matthew as you've seen we look at all funding mechanisms available to us and we've undertaken those transactions in the past. If you go back to 15, that's that is how we undertook but what we're trying to do is also address the.

I think the the float as you well recognize the float in the marketplace is not as broad as we would like it. So does a balancing act to provide both the growth in earnings growth and distributions as well as the growth in available units in the marketplace, but we look at all those as considerations when we think about how we fund transactions.

Sounds good and then Steve I think you mentioned that the crackers.

Produced record ethylene in the quarter right I feel like the Q2 volumes were relatively strong as well because just hoping you could you provide any sort of numbers on how much volumes improved quarter over quarter.

And would you expect similar rate in Q4.

Well.

The units continue to perform very well and so when you think of the the relative performance that we had you're right. They did as I say they did perform very very well over the course of the quarter and so they they produced.

Between two and 3% more ethylene sequentially from Twoq to Threeq you.

Thats the reason for the very strong performance. This was a record third quarter production performance by the three production units.

Did you can continue that into Q4 would there be just like natural seasonality that would pull production down in Q4, it's not seasonality alloburn. It is just mechanical integrity and making sure the plants running well and of course temperature has a lot to do with how well the units front as well so long as we have cool weather it will help the units performed.

Great. Thank you very much you're welcome.

Thank you and our next question comes from the line up.

With Citi. Your line is open. Please go ahead.

Hi, Good morning, good morning Air quality.

So I wanted to get some historical context on the Petro to turn around I think the last time was back in first quarter of 13 for 75 days, what was the impact to earnings or cost associated with that turnaround.

You're right. It did turn around 2013, I'm gonna have to go back and take a look in terms of the number of days, but we didn't give a specific earnings number to that just numbers of days and as we think about the upcoming turnaround. We have four we plan for 2020 will be more specific once we finalize the timing.

Of the outage and the number of days.

And but we'll we'll be able to give more clarity as we finish our planning for that.

Okay, Secondly, integrated ethylene margins for higher at the time at the Westlake partners IPO would it be accurate and saying parent Westlake chemical whatnot offer the same 10 cents per pound fixed margin and a new contract with the incremental okay dropdown.

We looked at not just the ethylene margins at the time in 2014, but we actually went back and looked at a much much longer time period.

I believe it was over 20 years and so we look at what the ethylene margins could be sustained for a long period of time and not just what they were at that point in time. So we'd want to provide the same degree of clarity and sustainability of margins as we have for any new as we are.

Finally for any new ethylene assets contributed.

So we are more accurate.

Yes, we were comfortable them, but that 10 cents.

Thank you.

Okay.

Thank you and our next question comes from the line of.

Bank of America. Your line is open. Please go ahead.

Hi, Steve or there are couple.

Questions on this I just wanted to know what was the last time that ethylene margins got even close to that Tencent fixed margin too.

To the partnership.

Well remember for the partnership it is a net margins. So it it is fixed for the partnerships. So thats the beauty of the ethylene.

Sales agreement that all cost.

Including turnaround costs are reimbursed and so therefore, the partnership is not exposed to the volatility of the earnings.

From the ethylene unit that risk is is really carry by Westlake Chemical Corporation not by the partnership the only risk that remains to the partnership is that small 5%.

Attributable to those pounds sold in the market.

I'm, sorry, I wasn't more clear I really meant the risks to Westlake chemical does that that tencent sufficiently.

Give you a sufficient margin.

To to Westlake chemical.

The integrated margin when we think true.

The integration from ethylene all throughout a product such as polyethylene has been in excess of 10 cents over a sustained period of time going back. Many years. So we're comfortable with that 10 cents sustained margin on an integrated basis, and providing that 10 cents ethylene margin to the partnership.

And then one more for you about feedstock if propane gets attractive and you can you can shift your feedstock order propane you get less ethylene out of that is.

Net negative for the partnership.

Yes that remember the the partnership is operating the ethylene units and so it is designed to make sure that we're maximizing production and I in my earlier comments I mentioned that as we switch over feedstocks on a sustained basis. It would only because we would de rate the ethylene units from.

And because there is integrated margin downstream and we'd want to do that only if there was a same benefit we haven't seen that at this stage and frankly, Steve I think that given the benefits that we see an ethane I think thats not a high probability at all.

Okay. Thank you.

Welcome.

Thank you and at this time.

Hey session has now ended I will now turn the call back over to Jeff.

Thank you again for participating in today's call. We hope you'll join US for our next conference call to discuss our fourth quarter and full year results.

Thank you for participating in todays Westlake Chemical partners third quarter earnings conference call as reminders. This call will be available for replay beginning two hours after the call head and at the replay can be accessed by calling the following numbers.

Callers should dial eight five.

9056 International callers may access the replay at.

For 3734.

Access code Ed.

Having sex or 456, this will conclude today's call.