Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Partners Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, November 6, 2018.

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..

domestic callers should dial 855-59-2056; international callers may access the replay at 404-537-3406. The access code is 7085308. Please note that information reported on this call speaks only as of today, November 6, 2018, and therefore, you're advised that time-sensitive information may no longer be accurate as at 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?.

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2018 results. In this morning's press release, we reported consolidated net income, including OpCo's earnings of $84 million for the third quarter of 2018. Westlake Partners' third quarter net income was $12 million.

On October 31, 2018, we announced distribution of $0.4207 per unit with respect to the third quarter of 2018. This is a 2.9% increase from the second quarter 2018 distribution, and 12% increase from the third quarter 2017 distribution. This is the 15th consecutive quarterly increase in distributions to our unitholders since our IPO.

For the trailing 12 months, MLP distributable cash flow provided coverage of 1.2x the declared distributions.

On July 27, 2018, the Partnership reset the distribution targets, which determine the payments to the incentive distribution rights, with the new first year established at a quarterly distribution of $1.29 per unit from the previous first year target of $0.32 per unit.

The effect of its reset would allow the Partnership to increase its quarterly distribution in line with historical growth rates for over 10 years before the next incentive distribution rights, or IDR payment is earned and paid.

While distributions to the IDRs were a small portion of Partners cash flows, we wanted to proactively address the investor interests regarding the IDRs in a manner that will be mutually beneficial to both the Partnership and our 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 our call over to Steve to provide more detail on the financial and operating results for the third quarter.

Steve?.

first, the Partnership did not pay any consideration, the reset is immediately accretive to unitholders. Next, removing the IDR cash flow burden reduces the frequency and size of the capital needs of the Partnership, allowing it to more opportunistically access the capital markets as well as improving the Partnership's cost of capital.

Being relieved of the IDRs for the foreseeable future, Partners is better positioned to pursue accretive investment such as Westlake's joint venture ethylene cracker in Lake Charles, currently being built with Lotte Chemical that is expected to start up in 2019.

Finally, the IDR reset highlights the significant strategic alignment between the Partnership and its sponsor, Westlake Chemical.

The ability of the Partnership to be a long-term cost advantage source of equity capital for Westlake Chemical is a strategic asset that has and will continue to play a significant role in Westlake's plans to continue its growth. As such, on October 5, 2018, we announced the commencement of $50 million at-the-market equity offering program.

We believe this program will provide another avenue to effectively and efficiently raise lower-cost equity proceeds as we pursue all 4 levers of growth, available to us to grow our distributions and cash flows. Now I'd like to turn the call back over to Albert to make some closing comments.

Albert?.

Thank you, Steve. The stable fee-based cash flow generated by the fixed-margin take-or-pay Ethylene Sales Agreement with Westlake Chemical, along with the 4 levers of growth form the foundation for us to deliver long-term growth in distributions to our unitholders.

We continue to evaluate all of the levers of growth available to us to increase our earnings and cash flows including organic expansions of our current ethylene facilities, periodic drop downs of OpCo into the MLP; acquisitions of other qualified income streams, either directly or jointly with our sponsor, Westlake Chemical; and negotiating a higher-fixed margin in our Ethylene Sales Agreement with Westlake.

Looking forward, we plan to continue to deliver low double-digit growth in distributions to our unitholders. The recent ethylene spending to Lake Charles and Calvert City have added to our production capacity and cash flows to fund these distributions.

Our most recent drop-down in the third quarter of 2017, highlights the ability of these accretive transactions with OpCo to fund earnings and distribution growth. OpCo has a large drop-down capacity, and the Partnership plans to increase its ownership of OpCo in the future.

The new Gulf Coast ethylene cracker joint venture that the Westlake and Lotte are constructing could be considered an opportunity for acquisition after its completion in 2019. Finally, we'll continue to evaluate all 4 levers of growth to optimize our earnings, cash flows and value to our unitholders.

Thank you very much for listening to our third quarter 2018 earnings call this morning. 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 this teleconference will be available starting today by 3:00 p.m. Eastern time. We will provide that number again at the end of the call. We'll now begin to take questions..

[Operator Instructions] Our first question comes from Stephanie Burns - I mean, Stephen Byrne of Bank of America Merrill Lynch. Your line is open..

Hi. This is Ian on for Steve. In talking about the 4 levers you have to pull, double-digit distribution growth and one of the factor you called out was perhaps this expansion with Lotte.

What was the potential timing of that before for a drop-down, and what kind of ranges of potential mechanics of that type of transaction you are evaluating?.

Ian, we would expect that the ethylene plant being jointly built with Lotte would be completed in the first half of 2019. We'd certainly want to consider that - make sure that plant is running reliably and effectively before we consider it as an opportunity to contribute the ownership that Westlake has into the operating company.

It'll be something that we'll assess. And as you know, we also have a significant amount of remaining capacity in OpCo that could also be dropped on to the Partnership. So we highlight that as certainly an acquisition opportunity.

But we certainly still have a significant amount of capacity in the operating company still to drop into the Partnership as well..

Thank you very much..

You're welcome..

Our next question comes from Michael Leithead of Barclays. Your line is open..

Hey guys..

Good morning..

Good morning. Just on ethane, the biggest issue seemed to be a fractionation and pipeline capacity tightness, which I believe is considered MLP-qualified earnings.

So I want to see if potentially investing in those types of upstream assets would be of interest to Westlake or are they deemed most to be outside the core competency of your current business?.

Well, Mike, we assess really opportunities to provide a stable income stream, and therefore, a predictable distribution flow from the business.

And so as we look out on across the landscape, any asset that is qualified by the IRS would be conceptually interesting, but we would also make to make sure that we could provide the stability that I just mentioned, and the predictability of any assets in that portfolio that we consider.

So if we can construct such a structure, it would be of interest to us..

Great, that's helpful.

And then could you just touch on the dynamics you're seeing in the spot ethylene market? And how you think that plays out over the next few quarters?.

Yes, the spot ethylene market is wider thing, and certainly, it moves with supply and demand. And as the derivative plants are catching up with new ethylene plants being built, there could be excess ethylene in the market. But eventually, I think the ethylene in derivative markets will be more balanced.

And also, secondly, by the end of next year, the ethylene export terminal in the U.S. will be finished. So that provides another avenue for U.S. ethylene to be exported..

Great, 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..

Good morning, Matthew..

Steve, you mentioned the Partnership remains in the long-term plans for WLK. I was hoping you can talk about the overall strategy here, just given that these sorts of drop-down MLPs aren't quite in as much favor as they used to be.

Are you looking harder at, I guess, external M&A that would add third-party business and transform Westlake LP into more of a stand-alone company? Or are you pretty content with keeping it as more of a drop-down story going forward?.

Well, Matthew, the key that we see is to provide that stable predictable income stream and the distributions that are, therefore, also very predictable. So as we think about the opportunities to grow the Partnership, we've highlighted here potentially the inclusion of the Lotte ownership interest as a potential acquisition target.

We also assess opportunities that might be, again, qualified income streams that could provide that stability. So we recognize that given the capital issues in some of the marketplaces, others haven't had as many levers we've, as you've heard us talk about before, 4 levers of growth.

We can expand our assets, we can acquire assets, we can do a - we can expand margins, and we can do drop downs.

So I would say that while we are a - while we have demonstrated drop-down capacity in the past, I would characterize our Partnership to be more than just a drop-down story that we actually have 3 other levers that we can work on to provide growth to our unitholders, and growth in earnings and distribution capacity.

So I think that there's certainly opportunities to grow in those other forms of expansion on those other 3 levers other than just drop downs. We certainly assess the viability of the Partnership on a regular basis and we still see it as very viable and very important to us like chemical..

Go it. Thank you.

And then, I guess with the ATM, should we assume that that will be fully exercised in Q4? And could you comment too on any potential upcoming drops?.

Yes, we'll certainly open the window after we get past the normal blackout period for the ATM program, and certainly we'll look to add to liquidity as the facts and circumstances provide.

Certainly, we recognize the liquidity as a consideration for all unitholders, and it's important to us and so the ATM program is designed to be able to deal with that. As it relates to the drop schedule, we certainly are mindful that as we continue to move forward, we've continued to grow the distributions.

And I would expect that between the next 3 to - 2 to 3 quarters that we would expect a drop-down in that portfolio to allow the continued growth in distribution, and therefore, growth in earnings..

Thank you..

You're welcome..

Our next session comes from Eric Petrie of Citi. Your line is open..

Hi, good morning..

Good morning, Eric..

Do you expect your turnaround reserves and maintenance CapEx cost to be similar year-over-year in 2019? And how should we think of those stepping up in 2020 with Petro 2 turn around? Yes, the maintenance cost should be very predictable between 2018 and 2019, now that we have the turnaround scheduled for 2020.

And so 2019 will look, from maintenance activity level, very similar to 2018. And as we get into 2020, we'll give more guidance in terms of the cost and the numbers of days we've added, as we plan for that turnaround.

We're doing the detailed work now, and as I noted in my prepared remarks, we have the adequate capital already reserved in cash to be able to provide for the cost of that major turnaround in 2020..

Okay, thank you..

You're welcome..

[Operator Instructions] Our next question comes from Jon Evans of SG capital. Your line is open..

Steve, could you just follow up again a little bit on the strategy with the ATM.

So is that your hope if that's successful, will you use those proceeds to fund drop-downs instead, and you'll just be able to do it over time and put more liquidity in the stock? Or what's the strategy there?.

Yes, the strategy there is to be able to address the desire to have, what I would consider, a periodic dribble, as these programs are sometimes called, dribble of units into the marketplace.

We certainly also have the ability to respond to reverse inquiry either who through our direct offering - registered direct offering or through the ATM program, and then of course, the Partnership has cash that is currently sitting in its hands above and beyond the turnaround reserve, of course, that it could also use to acquire ownership interest in OpCo.

And then of course, the fourth option would be to consider going on to the market and issuing units. But as I see it, we have a variety of options to be able to fund any drop-down needs.

And given that we've reset the incentive distribution rights, it greatly relieves the need to go to the market in size to be able to accomplish the growth in distribution that we've been working with for 4 years since the IPO..

So to just follow-up with that, if you do another drop-down potentially in the next 2 to 3 quarters, is it about $50 million, or is it bigger than that or what you think roughly the size is to continue to put you on that kind of growth path for the next couple of years?.

That's - that's the order of magnitude..

Okay. And then, just....

Oh, and I would say, of new equity..

New equity, okay. And then the last question, Lotte, I mean, that's going to be a project.

Would you slowly bring that into the Partnership from OpCo, or how would you envision that, or would it be one would be one fell swoop?.

The answer is, it can be done in a variety of different ways. It could either be brought in, in component pieces or it could be brought in all-in-one interest if you will, and it's really a function of how we think we need to bring that in if the valuation negotiation between Westlake Partners and OpCo and Westlake Chemical were all agreeable.

So as they say a variety of levers that we can pull to bring the ownership interest into OpCo. And of course, as I noted, we still have a very sizable portion of OpCo yet to be dropped into the Partnership.

So while we've highlighted the Lotte ethylene unit as 1 that could be an acquisition target, even if we choose to do that at some future date we still have plenty of capacity in OpCo to fuel the growth in distributions for a very long period of time..

Okay. And then just the last question, I promise.

You're not looking to go to a C Corp, right? You've done the IDR, that's all you feel like you need to do on the structure of the Partnership? Is that correct?.

We're still pleased with the structure that we have in mind..

Great. Hey, thank you for your time..

Thank you. You're welcome..

At this time, the Q&A session has now ended.

Are there any closing remarks?.

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 results..

domestic callers should dial 855-259-2056; international callers may access the replay at 404-537-3406. The access code is 7085308. Everyone, have a great day..