Earnings Call Transcript - WLKP Q3 2022

Operator, Operator

Thank you for standing by. Welcome to the Westlake Chemical Partners Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. After the speakers' remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference is being recorded today, November 3, 2022. I would now like to turn the call over to today's host Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer. Sir, you may begin.

Jeff Holy, Vice President and Treasurer

Thank you. Good afternoon everyone, and welcome to the Westlake Chemical Partners third quarter 2022 conference call. I'm joined today by Albert Chao, 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 the 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. 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 with details of our third quarter 2022 financial and operating results. This document is available in the Press Release section of our web page at wlkpartners.com. A replay of today's call will be available beginning 2 hours after the conclusion of this call. The replay can be accessed via the partnership's website. Please note that information reported on this call speaks only as of today, November 3, 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 web page at wlkpartners.com. Now I would like to turn the call over to Albert Chao. Albert?

Albert Chao, President and CEO

Thank you, Jeff. Good afternoon everyone, and thank you for joining us to discuss our third quarter 2022 results. In this morning's press release, we reported Westlake Partners third quarter 2022 net income of $15 million or $0.42 per unit. Consolidated net income, including OpCo, was $78 million for the third quarter of 2022. Westlake Partners' earnings stability is consistently demonstrated through our fixed margin ethylene sales agreement which insulates us from market volatility and other production risks. This contractual arrangement continued to benefit us in the third quarter as we generated earnings and cash flow in line with our expectations despite challenging industry conditions. The associated high degree of stability in our cash flow compared with the predictability of our business has enabled us to deliver a long history of reliable distributions and coverage. This quarter's distribution is our 33rd consecutive quarterly distribution since our IPO which has grown by 71% since our IPO and has never been reduced or cut. 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?

Steve Bender, Executive Vice President and CFO

Thank you Albert and good afternoon, everyone. In this morning's press release we reported Westlake Partners' third quarter 2022 net income of $15 million or $0.42 per unit. Net income including OpCo was $78 million on net sales of $415 million. The partnership had distributable cash flow for the quarter of $17 million or $0.48 per unit. Compared to the third quarter of 2021, net income for Westlake Partners increased by $2 million as OpCo benefited from higher production following the turnaround of Petro 2 in the second quarter of 2021, as well as a buyer deficiency fee of approximately $14 million in the third quarter of 2022 resulting from lower planned offtake by Westlake. Distributable cash flow of $17 million for the third quarter of 2022 increased $4 million, compared to the third quarter of 2021 distributable cash flow of $13 million, resulting from higher earnings at OpCo. Compared to the second quarter of 2022, our net income for the third quarter decreased by $2 million due to lower third-party revenues as we optimized the benefits of our third-party sales and margins by electing to complete these sales in a period of higher margins in the first and second quarters of 2022. Distributable cash flow decreased $3 million compared to the second quarter of 2022 as a result of the timing of these third-party sales and the recognition of the buyer deficiency fee. Turning our attention to the balance sheet and cash flows, at the end of the third quarter, we had a consolidated cash balance and cash investments with Westlake through our Investment Management Agreement totaling $155 million. Consolidated 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. As I mentioned in last quarter's call in July of this year, OpCo and the partnership extended their revolving lines of credit with Westlake for a new five-year term. This is another example of Westlake demonstrating support for the partnership by providing ample liquidity for future capital needs. We maintained our strong leverage metrics with a consolidated leverage ratio below one times in the third quarter. OpCo spent $13 million on capital expenditures. On Monday, we announced a quarterly distribution of $47.14 per unit with respect to the third quarter of 2022. Since our IPO in 2014, the partnership has made 33 consecutive quarterly distributions to unitholders, and we have grown distributions 71% since the partnership's original minimum quarterly distribution of $27.5 per unit. Our distributable cash flow coverage for the 12 months ending September was 1.07 times, which is slightly below our 1.1 target as expected due to the timing of the planned turnaround at Petro 2 at the end of last year. The partnership's third quarter distribution will be paid on November 28, 2022, to unitholders of record on November 10, 2022. We continue to evaluate our distribution policy and outlook while remaining mindful of the more volatile equity market conditions and looking to drive the value the partnership provides to our unitholders. Since our IPO in July of 2014, we've maintained a cumulative distribution coverage ratio in excess of 1.1 times, and with a steady stability in cash flows, we're able to sustain our current distribution without the need to exit to access capital markets. As a reminder, for modeling purposes, we have no turnaround plan for the fourth quarter of 2022, and our next planned maintenance outage is at our Calvert City ethylene facility in Calvert City, Kentucky, which is currently planned for the first half of 2023. I'd like to turn the call back over to Albert to make some closing comments. Albert?

Albert Chao, President and CEO

Thank you, Steve. Despite a currently challenging macroeconomic backdrop, the partnership's financial performance for the year is consistent with the stable fee-based cash flows it is designed to produce. Looking to 2023, while the global economy faces headwinds, we remain optimistic about the fundamentals of our business as our insulative ethylene sales agreement provides a predictable fee-based cash flow structure from our contract with Westlake for 95% of our production, which delivers stable and consistent cash flows and insulates us from potential market volatility. We maintain a strong balance sheet with conservative financial and leverage metrics. Westlake continues to navigate market conditions and will evaluate opportunities across four levers of growth in the future, including increases in ownership interest in OpCo, acquisitions of other qualified income streams, organic growth opportunities such as expansions of our current ethylene facilities, and negotiations for a higher fixed margin in our ethylene sales agreement with Westlake. We will remain focused on our ability to continue to provide long-term value and distributions to unitholders. As always, we'll continue to focus on safe operations, along with being good stewards of the environment where we work and live. Thank you very much for listening to our third quarter earnings call. Now I'll turn the call back over to Jeff.

Jeff Holy, Vice President and Treasurer

Thank you, Albert. Before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available two hours after the call has ended. We'll provide that number at the end of the call. Amber, we will now take questions.

Operator, Operator

Thank you. At this time, we will conduct the question and answer session. Our first question is from Michael Leithead at Barclays. Michael, your line is now open.

Michael Leithead, Analyst

Great, thanks. Good morning guys. First question, just a high level. Obviously the world is pretty volatile, interest rates have moved up a lot. Can you maybe just flush out a bit more just kind of how you're thinking about the distribution policy or thoughts around maybe potentially growing distribution in light of everything else?

Steve Bender, Executive Vice President and CFO

Yeah. Mike, it's Steve. Good question. As you have heard Albert outline, we've got really four levers that allow us to grow: increasing the ownership of OpCo, acquisition of other qualified income streams, organic growth opportunities, and negotiating for higher margins. As you can see, the market is very volatile. Capital inflows into any equity markets have been more challenged. And we've seen through our third-party sales that margins have been challenged in some of the early markets, which is why we moved those to occur in the first and second quarters this year to take advantage of those higher margins. So we certainly stand ready to look for opportunities to grow the distribution in conditions that are more conducive to providing us the value that it would bring. So you can see from those four levers, we stand ready; it's just market conditions. I think that has been the challenge that we see in the current situation, but we certainly stand ready to make that happen, like conditions prove to be more favorable.

Michael Leithead, Analyst

Fair enough, that makes sense. And then, second, I think this quarter had about a $14 million buyer deficiency fee. I think maybe you can just remind us of how the buyer deficiency mechanics work between Westlake Partners and Westlake Corporation?

Steve Bender, Executive Vice President and CFO

Certainly, and so there is an obligation for Westlake to acquire 95% of the planned production in any given year. At any point in time, should there be an unplanned outage or any adjustment to production, that buyer deficiency makes up for any shortfall of production. Therefore, that buyer deficiency provides that stable income stream to the partnership, whether production was made as a result of an unplanned outage or any changes in production. That mechanic works from a revenue recognition perspective. Ultimately, if they're unable to make up that production during the course of any given year, they're paid that shortfall, that buyer deficiency, at the beginning of the new year.

Michael Leithead, Analyst

Got it. Makes sense. Thank you.

Albert Chao, President and CEO

You're welcome.

Operator, Operator

At this time, the Q&A session has now ended. I will now turn the call back over to Jeff Holy.

Jeff Holy, Vice President and Treasurer

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 2022 results.

Operator, Operator

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. It may be accessed until 11:59 pm Eastern time on Thursday, November 10, 2022. The replay can be accessed via the Partnership website. Thank you and goodbye.