Q3 2020 Westlake Chemical Partners LP Earnings Call

[music].

Good afternoon. Thank you for standing by welcome to the Westlake Chemical partners third quarter 2020 earnings Conference call.

During the presentation all speakers will be all participants have been almost the only mode.

After the speakers remarks, you will be invited to participate in a question answer session.

As a reminder, this conference is being recorded today November 32020.

I'd now like to turn the call over to today's host, Jeff Holly Westlake Chemical partners, Vice President and Treasurer, Sir you may begin.

Thank you Michelle good afternoon, everyone and welcome to the Westlake Chemical partners third quarter 2020 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 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 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 were able to sell the price at which we were able to sell ethylene changes and the prevailing economic conditions actual and proposed governmental regulatory actions.

Competitive products and pricing pressures, the COVID-19 pandemic, our ability to borrow funds and access capital markets at a reasonable cost and other risk factors discussed in our SEC filings.

This morning, Westlake partners issued a press release with details of our third quarter 2020 financial and operating results. This document is available in the press release section of our web page at W. Ell K partners Dot com.

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

The replay may be accessed by dialing the following numbers domestic callers should dial eight Fivefive 8592, 056 International callers may access the replay at 4045373 406, the access code.

For both numbers is 7787568 please.

Please note that information reported on this call speaks only as of today November three 2020, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.

I would find we advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our web page at W. Okay partners Dot Com now I would like to turn the call over to Albert Chao Albert Thanks.

Thank you Jeff Good afternoon, everyone and thank you for joining us to discuss our third quarter 2020 results.

The third quarter had a strong start with solid production across our plants and operating rates similar to those of the same period in 2019.

This production was anchored by strong demand pool from Westlake, Downstreams vinyls and ollie's imports.

Stemming from sales and pricing recovering from the call. It 19 pandemic Lockdowns dead weight on the first and second quarter of this year.

On August 27, southwest, Louisiana was severely impacted by hurricane Laura well, the strongest hurricanes to hit to the Gulf coast in over 40 years, which resulting see they've been damage to the power and utility infrastructure in the region.

In anticipation of the storm, we idled facilities in the area prior to the Hurricanes landfill.

While we sustain a minimum damage to our facilities in lake Charles the lack of access to electrical power and other utilities cost optical to remain idle and declared force majeure.

Well. This is Paul is stored began to process all restarting operations.

I had just begun to produce ethylene when the threat of American Delta cost us to idle facilities. Once again in early October.

In mid October, but you wouldn't begin to restart as Paul what utilities became available and.

And Petro two has also recently we started operations.

I would just say especial. Thank you to our dedicated employees, who help restarts. These plants, while many were dealing with the impact of the stones to their own homes.

Due to provisions in now exiting sales agreement.

Westlake is committed to purchase and pay for a minimal amount of ethylene from opco each calendar year.

Does well insulated from the impacts of these outages do into force majeure.

Through this commitment.

Apco continues to receive a 10 cents margin per pound ethylene volumes that would have been produced plus production cost stead. Okay.

Along optical adding turn Westwicke partners to maintain consistent cash flows doing these unplanned events.

This is another example of how our long term fundamentals and thesis remains strong.

Turning to our financials in this mornings press release, we reported consolidated net income, including Opcos earnings of $32 million for the third quarter of 2020.

Westlake Partners' third quarter net income was $19 million.

These solid financial results.

Testament to the stability generated from our fixed margin ethylene sales agreement for 95% of annual planned production, each year, which insulates us from commodity price volatility.

This this certainty combined with our investment grade rated sponsor Westlake chemical producers predictable earnings and 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 third quarter Steve.

Thank you Robert and good afternoon, everyone in.

In this mornings press release, we reported consolidated net income, including Opcos earnings of $92 million on consolidated sales of $232 million for the third quarter of 2020.

Westlake Partners' third quarter 2020, net income was $19 million or 53 cents per unit.

The partnership had distributable cash flow for the quarter of $21 million or 60 cents per unit.

Third quarter 2020, net income for Westlake partners of $19 million increased by $4 million compared to third quarter 2019 partnership net income of $15 million. The increase in net income was primarily attributable to higher earnings on production sold and committed to Westlake, which included the benefit of 41.

Million dollar payment related to the loss production that would have been sold to Westlake had the force majeure event not occurred.

The in the increase was partially offset by lower third party sales volumes.

Distributable cash flow of $21 million for the third quarter of 2020 increased by $1 million compared to the third quarter of 2000, Nineteens distributable cash flow of $20 million in.

The increase in distributable cash flow was attributable to higher earnings on production sold and committed to Westlake and reduced interest expense for the quarter, partially offset by increased maintenance expense and higher turnaround reserves.

The partnerships third quarter 2020, net income of $19 million increase by $4 million from the second quarter of 2020.

Third quarter 2020, distributable cash flow of $21 million increased $4 million from second quarter, 2020, distributable cash flow of $17 million.

These increases were primarily due to the lost production payment.

Resulting from the forest mature at Opto and lower interest expense.

For the first nine months of 2020 net income for the partnership of $51 million increased $7 million in the first nine months of 2000 1919 net income the partnership of $44 million.

LP distributable cash flow of $56 million increased $2 million from the first nine months of 2019, MLP distributable cash flow of $54 million.

The increase net income attributable to the partnership was primarily due to the loss production payment, resulting from the force majeure at Opco and lower interest expense.

Turning our attention to the balance sheet and cash flows at the end of the third quarter, we had a consolidated cash balance of $23 million in cash invested with Westlake chemical through our investment management agreement of $191 million.

$191 million in cash invested through the investment management agreement.

Includes cash generated from operations throughout the quarter as well as the reserve for turnaround expenditures.

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

For the third quarter of 2020, Opco spent $9 million in capital expenditures.

For the third quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below one times and a net debt to capitalization ratio below 20%.

As we previously discussed the turnaround at our Petro two ethylene unit was originally scheduled to occur this year due to the continuing strong performance of Petro two and in order to reduce COVID-19 risk to our employees and contractors. The turnaround was deferred until the first half of 2021.

We are continuing to finalize their plan for the turnaround that will provide further details later on on the timing of the turnaround for the Petro two cracker.

The cost of this turnaround has been included in the amount charged to Westlake chemical for ethylene and expect to be fully reserved at the time of the commencement of the turnaround.

The partnership's predictable fee based cash flow continues to be an attractive attribute in today's economic environment.

Given the consistency of our earnings and cash flows combined with the continued market uncertainty we have kept our distribution consistent with the prior quarter.

Our cash flow will allow the partnership to continue distributions at our current level, while sustaining our long term target of 1.1 times distribution coverage, thus eliminating the need to access the equity capital markets.

We will evaluate market conditions in future quarters, and assess when and how we apply our four growth levers.

On October Thirtyth 2020, we announced distributions of 47 point 14 cents per unit with respect to the third quarter of 2020.

An increase of approximately 101.5% over the third quarter 2019.

Since our IPO in 2014, the partnership has made 25 consecutive quarter Weve distributions to unitholders, we have grown distributions, 71% since the partnership's original minimum quarterly distribution of 27 and a half cents.

For the 12 months ending September Thirtyth 2020, distributable cash flow provided coverage of 1.13 times the declared distributions. The third quarter's partnership distribution will be paid on November 24th 2020 to unit holders of record of November nine 2020.

Like to turn the call back over to Albert to make some closing comments Albert.

Thank you Steve well.

Were pleased with the partnership's solid financial performance.

The stability of our business model was illustrated in the third quarter EPS.

Getting sales agreement and its protective provisions provided us with a predictable earnings and cash flows despite hurricanes and associated unplanned outages.

The solid demand for ethylene derivatives, such as polyethylene and PVC that we observed via our parent Westlake chemical.

Continues to provide us the confidence that the predictable fee based cash flow structure from a take or pay contract with Westlake chemical.

95% up coast production will continue to provide the stable and predictable cash flows.

This ratable cash flow, which as this quarter demonstrated.

Insulated from production risks and therefore should be even more attractive investment thesis in today's uncertain and volatile economic environment.

Especially in the face of near historically low interest rates.

As Steve outlined how predictable cash flow.

Provides an ability to sustain all existing distribution.

Without relying on external sources of capital.

Thus, providing us greater flexibility in this environment and in the future.

The investment thesis all solid underlying value could not be more clear given our performance in the quarter.

We believe these strong financial attributes should be with better reflected in the market.

We have maintained a strong balance sheet, most conservative financial and leverage metrics.

As we continue to navigate these market conditions and prepare for a return to normalized market.

We will evaluate opportunities.

Four levers of growth in the future, including to increases of ownership interest of Opco acquisitions of other qualified income streams.

Any growth opportunities such as extensions of our current exiting facilities.

And negotiation of a higher fixed margin exiting sales agreement with Westlake.

EPS markets normalize and withdraws utilization of a full service. We believe we have the ability to continue to provide long term value to our unit holders.

As always.

We will continue to operate safely allow with being good stewards of the environment and the communities, which we live and work.

Thank you very much for listening to our third quarter 2012 earnings call no.

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 starting today at four PM Eastern time.

Michelle we will now take questions.

Ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchtone telephone.

If you would like to remove yourself from the queue you May press the pound key.

Again, Thats star one to ask a question.

Our first question comes from Mike Whitehead of Barclays. Your line is open.

Great. Thanks, and good afternoon guys.

Yes, our break between calls this quarter.

First I wanted to dig in a little bit more in terms of how you're thinking about your distribution policy and what it would take to possibly restart growing that again.

Is it more a function of where Westlake partners is currently trading.

How do you think about your growth versus kind of what peers are doing or in terms of equity market activity I guess, how do you kind of weigh the decision to keep it Steve.

Stable versus potentially growing it over time today.

Mike It's a good question. If you look at our current yield you can see that we are at top tier yielder in this space and we think that that valuation should be better reflected in unit price. When you think of the peer sets of those companies that we think we benchmark against very well structured partnerships at pro.

Wide stability of earnings and cash flows.

And to be able to grow this we feel like we need a valuation that makes more sense in this current low interest rate environment.

Got it that makes sense.

Then maybe bigger picture, we've seen a lot of volatility over the past six months, whether its MLP market Westlake partners unit price or ethylene margins.

I think you talked about in the call the cash flow profile of WL Kb has remained remarkably consistent so I guess kind of where we sit today.

That change at all how you view the LP as part of Westlake overall strategy.

Or maybe does it possibly reinforce what do you think the investment case is for potential unit holders.

I think the the stability of earnings and predictability of the cash flows I think is a hallmark for those at one a stable income stream in a predictable earnings.

Cash flow vehicle.

And who provide a predictable the ability to get a return on that investment that they've made.

When you think of the importance I think of an ability to integrate Westlake partners with Westlake Chemical I think your strategy are highly aligned and I think Westlake chemical continues to believe it makes good sense, where that aligned strategy and as long as we can execute on our strategies together. It makes good sense I think to keep these entities in there.

Place and growing as the market permits.

Great. Thank you.

Yeah.

Our next question comes from Matthew Blair of Tudor Pickering Holt Your line is open.

Hey, good morning, Albert and Steve.

Matthew.

So I appreciate the ability of.

Let's say golpu structure.

I was hoping you could help us understand how opco EBITDA was actually up quarter over quarter. Despite the downtime.

Was that the case, where you were down so you're saving on some op costs, but then you still receive that 41 million take or pay.

Revenue from.

From Westlake C Corp.

Yes, so it's a little bit of a convoluted story, but obviously during the period of the outage.

We saw some.

All right I guess I would say during the quarter. The maintenance expense was was much smaller than normal and so certainly as you know that 41 million dollar buyer deficiency fee allows us to recoup Oliver.

On avoided.

Operating cost during the period of the outage as well as recovery of that Tencent margin on the production that is lost.

When you put those pieces together thats what provides the very small uptick in results.

Okay, and then do we need to be on the lookout for a reversal of that in the coming quarters.

No those those circumstances shouldn't reverse in that context, you know as I said will we still are operating under a force majeure today and so as we look forward you know as as we've said in our prepared remarks the structure of the ethylene sales agreement provides an incredible stability of incur.

And cash flows and I think it illustrates given this quarter and as we look forward to the future stability and predictability Weve had other unplanned outages in the past and you've seen that we've been able to deal with those similar fashion.

Okay, and then last question.

Could you talk about the ethylene spot sales in Q3, and so forth so far in Q4.

I think you mentioned in the prepared comments that there were lower but but did you still have spot sales Despite force mizher.

We did we had we did have spot sales in the in the quarter and were able to deliver the ethylene accordingly.

Great. Thank you.

You're welcome.

At this time, the Q and a session has now ended I will turn the call back over to Jeff Holly.

Thank you again for participating in today's call. We hope you will join US for our next conference call to discuss our fourth quarter and full year 2020 of results.

Thank you for participating in today's Westlake Chemical partners third quarter earnings Conference call. As a reminder, this call will be available for replay beginning two hours. After the call has ended.

The replay can be accessed by calling the following numbers domestic callers should dial 85589.

Five six international callers may access the replay at forwards will for 5.7340 snakes. The access code is 7787568.

This will conclude today's call.

[music].