Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners LP and Westlake Chemical Corporation reset of Westlake Partners IDR tiers 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, ladies and gentlemen, this conference call is being recorded today, July 30th, 2018. I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Thank you, Michelle. Good afternoon, everyone, and welcome to the Westlake Chemical Partners LP and Westlake Chemical Corporation reset of Westlake Partners IDR tiers conference call. I am joined today by Albert Chao, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. The conference call will begin with Albert, who will open with a few introductory comments regarding the reset of Westlake Partners IDR tiers. Steve will then provide a more detailed look at the transaction and walk through the provided slide deck. Finally, Albert will add a few concluding remarks. W e will open the call up to questions. During this call, we refer to Westlake Chemical Partners LP as Partners or the Partnership.
We refer to Westlake Chemical Corporation as Westlake or Westlake Chemical. References to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake Chemical, and the Partnership, which owns certain olefin assets. 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, our ability to borrow funds and access capital markets, and other risk factors discussed in our SEC filings.
This morning, Westlake Chemical and Partners issued a press release and an associated slide deck announcing and providing details on the reset of Westlake Partners IDR tiers. These documents are available in the press release and presentation sections of our webpages at westlake.com and wlkpartners.com. A replay of today's call will be available beginning two hours after the completion of this call until 11:59 P.M. Eastern Time on August 6th, 2018. 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 6068415.
Please note that information reported on this call speaks only as of today, July 30th, 2018, 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 webpages at westlake.com and wlkpartners.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 review the reset of Westlake Partners IDR tiers. In this morning's press release, we announced Westlake Chemical Corporation and Westlake Chemical Partners LP have agreed to reset the distribution tiers for incentive distribution rights with the quarterly distribution for the first year being reset to $1.29 per unit from $0.32 per unit, and the quarterly distribution top tier, the 50% tier, reset to $1.69 per unit from $0.41 per unit. These actions will relieve the Partnership from making IDR payments for over 10 years at its historical distribution growth rates. While incentive distribution rights were currently a small portion of Partners cash flows, we wanted to proactively address the investor interest regarding the IDRs in a manner that would be mutually beneficial to both the Partnership and its sponsor, Westlake Chemical.
We believe this transaction accomplishes these goals and provides significant long-term benefits to both the Partnership and Westlake Chemical. I would now like to turn the call over to Steve to provide more detail on the transaction and the benefits to both parties.
Thank you, Albert. Good afternoon, everyone. I would like to start on the second slide of the slide deck titled Reset of Westlake Chemical Partners LP IDR tiers effective July 27, 2018. Westlake Chemical and the Partnership have agreed to reset the quarterly distribution for the first year where Westlake Chemical would begin earning IDRs to $1.29 per unit from $0.32 per unit. On an annual basis at $5.18 per unit from the $1.27 per unit. This permits the first quarter 2018 limited partnership distribution per unit of $0.3975 to grow 325% before any IDR payment will be earned and paid. This will relieve the Partnership of making IDR payments for over 10 years, and thus improve the Partnership's cost of capital.
It's very important to highlight that Westlake Chemical will continue to receive the same cash flows after the IDR reset as it was receiving before the IDR reset. This is due to the unique structure of Partners. As you can see from the ownership chart on the bottom right of slide two, Westlake Chemical receives cash flows from both its ownership in OpCo and its ownership in the Partnership. These cash flows will remain the same after the IDR reset, as the only cash flows Westlake Chemical does not receive from OpCo or Partners are the unitholders' distributions to Partnership, the Partnership makes to public unitholders, which do not change as a result of this transaction. Hence, Westlake Chemical will not receive any consideration for the reset. Turning to slide three, let us review the many benefits to both the Partnership and Westlake Chemical for this transaction.
As Albert mentioned, we have reset the IDR structure to enhance the value to both Westlake Chemical and the Partnership. Let's first walk through the benefits of the IDR reset to the Partnership. The first point I would highlight is that to Partners, the IDR reset is immediately accretive to cash flow per unit and coverage. Second, without the burden of IDR payments, the runway of drop-down inventory from our current asset base is significantly lengthened. As Albert noted earlier, at the Partnership's historical low double-digit growth rate in distributions, the Partnership would not have to make any IDR payments over the next 10+ years, and the existing drop-down inventory at OpCo can support that growth. As a reminder, the existing drop-down inventory at OpCo represents just one of the Partnership's four growth levers.
This really highlights the significant time period into the future the Partnership continue to grow its distribution at attractive growth rates to unitholders. Next, removing the IDR burden reduces the frequency and size of capital market needs to the Partnership, allowing it to grow more opportunistically and access the capital markets. The reset also improves the Partnership's cost of capital. Being relieved of the IDRs for the foreseeable future, Partners is better positioned to pursue accretive investments such as Westlake Chemical's JV ethylene cracker in Lake Charles, Louisiana, currently being built with Lotte that is expected to start up in 2019. Importantly, the IDR reset highlights the significant strategic alignment it has with its sponsor, Westlake Chemical. Let's now move to review the benefits of the IDR reset to the Partnership sponsor, Westlake Chemical.
First, as discussed earlier, Westlake still continues to receive the same cash flow it was receiving before the reset. This enables Westlake Chemical to execute this transaction without consideration in exchange for the reset. Second, the reset supports accretive drop-down transactions at attractive and accretive valuations to Westlake Chemical. Next, the reset keeps the Partnership's cost of capital competitive, providing Westlake Chemical the ability to raise equity through the Partnership at attractive levels. The ability of the Partnership to continue as a source of advantage cost of equity capital to Westlake Chemical over a long period of time supports Westlake's strategy to grow its business. Westlake Chemical is the Partnership's largest unitholder, thus resetting the IDR tiers, which we believe will enhance the value of the Partnership, benefits its largest unitholder, Westlake Chemical.
Of course, Westlake Chemical retains the future option of the revised IDR structure and the right to receive future IDR payments once Partners grows into the highest reset tiers with their growth having created significant value to the Partnership unitholders. Westlake Chemical still retains the future ability to further reset or eliminate the IDRs. These items highlight the compelling benefits the IDR reset has to both Westlake Chemical and the Partnership. Now turning to slide four, the long-term success of the partnerships is important to Westlake Chemical. Partners remains a valuable asset to Westlake Chemical. Through the Partnership's tax advantage structure, stable cash flows, and growing distributions, it trades at a premium multiple to Westlake Chemical, and hence offers a lower cost of equity capital.
This provides Westlake Chemical a cost-advantaged source of equity capital that Westlake Chemical has reinvested back into its own businesses, incrementally growing Westlake Chemical's earnings and cash flows. The strategy of the Partnership has not changed since its IPO in 2014. We continue to target low double-digit distribution growth and plan to achieve that distribution growth through the four levers of growth available to Partners, which include acquiring additional ownership interest in OpCo with over 80% of OpCo yet to be dropped down to the Partnership, increase in the contract sales margin of ethylene to Westlake Chemical, expansions at Partnership's existing assets, and accretive acquisitions, which Westlake Chemical's JV ethylene cracker currently being built with Lotte represents. It would be a normal acquisition opportunity.
Given the importance and the value enhancement the Partnership offers to Westlake Chemical, the positive attributes of resetting the IDR tiers to Partners also directly benefits Westlake Chemical. Now if we turn to the last slide of the deck, slide five, we have summarized the reset in the IDR tiers from this transaction. As already highlighted, the first distribution target per quarter is reset to $1.29 per unit from $0.32 per unit, which will allow us to grow the first quarter 2018 limited partner distributions of $0.3975 per unit, 325% before any IDR payment will be earned and paid. The 25% and 50% tiers have also been raised, with the 50% tier at the newly established distribution target per quarter of $1.69 per unit or $6.75 per unit on an annualized basis.
The IDR tiers have been significantly extended, which greatly extends the runway for drop-down transactions and enhances the Partnership's ability to pursue accretive investments while Westlake Chemical continues to retain its cash flows. I'd like to turn the call back over to Albert to make some closing remarks before we take questions. Albert?
Thank you, Steve. The reset of the IDR tiers between Westlake Chemical and Partners offers significant benefits to both parties. To Partners, it is immediately accretive to unitholders. It significantly increases the life of drop-down inventory of existing assets, reduces the need to access capital markets, and improves its cost capital. The ability of the Partnership to grow its distributions for the next 10 years at its historical low double-digit growth rate without the burden of needing to make IDR payments and being able to support that growth through drop-downs of the existing assets in OpCo highlights just how robust the Partnership's ability is to continue to grow distributions with all of its four levers. We believe the Partnership will have the ability to deliver distribution growth to its unitholders for a very long time.
To Westlake Chemical, it will continue to receive the same cash flows as it received before the transaction, continue to keep the Partnership's cost of capital competitive, to support the Partnership as a more attractive source of equity capital to Westlake Chemical, which supports the accretive nature of drop-down transactions with Westlake Chemical while directly benefiting Westlake Chemical as the Partnership's largest unitholder, and still maintain the option of the IDR structure in the future. Overall, the IDR reset highlights the strategic alignment we have between the Partnership and Westlake Chemical. Resetting the IDRs directly benefit both Partners' unitholders and Westlake Chemical shareholders. The benefits to the Partnership also accrues directly to Westlake Chemical as the Partnership's largest unitholder.
The Partnership maintains or remains an advantage source of equity capital to grow Westlake Chemical's business in a more cost-effective manner, which is enhanced through this transaction by improving the Partnership's cost of capital. Thank you for listening to our call. Now I'll turn the call back over to Jeff.
Thank you, Albert. Before we begin taking questions, I would like to remind you a replay of this teleconference will be available starting two hours after we conclude the call. We will provide that number again at the end of the call. Michelle, we will now take questions.
Ladies and gentlemen, if you'd like to ask a question, please press star then one. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Once again, to ask a question, please press star then one. Our first question comes from John Roberts of UBS. Your line is open, John.
John, are you there?
John, your phone's muted. Please unmute.
John, are you there?
Our next question comes from Jonas Oxgaard of Bernstein. Your line is open.
Good morning, guys.
Good morning. How are you?
I am fantastic. Question on the M&A angle you had there. You had your four pillars of strategy. As far as I can tell, you've only really employed two of the four pillars. You've never done an M&A. Outside of the potential Lotte drop-down, is there anything else you're looking at? For follow-up, if you were pursuing the Lotte, how would that be constructed? Can you talk a little bit about that?
Yeah. When you think about one of the obvious acquisition targets we mentioned was the Lotte venture. Given the strength that you've seen in the structure that we have today with our three ethylene crackers, we'd want to make sure that we provide the same degree of earnings stability in anything that we would acquire. When we think of that potential acquisition of the Lotte interest here, we would want to provide the same degree of stability and earnings stream that you get from the three ethylene crackers that are already in OpCo today.
As we think of opportunities beyond the Lotte ethylene cracker that we identified, we'd certainly want to make sure that any asset that we would think of targeting would have the same degree of stability of earnings and predictability of earnings that we see today in the construct around the three crackers that we've got.
Okay. With ethylene prices falling, with new capacity coming online, how do you think about the stability of these ethylene earnings now?
It's a great question. From Westlake's perspective, we think of them on an integrated basis. As I think about the ethylene margin, I think actually broader than that. I think of the ethylene margin and the margin further downstream to our ethylene derivatives. When I think about the integrated margin, there's materially more margin in the integrated chain than there is just in that portion of the ethylene margin. As you see how we've constructed the margin around OpCo, Westlake is obviously taking margin above the ethylene $0.10 margin we have today, and all the margin of the derivatives downstream. As we think about one of those levers, that third lever, where we could expand the margin, I see that as very actionable today b ecause Westlake Chemical certainly has meaningful margin above that $0.10 margin, just ethylene, as I think about the integrated margin.
Okay. That makes sense. Thank you.
You're welcome.
Our next question comes from Jim Sheehan of SunTrust. Your line is open.
Thank you. Can you give us a sense for how you're evaluating the Lotte opportunity? What would be the timing of how you look at that? Would you look to get right up to the 50% threshold right away, or take it in smaller steps?
Jim, as we think about it today, as you know, we have a 10% ownership in the Lotte cracker, and we have an option that is available to us to go up higher to a 50% threshold anytime from today, all the way up to three years post-startup, and that will be post 2019 of that cracker. We've made no decision at this stage to increase our ownership, but we certainly have that option up to three years post-startup. When we think about targeting for the Partnership to acquire ownership in the Lotte cracker, it could occur separate and apart from Westlake's decision to increase ownership of that cracker from 10% to a higher percentage. It could acquire that 10% now, when I say now, we mean post-startup. Of course, you'd want to have production.
It could acquire that 10% well before Westlake made any decision, if it chose to, of the incremental ownership percentage. That's purely a discussion between Westlake Partners and Westlake Chemical as to when that investment might occur and the timing of that. Clearly, you'd want to make that investment after it's producing earnings and EBITDA, so it'd be clearly post the 2019 startup.
Great. O n potential drop-downs that you'd consider from the existing assets, would you consider similar scale drop-downs to those you've done in the past, or would you consider something larger?
Well, when we think of the drop-downs, we've been doing this so that we could continue to grow the earnings of the Partnership to be able to continue to support the distribution growth. Our last drop-down was in September of last year, and we would continue on a pace in such a way that we provide, again, transparency and the ability to grow that distribution. You can see with this reset of the IDRs that that ability to see the very, very long runway, as we've said, over 10 years for the Partnership with its many levers, to be able to grow its distribution at that low double-digit growth rate. As we think about it, it allows us to really modulate that based on need of cash flows and market capacity to be able to execute.
Thank you.
You're welcome.
Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is open.
Hey, good morning, Albert and Steve. How are you?
Well. Morning.
Good morning.
Good. We've seen some other MLPs attack this cost of capital issue by issuing IDR waivers on either drops or external M&A. Did you consider this possibility, and if so, why did you choose to do an overall cut rather than an IDR waiver?
Well, Matthew, I will say that we looked at all the actions taken by companies and Partnerships to address the IDR issue. We felt that resetting the IDRs in such a way as we have provides very high degree of transparency, that we have a very long runway. As I mentioned, we have an ability to continue these growth in distributions over 300% for a very long period of time. That allows us really to provide the investor here an ability to see a way forward for an extended period, a very long period of time, to continue to have that growth in distributions. At the same time, it allowed Westlake Chemical to continue to receive the same cash flows that it was otherwise receiving because of the unique structure of our partnership.
Clearly, anything not going to the unit holders that hold the Partnership still remain the cash flows of the parent. From Westlake Chemical's perspective, its cash flows remain whole, while at the same time, the burden of these IDR payments are relieved from the Partnership. We thought it was a significant win-win and a clear signal to the market that the parent continues to support the Partnership for its long-term growth.
Sounds good. In terms of drops going forward, I guess in terms of the financing, should we still model in a 50/50 debt equity splits on future drops, or does today's announcement change that? Also, do you think modeling in a 2018 drop is reasonable?
Our last drop was done, as you may recall, in September 2017, and at that time, we'd said we'd continue to plan drop-downs in the 12 - 18 month window to provide the growth in distributions. In terms of how we finance that, we really assess the market at any particular time to make the right decision. Clearly, as we go forward with funding these drops, the intent would stay well within the guidance that we've given in terms of leverage of the consolidated group and the Partnership. The funding is somewhat a function of the market conditions at the time. I think as we look forward, we can certainly expect that we still see opportunities to fund in a variety of avenues. I don't think that we're limited really today, in today's market.
I think this reset provides us an ability to adjust our needs for capital access and allows a much longer horizon for the Partnership, as you can see, for well over 10 years with the existing asset base.
Thank you.
You're welcome.
Our next question comes from Jon Evans of SG Capital. Your line is open.
Steve, does this foreshadow just using the other lever of adding to the margin or not? I'm just curious if that's what you guys are trying to do here.
When you think about the levers that we mentioned, Albert mentioned all four levers, and that is organic expansion. We've undertaken debottlenecks in the recent past. We've done drop-downs, and you mentioned the expanding the margin, of course, acquisitions. I think it's clear that we will use these four levers of growth over time. Certainly, as we think about expanding the margin, as I mentioned earlier, we see no limitation to be able to use any one of these four levers today. Y ou're right, we've not used that lever. Certainly, I would anticipate that in the future, we certainly will. We'll just have to assess what's the right time to use any one of those particular levers. As I see it, those four levers are still very much available to us and very valid, irrespective of the ethylene margin per se.
As I mentioned, Westlake looks all the way through to the integrated margin, and that's the real important element here.
Right. Just the follow-up to that is from the standpoint of, if you look at the cost of capital, because you've given kind of the visibility to the market on the runway of the growth for almost a decade, do you think that is going to help the share price, which eventually lowers your cost of capital? Is that the real essence of what you're talking about, or can you just give us some insight?
Well, I think given the transparency that we provided the market, it should signal to the market that we see a significantly long runway for just these existing assets. As we mentioned earlier, it continued to have availability to expand its margin, drop-downs, and acquisition growth. Clearly, the parent, Westlake Chemical, continues to expand in ethylene with this recent investment we've made in Lotte over the last couple of years. We certainly have that option to allow us even more ethylene if we choose to elect that option. Those could certainly be easy acquisition targets for the Partnership and certainly add runway to its capacity over time. Clearly, I think the transparency here should telegraph to the market. We see a very long life for the Partnership, and we do think that that brings better value to the unit holder over time.
We think it should therefore improve the yield and certainly affect the price of the units over time.
You're not looking to change the structure of your tax status, right? Like some of these others have. Correct?
We continue to assess the market, but we still believe that the structure that we have today provides significant benefit to the unit holders and to Westlake Chemical, the sponsor.
Just the last question. The mantra will be still to continue to kind of grow that 2.9% sequential or that double-digit growth every year. That's the focus, right? You're not accelerating or decelerating that growth rate.
The clear message here is that with that low double-digit growth rate that we have been on, you can see we have a very long track record in front of us. We just laid out 10+ years of growth that we can provide using that historical growth rate that you just mentioned. You can see here we're again re-emphasizing to the market we have the wherewithal to continue on that path.
Great. Thank you for the information.
You're welcome.
Once again, if you'd like to ask a question, please press star then one. Our next question comes from Kevin McCarthy of Vertical Research Partners. Your line is open.
Yes. Good afternoon, gentlemen.
Good afternoon.
Good afternoon.
Made a number of comments regarding financing. In your view, does the change in IDR tiering increase the MLP's ability to issue debt or equity or both on more attractive terms?
Kevin, I think it provides both. Gives us an ability to really demonstrate the strength of the partnership, and I think it provides a very clear message to the market that we see the importance that we're telegraphing the importance of the partnership for the Westlake Chemical name. I think the ability and the way we've run the partnership since its IPO in 2014 provides us an ability to use leverage or debt. I think the tiering, the resetting of these tiers continues to provide opportunity to access both markets in a very, I think, opportunistic manner. We think this really benefits the partnership to be able to grow and access both markets.
Okay. A couple of clarification questions, if I may. Regarding the tiers that you outline on slide five, do those change or would they change in the event that the MLP issued units in the future?
No, they do not.
Okay. I guess as a practical matter, if distributions need to grow 325% to trigger, why not eliminate IDRs? Is there a reason to retain them?
We wanted to address the investor interest we saw in the market at the time, and I think you can see that we have provided a lot of transparency for this 10-year period. I think by retaining the future option of the IDRs, it allows us to assess what's the right strategy down the road. We still have the ability to reset them in the future or remove them if that's appropriate at that point in time. We've maintained the optionality, and we'll just consider what the right strategy is for the partnership and the parent over time.
Okay. Thank you very much.
You're welcome.
At this time, Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. I would like to remind you that our Q2 earnings call for Westlake Chemical will be at 11:00 A.M. Eastern Time on August 2nd, and for Westlake Partners at 12:00 P.M. Eastern Time on August 2nd. We hope you'll join us then to discuss our second quarter earnings results.
Thank you for participating in today's Westlake Chemical Partners LP and Westlake Chemical Corporation reset of Westlake Partners IDR tiers 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 11:59 P.M. Eastern on August 6th, 2018. 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 6068415. You may now disconnect. Everyone, have a great day.