Westlake Chemical Partners LP

Good afternoon, and thank you for standing by. Welcome to the Westlake Chemical Partners' fourth quarter 2021 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 22, 2022. I would now like to turn the call over to today's host, Jeff Holley. Westlake Chemical Partners Vice President and Treasurer. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to the Westlake Chemical Partners fourth quarter 2021 conference call. I'm joined today by Albert Chow, our President and CEO, Steve Bender, our Executive 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 refer to our parent company, Westlake Corporation, and references to Opco refer to Westlake Chemical Opco LP, a subsidiary of Westlake 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. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in our regulatory filings which are also available on our investor relations website. This morning, Westlake Partners issued a press release which details our fourth quarter and full year 2021 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 callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code is 636-9819. Please note that information reported on this call speaks only as of today February 22, 2022, and therefore, you are 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 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 2021 results. In this morning's press release, we reported record Westlake Partners full year 2021 net income of $83 million, or $2.34 per unit. Strong third-party sales margins during the year and a buyer deficiency fee contributed to consolidated net income including OPCOS, of $401 million. In the second half of 2021, we completed our planned turnaround at OPCOS Special II facility in Lake Charles, Louisiana. Westlake Partners' financial results continue to demonstrate the stability generated from our fixed-margin ethylene sales agreement for 95% of annual plant production each year. insulating us from market volatility and other production risks. This certainty, combined with our investment-grade sponsor, Westlake, produces predictable earnings and stable cash flows. This was evident despite many weather-related challenges of 2021 and the completion of our planned turnaround at Opco's Petro2 facility, and we delivered solid results and sustained distributions to our unit holders. The stable fee-based cash flow generated by our fixed margin ethylene sales contract with Westlake forms the foundation for us to deliver long-term value to our unit holders as we have since our IPO in July of 2014. This quarter's distribution is the 30th consecutive quarterly distribution since our IPO. This high degree of cash flow stability and predictability provide for our long history of reliable distributions. 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 Westlake Partners' fourth quarter 2021 net income of $30 million, or 84 cents per unit. Consolidated net income, including OPCO's earnings, was $138 million on consolidated net sales of $330 million. The partnership had distributable cash flow for the quarter of $15 million, or 43 cents per unit. Fourth quarter 2021 net income for Westlake Partners of $30 million decreased by $15 million compared to fourth quarter 2020 partnership net income of $15 million. The partnership benefited from a buyer deficiency fee as well as recovery of certain other costs from Westlake attributable to an unplanned outage. Distributable cash flow of $15 million for the fourth quarter of 2021 was comparable to fourth quarter of 2020 distributable cash flow of $16 million. For the full year of 2021, record net income of $83 million or $2.34 per unit increased by $17 million, compared to full-year 2020 net income of $66 million. The increased net income attributable to the partnership was due to strong third-party sales margins, as well as benefits from the buyer deficiency fee and recovery of certain other costs from Westlake. For the full year of 2021, MLP distributable cash flow was $70 million, comparable to MLP distributable cash flow of $72 million for the full year of 2020. Turning our attention to the balance sheet and cash flows at the end of the fourth quarter, we had consolidated cash balance and cash investments with Westlake through our investment management agreement totaling $106 million. At the end of the fourth quarter, Westlake had payment obligations to OPCO of $110 million, representing the buyer deficiency fee for the lost production and the recovery of certain other costs. These payment obligations 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 2021, OPCO spent $81 million on capital expenditures. We maintained our strong leverage metrics with a consolidated leverage ratio of approximately one times. On January 24th, 2022, we announced a quarterly distribution of 47.14 cents per unit with respect to the fourth quarter of 2021. Since our IPO in 2014, the partnership has made 30 consecutive quarterly distributions to our unit holders, and we have grown distributions 71 percent since the partnership's original minimum quarterly distribution of 27.5 cents per unit. For the full year of 2021, distributable cash flow provided coverage of 1.06 times the declared distributions. The partnership's fourth quarter distribution was paid on February 17th, 2022 to unit holders of record on February 3rd, 2022. The partnership's predictable fee-based cash flow continues to prove beneficial in today's economic environment and is differentiated by the consistency for earnings and cash flows. The structure of our ethylene sales agreement and the associated cash flow 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. Looking back since our IPO, we have maintained a cumulative coverage ratio above this target level further demonstrating the fortitude of our business. For modeling purposes, we have no planned turnarounds in 2022. Our next turnaround is at our PetroOne facility in Lake Charles, Louisiana, which is currently planned for 2023, and we will provide more details on the turnaround once we complete our planning. 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 financial and operational performance through the fourth quarter and the year as a whole. The stability of our business model and associated cash flows demonstrate the benefit of our ethnic sales agreement, and its protective provisions provide the partnership's predictable long-term earnings and cash flows, despite both planned and unplanned production outages. We remain optimistic about the continuing demand for ethylene, driven by robust downstream derivative needs by our parent, Westlake, and a strong end-use market demand in consumer products and packaging. Our ethylene sales agreement, which provides a predictable fee-based cash flow structure from our take-or-pay contract with Westlake for 95% of Opco's production, will continue to deliver these stable and predictable cash flows. With respect to the outlook for our third-party sales, we feel confident this should deliver healthy margins in 2022, driven by continued elevated demand and strong market fundamentals. We maintain a strong balance sheet with conservative financial and leverage metrics. As we continue to navigate market conditions, we'll evaluate opportunities We are our four levers of growth in the future, including increases of ownership interest of Opco, acquisitions of other qualified income streams, organic growth opportunities, such as expansion of our current ethylene facilities, and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake. We remain focused on our ability to continue to provide long-term value to our unit holders. As always, 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 fourth quarter 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 today's teleconference will be available two hours after the call has ended. We will provide that number again at the end of the call. Carmen, we will now take questions.

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Steve Byrne with Bank of America. Your question, please.

So, Albert, you made a comment about your expectations for increased demand for ethylene and my question for you is if the parent here Westlake was interested in expanding and more back integration into ethylene would that have to be initiated by the parents or could partners raise capital and fund some expansions and if you were would it be more capital efficient to, say, de-bottleneck one of the crackers or to acquire the other half of the Lotte cracker?

So, Steve, it's Steve Bender. So, good question, and you're right. We've got several alternatives available to us. We have inside the partnership the three ethylene units. We also have outside the partnership, Westlake Corporation has the LACC ethylene JV, And so depending on the capital cost and the margin expectation and therefore the returns, Westlake Corporation could consider going one of either paths or both. And so it really is a function of which path is most compelling would impact the partnership either not at all if the parent chose to go down the path with LACC or if it chose to go down the path of de-bottlenecking one of the other three ethylene units, it would work with OPCO, which owns those three units, to expand those facilities. So it depends on which path they choose to go down.

And can you help me better understand what led to the surge of EBITDA in the quarter?

Yeah. So in the quarter, we had a number of drivers. We had, of course, the turnaround, and because of the turnaround, we had a – outage, and because of that outage, we had, and then the outage was extended, we had two issues driving the revenue growth. That was both the buyer deficiency fee, because there was no offtake of ethylene, and so therefore it incurred a buyer deficiency fee, and of course a shortfall fee for the maintenance costs incurred during the quarter. So it was both the buyer deficiency fee, Steve, as well as the shortfall fee. Those totaled, by the way, in the quarter Just about $90 million.

Okay, thank you.

Thank you. Our next question comes from Mike Lighthead with Barclays. Your question, please.

Great, thanks. Good afternoon, guys. Good afternoon. First, just with all the changes going on at current Westlake Corporation, I used your platform earlier this morning. Does that change at all how you think about the overall strategy for Westlake Partners?

Mike, you're a little garbled. Could I get you to repeat that question?

Yes, sorry about that. Just with all the changes going on at parent Westlake Corporation, does that change at all how you think about the overall strategy for Westlake Partners?

No, there's no change in the structure at the partnership level. The demand for ethylene that Westlake Corporation has for its various performance and essential materials businesses remain as they did irrespective of the changes at the parent level. So the need for ethylene and the demand that the parent sees remains just as strong as it did prior to the resegmentation and the changes that you saw occur in 21.

Great. And then secondly, in regards to the potential for restarting distribution growth, Mike, as you've assessed the market, you've seen the market continues to reward value players.

And I think the presentation of the results this quarter illustrate the benefits of the partnership as a value MLP, delivering that consistency and predictability. We certainly stand ready to provide growth in the various four levers that we have, which is additional interest in OPCO, increase our margin arrangement with the parent, increase production capacity, as well as an accretive M&A opportunity. But as I said, the market is still rewarding those that are really demonstrating value. And so we certainly stand ready if the market stands ready to reward for that growth.

Mike?

Are there any other questions?

All right. Our next question is from Matthew Blair with Tudor Pickering Holt. Your question, please.

Good morning, Albert and Steve.

Hi, Matthew. How are you?

Good, good. Thanks. The $110 million of obligations, if that is repaid, does that act as a headwind on earnings per unit for Westlake LP in 2022 and And what's the cadence of that repayment? Like would it be pretty much in Q1 2022, or would it be spread out evenly throughout the year?

Yeah, it does not provide any headwind whatsoever to the earnings profile of the partnership. And that $110 million is made up, as I mentioned earlier, of a buyer deficiency fee and a shortfall fee. As you know, the buyer deficiency fee arises when there's an extended outage or an unplanned outage, and as a consequence, a lack of take by Westway Corporation. And that fee is paid in the following new year, and so that fee has already been paid. And then, of course, the shortfall fee is any cost that may be associated with the production of ethylene, and those are spread out over the course of the 12 months in the calendar year of 2022. Okay. And that just translates into higher costs passed back to Westlake Corporation. The margin for the partnership remains as it is. So there is no headwind there on the shortfall fee, nor is there any headwind on this buyer deficiency fee.

Okay, that's helpful. And then, Steve, you mentioned earlier that you stand ready to provide growth if that's what the market wants. I mean, it does look like your yields Around 7% is at a premium compared to recent averages. How would you assess the availability of equity capital? Do you feel you could tap the MLP markets if you wanted to? And I guess, how would you think about the structure of a drop? Would it be 50-50 debt equity, or do you think you could do a drop all on the debt side?

So, Matthew, we did observe a number of transactions that occurred in 2021. These were all in the MLP space, and they were at discounts that we thought were relatively elevated. But certainly as we think about transactions, be it a drop-down or whether it be a contract renegotiation of that 10-cent margin or production capacity increases, or an acquisition of some of the interest in LACC by OPCO, Those could be done with both leverage as well as with equity taps into the market. It's really a function of can we make it an accretive transaction for both parties, Westlake Corporation and the partnership, and will the market reward that with growth of the unit price accordingly? And that, as I said, as I mentioned earlier, the market seems to still be rewarding value players in this space. And so if we do see that pivot back to those who are growing their distribution then it certainly is of interest and capability for us to continue to grow that distribution.

Great. Thank you very much.

You're welcome.

Thank you. And at this time, the Q&A session has now ended. I will now turn the call back over to Jeff Holley.

Thank you. Thank you again for participating in today's call. We hope you'll join us for our next conference call to discuss our first quarter 2022 results.

Thank you for participating in today's Waste Lake 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 and may be accessed until 1159 p.m. Eastern Time on Tuesday, March 1, 2022. 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 636-9819. This will conclude today's call.