Westlake Chemical Partners LP

Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners Fourth Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, February 23, 2021. I would now like to turn the call over to today's host, Jeff Holey, Westlake Chemical Partners Vice President and Treasurer. Sir, you may begin.

Thank you, Victor. Good afternoon, everyone, and welcome to the Westlake Chemical Partners fourth 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 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 Olyphant's 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 conditions, 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 fourth quarter and full year 2020 financial and operating results. This document is available in the press release section of our webpage at wlkpartners.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 caller should dial 855- 859-2056. International callers may access the replay at 404-537-3406. The access code is 392-5687. Please note that information reported on this call speaks only as of today, February 23, 2021, and therefore you're advised that time-sensitive information may no longer be accurate as of the time of any replay. I will finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at wlkpartners.com. Now, I would like to turn the call over to Albert Chow. Albert?

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us to discuss our fourth quarter and full year 2020 results. In this morning's press release, reported consolidated net income, including off-cost earnings of $75 million for the fourth quarter of 2020. Westlake Partners' fourth quarter 2020 net income was $15 million, or 43 cents per unit. For the full year, consolidated net income was $341 million. Westlake Partners' full year 2020 net income was $66 million. This year proved to be another strong year for Wesley Chemical Partners. In spite of the unprecedented challenges driven by the impacts of the COVID-19 pandemic lockdowns and the production outages caused by hurricanes Laura and Delta, our earnings for the year remain solid, illustrating the strength of our business model. Let me provide a brief update on the hurricane's impact in the fourth quarter. With the threat of landfall of Hurricane Delta in October, we idle our facilities in Lake Charles, Louisiana, and we're fortunate to have sustained minimal damage to our facilities. Once power was restored, we worked quickly to resume operations and begin producing ethylene. I would like to say a special thank you to our dedicated employees who were vital to restarting these plants. The solid financial results we experienced in the fourth quarter, as well as for the whole year, are a testament to the stability generated from our fixed margin ethylene sales agreement for 95% of annual plant production each year, which insulates us from market volatility. This certainty, combined with our investment-grade sponsor, Wesley 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 fourth quarter and the full year of 2020. Steve?

Thank you, Albert, and good afternoon, everyone. In this morning's press release, we reported consolidated net income, including OPCO's earnings of $75 million, on consolidated sales of $246 million for the fourth quarter of 2020. Westlake Partners' fourth quarter 2020 net income was $15 million, or 43 cents per unit. The partnership had distributable cash flow for the quarter of $16 million, or 44 cents per unit. Fourth quarter 2020 net income for Westlake Partners was $15 million, decreased by $2 million, compared to fourth quarter 2019 partnership net income of $17 million. The decrease in net income was primarily attributable to impacts from the hurricanes and associated force majeure events, lower third-party sales volumes, and increased maintenance cost. Partially offsetting these decreases was the benefit of the $28 million buyer deficiency fee related to the lost production that would have been sold to Westlake had the force majeure event not occurred. I will discuss this mechanism in more detail shortly. Distributable cash flow of $16 million for the fourth quarter of 2020 decreased by $3 million compared to fourth quarter of 2019, distributable cash flow of $19 million. The decrease in distributable cash flow was attributable to lower earnings, increased maintenance expense, and higher turnaround reserves, partially offset by the buyer deficiency fee, and reduced interest expense for the quarter. For the full year of 2020, net income for the partnership was $66 million. It increased $5 million from the full year of 2019 net income to the partnership of $61 million. The increase in net income attributable to the partnership was primarily due to higher sales prices for ethylene sold to Westlake per the terms of the Ethylene Sales Agreement, as well as the buyer deficiency fee of $70 million, partially offset by lower third-party sales volumes. lower sales volumes to Westlake due to the force majeure events, and increased maintenance expense. MLP distributable cash flow of $72 million decreased $1 million from the full year of 2019 distributable cash flow of $73 million. As we discussed last quarter, the provisions in the ethylene sales agreement commit Westlake to purchase and pay for a minimum amount of ethylene from OPCO each calendar year. thus insulating us from a majority of the impacts of these outages during the force majeure events. Through this commitment, OPCO continues to receive a 10-cent margin per pound for ethylene volumes that would have been produced plus production costs that were incurred, allowing OPCO and, in turn, Westlake Partners to deliver consistent earnings during these unplanned events. The benefit of this provision provides OPCO with a buyer deficiency fee of $70 million for 2020. This is an example of how our business model provides predictable earnings and cash flows in value to our investors. Turning our attention to the balance sheet and cash flows, at the end of the year, we had a consolidated cash and cash invested with Westlake balance through our investment management agreement of $140 million. At the end of the year, Westlake Chemical had a payment obligation to the partnership of $70 million associated with the previously discussed buyer deficiency fee. This payment was received in January of 2021 under the terms of the sale agreement. The long-term debt at the end of the year was $400 million, of which $377 million was at the partnership and $23 million was at OPCOV. In 2020, OPCO spent $37 million on capital expenditures. For the fourth quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below one times and a debt-to-capitalization ratio near 20 percent. For modeling purposes, we provide an update on the planned turnaround of our Petro-2 unit that 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 to Westlake Chemical and will be fully reserved for at the commencement of the turnaround. Last week, extreme winter weather across much of the central and southern United States has caused widespread power outages and disrupted feedstock, raw materials, and utilities to some of our plants. As a consequence, several of our facilities have experienced some disruption to their operations. We have triggered a force majeure under our ethylene sales agreement for one of our Lake Charles ethylene units, and we will be benefiting from the buyer deficiency fees from Westlake Chemical. The partnership's predictable fee-based cash flow continues to be an attractive attribute in today's economic environment and is differentiated by the consistency of earnings and cash flows. The structure of our ethylene sales agreement and the associated cash flow coming from this agreement allow 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 the equity capital markets. We will continue to evaluate market conditions and assess when and how we apply our four growth levers. On January 25th, 2021, we announced distributions of 47.14 cents per unit with respect to the fourth quarter of 2020. Since her IPO in 2014, the partnership has made 26 consecutive quarterly distributions to our unit holders, and we have grown distributions 71% since the partnership's original minimum quarterly distribution of 27.5 cents. For the 12 months ending December 21, 2020, distributable cash flow provided coverage of 1.08 times the declared distributions. The fourth quarter's partnership distribution will be paid on February 19, 2021, unit record holders of February 4. Now, I'd like to turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. We are pleased with the partnership's solid financial performance. The stability of our business model was well illustrated in 2020 as our Ethylene sales agreement and its provisions provided us with the predictable earnings and cash flows despite hurricanes and associated unplanned production outages. Looking into 2021, we remain optimistic about sustained demand for ethylene, driven by strong demand for polyethylene and PVC produced by our parent, Wesley Chemical. Our ethylene sales agreement that provides predictable fee-based cash flow structure from our take-or-pay contract with Wesley Chemical for 95% of Opco's production will continue to deliver stable and predictable cash flows. As Steve outlined, we have maintained our distribution, limiting our reliance on the equity markets. We are excited about the partnership's future as we deliver long-term value to our unit holders. We maintain a strong balance sheet with conservative financial and leverage metrics. As we continue to navigate market conditions, we'll evaluate opportunities via our four levers of growth in the future, including increases of ownership interest above goal, acquisitions of other qualified income streams, organic growth opportunities such as expansions of our current Ethylene facilities, and negotiation of a higher fixed margin in our Ethylene sales agreement with Westlake. We believe we have the ability to continue to provide long-term value to our unit holders and can further enhance our growth utilizing our four levers as marked conditions warrant. 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 fourth quarter 2020 earnings call. Now I'll turn the call back over to Jeff.

Thank you, Albert. Before I begin taking questions, I'd like to remind you that a replay of this teleconference will be available today at 3 p.m. Eastern time. Victor, we'll now take questions.

As you remind me, ladies and gentlemen, To ask a question, you will need to press star one on your telephone. And to withdraw a question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Blair from Tudor Pickering Hope. You may begin.

Hey, good morning, Albert and Steve. Good morning, man. Good morning. Steve, you mentioned you triggered the force majeure for the Lake Charles ethylene in Q1. Do you think this payment will be smaller or larger than the $23 million that came in Q4?

We expect the unit to be up and running here in the reasonable near future, and so I expect it to be smaller.

Great. And then the yield for Westlake LP is improved to 8% or so. Does that make you more likely to think about you know, restarting the drop program and resuming distribution growth?

We'll continue to look at opportunities in the marketplace and see if those opportunities from a capital flow are there and if they're attractively financially and actionable. And if they are, we'll continue to assess the value proposition that a drop might bring. Great. Thank you. You're welcome.

I have a question from Steve Byrne from Bank of America. You may begin.

Thank you. Albert, you mentioned these four levers that you have for growth here. One of them would be to add additional assets into Opco. I just wanted to ask about the Lotte Cracker joint venture. Is that an eligible asset that could be included in this, in OPCO, or the fact that it's a joint venture, does that preclude it?

No, it does not preclude it, and it is an eligible asset. It is possible to take our interest in that ethylene unit and contribute that into the structure that we have. Again, it's something that we would call an acquisition. When you think of the four levers of growth that we have available to us, And as I mentioned to Matthew just a moment ago, we'll continue to assess the interest in continuing to grow our distributions through added assets such as that. And if that is viable and actionable, it's something that we'll consider.

Okay.

Thank you. You're welcome. And once again, as a reminder, that's star one for questions, star one. Our next question comes from Jim Altshul from Aviation Advisory.

You may begin. I guess good morning where you are. Thank you for taking my call. A couple of questions. First of all, I really both relate to modeling and analysis. You indicated that the force majeure payments, which at least some of them, the $70-odd million that were included in the fourth quarter financial results were not actually paid until last month. So in terms of modeling, if you look at the cash flow statement, unlike in prior years, the cash flow provided by operating activities more or less matched the distributions some of the distributions to the non-controlling interest on the unit holders in the prior year, cash provided by operating activities was significantly greater than the sum of the distributions. Is it reasonable that in doing an analysis that we should add back to the net cash provided by operating activities, that 70-odd million you got from Westlake Chemical in terms of a force majeure payment?

Yes, it is.

Okay. Next accounting-related question, if you look at the balance sheet, you have a big negative number for the general partner interest. And I'm wondering how to model that in terms of trying to figure out the total enterprise value. Why is that such a large negative number? And does the general partner have any distribution rights that are likely to be triggered any time soon? How should I be modeling that when I'm trying to do price to book and TEV to EBITDA?

Yeah, it simply reflects Westlake's interest in the business, and so it receives distributions from both OPCO as well as the partnership every quarter. So you're looking at the partnership's balance sheet, and it simply reflects the equity interest that Westlake Chemical has in the partnership.

Well, if Westlake is getting a district, because you have three lines. You have common unit holders, publicly and privately held, and that's a large positive number. You have common unit holder, Westlake, and that's a smaller positive number. And then you have general partner, Westlake, and that's a big negative number. Negative, what didn't change you to your 242, negative 242.5 million. Why is that such a large negative number? When I'm trying to calculate price, TEV, the EBITDA, should I assign any value to that general partner interest?

Yeah, so look at the total partnerships capital is really how you should look at the total equity value of the partnership when you look at that. So the total equity value here is the $915 million when you're looking at the total equity component. So it's both the non-controlling piece. So that's really how you should look at that. And I'm happy to spend some time with you or Jeff Holley, our treasurer, to spend some time with you to model through these If you're looking at both the balance sheet or the distributable cash flows, any of those numbers, I'm happy to spend some time with you to go through the modeling questions you might have.

Oh, okay. Well, if that's good, I'll follow up, and perhaps we can set a time that's convenient for you. And just one more thing, because I've only recently invested. With many of the other master owner partnerships in which I've invested over the years – When I get the K-1, typically it shows my share of the net income as a net loss, so all the distributions count as a return of capital. Am I likely to have a similar experience as an investor in Westlake Chemical Partners?

You will have a large component of your return. It's really a function of when you chose to invest. The K-1s are live now so that you can receive those online should you choose to do that. and certainly they will have been mailed within the last few days as well. So if you're looking for the mail, it should be coming soon. But you can also log on currently now and receive it electronically. Okay.

Well, I bought last month, so I'm not getting a cable one. But that's one of the advantages of investing in master limited partnerships, that often the distributions are not considered current income. So whom should I – call or email to set up a time to go over some of these modeling issues?

You can certainly reach out to myself. This is Steve Bender, and you can send me an email at sbender at westlake.com, and I'll introduce you to my treasurer, Jeff Hawley, and we'll both walk through the modeling questions that you might have.

Excellent. Thank you very much for your detailed answers to my questions. You're quite welcome.

And at this time, the Q&A session has now ended. I'd like to turn the call back over to Jeff Hawley for his remarks.

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our first quarter 2021 results.

Thank you for participating in today's Westlake Chemical Partners fourth 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 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 392-5687. This will conclude today's call. Goodbye.