Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners Third Quarter 2020 Earnings Conference Call. [Operator Instructions].

As a reminder, this conference is being recorded today, November 3, 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 Third 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 are 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 third 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 2 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 for both numbers is 7787568..

Please note that information reported on this call speaks only as of today, November 3, 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 can 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 afternoon, everyone, and thank you for joining us to discuss our third quarter 2020 results. The third quarter had a strong start with solid production across our plants and operating rates similar to those of the same period in 2019.

This production was anchored by strong demand pool from Westlake downstream's vinyls and olefin products stemming from sales and pricing recovering from the COVID-19 pandemic lockdowns that weighed on the first and second quarter of this year..

On August 27, Southwest Louisiana was severely impacted by Hurricane Laura, one of the strongest hurricanes to hit the Gulf Coast in over 40 years, which will result in significant damage to the power and utility infrastructure in the region. In anticipation of the storm, we idled our facilities in the area prior to the hurricane's landfall.

While we sustained minimum damage to our facilities in Lake Charles, the lack of access to electrical power and other utilities caused OpCo to remain idle and declared force majeure..

Once power was restored, we began the process of restarting corporations and had just begun to produce ethylene when the threat of Hurricane Delta caused us to idle our facilities once again in early October. In mid-October, Petro 1 began to restart as power utilities became available, and Petro 2 has also recently restarted operations..

I'd like to say a special thank you to our dedicated employees who helped restart these plants while many were dealing with the impacts of the storms to their own homes. Due to provisions in our ethylene sales agreement, Westlake is committed to purchase and pay for a minimum amount of ethylene from OpCo each calendar year.

This were insulated from impacts of these outages during the force majeure..

Through this commitment, OpCo continues to receive a $0.10 margin per pound for ethylene volumes that would have been produced plus production costs that occur, allowing OpCo and in turn Westlake Partners to maintain consistent cash flows during these unplanned events.

This is another example of how our long-term fundamentals and thesis remains strong..

Turning to our financials. In this morning's press release, we report consolidated net income, including OpCo's earnings of $92 million for the third quarter of 2020. Westlake Partners' third quarter net income was $19 million..

These solid financial results are a testament to the stability generated from our fixed margin ethylene sales agreement for 95% of annual planned production each year, which insulates us from commodity price volatility. This certainty, combined with our investment-grade rated sponsor Westlake Chemical produces predictable earnings and 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 third quarter.

Steve?.

Thank you, Albert, and good afternoon, everyone..

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $92 million on consolidated sales of $232 million for the third quarter 2020. Westlake Partners' third quarter 2020 net income was $19 million or $0.53 per unit.

The Partnership had distributable cash flow for the quarter of $21 million or $0.60 per unit..

Third quarter 2020 net income for Westlake Partners of $19 million increased by $4 million compared to third quarter 2019 Partnership net income of $15 million.

The increase in net income was primarily attributable to higher earnings on production sold and committed to Westlake, which included the benefit of $41 million payment related to the lost production that would have been sold to Westlake had the force majeure event not occurred. The increase was partially offset by lower third-party sales volumes..

Distributable cash flow of $21 million for the third quarter of 2020 increased by $1 million compared to the third quarter of 2019's distributable cash flow of $20 million.

The increase in distributable cash flow was attributable to higher earnings on production sold and committed to Westlake and reduced interest expense for the quarter, partially offset by increased maintenance expense and higher turnaround reserves.

The Partnership's third quarter 2020 net income of $19 million increased by $4 million from second quarter 2020..

Third quarter 2020 distributable cash flow of $21 million increased $4 million from second quarter 2020 distributable cash flow of $17 million. These increases were primarily due to the lost production payment resulting from the force majeure at OpCo and lower interest expense..

For the first 9 months of 2020, net income of the Partnership of $51 million increased $7 million from the first 9 months of 2019 net income to the Partnership of $44 million. MLP distributable cash flow of $56 million increased $2 million from the first 9 months of 2019 MLP distributable cash flow of $54 million.

The increased net income attributable to the Partnership was primarily due to the lost production payment resulting from the force majeure at OpCo and lower interest expense..

Turning our attention to the balance sheet and cash flows. At the end of the third quarter, we had a consolidated cash balance of $23 million in cash invested with Westlake Chemical through our investment management agreement of $191 million.

The $191 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 third quarter of 2020, OpCo spent $9 million in capital expenditures. For the third quarter of 2020, we maintained strong leverage metrics with a consolidated leverage ratio below 1x and a net debt to capitalization ratio below 20%.

As we previously discussed, the turnaround at our Petro 2 ethylene unit was originally scheduled to occur this year. Due to the continuing strong performance of Petro 2 and in order to reduce COVID-19 risk to our employees and contractors, the turnaround was deferred until the first half of 2021.

We are continuing to finalize our plan for the turnaround, and we'll provide further details later on, on the timing of the turnaround for the Petro 2 cracker. The cost of this turnaround has been included in the amount we charge to Westlake Chemical for ethylene and expect to be fully reserved at the time of the commencement of the turnaround.

The Partnership's predictable fee-based cash flow continues to be an attractive attribute in today's economic environment..

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

Our cash flow will allow the Partnership to continue distributions at our current level, while sustaining our long-term target of 1.1x distribution coverage, thus eliminating the need to access the equity capital markets..

We will evaluate market conditions in future quarters and assess when and how we apply our growth levers. On October 30, 2020, we announced distributions of $0.4714 per unit with respect to the third quarter of 2020, an increase of approximately 1.15% over the third quarter of 2019.

Since our IPO in 2014, the partnership has made 25 consecutive quarterly distributions to unitholders. We have grown distribution 71% since the Partnership's original minimum quarterly distribution of $0.2750..

For the 12 months ending September 30, 2020, distributable cash flow provided coverage of 1.13x the declared distributions. The third quarter's Partnership distribution will be paid on November 24, 2020, to unitholders of record of November 9, 2020..

Now I'd like to 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. The stability of our business model was illustrated in the third quarter as our ethylene sales agreement and its protective provisions provide us with predictable earnings and cash flows despite hurricanes and associated unplanned outages.

The solid demand for ethylene derivatives, such as polyethylene and PVC that we observed via our parent, Westlake Chemical, continues to provide us the confidence that the predictable fee-based cash flow structure from our take-or-pay contract with Westlake Chemical for 95% of OpCo's production, will continue to provide a stable and predictable cash flows.

This ratable cash flow, which, as this quarter demonstrated, is insulated from production risks and therefore, should be an even more attractive investment thesis in today's uncertain and volatile economic environment, especially in the face of near historically low interest rates..

As Steve outlined, our predictable cash flow provides an ability to sustain our existing distribution without relying on external sources of capital thus providing us greater flexibility in this environment and in the future. The investment thesis of solid underlying value could not be more clear, given our performance in the quarter.

We believe these strong financial attributes should be better reflected in the market..

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

As we continue to navigate these market conditions and prepare for a return to normalized market, we will evaluate opportunities via our 4 levers of growth in the future, including the increases of our ownership interest of OpCo; acquisitions of other qualified income streams; organic growth opportunities, such as expansions of our current ethylene facilities; and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake.

As markets normalize and with the utilization of our 4 levers, we believe we have the ability to continue to provide long-term value to our unitholders. As always, we will continue to operate safely along with being good stewards of the environment in the communities in which we live and work..

Thank you very much for listening to our third quarter 2020 earnings 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 that a replay of this teleconference will be available starting today 4 p.m. Eastern Time. Michelle, we will now take questions. .

[Operator Instructions] Our first question comes from Mike Leithead of Barclays. .

We have break between calls this quarter.

First, I wanted to dig in a little bit more in terms of how you're thinking about your distribution policy and what it would take to possibly restart growing that again? Is it more a function of where Westlake Partners is currently trading? How do you think about your growth versus kind of what peers are doing or in terms of equity market activities, I guess, how do you kind of weigh the decision to keep it stable versus potentially growing it over time today?.

Mike, it's a good question. If you look at our current yield, you can see that we're a top-tier yielder in this space, and we think that, that valuation should be better reflected in unit price.

When you think of the peer sets of those companies that we think we benchmark against, very well-structured partnerships that provide stability of earnings and cash flows. And to be able to grow this, we feel like we need evaluation that makes more sense in this current lower interest rate environment. .

Got it. That makes sense. And then maybe bigger picture, we've seen a lot of volatility over the past 6 months, whether it's the MLP market, Westlake Partners unit price or ethylene margins, but as I think you talked about on the call, the cash flow profile of WLKP has remained remarkably consistent.

So I guess kind of where we sit today, has that changed at all, how you view the MLP as part of Westlake's overall strategy? Or maybe does it possibly reinforce what you think the investment case is for potential unitholders?.

Well, I think the stability of earnings and predictability of the cash flows, I think, is a hallmark for those one, a stable income stream and a predictable earnings and cash flow vehicle and who provide a predictable ability to get a return on that investment that they've made.

When you think of the importance, I think, of an ability to integrate Westlake Partners with Westlake Chemical, I think their strategy are highly aligned. And I think Westlake Chemical continues to believe it makes good sense with that aligned strategy.

As long as we can execute on our strategies together, it makes good sense, I think, to keep these entities in their place and growing as the market permits. .

Our next question comes from Matthew Blair of Tudor, Pickering, Holt. .

I appreciate the stability of Westlake LP's structure. I was hoping you could help us understand, though, how OpCo EBITDA was actually up quarter-over-quarter despite the downtime.

Was this the case where you were down? So you're sitting on some op costs, but then you still received that $41 million take-or-pay revenue from Westlake's C-Corp?.

Yes. So it's a little bit of a convoluted story. But obviously, during the period of the outage, we saw some -- or I guess, I would say, during the quarter, the maintenance expense was much smaller than normal.

And so certainly, as you know, that $41 million buyer deficiency fee allows us to recoup our unavoided operating cost during the period of the outage as well as a recovery of that $0.10 margin on the production that is lost. And when you put those pieces together, that's what provides the very small uptick in results. .

Okay.

And then do we need to be on the lookout for a reversal of that in the coming quarters?.

No. Those circumstances shouldn't reverse in that context. As I said, well, we still are operating under a force majeure today. And so as we look forward, as we've said in our prepared remarks, the structure of the ethylene sales agreement provides an incredible stability of income and cash flows.

And I think it illustrates, given this quarter and as we look forward to the future, stability and predictability. We've had other unplanned outages in the past, and you've seen that we've been able to deal with those in a similar fashion. .

Okay. And then last question. Could you talk about the ethylene spot sales in Q3 and so far in Q4? Steve, I think you mentioned in the prepared comments that they were lower.

But did you still have spot sales despite force majeure?.

We did. We had -- we did have spot sales in the quarter and we're able to deliver the ethylene accordingly. .

At this time, the Q&A session has now ended. I will 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 fourth quarter and full year 2020 results. .

domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code is 7787568. This will conclude today's call..