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PetroLogistics LP (NYSE:PDH)

Q4 2013 Earnings Conference Call

February 06, 2014 11:00 AM ET

Executives

Mike Rogers - Corporate Controller

David Lumpkins - Executive Chairman

Nathan Ticatch - President and CEO

Sharon Spurlin - SVP and CFO

Analysts

Eric Petrie - Citigroup Global Markets Inc.

Vincent Andrews - Morgan Stanley & Co. LLC

Operator

Good day ladies and gentlemen. Welcome to PetroLogistics’ Fourth Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to today’s host Mike Rogers, PetroLogistics’ Corporate Controller. Please proceed.

Mike Rogers

Good morning and thank you for joining us to discuss our fourth quarter financial results and cash distribution, both of which we announced yesterday in our press release. On the call with me today are David Lumpkins, Executive Chairman; Nathan Ticatch, President and Chief Executive Officer; and Sharon Spurlin, Senior Vice President and Chief Financial Officer. Please note that during the course of this conference call, management may make forward-looking statements regarding future events, anticipated future trends and the future performance of the Company. We wish to caution you that such statements are based on what we believe are reasonable assumptions, but we can give no assurances that these assumptions will materialize.

Important factors that could cause actual results to differ materially from those in our forward-looking statements that may be made during our call are enumerated in our annual report on Form 10-K as filed with the Securities and Exchange Commission. We will also make reference to non-GAAP financial measures on this call. A reconciliation and other associated disclosures are contained in our press release and associated filing on Form 8-K.

I will now hand the call over to the Executive Chairman, David Lumpkins.

David Lumpkins

Good morning everyone and thank you for joining us. Today we will discuss the following; I’ll provide an overview of recent results and the market dynamics affecting our business, Nathan will cover our operations, Sharon will discuss financial results and then we’ll close with your questions.

As indicated in our earnings release yesterday, the Partnership posted fourth quarter results of $40.1 million in adjusted EBITDA and a distribution to unitholders of $0.30 per unit. That brings results for the full year 2013 to $268.8 million in adjusted EBITDA and distributions to unitholders of $1.72 per unit. The most notable accomplishment in the fourth quarter was the successful completion of our first triennial turnaround. The main driver for the turnaround is the replacement of the reactor catalyst but we also take the opportunity during the downtime to undertake numerous other projects to enhance reliability and overall plant performance.

The entire cost of the turnaround was funded from the reserves we set aside each quarter for that purpose, and distributions to unitholders were continued during the plant outage utilizing those reserves as well. Nathan will discuss the turnaround in more detail but we are already seeing positive results in plant performance as we look forward to improve reliability going forward.

With respect to the business fundamentals for the quarter let us turn first to the propane side of the equation given the recent attention focused on propane in the U.S. The propane price increased each month of the fourth quarter, starting at a $1.13 per gallon monthly average in October and ending with $1.27 average for December. The average price for the full quarter was $1.20, up from $1.03 in the third quarter. And as I am sure you know this trend accelerated into January with the average price for the months jumping to $1.40 per gallon and the price spiked late last week to even higher levels.

So what’s going on? The answer is that this has been a winner when events really did conspire to drive up propane prices. The big story in the propane market for some time has been the race between the increase in export capacity driving up demand and the increase in fractionation capacity increasing supply. But as we’ve said in the past, it’s important to recognize that capacity does not necessarily translate into volume. And the fact is that propane volumes moving offshore had filled up that new export capacity faster than growing NGL streams have filled up the new fractionation capacity in the last year.

With recent additions to export capacity it became fully operational and their existed a large arbitrage between U.S. and international propane prices, volumes quickly began to move offshore. By October 2013, exports reached a record level of over 400,000 barrels per day, almost double levels a year ago. And on the other hand, actual NGL fractionation production levels as opposed to fractionation capacity, is a function of the rate of drilling and completion of wells containing NGLs together with the completion of accurate logistics to get the volumes to the market. And those activities unfold in more relatable fashion over time rather than the step change we saw last year in the export volumes.

Although, current propane production is about 15% higher than this time last year, that increase has not been enough to offset the new exports during the year. Therefore, new demand for propane in the last year exceeded new supply. As a result, propane inventories, which have been historically high levels a year ago, declined to levels below the five year average as we went into this winter. Those inventory draw-downs were exacerbated by unusually large propane consumption for crop drying last fall due to rainy weather late in the harvest in the Midwest. Then January turned up to be the coldest months nationwide in many years. That factor had the dual impact of increasing heating demand and also reducing NGL obsolete from regions where gas production and gas plant operations were adversely affected by the very cold temperatures.

The combination of all these factors led to large price spikes in recent weeks in the mid-continent northeast regions in particular and the Gulf Coast as well, through a lesser, but still significant extent. We are fortunate in this regard to operating close proximity to Mt. Belvieu, the predominant U.S. propane hub, which did not experience the same degree of price dislocations seen in many other regions of the country.

So where are we now? The bad news is that winter is not over yet. The good news is that the markets are doing their job and responding to price signals. On the export front, international prices have adjusted downward recently due to a number of factors including new supply appearing from U.S. exports as well as a relatively mild winter in Europe and Asia. Facility posted price dropped about $0.35 per gallon in the last months through a $1.74. That decline, together with the U.S. price increase, has sharply curtailed the arbitrage between U.S. and major international markets.

We understand that certain cargo slated for export from the U.S. have been cancelled as a result. Additionally, propane became even more disadvantaged to ethane as an ethylene feedstock and even to some heavier feedstocks as well leading to further declines at the margin and demand for propane as an ethylene feedstock. Meanwhile on the supply side NGL fractionation activity will continue its gradual growth each month with continued increases in wellhead output and NGL transportation to fractionators. While the risk remains for further price surprises until the end of the winter, essentially all NGL prognosticators forecast propane prices to moderate after the winter seasons is over, which outlook is also supported by the propane futures market.

Now, on the propylene side of the equation, the environment remains constructive. For the fourth quarter last year, the average benchmark polymer grade propylene price was 68.2 cents per pound, about the same level as the third quarter. The price trend ended the year however on an up note. After starting the quarter at 67.5 cents per pound in October, the price dipped a penny in November before moving up 4 cents in December to 70.5 cents. The December inventory level increased from just under 3 million barrels at the beginning of the month to around 3.6 million by the end.

The likely explanation for that increase is that buyer soft the bills and inventories in preparation for plan turnaround schedule for the spring. This upward price trend continued into January with another 4 cent increase to 74.5 cents per pound. There was also a small increase in propylene inventories to 3.7 million barrels, still within the normal historical range.

Although the U.S. demand environment can generally be described as improving further price increases may be limited by the lack of derivative export affordability given higher prices in the U.S. versus Europe and Asia. Putting the two pieces together, the propane, propylene spread in the fourth quarter was 34 cents per pound compared to 39 cents for the third quarter with the decrease entirely a function of higher propane prices. The spread increased to 35.5 cents in January as the increase in the propylene price more than offset the increase in the price of propane for the month.

And with that let me turn it over to Nathan to discuss operations.

Nathan Ticatch

Thank you, David. Our total sales volume for the fourth quarter was 294 million pounds. The total production volume of propylene in the quarter was 200 million pounds, with the difference attributable to the plant downtime related to our October turnaround. During the turnaround we continue to deliver propylene to our customers with total sales for October at 89 million pounds all of which was provided out of the inventory.

In reviewing plant performance for 2013, during the first half of the year, we had a number of unplanned outages, which resulted in a disappointing on stream rate of 84% and capacity utilization of 77%. To address this unacceptable performance we have implemented an aggressive action plan. We identified the root cause of all of our prior outages and implemented appropriate modifications to reduce the potential for recurrence. Further, we identified other areas of risk and took preemptive actions to minimize the occurrence of adverse effects. We also intensified our preplanning process for routine maintenance and changes to process conditions to minimize the potential for disruption of plant operations.

The scope of the turnaround was also expanded to include a number of projects focused on improving plant reliability. Finally, to bring further intentionality to the activity, we have established a permanent reliability group. Due to all of these actions, we have had a significant improvement in plant performance. Excluding the planned turnaround, the on stream rate for the second half of 2013 improved to 97% and capacity utilization increased to 88%. In January of this year, we achieved a 100% on stream rate and a 100% capacity utilization.

Although the plant is running well, we have identified an issue that will require the replacement of two heat exchangers. The repairs will require an estimated seven day outage upon the delivery of the replacement exchangers which we anticipate to occur by April. Fortunately the conditions that need to be addressed are not currently adversely affecting production.

The successful completion of the turnaround was clearly the highlight of the fourth quarter. Our first triennial turnaround lasted 32 days and was completed at the start of November. The turnaround represented a significant accomplishment and was the culmination of many months of planning. During the turnaround in addition to unloading and reloading 6 million pounds of catalyst we also upgraded major systems such as the waste heat boiler and the regeneration air heater. We upgraded our emergency shut-off systems for three of our large compressors and reconfigured the air diffusers inside each reactor.

We also performed significant maintenance including inspecting and rebuilding reactor valves, cleaning heat exchangers and repairing expansion joints. Some of the preventative maintenance included upgrades to our electrical distribution system, upgrades to the plants distributed control system, and upgrades to our steam system. In total, the turnaround comprised approximately 166,000 man hours and a peak headcount of 922 contractors owned site.

Also, work is progressing well on the 109 project. As you may recall the 109 project involves placing and existing fractionation tower into service to augment the capability of the splitter tower. This project will increase polymer grade production, enhance plant efficiency and reliability, and provide a marginal increase in plant capacity. The $28 million project remains on schedule and on budget and is planned to be placed in service during the fourth quarter this year. Finally, another important accomplishment during the fourth quarter was the extension of the term of our Total contract through the end of 2017. With this amendment, we have now successfully renewed and extended all of our major propylene contracts.

I will now turn the call over to Sharon to discuss the financial results of the quarter.

Sharon Spurlin

Thank you, Nathan. We declared a cash distribution for the fourth quarter of 30 cents per unit for unitholders of record as of February 18th with the payment date of February 25th. Our 30 cent cash distribution is based on our ongoing intention to payout all of our available cash to unitholders on a quarterly basis. As David mentioned, the total distribution for the year ended December 31, 2013 was $1.72 per unit. We recognized total sales of $191 million during the quarter, which included propylene sales of $187.9 million.

Our cost of sales totaled a $158.1 million of which $74.4 million represented propane feedstock cost which is the primary driver of our cost of sales. Additionally, we incurred $6.3 million of extraordinary expenses related to the turnaround. All of which were covered by our turnaround reserves. Our propane to propylene spread averaged 34 cents per pound for the quarter. This spread is a key driver of our gross profit which was $32.9 million for the period.

Gross profit is determined by multiplying the propane to propylene spread by our sales volume and subtracting applicable customer discounts propane transaction cost and other operating cost including depreciation and amortization expense. We incurred $4.5 million for general and administrative expenses which included additional administrative support related to the turnaround and professional services related to our first year of reporting under Sarbanes-Oxley Section 404.

Net income for the quarter was $21.5 million. To reconcile to adjusted EBITDA we start with net income and add back $6.4 million of interest expense primarily related to our $365 million of senior notes which bear interest at 6.25% and are due in March of 2020. 10.7 million of depreciation, amortization and accretion expenses and $1.5 million of income tax expense and equity-based compensation expense on our LTIP unit.

Adjusted EBITDA is the most representative metric for the cash earnings of our business. It is therefore used as the basis for the calculation of cash available for distribution. We began our cash available for distribution calculation with adjusted EBITDA of $40.1 million for the period. We then subtract debt service, maintenance capital expenditures state income taxes insurance reimbursement and cash payments on our unvested LTIP units, all of which totaled $10.4 million.

We also deduct a $5.9 million reserve for the next planned triennial turnaround. We then add back a number of cost related to the turnaround which were covered by our reserves. These costs include; $12 million to adjust for propylene purchased and delivered to customers during our turnaround and October overhead expenses. The adjustment for purchase propylene is calculated as the difference between our actual cost of sales on a GAAP basis, which included the cost of the purchased propylene and our cost of sales on a production basis, which excludes the impact of the propylene purchase for the turnaround.

The October overhead expenses represent overhead expenses incurred during the turnaround, which reduced our gross profit but were not included in our inventory cost. We also add back $6.3 million for extraordinary maintenance expenses, which were incurred during the turnaround. While these expenses were deducted in determining GAAP earnings they were added back to determine cash available for distribution, because they were funded by our turnaround reserves. This results in total cash available for distribution of $42.1 million, which when divided by our 139.2 million units outstanding with 30 cents per unit.

And now with respect to the balance sheet. As of December 31, 2013, we had cash on the balance sheet of $25.4 million, total working capital of $54.7 million and $170 million of available capacity under our revolving credit facility, which expired in March 2018. Together, our cash plus available revolver capacity yields current liquidity of $195.4 million. Our total long term debt was $365 million, which consist of our fixed rate senior notes. We have maintained and plan to continue to maintain a conservative capital structure. Our debt to adjusted EBITDA was 1.4 times and our adjusted EBITDA to interest expense was 10.2 times for the year ended December 31, 2013.

That concludes our prepared discussion. We would be pleased to entertain your questions. Operator, would you please explain the question-and-answer procedure.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. In the interest of time we ask that questions to be limited to question and one follow up question. (Operator Instructions) And we have a question from P.J. Juvekar of Citi.

Eric Petrie - Citigroup Global Markets Inc.

Yes hi. Good morning, this is Eric Petrie standing in for P.J. You commented that your utilization in January was 100%. Do you see this continuing into February and March, or was it a function of building your inventory stocks?

David Lumpkins

No, the statistics that I gave were all around plant production. So, for the month of January we had no disruptions, no upsets, and achieved 100% on stream meaning that we were making propylene every minute of the month and further we were making it at our max capacity. So, it was a good month. And the only downtime that we currently foresee is the outage that I spoke of that will occur depending on equipment delivery in March or early April to replace these two heat exchangers.

That being said, I can tell you we won’t end the year at 100% capacity utilization every plant will have some amount of upsets or unexpected events. But clearly the intention of the statistics is to say that the last six months and where we are right now is a step change or much better place than when we were the first six months of last year.

Eric Petrie - Citigroup Global Markets Inc.

Okay, and then could you give us a little trend in how customer nominations changed between fourth quarter and what you’re seeing in January?

David Lumpkins

In January, we were at our contract max, which means customers have a range of nominations and in January we were at the highest level of nominations. So, in the fourth quarter nominations were not that high. On the other hand I would say that as we move forward that January was higher than a trend line month.

Eric Petrie - Citigroup Global Markets Inc.

And then lastly could you just describe is that Asian monomer and polymer prices I believe are below North American propylene prices. And you just discussed where you see propylene prices going in the spring with the refinery outages?

David Lumpkins

Well, that’s the $10,000 question. CMAI shows prices bring strong in the first quarter and coming off a bit in the second quarter. I think a number of prognosticators are suggesting that as well there is a turnaround season that get started about this time every year and people like to buy in anticipation of that but fundamentally and ultimately it’s just a function of what we see in supply and demand and that’s been very difficult to predict on a month-to-month or quarter-to-quarter basis.

But right now in general I’d say that the demand environment is pretty constructive. A lot just depends on the U.S. economy continuing to be able to grow I mean this is a GDP driven business and as the U.S. economy continues to grow or even at a tepid (Ph) pace of say 2% then we got to continue to see petrochemical demand grow as well. But it’s very difficult to predict and no one has very good track record of predicting how that’s going to unfold on quarter-to-quarter basis.

Operator

And our next question comes from Vincent Andrews of Morgan Stanley.

Vincent Andrews - Morgan Stanley & Co. LLC

The heat exchanger, could you just sort of quantify what the cost of that is or maybe it’s not the cost of the -- maybe is the downtime that cost but how should we be thinking about that in our models?

David Lumpkins

Yes, so it will require seven day outage. So, for seven days we’re not going to produce and put it in perspective or at least the way I think about it in an annual period if you’re at 95% on stream rate that means you’re going to have 18 days of downtime. Here we’re going to have seven days. The cost of the outage is we are replacing these two exchangers. We’re making modifications to them they should have been 20 year assets. But we have seen unusual metal loss so we’re going back and changing the metallurgy on these exchangers to remedy that problem. And then there is also a little other capital work we’re doing but the major equipment in this outage is $2 million and then we’ll spend another $1 million on the installation and maintenance, other maintenance.

Vincent Andrews - Morgan Stanley & Co. LLC

Okay, and then just sort of on the balance of the model for propane and propylene. Are there any other line items as we look at ’14 that I know Sharon went through some things that were unusual in ’13 that shouldn’t recur in ’14. But is there anything else that we should be aware of that’s specific to ’14?

Sharon Spurlin

It’s not specific to ’14, Vincent.

Vincent Andrews - Morgan Stanley & Co. LLC

Okay. Thank you very much all.

Operator

And our next question comes from Selman Akyol of Stifel.

Unidentified Analyst

Good morning everyone and thank you for taking my call. This is Brian on for Selman. Just want to touch on a couple of quick questions, first off following the successful trend your maintenance and subsequent improvements we’ve been able to increase nameplate capacity or lease improvement so I just focus on reliability?

David Lumpkins

The nameplate capacity currently is at the same level nominally 1.4 billion pounds annually. So that did not -- it was not affected by the outage. But we were focused on reliability and making sure that there weren’t issues from time to time that were preventing us from operating that nameplate capacity. So, I would say no, nameplate has not changed but I think actual production our view is that based on a lot of the work we will actually produce more material than we have in the past, so both from being online more times and at a higher capacity.

Unidentified Analyst

Okay, and then it looks like you dare to successfully renegotiate several contracts of customers since last quarter of the call. Could you provide an update on where you stand today as regards to minimum and maximum contracted volumes and also specifically how with Lyondell and BASF?

David Lumpkins

So in the aggregate our minimums or 89 million pounds a month and the max is 116.5 million pounds a month. So that’s the contract range. With regard to -- I'm sorry the question was with regard to BASF is…

Unidentified Analyst

Yes, and Lyondell?

David Lumpkins

Yes. So, Lyondell was a contract it’s actually a pretty small contract volume metrically and it is something that we and they keep on an annual basis so it has continued to roll on an annual basis. The all of their other contracts are contracted through the end of ’16 or beyond.

Unidentified Analyst

Great, thank you. And then just lastly on to kind of follow-up on the previous question, the January production, was that primarily done to meet customer demand or more to build inventory in front of the planned downtime in April?

David Lumpkins

Well, generally our operating philosophy is to make all we can. And we are in as I mentioned we were at contract max so in a 31 day month at a 100% capacity utilization we make about a 123 million pounds at contract max we needed to provide 116. But we are also in a mode to build inventory we drew down all of our inventory as part of the turnaround to supply customers. And so it is our goal to get about 40 million pounds of safety stock. And so we’re working to accomplish that. And then after safety stock is build then to the extent that we make more than our contract customers’ desire we would look for opportunities to sale in the spot market.

Operator

[Operator Instructions] We have no further questions at this time. I will now turn the call over back to Mr. Lumpkin.

David Lumpkins

Okay, thank you all very much for your participation this morning. We very much appreciate your interest in the Company and look forward to speaking with you again in the near future.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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