Q2 2021 Westlake Chemical Partners LP Earnings Call

Thank you for standing by welcome to the West like Chemical Partners second quarter 2021 earnings conference call. During the presentation, all participants will be in a listen only mode.

The speakers remarks, you will be invited to participate in a question answer session. As a reminder, this conference is being recorded today August 3rd 2021, I would 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 Tamika and good afternoon, everyone and welcome to the Westlake Chemical partners second quarter 2021 conference call.

Im joined today by Albert Chao, our President and CEO, Steve Bender, Our senior Vice President and Chief Financial Officer, 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.

Orphan 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're 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 conditions, our ability to borrow funds and access capital markets at a reasonable cost and other.

Our risk factors as discussed in our SEC filings.

This morning, Westlake partners issued a press release with details of our second quarter 2021 financial and operating results. This document is available in the press release section of our webpage at W. L K partners Dot com.

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

This replay may be accessed by dialing the following numbers domestic callers should dial 855.850 92056.

International callers may access the replay at 4045373406, the access code is 3216579.

Please note that information reported on this call speaks only as of today August 3.2021, and therefore, you're advised that time sensitive information may no longer be accurate at the time of any replay.

I would finally advise you that this teleconference is being broadcast live through an internet webcast system that can be accessed on our webpage at W. L. K partners Dot 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 second quarter 2021 results.

In this morning's press release.

<unk> Westlake partners second quarter 2021, net income was a record of $25 million or <unk> 71 per unit.

Ethylene production in the second quarter was strong contributing to optical its record quarterly net income of $120 million.

During the quarter, we saw a strong demand for a very broad range of ethylene derivatives.

As a result of the current economic recovery and expansion.

The strong ethylene derivative demand drove ethylene prices higher in the second quarter benefiting our third party sales.

On June 20, <unk> 2021 optical at Petro 1 facility.

He was an unplanned outage.

We resumed normal operations on July 19th.

As a result of this unplanned outage.

Opco declared force majeure under Arco's ethylene sales agreement.

Pursuant to the ethylene sales agreement Westlake is obligated to purchase and pay for a minimum amount of ethylene from optical each calendar year.

Thus, we are insulated from impact of such outages.

Under this agreement, let's say chemicals ethylene purchase obligation.

Fueling cost plus fixed margin per pound.

These protected positions allow optical and he turned Westlake partners to maintain consistent cash flows doing unplanned events.

Let's make partners financial results from the second quarter continued to demonstrate the stability and generated from our fixed margin ethylene sales agreement with <unk>.

95% of annual planned production each year.

It does include us.

Insulating 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 the 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 Westlake partners second quarter net income on the $25 million or <unk> 71 per unit.

Consolidated net income, including <unk> earnings was $120 million on consolidated sales of $322 million.

The partner had distributable cash flow for the quarter of $26 million or <unk> 73 per unit.

As Albert mentioned the provisions of the ethylene sales agreement commit Westlake to purchase and pay for a defined amount of ethylene from opco each calendar year, thus insulating us from the impacts of unplanned outages, resulting in force majeure events.

We recognized $9 million in the second quarter associated with lost production.

These provisions enable up to and in turn Westlake partners to deliver consistent earnings during these unplanned events.

As the unplanned outage was primarily impacting third quarter production, we expect to continue to recover costs. Most production pursuant to our ethylene sales agreement during the balance of the year.

Record second quarter 2021, net income for Westlake partners of $25 million increased by $10 million compared to second quarter 2020 partnership net income of $15 million.

The increase in net income primarily attributable to higher production and higher earnings on third party sales as well as the buyer deficiency related to year to date, most definitely on production.

Distributable cash flow of $26 million for the second quarter of 2021 increased by $9 million compared to the second quarter of 2020 distributable cash flow of $17 million.

The increase in distributable cash flow was attributable to higher earnings at <unk>, resulting from increased production and the buyer a deficiency fee.

Partially offsetting these increases were increased maintenance cost and contribution to the turnaround reserves.

For the 6 months of 2021 net income for the partnership of $40 million increased 7 million from the first 6 months of 2020 net income for the partnership of $33 million.

MLP distributable cash flow of $42 million for the first 6 months from 2021 increased $7 million from the first 6 months of 2020, MLP distributable cash flow of $35 million.

The increases in net income and MLP distributable cash flow were primarily due to higher earnings on ethylene sold to Westlake chemical and third parties from Opco and the buyer deficiency fee, partially offset by lower ethylene production from unplanned outages.

Turning your attention to the balance sheet and cash flows at the end of the second quarter, we had consolidated cash balance and cash invested with Westlake chemical through our investment management agreement totaling $240 million.

At the end of the second quarter, Westlake chemical had payment obligations to the partnership of $18 million, representing the buyer deficiency fee from loss production and cost recovery.

These payment obligations will be received from 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 that up COVID-19.

In the second quarter, Opco spent $15 million on capital expenditures.

For the second quarter of 2021, we maintained our strong leverage metrics with a consolidated leverage ratio of approximately 1 times net debt to capitalization ratio of nearly 12%.

Looking ahead, the planned turnaround of our Petro 2 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 and commencement of the turnaround.

The partnership's predictable fee based cash flow continues to prove very beneficial in today's economic environment is differentiated by the consistency of our earnings and cash flows.

The structure of ethylene ethylene sales agreement and the associated cash flow allows the partnership to continue distributions at our current level, while sustaining our long term targeted 1.1 times distribution coverage, thus eliminating the need to access equity capital markets.

Looking back over the past 7 years since our IPO, we've maintained a conservative coverage ratio above this targeted level.

On August <unk>, 2000, 2021, we announced distributions of $47 <unk> per unit with respect to the second quarter.

Since our IPO in 2014, the partnership has made 28 consecutive quarterly distributions to our unit holders and we have grown distributions, 71% since the partners original minimum quarterly distribution of $27.05 per unit.

For the 12 months ending June 32021, distributable cash flow provided coverage of 1.8 times the declared distributions.

Second quarter's partnership distribution will be paid on August 26, 2021 to unit record holders of August 12.2021.

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

Thank you Steve we.

We are pleased with the partnership's financial and operational performance.

The stability of our business model was well illustrated in the first half of 2021 is on.

<unk> sales agreement and its protective provisions provided the partnership with predictable long term earnings and cash flows despite in 14 events and associated production outages.

We remain optimistic about sustained demand for ethylene driven by continue downstream derivative needs by on parent Westlake chemical as well as strong market demand for ethylene support our third party sales.

Our ethylene sales agreement, which provides a predictable fee based cash flow structure.

From a take or pay contract with Westlake chemical for 95% of <unk> production.

We will continue to deliver stable and predictable cash flows.

This further proves our thesis on the underlying value of the partnership.

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

As we continue to navigate market conditions, we will evaluate opportunities via our 4 levers of growth in the future including increases on the ownership interest of Opco.

Acquisitions of other qualified income streams.

Organic growth opportunities such as expansions of our current ethylene facilities.

And negotiations, although a higher fixed margin ethylene sales agreement with Westlake.

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

As always we.

We will continue to operate safely.

Along with being good stewards of the environment, where we work and live.

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

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

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 will provide that number again at the end of the call.

We will now take questions.

Thank you at this time, if you would like to ask a question. Please press star 1 on your telephone keypad.

Again, if you want to ask a question. Please press star 1.

Your first question is from the line of Mike <unk> with Barclays.

Great. Thanks, Good afternoon, I guess.

First question, if you look at the W. L. K P unit price, it's much improved over the past year, but its cash sort of held fairly steady around 27, and when I think about further price improvement from here. It's really a question of either the yields going down or distribution growth restarting again.

So I guess when you look at the market and talk to investors, what's your latest thoughts on on that value versus growth model.

On that you think can ultimately drive the unit price higher going forward.

As we think about the levers that average just outlined the 4 growth levers those are readily available to us and we can access and use those levers as the market provides the opportunity to do so.

And when I say that we really are focused in demonstrating the value proposition that you see the partnership being able to deliver.

But also looking for ways in which we get rewarded for those growth levers and so.

So we stand ready to be able to provide growth in distributions when using any 1 or several of those growth levers as long as we get the contribution back for the value that those levers provide.

Mike as we see the market today.

The market continues to appreciate value over growth, we certainly stand ready to provide growth if the market is ready to provide that value.

Got it and when I think about.

Kind of some of your comments is there a specific yield or a specific level at which.

You would look to do that or it's really dependent upon the.

The capital markets and the opportunity available to you.

It's the availability of the market. So as you can imagine we have a major turnaround this year and so I would expect that we will be addressing those operational needs for the maintenance of the.

Ethylene unit and as we talk to investors and look at the capital markets will continue to assess the opportunity to use those growth levers as I say, we stand ready to do so.

Being rewarded accordingly for those.

Using those levers.

Got it thank you.

Youre welcome.

Your next question comes from the line of Matthew Blair with Tudor Pickering Holt.

Hey, good morning, Albert and Steve.

Hi, Matthew.

Yes.

I had a question on the spires sufficiency sees so in Q2, it looks like it was $8.7 million.

Given the cracker was down from 19 days.

Days in Q3.

Would you expect that number to look larger in Q3 relative to Q2.

Yeah.

Matthew the answer is we do expect to have most of the lost pounds occurring in Q3, because the outage did occur late in the second quarter. So there is very likely some additional buyer deficiency fee to accrue in the.

In the second half and largely in the third quarter of this this year.

The benefit of having the structure as we do both with the shortfall fee and the buyer a deficiency fee as it protects opco and therefore, the partnership providing that earnings stability, even though the even though the unit loss those pounds.

Blake will still pay for the fixed component of all of the cash production cost to provide net buyer deficiency protection.

Sounds good and then would you expect the downtime in Q3 have an impact on your third party ethylene sales.

We've been able to take advantage of those.

Stronger ethylene markets over the course of the first half of this year.

So as we think about the benefits that we see here, we'll be looking to sell some additional ethylene, but we've really had the ability to achieve significant portion of the third party sales for the first half of the year.

Great. Thank you Youre.

Youre welcome.

At this time, we have came to the antibody Q&A session I will now turn the call back over to Jeff Holly.

Thank you again for participating on today's call. We hope you'll join US for our next conference call to discuss our third quarter 2021 results.

Thank you for participating on todays Westlake Chemical partners second quarter earnings Conference call.

A reminder, that this call is it will be available for replay beginning 2 hours. After the call has ended and may be accessed until 11.59 P M Eastern time.

On Tuesday August 10th 2021.

So we play on.

Following numbers domestic callers should dial 8558592056.

International callers may access the replay at 4045373406, the access code is 3 to 1.6.

7.9 this low.

It concludes today's call.

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