利安德巴塞爾 (LYB) 2002 Q2 法說會逐字稿

Good morning and welcome to the Lyondell Chemical Company second quarter 2002 earnings release and teleconference. All participants will be able to listen- only until the question and answer portion of today's call. Today's conference is being recorded should there be any objections you may disconnect at this time. I would now like to turn the meeting over to Mr. Doug Pike, Director of Investor Relations, and Mr. Kevin DeNicola's, Senior Vice President, and Chief Financial Officer. Gentlemen please begin when you're ready.

Thank you, good morning, and welcome to Lyondell's second quarter 2002 teleconference, and web cast. This is speaking, I'm Lyondell's Director of Investor Relations, and I'm joined today by Dan Smith our President, and Chief Executive Officer, Kevin DeNicola, Lyondell's Chief Financial Officer, and Morris Gelb our chief Operating Officer. The agenda for today's call will be as follows; I'll begin this morning with a review of our second quarter performance, Kevin will then review some key metrics as well as update you to our recent financing and depending acquisition of our position in Equistar, after that we'll open the call up to questions and the call is scheduled to last 60 minutes.

before we begin I need to first review our Safe Harbor language; the statements in this mornings teleconference relating to the matters that are not historical facts are forward looking statements. these forward-looking statements are just predictions or expectations and are subject to risks and uncertainties. actual results can differ materially based on factors including but not limited to future global economic conditions, further increases in raw material into our energy costs, access to capital markets, industry production capacity and operating rates, the supply demand balance for the products produced by the company, and its joint ventures, competitive product and pricing pressures, technological development, changes in governmental regulations and other risk factors.

for more detailed information about the factors that could cause our actual results to differ materially, please refer to Lyondell Chemical's annual report on form 10K for the year ending December 31st 2001. Lyondell's quarterly report on form 10K for the quarter ending June 30th 2002, this will be filed in August, and also to the proxy statement that Lyondell has filed with the SEC with respect to special meeting of shareholders relating to the transactions with Occidental.

I'd also like to point out that a replay of today's call will be available from 1.00pm Eastern time today until 5.00pm Eastern time on August 3rd. the replay number is 14022205338 and the access code is 55 49, and the replay can also be accessed at our website www.lyondell.com. I'd now like to proceed to the earnings discussion. for the second quarter of 2002 Lyondell had net income of two million dollars or two cents per share. this compares to our first quarter loss of $55 million. Lyondell in each of its' joint ventures showed significant, excuse me, Lyondell's interest during joint ventures showed sequential improvement lead by Equistar which achieved the $97 million improvement in . Equistar's improvement was largely attributed to price increases in ethylene and its' co-products which are sub sequentially faster in the market by polymers and derivate products.

in the businesses the sequential increase was driven by inspiring, bought LCR the financial impact of reduced CSA crude deliveries was off set by strong operations, additionally the refinery is from aromatics pricing, other fuel opportunities and increased spot proof consumptions. as a result of these business improvements, the end up for Lyondell and its proportionate share of the joint venture companies increased from $139 million in the first quarter to $217 million for the second quarter. net interest expense during the quarter was $91 million, which was unchanged from the first quarter, while D and A for the second quarter was $63 million. both figures include four million dollars of non-cash amortization of that issue expenses.

As a result of our recent financing, quarterly net interest expense will increase by approximately four million dollars beginning in the third quarter. Now I'd like to briefly discuss the results in each of the reporting segments beginning with the intermediate chemicals and derivative segment. This segment includes propylene oxide, derivatives of propylene oxide , TDI, MTBE and styrene. during the quarter was $120 million and this compares to $95 million in the prior quarter. As I mentioned earlier the improvement was primarily driven by MTBE and styrene the co-products of the propylene oxide processes.

Quarterly performance in MTBE was somewhat unusual compared to the past two years as margins did not experience their typical second peak. This attributed to a gasoline market, which had levels of both inventories and imports. reports raw materials margins that were actually eight cents per gallon below the first quarter although other margins were approximately equal to the first quarter levels and despite having flat margins a 30 percent increase in volumes enabled to us to realize sequential profit improvement. The combined performance for the first two quarters of 2002 were approximately equal to the same period in 2001.

Styrene also had improved performances the industry experienced tightness due to a combination of demand growth and operating problems, which were experienced by some of our competitors. Our operations were strong and we increased our styrene volumes by nine percent over the first quarter. Accompanying the volume increases were increased prices. reported the contract prices increased by approximately seven cents versus the first quarter. However styrene's raw materials also showed significant strength and as a result reported margin only grew by 1.4 cents per pound. Since only approximately one third of our annual capacity is subject to market pricing our overall styrene margin increase was less than the statistic. Propylene oxide and derivatives had relatively flat sequential performance as volumes were negatively impacted by the seasonal decline in the sales. As a result of some price increases and changes in the customer mix quarterly margins increased slightly despite propylene price increases of approximately four cents a pound.

And the industry has announced price increases of four to seven cents a pound for propylene oxide and all of its derivatives effective July 1st. To date in the third quarter we seen improved strength in the MTBE margin and we've nominated an additional price increase in styrene. If successful the styrene price increase will pass through the current strength in pricing.

Now I'd like to discuss the performance at Equistar. On a one hundred percent basis Equistar second quarter EBIDTA was $96 million this compares to a negative $1 million in the first quarter. And no cash distributions were made to the owners during the quarter. Petrochemical segment of led the turn around in profitability. With increase in $29 million in the first quarter to $132 million. Ethylene volumes increased by seven percent but margin improvement was the key story in the quarter's performance. According to net transaction pricing increased by three in one quarter cents per pound versus the first quarter. Well the average costs of ethylene productions increased by approximately 1.2 cents per pound. Equistar's cost of ethylene did not experience this sequential increase. It was aided by its mix of heavy and the exploration of fixed price gas contracts that negatively affected the first quarter. The heavy crackers benefited from strong co-product pricing that's propylene, benzene, and butadiene price increases partially offset feeds stock increases.

Evident in polymer segment was relatively flat as industry prices were up proximately three cents a pound, and therefore offset most of the monomer increases, and Equistar's polymer volumes were up 85 million pounds or approximately six percent. Polymer co-product prices are expected to provide some momentum for the third quarter as they've remained strong entering the period.

Now let me switch to and discuss the LCR results. LCR second quarter was $100 million an increase of $22 million over the first quarter. This improvement was achieved despite a 28,000 barrel a day reduction in the CSA Group processing. Partially offset the impact of the CSA reduction LCR expanded its feed stocks slate to include five different spot crude's, and increased consumption of non CSA crude's by 26,000 barrels per day.

Positive contributors to the financial performance for increased aromatics pricing, strong operations, and the ability of LCR to take advantage of opportunities within the fuel market.

nominations for July, and August CSA crude deliveries are above second quarter levels, and LCR expect that CSA consumption will average 215,000 barrels a day in these months. Nominations for September have not yet been received. For this third quarter LCR expects total crude runs to be similar to the second quarter. I'd also like to mention that during the quarter the CSA pricing formula will be subject to a scheduled semi annual adjustment. This is a regular occurrence but in this period the adjustment will be larger than normal as first half 2001 natural gas pricing will no longer be a component of the formula going forward. This concludes my prepared comments. I'd now like to turn the microphone over to Kevin to discuss working capital, and fixed costs along with our recent financing, and project activities.

Thanks . First with working capital the improvements in the business have lead to a natural increases in pressure on working capital but I'm happy to report that our internal efforts have significantly reduced the impact at both Lyondell, and Equistar, and at Lyondell we've reduced our days of working capital by to 44.5 days. That's about eight-day reduction versus the beginning of the year, and this improvement has been enough to hold our working capital dollars at about the same as year-end 2001.

Now for the course-funding period in Equistar we've reduced days of working capital by 4.2 days to about 44 days. That wasn't enough to fully offset the dollar increases form the improved business conditions but we limited that increase to about $79 million. We funded that by drawing down about 100 million on the Equistar revolver, and our outlook is that the cash flows are coming back into balance in the third quarter. We expect that if the business conditions continue as they are we'll be paying that revolver down, or beginning to pay that revolver down in the third quarter.

The second thing is fixed costs. We continue to make progress here, and our fixed costs pending at Lyondell, and Equistar combined is about 10 percent less than last year's levels. This is about $72 million so far, that's 34 million of savings at Lyondell, 38 million in Equistar.

On the recent financing obviously we're quite happy to have completed that financing. I believe that positions us for the coming year. In doing this we have maintained Lyondell's liquidity at a level which we believe to be more than adequate. A long with putting in place the $350 million three year revolver we've also mended the lined up bank place approximately $150 million of cash on the balance sheet that was July 1st so obviously that's not showing up on the June 30th numbers. I believe that these actions are prudent and help protect all the stakeholders through the preservation of Lyondell's financial flexibility. And finally during the quarter the transaction we moved forward the definitive proxy and the filing. Transaction structure is unchanged from any of the previous disclosures, special shareholders meetings have been scheduled for August 31st, August 21st sorry and barring an unexpected changes we expect the close of transaction by September 1st and that's the end of our prepared remarks so we'll open the floor up for questions.

Please now open the floor for questions.

Thank you at this time if you would like to ask your question please dial star then one. You will be announced prior to asking your question. To withdraw your question please dial star then two. Once again if you would like to ask your question please dial star then one on your telephone keypad now. Our first question comes from representing UBS Warburg.

Yes good morning I've got a number of questions. The first one is on the side of the business I just want to get a sense of where you see MTV markets here in third quarter because we understand there's been a spike in prices and also just a little bit of outlook here for the PO derivatives markets. I know you mentioned a price increase announcement for the third quarter just wondering what was happening on the cost side and whether you'll see expect to see some margin improvement there, I've got some follow ups.

Let me start with the, this is Morris Gelb let me start with the MTV question first I think mentioned that we have seen MTV margins move up early in the third quarter from the late second quarter levels. This is a very, very difficult business to predict in terms of margins and we are not in a position to say how things are going to play out for the rest of the quarter but looking at inventory stats on gasoline and crude oil and gasoline consumption and so on it looks as though there is a strengthening of market conditions there but we'll just have to watch that and see how it develops. With regard to the the PO business it's much too early to say how successful we're going to be on these price increases. There is some moderation on the propylene side in terms of the price increase that we saw in the second quarter. We're not likely to see a repeat of that in the third quarter so that if we are successful with the product price increases we should see some margin expansion. Demand in general seems to be holding up and we don't see any significant changes there.

OK thank you the next question is just on the Equistar side petrochemicals margins in the second quarter obviously are much better than the first wondering what the outlook is on the volume side for the third quarter whether that market has reached a new plateau or whether there is the sense that we're going to get any increases in demand for the quarter.

I would say that we're probably closer to the view that a plateau has bee reached, in other words, we're not going to see a continuing expansion in volumes of the sort we saw in the last few months. on the other hand volume is holding up and we're not giving back anything either.

Next Question.

Thank you.

Our next question comes from representing Salomon Smith Barney.

Good morning.

Morning P.J

Dan, question for you; your polyethylene volumes where up I think 14 percent in second quarter, had similar numbers that they reported this morning, the real growth may be four percent so the rest going into inventory, with that we can make a case that inventories are lowing the supply chain any more, what does that mean for the second term of demand?

Well first of all P.J, we just postulated about four opinions last night which I've got to disagree with, the best that we can tell of what's going on is there has been some cautious rebuilding of inventory so we really don't see any large amount of inventory build in the business this year. we're I think, that numbers actually showed us up five point six percent so I think you're a little of in your numbers.

I was looking at other year and that might be sequential.

Well I think sequential is part of the better way to look at it, I think you're, yours is a very dangerous way to look at these businesses. you've got to look at momentum businesses more than living in sequential quarters. we understand what you're trying to say is what we hear from the customers, what we see in the real card turns and antidotal of what we see further downstream is people saying that they do not believe that we're in a boom time and therefore they're not inclined to be fearful of rapidly rising prices and therefore they're not inclined to rapidly restock the inventories; so what we think we're seeing as business conditions improve and they clearly have improved, you got to have a little bit more inventory just to service that business, and what we're seeing we think I consistent with that. different from a traditional restocking coming out of a recession I think the reasons are very simple, no-body is really very sure of where we are coming out of that recession, so I don't think we've glutted the supply scene if that's what your implying and certainly the ongoing sentiments in the business and the way that month to month patterns looked doesn't indicate that either.

Yeah I wasn't implying anything, I just wanted your opinion.

You got it!

And I also wanted your opinion on the second issue that you talked about, about US exports going down in the past but now with the dollar coming down have you seen net exports go up?

You know it's so soon I don't think that we can sort anything at this point in time. I think your absolutely right with the dollar weakening quickly versus the euro, you would expect that the North American continent would be better served and the export markets particularly in Asia, but Asia's been a little bit squirrelly in the last few months here to, so I don't think we can clearly tell anything but obviously the general trend is a weaker dollar should support exports but we've just not seen much yet.

OK, thank you.

Your welcome.

Could we have the next question please?

Our next question comes from Andy Cash representing UBS Warburg.

I'm sorry, I had to step away and I heard something about exports, actually that was a question I was going to ask so I don't know, don't repeat it I'll listen to the replay but there is something more to add about exports especially in PO's and derivatives I would appreciate it.

Well the Asian markets have not shown much strength and I would say that we're not seeing any signs of strength going forward, on the other hand our businesses in the rest of the world are continuing to look reasonably good.

Is it possible that you know exports are not picking up so much as in general terms, correct me if that's not right in you view but is it possible that you know demand growth is just so god in the U.S. that you know your trying to take care of your U.S. customers first. Is that?

Well when you missed what I saying, I was saying that the weakening of the dollars been fairly recent. We just can't sort out what's coming from were but again to reminds you that in the Equistar businesses we don't do a huge amount of export.

Right.

Morris was giving you the pattern on the worldwide businesses but I would assure you we still have additional volume that we could put to the market, so I don't think we're in a position that w can't service additional demand if it were there.

OK. And then just you know looking at the tone of the business in terms of big booked orders especially in polyethylene, and polypropylene. Any sense of that how's it going?

Continues to look good. I think the statements in our press release are on purpose that we're very cautious because the things that really control this are well outside our controls. When we get up and watch the morning headlines like you do there's too much up and down to be real secure about just were this economy or the world economies are going, and then the Middle East situation makes us a little cautious about the peat stock pricing. But if you look at the flow of business, the flow of business is up, continues to look up but it's not gang busters, and I think we all have to remember we're coming off of a terrible bottom here, and we've just come off of that bottom, and we still have significant over supplier bursary across the board in these industries.

Well just as a comment based on all the different pieces of data that we look at I don't see any inventory building in the supply changes you know confirming what your saying so I think there's a lot more to go so good luck. Thanks.

We hope so, thank you .

Thank you. We'll take the next question.

Our next question comes from representing Morgan Stanley Dean Witter & Co.

Good morning .

Good morning guys. The comments that were made at the end of the LCR review when you said that the contract with CSA, the CSA contract was be changed in the third quarter, and at the same your see more volume. Could you help me put those two things together, and will this change that you anticipate in the contract reduce your unit volume profitability, or unit profitability.

No let's go back and clarify some things. Remember we're cut back in the disputed .

Right.

And all that's happened here is that we're getting nominations above that cutback level early in the quarter. We don't know exactly were that's going, and that's what speaks to the volume. We tried to estimate for you what we know with the lifting's that are already scheduled what that would do for average volume under the CSSA in the third quarter.

Second part the contract. If you go back into long history here we described this contract early on as having cost escalators on components. It's been such a minor issue for now almost 10-years that nobody's paid much attention, so one of those cost escalators is fuel, and fuel you remember in our refinery is largely natural gas, and you remember the price spike in the first quarter of last year. The way this contract works is the catch up on the escalator for that is a lagged catch up, so you actually catch up six months a year later, and you catch up over a period of time, so what we have enjoyed earlier this year is the catch up for that large spike in natural gas pricing last year. You'll also remember that natural gas price spike ended sometime in the middle of the year, so as we go into the third quarter all we're telling is that we don't have that extra here from the spike last year. That's all it is it's an adjustment in the escalators.

OK so it's not a rewriting of the contract it's just ...

No.

OK well then let me see if I can ask you this question based on what you see in volumes the higher volumes at least for two months what do you see in spot values for the product, does it look to you as of today that will make more money in the third quarter than the second quarter?

Well we don't forecast out in that manner but I think if you look at it we're saying in the first couple of months we'll run 215,000 barrels a day of crude we'll hold the total crude run flat so we'll be up a little bit on crude probably down a little bit on spot crudes.

Net higher margin crude still correct?

The crudes are higher margin crude than the spot crudes at this point in time. We will see some deterioration in that spread because of the regularly scheduled adjustment in the contract that Dan just referred to. Now we still have a very strong aromatics market and that contributed to the second quarter quite well. We had strong benzene and are strong so we will benefit some from that which is really outside contract so I think if that helps you understand really the dynamics of it.

To sum up I think the real issue here is this strengthening we've seen in gasoline margins first of all is not real significant but it is helpful but who knows when the gasoline season is really over and so we don't anything about September at this point in time and it's likely the gasoline season fizzles out before that so you're really when you ask third quarter we feel pretty good about the first part of the third quarter but when you get in the end of it there's just too much in the way of unknowns to good statement there.

Could you also update us on where that energy bill is in congress whether that's changing at all committee.

It's in the conference committee but as I understand the house recess is at the end of this week in the senate another two weeks and best we can tell not much is going on so far so I think you're going to be into September before you really see anything very meaningful happening there.

OK thank you.

Thank you. May we have the next question now?

Our next question comes from representing Merrill Lynch.

Morning .

Morning, following up on comments on MTBE what if any impact do you think that the recent announcements from the West Coast refiners about removing MTBE as early next year will have on your U.S. MTBE business next year and could you put that in context of volumes for your global business would Europe still be up?

I'll start with the short comment and then let Morris take you into more detail but obviously having major customers switch away in one of the major markets is not a healthy thing but I think it is important to note that we're talking about California we're not talking about the world or even the rest of the U.S. and to put it in perspective that's about 10 percent of the market. It is important, it's certainly not good news but I don't think that in itself is a reason to really worry a huge amount but let me let Morris go into a little more detail about the whole situation.

Well has said it very well if you put into context this represents a little over 10 percent of the U.S. market and we don't see it as having major impact on some of the other producers we don't think our business is be materially affected as a result of this.

OK thank you.

OK next question?

Our next question comes from representing Credit Suisse First Boston.

Good morning .

Good morning Dan. Back on LCR given the high level of , and the interest expense in the cap ex I would have expected a greater level of distributions. You know I realize working capital can have an impact quarter to quarter, and some discretion on you r part you know was there a significant working capital bill in the second versus the first explaining it?

I'll let Doug go into detail on that but again the thing to remember David is the way the business flows here you tend to move the crude around in big chunks, and when you pay for the crude, and when you price the crude et cetera it can actually tie up cash or not tie up cash, so when you move quarter to quarter, and these things slop over from one quarter to the next the cash doesn't necessarily attract the book accounting every quarter. You got to look at it over a little longer period, so sometimes we look like we're getting more cash distribution when we have less earnings, and sometimes we look like we're getting less but Doug you fill in, in more detail.

Yeah let me do.

Well Dan before you go to Doug you know the same thing occurred in the first quarter. would suggest that a much greater distribution now I understood that to be working capital bill after the fourth quarter term.

Right that's what we're getting right into.

Yeah I'll take both of those if you don't mind Dan. As far as let me go to the first quarter than. The first quarter impact was really one coming over from the prior quarter were we had the large turnaround, and the net distributions were lower than you might expect in that quarter due to capital costs that were being paid, and movement back of cash, so that's were you see the first quarter cash payments back for recruit expenses. So in the first quarter the reduction in the distributions was a matter of capital related to the turnaround.

Second quarter is a different story. It is a working capital story and it relates to the changes in the crude slide, and the product slides so what you see there is the changes in the slides did tie up some more crude in dollars, and working capital on the balance sheet. When we go back to in the future to the more typical slate with the CSA mix that we have versus you'd more typically expect. We would expect that to turn around and come back to use, so.

OK, second question looks like you consolidated your ownership in LAC on May 1st.

Yes that's correct.

Yes that's correct. We redeemed the partner in that they decided that they wanted to exit that business we were able to work out an arrangement that was satisfactory to everybody, so we've taken over 100 percent of that business.

Now does the 120 million of , and consolidate for May, and June and the negative two reflect the period when you didn't have full ownership?

That's correct.

That's exactly right.

That's correct.

OK, and the final question cap ex seems to be running significantly below you know the guidance that you provided a the beginning of the year particularly at Lyondell and Equistar you know it either suggest a you now a fairly significant second half catch up or maybe the numbers are down a little bit?

Yeah I think that you're right, there will be a significant second half catch up but we do expect the numbers to be down some what for the full year.

Can, order magnitude or...?

It's difficult to predict but I would say somewhere in the five to 10 percent range.

OK, thank you.

You're welcome.

Next question please.

Our next question comes from representing UBS Warburg.

Good morning gentlemen.

Morning Greg.

Have you had time yet to digest the impact yet of the knocks/ requirements in the Houston area in terms of capital and operating costs?

Not entirely. what I can tell you is if the rules play up the way we currently expect them to we will see a pretty significant reduction in capital spending for the Knocks program and the issue though, is we need to understand the implications of the rules on capital spending and operating costs, and we haven't completed that analysis yet so we're not in a position yet to tell you which way the total cost picture is going to go.

Well we wouldn't expect the total cost picture to be greater than the national rule.

That's true, it's a question of how much a reduction we're going to see.

Well there where a lot of details in that 140 pages that was issued.

That's correct.

That's correct.

Second question, the crude supply from was up about 10,000 barrels a day from where you had previously expected. my question to you, you now said that you expected 215.000 barrels a day in the third quarter, my question is there any upside on this or are they still supplying versus some sort of guideline?

Yes and yes and yes I think. I think there is some potential upside, yes they still maintain their supply against the quarters, how they interpret that and how they decide which volumes goes where is what causes some of the mysteries here. and then this morning talked about the potential of raising their levels of production so I think there are some potential upsides but we'll know when we get the nominations basically.

OK, another question if I could, the aspiring volumes where excellent was some of this due to, for instance the no supplying to although I know that was in February, but did any of that carry over to the second quarter?

Yeah, I think we definitely benefited from some of the operating problems that some of the producers had in the second quarter.

A quick, it seems like your aspiring production ratio was up higher than your PO, does this imply that you can preferentially improve your aspiring yield in the process or is it absolutely fixed?

We have a significant amount of flexibility in terms of the deduction ratio between styrene and PO and for that matter between MTB and PO, and then for that matter between MTB and styrene so that we can vary those ratios over a fairly wide range.

That seemed to really come in handy in the quarter.

Well yes, and we take advantage of it at every opportunity, as margins move around in these businesses we optimize our production activity.

That's right and the basic traits of the company we think they're two things that are greatly important; flexibility that's installed but also the flexibility that organizations re-act to the changes in the market and use them.

Great. How is the second nickel a pound of polyethylene price increase coming?

We're still optimistic.

A lot of folks have reported that it's at least partially implemented by now would you agree?

Yes.

OK the last question if I could is your negative $4 million and other expenses is that one time or is that going to be ongoing? Maybe I didn't ...

There's nothing unusual in the items in this quarter .

I'm sorry it was other income not other expenses.

and derivatives?

Yes.

Usually you show .

OK so that's not an expectation going forward?

No not at all.

OK thank you very much gentlemen.

Next question?

Our next question comes from representing .

Just to clarify the cap ex for the quarter was $1 million is that right?

12 million year to date and then with 11 million in Q1.

Correct.

OK and the contributions for the quarter to the were how much?

The contributions on the side were lower in fact that's part of the reduction a significant part of the reduction in capital spending in the first half. The spending pattern in the project has shifted.

Year to date I think it was 23 million and I don't in front of me what was it for just this quarter?

10 million.

10 million?

10 million.

Next question.

Just hold on a sec, with regard to the MTBE business what is the when is the exploration of the contract and is there do we have an idea of range between what the market would be and what the contracted rate is and how much of the MTBE production is tied to the contract?

The contract which is now a contract represents about 10,000 barrels a day and that expires at the end of this year and that exploration will have an impact on MTBE margins on our earnings in the MTBE business.

Is there a kind of a magnitude that we kind of think about.

I don't believe that we've talked about the differences between the contract and and in any case is very difficult to predict.

I mean we've had periods over the past year where actually it's been flipped where between the contract and so it's also very difficult to predict where the markets will be at that time.

I got you and you may have said this already but just to repeat where do you see the prices now for MTBE?

I believe the reported margins were 36 cents or in the high thirties.

OK thank you.

Thank you.

We'll take the next question please.

Our nest question comes from representing .

Morning .

Morning, Dan one question for you, we've been surprised by the discipline around these polyethylene price increases given over supply in the market do you think that's just attributable to the fact that there ahs been you know very little margin in the business or has the business structure maybe improved some what with all the consolidation over the last few years?

I'm not go there. I'm not say anything about our brothers in the business. I will tell you that as we have become very large in the business we certainly our stewards of our business position, and coming off of numbers were you would lose in on the conversion of ethylene to polyethylene it doesn't make sense, and so we continue to do whatever's necessary to get a positive margin there, and hopefully we are competing against people who are smart enough to want positive margins as well but I think it would be premature to say that the restructuring that has occurred has suddenly brought new discipline to the market. I just don't see enough evidence so far I think you can just look at the fact that most people are coming off of negative numbers, and not many of us can afford to load those hopper cars with quarters, and plastic pellets at the same time, so I think that's really what your seeing.

One other thing we've heard is that Asian producers have been even more disciplined recently in terms of you know in terms of their pricing of their products, is that a fair comment?

Yeah I'm not in a position to really to speak to that I don't have enough information about their relative position. We tend to watch pretty carefully using the cost of deed costs, and the cost of conversions what the cost of a marginal as well as an average producer is in North America, and as I've told you many times before we look at the market as a regional market with caps and collars internationally. Certainly if there are better opportunities to export than there are in the domestic market people we do that if we they can get there but it tends to be a secondary market not a primary market.

With everything that's happened recently in addition to the currency swing that natural gas has come down relative to crude oil is that something that could help the competitive position of North American companies?

Absolutely. The North American position is largely under pinned by natural gas pricing it reminds you that we're about two to one liquid capable. Well what that means is we could be all natural gas based but two thirds of our capacity roughly could go to liquid base, so we're low better prepared through thick and thin of things but North America as a whole is taking us out of the equation is almost 80 percent natural gas breaks when your talking about ethylene. So critically important to the competitive position in North America, and the world markets.

OK, and lastly I just wanted to ask about . I mean that's been a very tight product with significant price increases being implemented. Is it large enough to make a difference for you, and also was there any benefit from that in the second quarter, or is it more of a second half affect?

I guess our view is that every price increase helps.

We haven't found a million bucks anymore.

Right they're all important. I think that we probably haven't seen the full impact in the second quarter. We have had some pretty good success in as you say significantly increasing prices for much the same motivation that you just discussed with Dan in the business. That business has been hit very hard over recent quarters, and there was a need to put it on better footing. How did we go, how it proceeds remains to be seen but I do think there's more to be had there.

On our position our people have been working very hard on cost production and everything else, and are making good progress but I think you need to keep the same prospective here that in general we can far more, it made sense for them to weaken and they're coming of with very, very weak margins so even though the price increase look large they're really what you need to get the business back to anything, if it makes any kind of sense at all. But yes, it is large enough to make a difference, it's not going to swing the numbers hugely but a good contributor in terms of improvement here is important here like it is anywhere else.

And the next question please.

Our next question comes from representing Credit Suisse First Boston.

Good morning, hi. I was wondering if you could talk about the affective operating rates for the versus name plate operating rates and if you have any plans or you think you know of your competitors restarting any of the closed plants?

Let me answer the last first, no. I don't obviously answer for the competitors, our electoral plant is down we have no plans to restart again it reminds me the state its in we would have to rehire, re train and go through a long process so we're not looking at a restart in my opinion in less than probably about a year once we've made the decision so when we say no we have no plans, that means it's well out if ever.

the operating rates then for us tend to be tilted maybe a little higher than the industry because that still is a nameplate capacity and as we look at our own position we operate where it makes sense for us to operate, so we may be tilted slightly higher than the industry as a whole if you look at a percentage of nameplate I'm sure we're right on or even maybe slightly below.

OK.

And what we re-emphasize Nancy in my opinion we still have more than ample supplies for any demand we see coming at us in the short term and I don't see any need to be increasing supply.

Of course the threat of riding profitability always you know puts that closer to the restarts.

Yes your referring to the commodity mentality, if you get a little margin you've got to give it away again, I would agree with you.

Right.

We don't subscribe to that theory though.

And as far as the prices for say ethylene and polyethylene at the beginning of the third quarter versus the average for the second, could you give us an idea as to how that works out?

You got that?

The average of the second versus the third, we would be up, you know the increase in, in polyethylene went in kind of ratably over the third quarter of about three cents so you can figure that we would be up about that and then it would be a matter of what kind of impact we see from the current price increase as it gets finalized.

OK, thank you.

Thank you.

OK, next question please.

Our next question comes from representing .

Hi, how you doing?

Great, how are you?

Pretty good. I got a quick question, can you give any sort of ETS guidance for the third quarter?

No we typically don't, Bob and the reason is we're commodity based, we're very large so again your talking about differences and big numbers, the two major drivers for us I would say as far as the economy goes and that's still rather rocky, it's hard to predict if we'd delete much less for the quarter.

Alright.

And secondly; where stock prices go. and I think when we stood up people blowing themselves up in the Gaza Strip and the impact on the Middle East we still think there's a warping in crude oil pricing that comes and goes but is significant and the events surrounding that part of the world can literally pull you out of the water in a couple of weeks, so.

Right.

So it doesn't make sense for us to put a number out there that we can't accurately calculate. What we do is very conservatively plan against the worst scenarios that we can see, and eek out everything that we can along the way, and hopefully with the flexibility we've got built in, and the in fleet of foot in our decisions we fair as well as anybody in that situation but clearly it's still an unsettled world that we live in, and the directions are not clear enough to feel comfortable giving very strong guidance.

OK, all right, thank you.

Your welcome.

Thank you. The next question?

We have a follow up question from representing UBS Warburg.

Could you please give me a brief update on your BDO start up plus your expected timing for PO11. I assume it hasn't changed but anyway a brief update.

Right the BDO is in start up and I'm happy to report that it's operating, and producing on spec product. We've begun to sample product to customers from that facility, and that's how the start up has progress reasonably well. The PO11 plant is expected to begin operation in the second half of next year, and that hasn't changed from our last update.

You can't give a third quarter or fourth quarter or anything more exact at his point I assume.

At this point I'd rather just leave it at second half of next year. I think it'll be earlier in the second half than later but I don't want to be any more specific in that.

OK, thank you very much.

Are there any more questions?

Our next question comes from representing CIBC World Markets.

Morning .

Morning. I know this is looking quite a bit ahead but what would you look for, for cash flow out of Equistar before you would think about paying a distribution?

That's a good question and an interesting question, and a hard one to answer because what surrounds that are a couple of things. First of all we agreed in our Equistar refinancing to a concept called Penalty Interest that basically says if we distribute to the owners cash flow before we reach certain ratios in Equistar than we're subject to higher interest in the debt, so that's definitely a dissuasion from too quickly dividend out. We also believe that given the deep down turn that these businesses went through that logically speaking we need to take some of that down. Clearly the revolvers get repaid, and then I think how much more debt gets repaid as a function of were the business conditions look to be currently, and the future prospects but it's be a measured judgment as we go through that because obviously we and our partners are interested in getting the cash flow out but we're also interested in restoring Equistar to investment grade rating, so it's be a quarter by quarter decision based on were the cash is in Equistar, and what the future prospects are, and it's very difficult to get much more precise than that.

And do you have?

For a rapid building market it could be much quicker if we were in a slower growing market it could be much longer.

And do you have a backlog of capital projects there. I would imagine over the last couple of years there's you know it's been limited capital spending. I mean is that something you look at as well as a use for cash there?

No. We do not have a backlog of capital spending. I would remind you Equistar as a consolidation move putting three major positions together and so doing as we rationalize those positions. We've been very efficient with capital any future expansions there in ethylene will be undoubtedly by de bottlenecking, and those are well out in the future from what we can see. We're doing everything environmentally, operationally that we need to, to keep the operating base in very good order and we've given guidance before that over the longer haul you expect us to be investing at somewhere between a third and a half of depreciation and I think that if you do the calculations for this year we're about a third which is if you're going to be at the bottom end of that capital spending. But re-emphasize we do not see a in capital spending coming at us and don't intend to go there.

That's very helpful thank you and then lastly if you could refresh me on the accounting treatment that you used for the PO plant in Europe because if you're only showing one million of cap ex but your capital contributions in the quarter for that were 12 million you know how does that flow through and then separately to that how much or what is the balance left outstanding for your capital contributions to get that plant to start up?

That's a lot of questions. I actually I think when we did the road-show we actually talked about around 65 percent of the spending I think had been completed for that project overall. I don't think we've ever really totaled it total numbers there but we got that's I think the guidance we gave before. The accounting question we actually have it as a venture on the balance sheet maybe I time but we have an item on the balance sheet that is a venture and that is where that is showing up and I can't exactly find it right now, oh it's investments and PO ventures and I think it's coming in there as well but that also includes our buyer relationship as well so.

So the capital contribution goes as a contribution to ventures.

Yes because the PO 11 project is a joint venture with so it is all on that one line item on the balance sheet.

OK thank you.

Thank you. I think we'll take maybe time for one more question and then we'll have to wrap up for time constraints here.

Our last question comes from representing .

Morning .

Thank you I actually had to hop off the call at one point so I'm sorry if this question has already been asked. I was wondering if you could give us an update on the state of the MTBE litigation whether specifically to the case or sort of more generally.

Well let me start with the case if you missed it Lyondell agreed to sell in the amount of four million to resolve the lawsuit brought South Public Utility over gas and contamination of ground water. I think it's important to note in that case that there's not liability and although that San Francisco jury answered preliminary the jury made no findings of liability as to land nor was there a final judgment rendered. We believe frankly that it was in our best interest to settle this case at this time because when you looked at possible miss trials, retrials and appeals we undoubtedly would be spending at least that much if not more to continue with that but at the same time you asked for the state of litigation we similarly won an important case in and then there was another judgment rendered in Federal District Court in New York denying class action certification really for a this was an accumulation of state court cases that had been brought to the federal level.

So basically this decision denying class actions status we think pretty effectively puts us in a position where the litigation is greatly reduced if not eliminating going forward. So the only thing we really see here is couple of other district cases in California yet to be tried and we're feeling much better about the whole litigation situation.

OK thank you.

You're welcome.

Thank you then I think we'll conclude things for today at this time.

Thank you very much for your interest and your attendance this morning.

Thank you for participating in today's conference all participants may disconnect at this time.