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Edited Transcript of WLKP earnings conference call or presentation 5-Nov-19 5:00pm GMT

Q3 2019 Westlake Chemical Partners LP Earnings Call

Houston Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Westlake Chemical Partners LP earnings conference call or presentation Tuesday, November 5, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert Yuan Chao

Westlake Chemical Partners LP - President, CEO & Director of Westlake Chemical Partners GP LLC

* Jeff Holy

Westlake Chemical Partners LP - VP & Treasurer of Westlake Chemical Partners GP LLC

* Steven Mark Bender

Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC

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Conference Call Participants

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* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. Welcome to the Westlake Chemical Partners Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded today, November 5, 2019.

I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer. Sir, please begin.

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Jeff Holy, Westlake Chemical Partners LP - VP & Treasurer of Westlake Chemical Partners GP LLC [2]

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Thank you, Michelle. Good morning, everyone, and welcome to the Westlake Chemical Partners Third Quarter 2019 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. The conference call will begin with Albert, who will open with a few comments regarding Westlake Chemical Partners' performance in the third quarter as well as the current outlook on our strategy and opportunities. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and then we'll open the call up to questions.

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, our ability to borrow funds and access capital markets and other risk factors discussed in our SEC filings.

This morning, Westlake Partners issued a press release with details of our third quarter financial and operating results. This document is available in 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 caller should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code is 9764456. Please note that information reported on this call speaks only as of today, November 5, 2019, 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 would like to turn the call over to Albert Chao. Albert?

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Albert Yuan Chao, Westlake Chemical Partners LP - President, CEO & Director of Westlake Chemical Partners GP LLC [3]

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Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2019 results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $82 million for the third quarter of 2019. Westlake Partners' third quarter net income was $15 million. In the third quarter of 2019, we achieved strong financial performance and strong production volumes compared to the same period in the previous year. These financial results were attributable to acquisitions of an incremental 4.5% interest of OpCo into the Partnership in the first quarter of this year. We continue to evaluate all opportunities available to us, including growth through acquisition and margin expansion as a means to further grow our cash flows and continue to create value for our unitholders.

We had excellent ethylene production this quarter, which drove our strong results. We have demonstrated a sustained 5-year record of growing our distributable cash flows, provided a historical 12% annual distribution growth while delivering exceptional stable cash flows. These cash flows are insulated from commodity price risks via our sales agreement with our investment-grade rated sponsor Westlake Chemical, which reset its incentive distribution rights without compensation in 2018, demonstrating excellent governance and strategic alignment.

On October 31, 2019, we announced distributions of $0.4646 per unit with respect to the third quarter of 2019. This represents a 6% annualized increase as compared to the second quarter 2019 distribution. This is the 19th consecutive quarterly increase in distributions to our unitholders and an increase of 69% over the Partnership's minimum quarterly distribution.

For the 12 months ending September 30, 2019, distributable cash flow provided coverage of 1.11x the declared distributions. We intend to retain a sustainable top tier distribution growth rate to unitholders that reflects underlying value of our business. This top tier distribution growth rate will reduce our reliance on the equity capital market, better align distributions growth to current market conditions and reduce unitholder dilution and extend the drop-down runway.

Before I turn the call over to Steve, I would note that this distribution strategy provides us the ongoing flexibility for reevaluating our distribution growth rate should MLP equity markets improve.

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?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [4]

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Thank you, Albert, and good morning, everyone.

In this morning's press release, we reported consolidated net income, including OpCo's earnings, of $82 million on consolidated sales of $217 million for the third quarter of 2019. Westlake Partners' third quarter 2019 net income was $15 million or $0.42 per limited partner unit. The Partnership had distributable cash flow for the quarter of $20 million or $0.58 per limited partner unit. Third quarter 2019 net income for Westlake Partners of $15 million increased by $3 million compared to third quarter 2018 Partnership net income of $12 million. Distributable cash flow of $20 million for the third quarter of 2019 increased $5 million from third quarter 2018 distributable cash flow. The increased net income and distributable cash flow was primarily due to the 4.5% increase in ownership interest in OpCo.

The Partnership's third quarter 2019 net income of $15 million increased $1 million from second quarter 2019 net income of $14 million, while third quarter 2019 distributable cash flow of $20 million increased $4 million from second quarter 2019 distributable cash flow of $16 million. The increased net income and distributable cash flow for the third quarter was driven by our record quarterly ethylene production at OpCo and lower SG&A expense.

For the 9 months of 2019, net income for the Partnership of $44 million increased $6 million from the first 9 months of 2018 net income to the Partnership of $38 million. Distributable cash flow of $54 million increased $8 million from the first 9 months of 2018's distributable cash flow of $46 million. The increases in net income and distributable cash flow were primarily due to the 4.5% increase in ownership interest of OpCo and higher production of Opco, partially offset by the timing of maintenance capital expenditures, onetime costs associated with the acquisition of an incremental interest in Opco.

The benefit from the long-term ethylene sales agreement with our sponsor, Westlake Chemical, who has short ethylene for their derivative production, is a stable fee-based cash flow to the Partnership. This take-or-pay agreement is 95% of our ethylene sales and protects the Partnership's cash flow from the margin volatility that can be associated with the ethylene business. This sales agreement, which is structured to generate a net margin of $0.10 per pound of ethylene to the Partnership, along with the take-or-pay provisions with Westlake Chemical, incentivizes us to continue to look for opportunities to increase capacity and operating rates.

Turning our attention to the balance sheet and cash flows. At the end of the third quarter, we consolidated cash balance of $19 million in cash invested with Westlake Chemical to our investment management agreement of $165 million. The $165 million in cash invested through the investment management agreement includes cash generated from operations throughout the quarter and the reserve for turnaround expenditures. Our next turnaround is at our Petro 2 facility in Lake Charles, Louisiana, which is currently scheduled for the second half of 2020. I will give more specifics on the duration of the turnaround once we finalize our turnaround planning.

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 2019, OpCo spent $6 million in capital expenditures.

For the third quarter of 2019, we maintained strong leverage metrics with a consolidated leverage ratio between 1 -- below 1x and a net debt to capitalization ratio of below 20%. On October 31, 2019, we declared a quarterly distribution to unitholders of $0.4646 per unit. This was our 19th consecutive increase in quarterly distributions to unitholders. This distribution will be paid on November 26, 2019, to unit record -- to unitholders of record on November 12, 2019.

Now I'd like to turn the call back over to Albert to make some closing comments. Albert?

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Albert Yuan Chao, Westlake Chemical Partners LP - President, CEO & Director of Westlake Chemical Partners GP LLC [5]

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Thank you, Steve.

This quarter, we marked the fifth anniversary of our IPO. I want to take this time to reflect on the significant progress the Partnership has made over the past 5 years.

We have provided a sustained and consistent distributable cash flow growth because of the exceptionally stable earnings of our business, which are insulated from commodity risks due to the long-term contractual arrangement and strategic alignment with our sponsor, Westlake Chemical. Furthermore, we have continued to maintain a strong balance sheet with conservative financial and leverage metrics. We will continue to deliver a top tier distribution growth strategy. Through this alignment, we will reduce unitholder dilution, further bolster our strong balance sheet and align with current market conditions to deliver long-term value to our unitholders.

Additionally, we continue to benefit from the stable fee-based cash flow generated by the fixed margin take-or-pay ethylene sales agreement with investment-grade rated Westlake Chemical, our sponsor, along with the 4 levers of growth, including: organic expansions of our current ethylene facilities; continuation of 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.

As an example of an acquisition opportunity is Westlake's interest in its 2.2 billion pounds ethylene cracker joint venture with Lotte Chemical, which recently started up. We're continuing to evaluate how this asset could be mutually beneficial to both Westlake Chemical and Westlake Partners as well as be part of a long-term growth strategy for the ownership of the assets.

All these levers could provide opportunities to continue to grow our distributions to our unitholders.

Thank you very much for listening to our third quarter 2019 earnings call. Now I will turn the call back over to Jeff.

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Jeff Holy, Westlake Chemical Partners LP - VP & Treasurer of Westlake Chemical Partners GP LLC [6]

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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 at 2 p.m. Eastern Time. We will provide that number again at the end of the call. Please be aware that we have posted a presentation outlining our distribution philosophy, which is available on our partnership website at wlkpartners.com.

Michelle, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Leithead with Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [2]

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I guess, first, could you just walk us through your decision to reduce the distribution growth rate this quarter? Obviously, the distribution yield today is much higher than maybe where it was 3 or 4 years ago. And I agree, you don't want to keep issuing new equity at a valuation that would be more dilutive. So I guess, how do you think about the current yield versus distribution growth in today's capital environment? And really, at the end of the day, how to optimize value for your unitholders?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [3]

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Mike, with the adjustment in our distribution growth strategy, it reflects market conditions. And as we noted, we intend to retain a sustainable top tier distribution growth rate, which reduces our reliance on the equity capital markets and I think aligns well with the approach that we've taken. I think given the balance sheet that we have and the stable income stream that we have, I think that we can continue to work on executing on those 4 levers that Albert just spoke to.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [4]

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Got it. That's helpful. And you talked about Westlake's stake now in the Lotte cracker as a potential inorganic growth opportunity. Could you just talk about maybe how such a transaction would potentially mechanically work? Does that get purchased into the existing OpCo structure? Or would you need to set up a new ethylene sales agreement, just how that would work? And I guess, how you think about the relative attractiveness of such a transaction versus further OpCo purchases?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [5]

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There are a variety of ways to think about it, but I think the most simplest way to consider it would be to provide the same stability that we have around the existing ethylene capacity that we have at OpCo. And so an ethylene agreement that would provide that same degree of stability that we enjoy today would be structured, and that would allow the Westlake Chemical to contribute that into a vehicle that would provide that ethylene offtake agreement with the same stability and, therefore, provide the master limited partnership, the ability to benefit from those earnings streams in the same way in which they're benefiting from OpCo's cash flow streams today.

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Operator [6]

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And our next question comes from the line of Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [7]

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I just wanted to sort of discuss kind of the stock price on a go-forward basis. I appreciate you sort of answered the question in a different way to the frequent question. But when I think about lower distribution growth rate expectation or this dire more internal equity funding, how do we think about OpCo at like sales assets to (inaudible)? Do you do them on a smaller but more frequent basis on a go-forward basis? That way, you continuously are able to optimize the retained distributable cash flow, keep the equity components at a minimum? Just kind of wondering how you're thinking about optimizing it on a go-forward basis sort of (inaudible) requirement yet, at the same time, trying to continuously increase your (inaudible)?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [8]

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Yes. Well, the approach that you outlined is certainly one of the alternatives, and that being smaller transactions that could be more frequent or transaction size to meet market conditions. And Shneur, a lot of this is a function of the shape of the market and the size of the market at the time. But given the fact that we have significant flexibility with the levers that we have available to us, we have the flexibility to really consider which approach and the timing of that approach to address the ability to reward those unitholders with growth, while at the same time, adjusting the lever and the timing of that to meet market conditions.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [9]

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Okay. And when you talk about distribution growth rate being top tier, do you have a sense of what that number should be or what ballpark to look at some advantaged growth out here right now, assuming people have been slowing the growth rate...

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [10]

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You're cutting out a little bit. It's a little hard. Could I get you to restate that again?

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [11]

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Sorry. So just to repeat the question. The -- as far as the top tier distribution growth rate, a lot of top tier growth rates have been reset recently. So I was kind of wondering, which group of peers you're looking at, at this point right now as to how we should think about a growth rate that you would be targeting on a go-forward basis?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [12]

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No, you're right. You're absolutely right. And so as we took a look at some of those that are growing at mid-double digits, we recognize that in this environment that's challenging for them. And so I think if you take a look at our approach here, it is to be in that top tier. And you're right, there are a number that I believe are going to have to think about their growth rates given the conditions in the market. So we want to beat, if you will, benchmark against those that are -- have the same kind of metrics that we have, and that is stability and the capacity to grow that stability of earnings over time. And there are a number of participants in the market that don't have the degree of stability or the ability to provide that stability over a very extended period of time. And that's the peer set that we're kind of looking at in being able to continue to deliver that top tier growth rate.

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Operator [13]

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And our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [14]

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So given the low leverage ratio, the higher equity yield and the lower distribution growth going forward, would you think about funding drops entirely with debt, at least in the short term and remove this -- I guess, this equity market overhang completely?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [15]

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Well, Matthew, as you've seen, we look at all funding mechanisms available to us, and we've undertaken those transactions in the past. If you go back to '15, that's -- that is how we undertook that. But what we're trying to do is also address the -- I think, the float. As you well recognize, the float in the marketplace is not as broad as we would like it. So there's a balancing act to provide both the growth in earnings, the growth in distributions as well as the growth in available units in the marketplace. But we look at all those as considerations when we think about how we fund transactions.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [16]

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Sounds good. And then, Steve, I think you mentioned that the crackers produced record ethylene in the quarter. I feel like the Q2 volumes were relatively strong as well. But I was just hoping, could you provide any sort of numbers on how much volumes improved quarter-over-quarter? And would you expect similar rates in Q4?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [17]

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Well, the units continue to perform very well. And so when you think of the relative performance that we had, you're right, they did -- as I say, they did perform very, very well over the course of the quarter. And so they produced between 2% and 3% more ethylene sequentially from 2Q to 3Q, and that's the reason for the very strong performance. This was a record third quarter production performance by the 3 production units.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [18]

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And do you think you can continue that into Q4? Or would there be just like natural seasonality that would pull production down in Q4?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [19]

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It's not seasonality. A lot of it is just mechanical integrity and making sure the plants run well. And of course, temperature has a lot to do with how well the units run as well. So long as we have cool weather, it'll help the units perform.

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Operator [20]

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And our next question comes from the line of Eric Petrie with Citi.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [21]

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So I wanted to get some historical context on the Petro 2 turnaround. I think the last time was back in first quarter of '13 for 75 days. What was the impact to earnings or costs associated with that turnaround?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [22]

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You're right, it did turn around in 2013. I'm going to have to go back and take a look in terms of the number of days, but we didn't give a specific earnings number to that, just numbers of days. And as we think about the upcoming turnaround we have for -- planned for 2020, we'll be more specific once we finalize the timing of the outage and the number of days. And -- but we'll be able to give more clarity as we finish our planning for that.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [23]

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Okay. Secondly, integrated ethylene margins were higher at the time of the Westlake Partners IPO. Would it be accurate in saying parent, Westlake Chemical, would not offer the same $0.10 per pound fixed margin in a new contract with the incremental Lotte drop-down?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [24]

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We looked at not just the ethylene margins at the time in 2014, but we actually went back and looked at a much, much longer time period. I believe it was over 20 years. And so we looked at what the ethylene margins could be sustained for a long period of time and not just what they were at that point in time. So we want to provide the same degree of clarity and sustainability of margins as we have for any -- as we have historically for any new ethylene assets contributed. So we're...

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [25]

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So you're comfortable.

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [26]

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Yes, we were comfortable then with that $0.10.

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Operator [27]

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And our next question comes from the line of Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [28]

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Steve, there a couple of questions on this. I just wanted to know, when was the last time that ethylene margin got even close to that $0.10 fixed margin to the Partnership?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [29]

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Well, remember, for the Partnership, it is a net margin. So it is fixed for the Partnership. So that's the beauty of the ethylene sales agreement, that all costs, including turnaround costs, are reimbursed. And so therefore, the Partnership is not exposed to the volatility of the earnings from the ethylene unit. That risk is really carried by Westlake Chemical Corporation, not by the Partnership. The only risk that remains to the Partnership is that small 5% attributable to those pounds sold in the market.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [30]

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I'm sorry, I wasn't more clear. I really meant the risk to Westlake Chemical. Does that $0.10 sufficiently -- give you a sufficient margin to Westlake Chemical?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [31]

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The integrated margin, when we think through the integration from ethylene all throughout products such as polyethylene, has been in excess of $0.10 over a sustained period of time going back many years. So we're comfortable with that $0.10 sustained margin on an integrated basis and providing that $0.10 ethylene margin to the Partnership.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [32]

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And then one more for you about feedstock. If propane gets attractive, and you can shift your feedstock over to propane, you get less ethylene out of that. Is that a net negative for the Partnership?

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Steven Mark Bender, Westlake Chemical Partners LP - Senior VP, CFO & Director of Westlake Chemical Partners GP LLC [33]

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That -- remember, the Partnership is operating the ethylene units. And so it is designed to make sure that we're maximizing production. And in my earlier comments, I mentioned that as we switch over feedstocks on a sustained basis, it would only because we would de-rate the ethylene units from their production because there's integrated margin downstream. And we'd want to do that only if there was sustained benefit. We haven't seen that at this stage. And frankly, Steve, I think that given the benefits that we see in ethane, I think that's not a high probability at all.

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Operator [34]

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

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Jeff Holy, Westlake Chemical Partners LP - VP & Treasurer of Westlake Chemical Partners GP LLC [35]

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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.

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Operator [36]

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Thank you for participating in today's Westlake Chemical Partners Third Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has 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 9764456. This will conclude today's call. Goodbye.