Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, August 6, 2020.

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..

Thank you, Michelle. Good afternoon, everyone, and welcome to the Westlake Chemical Partners second quarter 2020 conference call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior 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 or Westlake Chemical refer to our parent company, Westlake Chemical Corporation, and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake Chemical and the Partnership, which owns certain olefins assets.

Additionally, when we refer to distributable cash flow, we're 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.

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, the COVID-19 pandemic, our ability to borrow funds and access capital markets at a reasonable cost, and other risk factors discussed in our SEC filings.

This morning, Westlake Partners issued a press release with details of our second quarter 2020 financial and operating results. This document is available on the Press Release section of our web page 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 3867318.

Please note that information reported on this call speaks only as of today, August 6, 2020, 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 may be accessed on our web page at wlkpartners.com. Now, I'd like to turn the call over to Albert Chao.

Albert?.

Thank you, Jeff. Good morning, ladies and gentlemen, and good afternoon to those on the East Coast. Thank you for joining us to discuss our second quarter 2020 results. These are extraordinary and unprecedented times.

Before we discuss the quarter, I would like to acknowledge this has been and continues to be a very challenging time, and our thoughts are with those affected by COVID-19.

Our first priority is to ensure the health and safety of our employees, who continue to work diligently to serve our customers to produce essential products in these uncertain times. Although this pandemic is creating short-term turbulence, our long-term fundamentals and thesis remain strong. Turning to our financials.

In this morning's press release, reported consolidated net income including OpCo's earnings of $80 million for the second quarter of 2020. Westlake Partners' second quarter net income was $15 million.

These solid financial results are a testament to the stability generated from our fixed margin ethylene sales agreement for 95% of our sales and resulting consistency of our cash flow stream. Our ethylene facilities ran well and delivered solid financial performance with slightly lower production in the second quarter.

I will note that year-to-date production volumes are only down approximately 2% versus the same period in 2019.

The ethylene fuel agreement provides for Westlake Chemical, our investment-grade-rated sponsor, to purchase 95% of annual plant production each year at a fixed margin, thus insulates us from commodity price volatility and produces predictable cash flows.

I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the second quarter.

Steve?.

Thank you, Albert, and good day, ladies and gentlemen. In this morning's press release, we reported consolidated net income, including OpCo's earnings of $80 million on consolidated sales of $239 million for the second quarter of 2020. Westlake Partners' second quarter net income was $15 million or $0.43 per unit.

The Partnership had distributable cash flow for the quarter of $17 million or $0.48 per unit. Second quarter 2020 net income for Westlake Partners of $15 million increased by $1 million compared to second quarter 2019 Partnership net income of $14 million.

The increased net income was primarily attributable to the higher earnings on production sold to Westlake. The increase was partially offset by slightly lower production at OpCo. Distributable cash flow was $17 million for the second quarter of 2020 increased by $1 million compared to second quarter 2019 distributable cash flow.

This increase was attributable to higher earnings on production sold to Westlake and reduced maintenance capital expenditures for the quarter, partially offset by lower production and increased turnaround reserve. The Partnership's second quarter 2020 net income of $15 million decreased by $3 million from the first quarter in 2020.

Second quarter 2020 distributable cash flow of $17 million decreased $1 million from first quarter 2020 distributable cash flow of $18 million. These decreases were the result of slightly lower production at OpCo. The impact of this lower production was partially offset by earnings on ethylene sold to Westlake.

For the first 6 months of 2020, net income for the Partnership of $33 million increased $4 million from the first 6 months of 2019 net income to the Partnership of $29 million. MLP distributable cash flow of $35 million increased $1 million from the first 6 months of -- from last year MLP distributable cash flow of $34 million.

The increases in net income and MLP distributable cash flow were partially due to the earnings on ethylene sold to Westlake and partially offset by a lower production. Distributable cash flow had an additional favorable benefit of reduced maintenance capital expenditures for the period, partially offset by increased turnaround reserves.

Turning our attention to the balance sheet and cash flows. At the end of the second quarter, we had a consolidated cash balance of $24 million in cash invested with Westlake Chemical through our investment management agreement of $171 million.

The $171 million in cash invested through the investment management agreement includes cash generated from operations throughout the quarter as well as the reserve for turnaround expenditures. Long-term debt at the end of the quarter was $400 million, of which $377 million was at the Partnership and $23 million was at OpCo.

For the second quarter of 2020, OpCo spent $8 million in capital expenditures. For the second quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below 1 times and a net capitalization ratio below 25%. The turnaround of our Petro 2 ethylene unit was originally scheduled to occur in September 2020.

Due to the continued strong performance of Petro 2 and in order to reduce COVID-19 risk to employees and contractors, the turnaround has been deferred until the first half of 2021. We are continuing to finalize our plan for the turnaround, and we will provide further details of the turnaround of Petro 2 cracker later in 2020.

The cost of this turnaround has been included in the amount we charge Westlake Chemical for ethylene and is expected to be fully reserved for at the commencement of the turnaround. The Partnership's predictable fee-based cash flow continues to be an attractive attribute in today's uncertain economic environment.

Given the predictability of our earnings and cash flows and continued market dislocation, we have kept our distribution consistent with the prior quarter.

Our cash flow will allow the Partnership to continue distributions at the current level while maintaining our targeted 1.1 times distribution coverage, thus eliminating the need to access the equity capital markets. We will continue to evaluate market conditions in future quarters and assess when and how we apply our four growth levers.

On July 31, 2020, we announced distributions of $0.4714 per unit with respect to the second quarter, an increase of approximately 3% over the second quarter of 2019.

Since our IPO in 2014, the Partnership has made 24 consecutive quarterly distributions to unitholders, and we have grown distributions 71% since the Partnership's originally -- original quarterly distribution of $0.275 per unit. For the 12 months ending June 30, 2020, distributable cash flow provided coverage of 1.13 times the declared distributions.

The second quarter's Partnership distribution will be paid on August 24, 2020, to unitholders of record on August 10, 2020. Now, let me turn the call back over to Albert to make some closing comments.

Albert?.

Thank you, Steve. We are pleased with the Partnership's solid financial performance and ability to continue to deliver strong production volumes. As Steve mentioned, we had slightly lower ethylene production in the second quarter.

While production was lower versus the prior year period, we remain confident that 2020 as a whole will be a strong production year, delivering solid financial performance. Outlook for ethylene remains strong, and our parent, Westlake Chemical, has seen improving market conditions that began in May and continues to the present time period.

We believe the predictable fee-based cash flow structure from its take-or-pay contract with our parent, Westlake Chemical, for 95% of OpCo's production provides a stable and predictable cash flow.

This predictable cash flow should be an even more attractive investment thesis in today's uncertain economic environment and market volatility caused by COVID-19 as well as the low interest rate environment.

As Steve outlined, our predictable cash flows provide an ability to sustain our existing distribution without relying on external sources of capital, thus providing us with greater flexibility in this environment.

This also provides us the ability to optimize growth in distribution and financing decisions that will have a beneficial impact to our unitholders. As the market condition recovers, we anticipate these strong financial attributes will be better reflected in the unit price of the Partnership.

We have maintained a strong balance sheet with conservative financial and leverage metrics.

As we continue to navigate the evolving market conditions, prepare for return to a normalized market, we'll evaluate opportunities via our four levers of growth, including increases of our ownership interest of OpCo; acquisitions of other qualified income streams, such as Westlake's interest in the LACC ethylene cracker; organic growth opportunities, such as expansions of our current ethylene facilities; and negotiations of a higher fixed margin in our ethylene sales agreement with Westlake.

As market dislocations correct and the utilization of the aforementioned four levers, we believe we have the capability to provide continuing value to our unitholders over the long term. As always, we'll continue to operate safely along with being good stewards of the environment and the communities in which we live and work.

Thank you very much for listening to our second quarter 2020 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 this teleconference will be available starting today at 2 p.m. Eastern Time. Michelle, we will now take questions..

[Operator Instructions] Our first question comes from Arun Viswanathan of RBC..

On vinyls, maybe you can just give us your perspective on the caustic market. We had several months of increases and then we saw a downtick here in July. And usually, the caustic market is either going up or down.

So, do you expect, I guess, continued declines here as PVC operating rates and vinyl operating rates continue to remain relatively high? Or do you expect operating rates there to come down later in the year on construction and maybe caustic regains some pricing momentum? How are you thinking about that trade-off?.

Arun, as the caustic market is not as seasonal as the PVC market. And so certainly, we have seen price announcements and demand strength in PVC. So, that does pull on more chlorine, which puts more cost into the market.

So, while we've seen price combinations starting in February, March and April by the industry, totaling $160 a ton to $195 a ton, a lot of the answer to your question is highly dependent upon how we see the manufacturing and industrial demand recover.

And whether it recovers more strongly or not will really drive whether we're able to see further traction in caustic pricing during the course of 2020. So as we look forward, we're certainly seeing strength in PVC and, therefore, a stronger pull on chlorine and you're right, puts more caustic in the market.

But the real strength in caustic will be very dependent upon how quickly the industrial manufacturing side of the economy picks up and begins to more fully recover..

All right. Great. That's helpful. And then maybe I'll ask the same question on the olefins side. PE, it looks like momentum has remained relatively positive here, again, maybe because the export window is now open and demand is relatively robust on the packaging side.

So a, I guess, do you expect all of those dynamics to continue and thus, the olefins chain to continue to get pricing? Or do you see kind of typical destocking in August and December maybe resulting in some price declines?.

We've seen continued strength, and that strength really goes back to the earliest parts of the year. And so as we've seen price traction really beginning in June and coming through July with now price nominations of $0.05 in polyethylene in August, the operating rates reflect that strength in pricing. I think the chain is fairly tight.

There's not a lot of excess inventory in the marketplace. And so I think there is very good traction in operating rates being elevated and traction in pricing. So we'll see how the market plays out. It's early August, but we've seen very good strength earlier so far in the quarter in July. So we'll see how the rest of the year plays out..

Our next question comes from Mike Leithead of Barclays..

Apologies for missing the call the past hour. But I guess, just one question from me today on the distribution. If we look, we've now been steady for the past couple of quarters, and I appreciate you're constantly evaluating it.

But just trying to get a sense of when you look at this or when you evaluate keeping it steady versus increasing it or decreasing it, can you give us a better sense, are you looking for a better partnership yield right now in the market? Are you looking for a better relative yield versus peers? Kind of how do you frame that internal dialogue around kind of distribution level today?.

The market continues to be and we've seen this across many of these midstream players in the MLP space continues to be fairly dislocated. And I think we're certainly looking to see a better and more normalized market before we kind of assess how we move forward with distributions.

So when we think about the 4 levers of growth that we have, they're all imminently actionable, but we certainly need a value proposition. We've got about a 10% yield, let's say. And certainly, we need, I think a valuation that is more reflective of the stability we've been clearly able to demonstrate.

The stability of cash flows, the stability of earnings through the last 6 years and even through this most recent period and the most challenging time for many industries, we've been able to very clearly demonstrate the stability of the business.

And I think in a very low interest rate environment and potentially with tax rates likely to rise, that vehicles like this should become very attractive. And so as we see the markets begin to stabilize and begin to assess how to reward investors, I think those are the kinds of conditions, Mike, that we're looking to see..

You're welcome..

Your next question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is open..

Hey, good morning, Albert and Steve..

Hi, Matthew..

Good morning, Matthew..

So the release mentioned lower ethylene production at OpCo in Q2. I know you said year-to-date production was down about 2%.

But can you offer any sort of commentary on op rates in Q2? And as you look into Q3, do you think that higher op rates would be a tailwind to the Partnership?.

So, during the quarter, Westlake Chemical did elect to receive fewer pounds of ethylene. But as you know, we've moved the turnaround into 2021. And so, I fully expect that production will be in line with production that we saw for the second half of '20 in line with the second half of '19, because we don't have that planned turnaround now in 2020.

And so, as we see and as you know well, Matthew, we have a contractual obligation to receive payment for that ethylene, whether Westlake Chemical takes it or not during the course of the year. So it's an annual nomination, and we're very comfortable that Westlake Chemical will take that ethylene.

And having pushed the turnaround into '21, there is no reason why we should see a reduction of pounds over the course of the year..

Sounds good. And then on paper, it looks spot ethane cracking margins have improved so far in Q3.

I know it's only 5% of your sales, but would you expect to realize that in Q3? Are there timing lags? Or I guess any other factors we should take into consideration?.

No, there are no timing lags per se. We're selling it in the merchant market. And so, as we see the merchant market evolve, that 5% that's sold into the market is realized accordingly..

Great. Thank you very much..

You're welcome..

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

Hi, good afternoon, Albert and Steve..

Hi, Eric..

Good afternoon..

Are you considering expanding Petro 2 during the upcoming first half '21 downtime? I believe the last time you expanded capacity was roughly 120 million pounds back in 2013..

Yeah. There's no debottleneck or expansion plan for this maintenance that we'll undertake in '21. It's just a maintenance outage..

Okay. And then just in terms of qualitative statements, your earnings in the quarter for Westlake were roughly split between olefins and vinyls.

Are you more positive on the vinyl cycle or the olefin cycle in second half and going into 2021?.

Well, as you know well, the supply demand balance is quite different in the two chains. And so certainly, we've seen strength in the construction markets beginning earlier this year. And even during the course of the pandemic, we've seen strength in our building materials businesses in pipes, fittings and siding.

So we think that given the supply demand balance in the vinyls chain and the strength that we have in our vinyls products business further downstream that we're very well positioned in the vinyl cycle.

On the ethylene -- polyethylene chain, we think we're very well positioned given our specialty orientation, but we certainly have seen a lot of capacity come in over the last several years. And that certainly has weighed on margins as new pounds have come in.

And certainly, we've seen, I think, an illustration of the strength given our specialty portfolio that we saw in the second quarter..

[Operator Instructions] Our next question comes from Steve Byrne of Bank of America. Your line is open..

Yes, thank you. Let me also apologize for missing your earlier call. We were relying on Bloomberg for the timing, and they were off an hour. So, sorry about that. I'll keep more questions here -- I'll keep my questions more relevant to your crackers.

For that new low-take cracker, I just wanted to ask how has it been running? And was it built with an expanded infrastructure and foundation to make it relatively easy to add additional furnaces to increase the capacity over time?.

So, Steve, the plant's been running very reliably. We're pleased with the operating performance of the unit and so pleased to see that.

And certainly, as you have seen in the industry, pre-installation of certain to the plan allow you to have cost-effective debottlenecks should you choose to do that and should the market be indicative of the economics to take those actions.

Naturally, you wouldn't do that until you get to a normal time period, where you're going to bring the unit down for maintenance and such. But certainly, there were some opportunities to install a certain piece of equipment that would make it cost-effective, should we choose to in the future debottleneck that unit..

And then just kind of a high-level question about your crackers. Obviously, the target molecule is ethylene, and there are some by products, but there's a fair amount of hydrogen that comes off of these crackers. And I'm assuming it uses a combustion fuel for you at $0.20 a kilogram.

And I'm sure you're aware of the focus in many, many jurisdictions for a different color of hydrogen than gray. And I just wanted to know whether you had thought through whether there's any alternative use for that hydrogen.

And if you generated another revenue stream from crackers, would that encourage you to reflect that potentially as one of the levers you can pull on increasing the value proposition to the Partnership?.

So, we -- Steve, we certainly do look at times of using hydrogen at a higher value and not just as fuel, but selling that back into the merchant market.

But back to your earlier question about green or gray hydrogen, certainly, those are -- tend to be thought of in terms of coming from more green base, be it renewable applications, not necessarily based on gas or other NGLs.

And so, it's something that we're looking at and paying attention to, but it's something that we'll just have to see if there's an underlying value stream long term if we want to look at doing anything on that front more broadly..

Steve, if I may also, that we produce hydrogen from our colocalize cells. So, we produce not a whole lot of amount because when you do electrolysis on salt brine to make chlorine caustic, there's water in the salt brine, and they turn into hydrogen as well. So, we do produce hydrogen from a chlor-alkali plant as well as ethylene plants.

So, we are all ears, and we want to enter into the hydrogen economy, and we have way to supply with today's production without adding any more capacities..

Very good. It might not be green. It could be a different color, but yes, sounds interesting. Very good..

You're welcome. But we could buy renewable power, then we become greener for chlor-alkali plants..

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

Thank you again for participating in today's call. We hope you'll join us for our next conference call to discuss our third quarter 2020 results..

Thank you for participating in today's Westlake Chemical Partners Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call is ended. 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 3867318. This will now conclude today's call. Goodbye..