Investor Update

Jul 30, 2018

Slides

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners LP in 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 speakers' remarks, you'll be invited to participate in a question and answer session. As a reminder, ladies and gentlemen, this conference call is being recorded today. July 30 2018. I would now like to turn the call over to today's host, Jeff Holly, 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'm 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 west 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 and then we'll open the call up to questions. During this call, we refer to Westlake Chemical Partner LP as partners or the Partnership We refer to Westlake Chemical Corporation as Westlake or Westlake Chemical and 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 Left Lake Partners IDR tiers. These documents are available in the press release and presentation sections of our webpages at westlake.com, andwlkpartners.com. A replay of today's call will be available beginning 2 hours after the completion of this call until 11:59 pm Eastern Time August 6, 2018. The replay may be accessed by dialing the following numbers, Domestic callers should dial 8558592056. International callers may access the replay app 4045373406. The access code is 6068415. Please note that information reported on this call speaks only as of today, July 30 2018, and therefore, you're 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 pages at westlake.comandwlkpartners.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 1st year being reset to $1.49 per unit from $0.32 per unit, and the quarterly distribution top tier The 50% tier reset to $1.69 per unit from 41¢ per unit. These actions will relieve the partnership for making IDR payments for over 10 years at its historical distribution growth rates. While incentive distribution rights will 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, and good afternoon, everyone. I would like to start on the second slide of 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 1st year where Westlake Chemical would begin earning IDRs to one dollar 29¢ per unit from 32¢ per unit, or 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 $39..75 to grow 325 percent 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 2, 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 RDR 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 3, let us review the many benefit 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 resets 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. 2nd, without the burden of IDR payment, 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 growth rate in distributions. The partnership would not have to make any IDR payments over the next 10 plus years, and the existing dropdown inventory at OpCo can support that growth. As a reminder, the existing dropdown inventory at OpCo represents just one of the Partnership's 4 growth levers. And this will 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 to capital markets. The resets 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 JV, ethylene cracker, and Lake Charles, Louisiana, currently being built with Wotte 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's sponsor at Westlake Chemical. First, As discussed earlier, Westlake still continues to receive the same cash flow that 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 dropdown transactions that attracted and accretive valuations to Westlake Chemical. Next, the reset keeps the Partnership's cost to 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 capital A source of advantage cost of equity capital at Westlake Chemical for a long period of time supports Westlake's strategy to grow its business. Westlake Chemical is the Partnership's largest unit holder, thus resetting the IDR IDR tiers, which we believe will enhance the value of the Partnership benefits its largest unitholder, Westlake Chemical. And, of course, Westlake Chemical retains the future option of the revised IDR structure and the right to receive future IDR payments once partner grows into the highest reset tiers with our growth having created significant value to the Partnership unitholders. Westlake Chemical still retain 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 4, the long term success of the Partnership's 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 that trades at a premium multiple to Westlake Chemical and hence offers a lower cost of equity capital. This provides Westlake Chemical a cost of energy source of equity capital that Westlake Chemical has reinvested back into its own businesses, grow incrementally growing Westlake Chemical's earnings and cash flows. The strategy at 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 4 levers of growth available to the to partner which include, require an 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 JV, ethylene cracker currently being built with Lo Tea 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 5, we have summarized the reset in the IDR tiers from this transaction. Has already highlighted, the first distribution target per quarter is reset to $1.29 per unit from 30 32¢ per unit. Which will allow us to grow the first quarter 2018 limited partner distributions of $39.75 per unit, 325% before any IDR payment will be earned and paid. The 25% 50% tiers have also been raised with a 50 percent 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 the Westlake Chemical continues to retain its cash flows. Now I'd like to turn the call back over to Albert to make some closing remarks. Before we take questions. Adam? Thank you, Steve. The reset of the IDR chairs between Westlake Chemical And Partners offers significant benefits to those parties. To partners, it is immediately accretive to unitholders This significantly increases the life of dropdown inventory of existing assets, reduces the need to access capital markets, and improves its cost capital. The ability of the partnership grows 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 dropdowns of existing assets in OpCo, highlights just how robust the partnership ability is to continue to grow distributions with all of its 4 levers We believe the partnership will have the ability to deliver distribution growth to its unit holders 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 creative nature of dropdown transactions with Westlake Chemical. While directly benefiting Westlake Chemical, as the Partnership's largest student holder 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 partnership partners with the holders and Westlake Chemical shareholders. And 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 Chemicals Business in a more cost effective manner, which is a hands through this transaction by improving the partnerships 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 2 hours after we conclude the call. We will provide that Our first question comes from John Roberts of UBS. Your line is open. John, the cell phone's muted. Please unmute. John, are you there? Our next question comes from Jonas Oxgaard of Bernstein. Your line is open. Good morning. How are you? I am fantastic. Question on the on the M and A angle you had there. You have your your 4 pillars of strategy. As far as I can tell, you've only really employed 2 of the 4 pillars. You never done an M and A. Outside of the locked potential locked the dropdown, is there anything else you're looking at? And for follow-up, if you're pursuing the lockdown, how would that be constructed? Can you talk a little bit about that? Yes. So when you think about, one of the obvious acquisition targets we mentioned was the Voci Venture. And given the strength that you've seen in the structure that we have today with our cert with our 3 ethylene crackers, we'd wanna make sure that we provide the same degree of earning stability in anything that we would acquire. So 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 3 ethylene crackers that are already in OpCo today. And as we think of opportunities beyond, the low t ethylene cracker that we identified, we'd certainly want to make sure that any asset that we would have 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. Well, with ethylene prices falling with new capacity coming online, how do you think about the stability of these ethylene earnings though? It's a great question. From Westlake's perspective, we think of them on an integrated basis. And so 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. And so 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. So as you see how we've constructed the margin around OpCo, Westlake is obviously taking margin above the ethylene 10¢ margin we have today. And all the margin of the derivatives downstream. So as we think about one of those levers, that 3rd lever where we could expand the margin, I see that as very actionable today because Westlake Chemical certainly has meaningful margin above that 10¢ margin just ethylene as I think about the integrated margin. Our next question comes from Jim Sheehan of SunTrust. Your line is open. So can you give us a sense for how you're evaluating the Wotte opportunity, what would be the timing of how you look at that, would you look to, you know, get right up to the 50% threshold right away or take it in smaller steps? And, Jim, as we think about it today, as you know, we have a 10% ownership in the low t 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 3 years post startup, and that will be post 2019, of that cracker. And we've made no decision at this stage to increase our ownership, but we certainly have that option up to 3 years post startup. When we think about targeting for the Partnership to acquire ownership in the OT cracker, it could occur separate and apart from Westlake's decision to increase ownership of that cracker from 10 to a higher percentage. So it could acquire that 10% now or when I say now, I mean, post startup course, you'd want to have production. But it could acquire that 10% well before Westlake made any decision if it chose to, of the incremental ownership That's purely between, a discussion between Westlake Partners And Westlake Chemical as to when that investment might occur and the timing of that. But it'll kick clearly, you'd want to make that investment after it's producing earnings and EBITDA, so it'll be clearly post the 2019 startup. Great. And then on the potential drop downs that you consider from the existing assets, would you consider a similar scale dropdowns to those you've done in the past, or would you consider something larger? Well, you know, when we think of the dropdowns, 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 continue on a pace in such a way that we provide again trans transparency and the ability to grow that distribution And you can see with this reset of the IDRs that that ability to see the very, very long runways 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. So as we think about it, that 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. Good morning, Albert and Steve. How are you? Well, good morning. Good. Good. We've seen some other MLPs attack this cost of capital issue by by by issuing IDR waivers on on either drops or external M and 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, we 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 the IDRs in such a way as we have provides very high degree of transparency that we have a very long runway as I we have an ability to continue these these growth in distributions over 300% for a very long period of time. And that allows us really to provide the investor here, a, an ability to see a way forward for an extended period a very long period of time to continue to have that growth 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. So from Westlake Chemical's perspective, this cash flows remain whole while the same time, the burden of these IDR payments are relieved from the Partnership. So 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. And then terms of drops going forward, I I I guess in terms of the financing, should we still model in a a fifty-fifty debt equity split on future drops, or does, does today's announcement change that? And, also, do you think, modeling in a 2018 drop is is reasonable? You know, our last drop was done as you you may recall in September of 2017. And at that time, we'd said we'd continue plan drop downs in the 12 to 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. But clearly, as we go forward with funding these drops, the intent would stay what to stay well within the guidance that we've given in terms of leverage of the consolidated group and the partnerships. So 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 So I don't think that we're limited really today, in today's market. And 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 John Evans of SG Capital. Your line is open. Steve, does this foreshadow just, using the other lever of adding to the margin or or not. I'm just curious if that's what you guys are trying to do here. You know, when you think about, the the levers that we mentioned, Albert 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 4 levers growth over time. And 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 in So you're right. We've not used that lever, but certainly I would anticipate that in the future, we certainly will. And we'll just have to assess what's the right time to use any one of those particular levers. But as I see it, those 4 levers are still very, 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. And then just the 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 gonna 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 significant a significantly long runway for just these existing assets. And 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 Mochi over the last couple of years. And 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 have runway to its capacity over time. So, clearly, I think the transparency here should telegraph to the market. We see a very long, 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. But you don't think you can you're not looking to change the structure of your tax status, right, like some of these others have correct? You know, we continue to assess the market, but we still believe that the structure that we have today provides significant benefit to the unitholders and the Westlake Chemical to sponsor And then 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 is that with that low double digit 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've just laid out 10 years plus of growth that we can provide using that historical growth rate that you just mentioned. And you can see here we're 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. Our next question comes Kevin McCarthy of Vertical Research Partners. Your line is open. Yes. Good afternoon, gentlemen. Need a number of comments regarding financing. In your view, does the, change in in, IDR tiering increased CMLP's ability, to issue debt or or equity or or both on more attractive terms. You know, 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 it's IPO and 14 provides us an ability to use leverage or debt And I think the tiering, the resetting of these tiers, continues to provide opportunity to access both markets in a very, I think, opportunistic manner. So we think this really benefits the partnership to be able to grow and access both markets. K. And then a a couple of clarification questions, if I may. Regarding the, the tiers that you outlined on slide 5, do those change, or would they change in the event that the MLP, issued units in the future? No. They do not. Okay. And then, I guess as a practical matter, if if distributions need to grow 325 percent, to to trigger why not eliminate IDRs? So is is is there a reason to retain them? Well, we wanted to kind of 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, 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. So we've maintained the optionality, and we'll just consider what the right strategy is for the partnership and the parent over time. K. Thank you very much. You're welcome. At this time, Q and 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 am Eastern Time on August 2nd and for Westlake Partners at 12 pm Eastern Time on August 2nd. We hope you'll join us then to discuss our 2nd quarter earning results. Thank you for participating in today's website. Westlake Chemical Partners LP And Westlake Chemical Corporation reset of Westlake Partners IDR Keyer's conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 PM Eastern. On August 6 2018. The replay can be accessed by calling the following numbers. Domestic callers should dial a 558592056. International callers may access the replay at 4 4 5373406. The access code is 60684 15. You may now disconnect. Everyone, have a great day.