利安德巴塞爾 (LYB) 2002 Q3 法說會逐字稿

Good morning, and welcome to Lyondell's third quarter, 2002, teleconference. All lines will be in a listen-only mode until the question-and-answer portion of today's conference. At the request of Lyondell, this conference call is being recorded. If you have any objections you may disconnect at this time.

I would now like to introduce your leader for today, Mr. Doug Pike, Director of Investor Relations. Sir, you may begin when ready.

Good. Thank you, Bill. Good morning, and welcome to Lyondell's third quarter, 2002, teleconference and Web cast. As Bill said, this is Doug Pike, 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 third quarter performance. Kevin will then review some key metrics and discuss factors related to our cash and cost management efforts. After that, we'll open the call up to questions. The call is scheduled to last 60 minutes.

But before we begin, I need to review our safe harbor language. The statements in this morning's teleconference relating to 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 could differ materially based on factors including but not limited to the cyclical nature of the chemical and refining industries; global economic conditions; industry production capacity and operating rates; the supply and demand balance for Lyondell and its joint venture products; competitive products and pricing pressures; availability, cost and volatility of raw materials and utilities; access to capital markets; governmental regulatory actions and political unrest; technological developments 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 Company's annual report on Form 10K for the year ended December 31st, 2001, and to Lyondell's quarterly report on Form 10Q for the quarter ended September 30th, 2002, which will be filed in November.

I'd also like to point out that a replay of today's call will be available from 1:00 p.m. Eastern time today until 5:00 p.m. Eastern time on November 8th. The replay can be accessed by calling 1-800-879-7371 or 1-402-220-5338. And the access code at both numbers is 5549. The replay can also be accessed at our Web site, www.lyondell.com.

Now, I'd like to proceed to the earnings discussion. For the third quarter of 2002, Lyondell had a net loss of $2 million or 2 cents per share. This compares to a second quarter net income of $2 million. Before a third quarter charge related to refinancing costs, income was $5 million or 4 cents per share. As compared to the same period last year, income increased by $21 million before the 2002 refinancing charge and the 2001 charge that was related to the shutdown of our [inaudible plant] business.

The relatively flat sequential income was driven on the positive side primarily by strong results at Equistar during the first two months of the third quarter. This performance reflected the momentum for price increases that were implemented during the second quarter. As expected, the [IC&B] business results were down slightly and this was due to the normal decline in [MTBE] profitability that accompanies the end of the summer driving season.

LCR results were below second quarter levels as a result of CSA crude margins returning to more normalized levels versus the elevated levels that were experienced in the second quarter. This impact was partially offset by increased CSA volumes. I'll address these comments in greater depth later in the teleconference when I discuss the individual company performance.

I'd like to point out to you that two transactions occurred during the third quarter that changed Lyondell's outstanding share count from an opening level of 117 million shares to close the quarter at 160 million shares. On July 1st, 8.3 million shares of Lyondell common stock were issued through a public offering. And on August 22nd, 34 million shares of Lyondell Series B common stock were issued to Occidental Petroleum. Lyondell used the proceeds from this transaction to purchase Occidental's 29.5% ownership position in Equistar. As a result of these transactions, Lyondell's average share count during the third quarter was 140 million shares. Lyondell's ownership position in Equistar averaged 53.5%.

Lyondell now owns 70.5% of Equistar. Third quarter EBITDA for Lyondell and its proportionate share of the joint venture companies was $241 million, a $24 million increase from the $217 million in the second quarter. The Occidental transaction increased the third quarter proportionate EBITDA by $13 million, but it did not have a significant impact on third quarter net income.

Net interest expense in the third quarter was $95 million and D&A for the period was $66 million. Both figures include $4 million of non-cash amortization of debt issuance and expenses.

An additional detail I'd like to call to your attention is we have updated our estimated tax rate for the year. Consistent with this update, we have raised our estimated annual effective tax rate to 30%. This revised estimate results from a change in our forecast European taxes relative to our U.S. tax position. From a dollar standpoint, the impact of this revision is quite minor, as it represents an increase in third quarter net income of only $3 million. But the direction of this impact is somewhat counterintuitive as the positive dollar impact results from Lyondell parent company being in a loss position for the year while the European operations are realizing a profit.

Now, I'd like to briefly discuss the results in each of the reporting segments beginning with the intermediate chemicals and derivatives segment. This segment includes propylene oxide, derivatives of propylene oxide, toluene [diisocyanate], MTBE, methanol and styrene. During the third quarter, EBITDA for this segment was $117 million and this compares to $120 million in the prior quarter.

As I mentioned earlier, the slight shortfall was primarily driven by MTBE, one of the co-products of the propylene oxide process. Quarterly performance in MTBE followed typical seasonal trends as profitability trended down from second quarter levels. This is a normal pattern as the summer driving season comes to an end. [Plats] reports that spot raw material margins averaged 24.5 cents per gallon in the third quarter versus 30.5 cents per gallon in the second quarter. And the quarterly changes in Lyondell's raw material margins were in line with [Plats'] recorded quarter-to-quarter variance.

Styrene profitability during the third quarter was largely unchanged versus the second quarter. Our volumes were down approximately 7% due to a scheduled PLSM turnaround. The margins, as reported by CMAI, increase by half a cent a pound. Our business mix realized a margin increase that was slightly below the CMAI data and the effect of the higher margins offsets the volume impact.

Propylene oxide and derivative volumes increased by 5% in the third quarter versus the second quarter. Excluding toluene [diisocyanate], propylene oxide and derivative margins were down slightly as price increases did not keep pace with propylene prices.

In the [butanediol] product area, increased sales volumes and prices were not sufficient to fully offset the increased operating costs of the new European facility. And during the quarter, the toluene [diisocyanate] and methanol markets experienced tight supply/demand balance, and this helped drive margin improvements which contributed positively to the quarter's performance.

For October, overall business conditions in the IC&D segment have been similar to those that existed at the end of the third quarter. The notable exception has been an increase in MTBE margins. This is atypical as MTBE margins are generally weak during the fourth quarter. We believe this situation is temporary and can be attributed to short-term industry conditions created by low inventories and refining disruptions related to the recent Gulf Coast storms.

I'd also like to point out that our fourth quarter MTBE volumes are expected to be negatively impacted by the turnaround in one of our Bayport facilities.

Now, I'd like to turn your attention to the performance at Equistar. Equistar's third quarter performance reflects the success of the second quarter price initiatives. As a result of these increases, profitability was quite good early in the third quarter. However, while prices generally remained unchanged throughout the quarter, raw material cost increases negatively impacted September results.

On a 100% basis, Equistar's third quarter EBITDA was $147 million, an increase of $51 million over the second quarter and $101 million better than last year's third quarter. No distributions were made to Equistar owners during the quarter.

The petrochemical segment of Equistar generated $152 million of EBITDA during the third quarter. This is a $20 million increase over the second quarter. According to CMAI, the ethylene net transaction price remained flat over the course of the quarter and averaged .4 cents greater than during the second quarter.

CMAI reported that the third quarter average cost of ethylene production was .1 cents lower than the second quarter average. However, I should point out that the trend was very different than during the second quarter. During the third quarter, the cost of ethylene production trended higher, while during the second quarter, the reverse occurred. Over the course of the quarter, the increase in the cost of ethylene was significant, and CMAI reports that it rose from 12.1 cents per pound in July to 16.4 cents a pound in September. This increase was largely driven by crude oil prices that increased by approximately $3.75 a barrel between the beginning of July and the end of September.

According to CMAI, the net result of these price and cost changes was a one half cent a pound increase in ethylene margin. Equistar's margins increase was in line with the reported CMAI increase.

Total ethylene volumes for the third quarter were approximately equal to second quarter volumes. But total petrochemical sales volumes were 4% less than the second quarter volumes.

EBITDA in the polymer segment demonstrated significant quarter-to-quarter improvement as polymers generated $21 million of EBITDA during the third quarter. This is a $32 million increase over the second quarter. Domestic polymer prices were reported by CMAI to average approximately 4 cents a pound higher than in the second quarter while export prices were typically reported to be slightly reduced. Equistar's mix of polymer sales yielded a 3 cent per pound average price increase when compared to the second quarter. Equistar polymer volumes were relatively stable over the quarter, but averaged approximately 4% below second quarter levels. And year to date, polymer volumes are 6% greater than during 2001. We believe that this is consistent with industry growth rates for the same period.

During the beginning of the fourth quarter, profitability has continued to be negatively impacted by high crude oil and natural gas liquid costs. Price increases have been announced in the key product areas but market conditions limit our ability to rapidly realize these increases, and consequently pass through the higher feed stock costs.

Now, I'd like to review the results at LCR. LCR's third quarter EBITDA was $86 million, a $14 million reduction from the second quarter. This reduction came despite a 4,000 barrel a day increase in total crude processing rates and a 6,000 barrel a day increase in CSA consumption. The principle contributor to the reduced EBITDA was CSA margin as a scheduled, semi-annual contracts formula adjustment resulted in a reduced margin.

As we mentioned in last quarter's teleconference, this scheduled adjustment removed the affect of first half of 2001 natural gas pricing from the formula. You may recall that natural gas prices were extremely high early last year. The contract formula has now returned to a more normalized level.

Also contributing to the shortfall were timing impacts created by rising crude oil prices during the quarter and fewer of the market opportunities that bolstered the second quarter results. Despite the reduced EBITDA it's important to note that net cash distributions from LCR to Lyondell increased to $49 million during the third quarter.

Year-to-date distributions are $73 million which is more consistent with the year-to-date EBITDA and typical cash distribution levels.

Now, this concludes my prepared remarks so I'd now like to turn the call over to Kevin to discuss some of the elements of our cash management efforts.

OK, thank you, Doug. Let me begin with a discussion of our working capital efforts. Our working capital metrics at Lyondell and Equistar continue to be favorable versus year end, 2001, levels. Equistar finished the third quarter with 46.9 days of working capital, and that's a reduction of 1.3 days since the beginning of the year. However, as a result of increased prices in raw material costs, the dollar value of the working capital has increased by about $115 million.

For the corresponding periods at Lyondell, the days of working capital have been reduced by 4.5 days to 48 days while the dollar value has remained relatively constant. Inventories related to the turnaround activity at both companies are elevating the third quarter metrics. Additionally there is some seasonality in the Lyondell figures as Lyondell carries higher propylene, glycol and de-icer inventories at this time of year in order to service the needs of the aircraft de-icing industry.

Our cash fixed cost management has continued to be an area of focus within the enterprise. Year to date, combined spending at Lyondell and Equistar is approximately $60 million below spending for the same period in 2001. This represents a 6% reduction. Approximately 70% of those savings have occurred to Equistar. At Lyondell, the cost reductions have more than offset the incremental costs related to operating the new European [butanediol] facility. Year to date, the net reduction in Lyondell's costs is $18 million.

Now, a third element of the cash story is capital spending. During the third quarter, Lyondell's capital spending was $8 million but our contribution to [PO11] venture was another $17 million. And this brings corresponding year-to-date spending to $20 million and $38 million respectively.

At Equistar, capital spending continued at prior period levels of $14 million for the quarter while spending at LCR was $11 million. Now, on a 100% basis, we expect total enterprise capital spending in 2002 to be approximately 15% below our original guidance. The current forecast is that 2002 capital spending by entity will be as follows. IC&D capital will be $55 million plus another $55 million contribution to [PO11], a total of $110 million; Equistar, $80 million; LCR, $65 million. I'd like to note that fourth quarter capital spending is expected to increase from the third quarter as a result of current turnaround activity at Lyondell's Bayport PO plant, Equistar's [Chocolate Bio] ethylene plant.

We've not finalized plans for the 2003 capital program, but we would expect spending to increase from current levels due to increased spending related to NOX reduction and Equistar's turnaround activity and we expect to issue guidance for 2003 capital spending in the December press release.

Now, from a liquidity standpoint, Lyondell Chemical finished the quarter with $463 million of cash, and an undrawn revolver. This represents an increase of approximately $250 million over the second quarter. One hundred sixty million of the increase can be attributed to our early third quarter financing. The balance of the increase resulted from operations.

I'd like to point out that Lyondell's semi-annual interest payments are due in the second and fourth quarters of the year. Therefore, third quarter interest payments are smaller than the payments it will make this quarter.

Equistar finished the third quarter with $19 million of cash, $89 million drawn on a $500 million revolver. It's important to mention that during the quarter, in addition to reducing the revolver balance by $11 million, Equistar paid its semi-annual interest payment of approximately $85 million.

Now, after the third quarter Equistar completed a $100 million receivable financing. This involved the sale of a portion of Equistar's accounts receivables to a third party in return for cash. This transaction provides low-cost financing which does not increase Equistar's indebtedness under the credit agreement. However, the transaction does reduce the revolver commitment by $50 million to $450 million but does increase overall liquidity by about $50 million. It is envisioned that this will remain in place for the near term. The impact of this was obviously not reflected in the third quarter financials and Equistar intends to use the funds to reduce the revolver borrowings.

As a final point, I'd like to update you regarding the refinancing of the LCR bank loans that come due in January. During October, the owners and LCR management initiated efforts to refinance these loans. Financing that is being pursued is similar to the current structure, but will be secured by substantially all of LCR's assets. We anticipate that LCR will close this transaction during late November and existing owner loans will be extended in the manner consistent with the bank loans.

So I'd like to summarize with these comments. We are maintaining a sufficient level of liquidity at Lyondell Chemical through a combination of cash and undrawn revolver. In Equistar we've taken actions to efficiently fund the working capital and eliminate the draw on the revolver. LCR has continued to perform very well, continues to provide significant cash flow to Lyondell. Our past financing efforts have extended loan maturities at both Lyondell and Equistar so there's no near-term amortizations. And most importantly, overall operating results have been sufficient to support our routine cash requirements despite continued [trough] conditions.

And this concludes my comments and I think we'll open it up for questions.

Thank you, sir. At this time we are ready to begin the formal question-and-answer portion of today's call. If you would like to ask your question at this time, please press star one on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, please press star two.

Our first question is from Don Carson, Merrill Lynch.

Yes, thank you. A couple of questions. One, Doug, I was surprised on the pricing, that you were only up about 2.8 cents for the quarter, just under three, given the price increases we had across the board. Was that a shift in mix or what was going on there?

And then secondly, can you just talk about your overall operating rates that you're running at, as you factor in the turnarounds?

Don, on the pricing I assume you're referring to polymer pricing?

Yes.

OK. Well, I think when you compare the quarters, and of course as you remember, we're comparing quarters, the second quarter included the implementation phase of that. So you see, some of the price increases were realized in the second quarter. Throughout the third quarter, prices really remained flat. So that's how you see the balance where it comes out to about a three cent increase.

On the operating rates [inaudible] respond.

If you leave out Lake Charles, Don, and take into account the [Chocolate Bayou] turnaround, we're running in the low 80s.

OK. And would you anticipate that's kind of the operating outlook for Q4 or do you think it comes down a bit with the softness we've seen in some of your end markets?

I think it will be fairly close. We have seen industry operating rates. We just got a report the other day that industry operating rates have dropped down into the high 70s currently and we think that's kind of the range where we're going to be.

OK, thank you.

Our next question is from [Fran Radawicz] from Bear Stearns. Please go ahead with your question.

Could you please break out for us what MTBE was in terms of sales for the quarter? And any plans for MTBE, or update us on some of the MTBE in relation to the company?

Well, sales volumes are in the earnings release, Fran, so-

Oh, I meant sales, not volumes.

[inaudible] No, we don't typically break that out of the segment results, Fran.

If we started doing that, Fran, we'd end up with every product being a segment. [inaudible] But specifically on MTBE, I think you are well aware, there's really nothing new to report on the situation. The Congress went home before the election break without coming to agreement on an energy bill. There was good progress in the House. The House may have proposed it but the Senate really did nothing on it other than renege. So whether this comes back in the lame duck session or whether or not it comes back next year, we just don't know at this point in time.

But in the current situation, MTBE is actually a little stronger. The gasoline market has been a little stronger over the past few weeks here. So it curiously has turned up a little bit here recently. We don't know if that's a blip or whether or not it's something more profound than that. But our plans for MTBE are to continue to sell what we can at the highest margin we can for as long as we can. So, I don't think we can elucidate much more than that.

All right, thank you.

Thank you.

Our next question is from [Graham Copley] from Sanford Bernstein.

Good morning, [Graham].

Good morning, guys. Looking through your debt covenants for the new financing, what kind of economic recovery do you need next year to make it to the sort of Q2 and Q3- sort of tighter in covenants? Because it does require quite a big step up I think in EBITDA from the ICD businesses in order to get there.

I think some is the answer, [Graham]. These covenants are not any different from what they've been for the last couple of years. They consistently call for a step up in the ratios quarter by quarter, which-you don't have to be a rocket scientist to figure out if the business is not stepping up at all, then you're going to run up against constraints. So it's not a gargantuan increase in business activity that it would take to get there, but it would require some step up from where we are in sequential quarters. And the longer you have no recovery in sequential quarters, the harder it is to get to that target.

So I think the numbers are out there. You've looked at them and you can do your own calculations. If nothing improves [inaudible] you would cross over and we continue to look at it very conservatively and we'll take whatever actions we need to, to avoid running up against that.

When you were-[inaudible] put in place the last refinance, how much did dividend figure in the conversation?

It really didn't, Graham. We went to our bank group with a proposal of how we wanted to approach the situation. So there was no-I've read your analysis and other people's. There was really no give and take about "You've got to do this; you've got to do that." We sat down some months before that, our financial staff and management, and talked through what we thought were the smart things to do to handle the situation. And that's how we came up with the proposal and we basically sold the proposal to the bank group.

Right. So it wouldn't be unreasonable if we had a poor economic environment next year to see perhaps some more incremental equity issuance.

I'm not going to project what you may or may not see. I don't think it's appropriate at this point in time.

And the other thing, you know, Graham, is we continue-it's part of what we were doing in terms of building the cash balances and things of that nature. That was part of the objectives there. So it will give us a lot of flexibility.

OK, thanks.

Thank you.

Our next question is from [Les Ravitz] from Morgan Stanley.

Good morning, Les. How are you?

I'm good. How are you guys?

Good.

A couple-actually two questions. One has to do with the relationship with [Peravesa] and could you update a little bit on how that's going, not only on the CSA agreement but more permanent financing? And then the other question is on the turnaround schedule that you're looking at for 2003 at Equistar, it seems like you're going to be shutting down some plants in the middle of a hot period. Could you talk a little bit about that?

Well, let's talk about that one first. You're right. We do have one plant coming down during the summer of next year. The other one is going to be in the spring, so-

Yeah, the spring is where I was thinking it was going to be hotter.

Well, it doesn't usually get too hot in Houston in the spring. It's really summer, so-the [Peravesa] situation-let's go back to that. We are working very well with them at this point in time and they are supplying the crude. They have not rescinded their force majeure, alleged force majeure, but they are supplying the volumes. I would say the working relationships are good. We're working through a lot of things with them. We're looking at opportunities with them because there are things that we can do together that will lower capital expenditures between the two parties, both in LCR but elsewhere as well. So I think we do have a good working relationship, but we still have our differences that we're continuing to work through.

I would remind everybody, the reason there are suits out there is because we have contracts but the contracts do not have arbitration clauses. So if you can't get to an easy solution, you really don't have any other way to force the resolution other than go to the courthouse. Not a good way to do things, but that's the way they were set up and so we're dealing with that. But I would say the working relationship is as good as it's been in five years and we're working through things and we do continue to look at the long-term financing and we think we're making progress towards that, but it simply was not smart to hold off and not do the interim financing. The interim financing buys plenty of time to get to a permanent solution on the financing.

Now, I'll go back to your Equistar question. We have [Olson's One] and [Olson's Two] at [Channelview] scheduled for turnaround next year. Those are our two largest units in the system and I presume you're referring to your own forecast that you think the volumes will pick up and that could be a time that we wouldn't like to have those plants off.

That could well be true, but I would also point out that that down time will probably hasten that if that's the case, because there are substantial impacts in the industry. And when the industry is operating in the upper 70s or 80 or wherever it really is, we can have a pretty sharp turn up before we run out of capacity. So we think it's prudent to get those done. Those will be about a seven-year interval which we're comfortable operating that far. We're not comfortable pushing them further back. And frankly, if we push them further back we think there's even more chance that they'd be in a very high profitability area. So-

Is there going to be any increase in capacity from those units following the turnaround?

No. No, we're not doing the bottlenecks. We just don't see a reason to do that. So there will be typical maintenance with some improvements to some of the equipment, but I don't think you'll really see any capacity creep of any consequence.

Thank you.

Thank you.

Our next question is from [Paul Casino] from [Latomo Trust].

Good morning, Paul. How are you?

Good.

Well, just a quick question, then. You probably mentioned this a while ago. I just probably didn't capture it. How much is your bank debt for both Lyondell and Equistar levels right now? And bank debt meaning term loan and revolver.

Term loan- 420 in round numbers for Lyondell on the term loan. And nothing drawn on the revolver. Equistar is about 300 of term loan and we said we were in the revolver $80-some-odd million but we just did $100 million receivable financing so that will be reversed out in the next couple weeks or so.

OK. That's all I wanted to know. Thank you very much.

Thank you.

Our next question is from Sergy Vasnetso from Lehman Brothers.

Good morning, Sergy.

Good morning. I have a few questions. One is on tax rate. To bring your total for the year to 30% I calculate you need about a 37% tax rate give or take in the fourth quarter. Could you comment on that? And also your tax plans for 2003.

Well, for the tax rate, Sergy, what we're really making an adjustment for is the fact that the parent is going to be-is in a loss position, whereas we do have some foreign taxes. The operating entities in Europe are in a taxable position. Being as close to zero as we are right now, that's moving the rate around. And as we said, the impact-dollar impact is really very small. What we really made was about a $3 million adjustment in the taxes as a result of that. So, it just happens as to where we are the changes are moving, but the actual affects are relatively minor in the fourth quarter. We think that 30%-that is our rate for the year.

Doug, I'm sorry. I was thinking about fourth quarter impact specifically. So for the fourth quarter, the rates would be 37%?

No. No, we think we'll be at 30% for the year, Sergy.

OK. And for next year?

Well, I think next year-we haven't really done an updated forecast, but it will depend really on the economic environment, and whether that moves back up or not will depend on the profitability in each of the entities.

OK. A last question on Capex. You've done a pretty nice summary by business. Could you talk about your plans for 2003 and also incremental impact from NOX on the-

Yeah. We'll take the 2003 capital budget to the board in December and we'll make a press release after the board takes action in December.

OK. Thank you, then.

You're welcome.

Our next question is from [Bill Hoffman] from UBS Warburg.

Good morning, Bill.

Good morning. A couple of questions. I just want to get a little better sense on the fourth quarter. With volumes obviously softening due to some of the seasonality, but also the impact of higher [impact] costs. Just trying to get a sense of what your margin squeeze might be and if we can go through sort of the [PO] derivatives business also in the styrene side.

Well, first of all, which day do you want to know about? Because what happens-let's talk about it in a global aspect-third quarter continued the sequential month-over-month improvements until we got to August. And then if you'll remember what happened, energy prices went up about 15%, late August, and early September. And that, against a weakening economic environment. But when we say, "weakening," you cannot take every product and say, "The volumes are softer across the board." Some are not softer; some are. And it's kind of a mixture that varies week to week and month to month. But we definitely, as you've seen in everybody else's reports and what everybody is saying about the economy, have seen an economy that's flattening out compared to where it was in the earlier periods.

Now, on the energy prices per se, weak environment. You're pushing a limp noodle trying to get prices up. But nonetheless, we have price increase announcements out for every product. We're having some success with some because there's a feedstock push here. So margins got collapsed to some extent and people are trying to push them back up. And then the energy pricing has not been consistent as you watch crude prices falling off about $1.50 to $2.00 just over the last 10 days or so. And it ebbs and flows back 30 or 40 cents. But it's opened up a little bit. So we're getting a little help there where we can [see in that] versus the gas products and our competition is not, because with the cold snap in the Midwest gas prices are actually still edging upward.

So the umbrella that we have of the higher cost producers is starting to help a little bit on the Equistar products. The stronger gasoline market-gasoline has not weakened as much as crude has, so the co-products from [cracking liquids] the liquids also have been a little bit stronger so that helps a little bit as well.

On the IC&D, the propylene oxide chain, we really have pretty much just kept that constant going through. The increases in our product pricing have pretty well kept pace with the increase in the raw materials. The volumes actually did increase for propylene oxide and derivatives about 5% in the third quarter versus the second. And we're still seeing some spotty increases as we go into the fourth quarter. But it's a mixed picture out there and the economy is definitely not in wonderful shape.

Can you-I mean just to get a little more specific, are you seeing-let's take the styrene business just for an example-do you think you're going to be able to see better margins in styrene in the fourth quarter or not?

No, we don't see anything positive happening in styrene. Styrene is more in the category of what we're seeing in say the polyethylene segment. As Dan said, though, the [PO] chain itself seems to be a little bit better than the other chemical products we're dealing with.

OK. The next question is just with regards to [PO11]-I guess we should be getting closer to the end of that-the funding on that project. Just wanted to know when you expect to start seeing some production on the PO side. I understand [inaudible] side of the business has started up.

Bill-Well, that's-we're really looking at a mechanical completion in the middle of next year. So start up will be in the third quarter of the year next year.

OK. And now with the rest of the Equistar business-I'm pretty impressed to see that you've gotten some positive margins in the polymer side of the business and I know one of your goals was to actually make that a profitable business going forward. Can you just talk a little bit about-you mentioned it was a mix issue in the quarter but I'm wondering whether you think you are heading in the direction of being able to operate that as a profitable business.

Well, I think what we saw is we-in the third quarter-in the second and third quarter, we weren't able to realize price increases. It took the third quarter for polymers to really catch up from the monomer increases in the second quarter and get those passed through. You know, as we look forward, it's really-the market is a little bit loose. We have priced -some additional price increases are announced. The industry is working very hard to realize those. And we'll just have to see as it turns through. But I think, you know, there is a chain here and sometimes the profit is on the ethylene side, sometimes it will be more on the polymer side. And that will shift quarter to quarter as you move through. And polymer pricing does typically take a little bit longer to move through than do the monomers. As you get closer to the oil, price increases tend to move a little bit quicker.

I think if you look at these individual businesses you lose track of something very important. Half of all ethylene is used in polyethylene. So if you say, "Let's just shut down all the polyethylene in the world because it's not profitable this month," then there's no place to put the ethylene. So the chain economics are very important which is why most people are vertically integrated. But clearly, we're only satisfied if we're making profits on every segment as we go forward. So you're correct. If we continue to push, we expect to make not only some positive gain but we expect to return capital in each of the business segments as we look out.

OK, thanks. And then just a final question on-I want to get a sense of your pension plan, where you are with regards to liabilities? Whether you expect any cash money requirements either at the back half of this year or in the next year?

I think if you refer to our documents, we've been very straightforward in those. But we've been funding pension plans every year. Remember, we're fairly new and we don't have a lot of historical liability, unlike some of these people who have hundreds of thousands of retired employees. We're not in that zone because we're a relatively new entity dating back in the earliest stages only to the late '80s. So we have been consistently making contributions to the retirement plan. I'm sure we will again in the coming years as well. Now, I know what you're thinking about is the same everybody else is, that if the earnings are lower then obviously those contributions have to go up. But for us, we don't think that's a very significant issue.

So you don't see any kind of meaningful funding requirements?

Well, I think anything is meaningful at this point, but-

[unequal] change.

No, I think they're pretty much level with where they've been in the past year and this year. So not significant changes there.

Thank you very much.

Our next question is from John Moten, Deutsche Bank.

Good morning, John.

Yes, I'll try to be a little bit briefer. A couple of questions. On the receivables financing, Kevin, you didn't specify how long that was in place and I was curious about the enhancement of liquidity by $50 million. Is that just for the quarter or is that on an annualized basis for the receivables- ?

It's the arithmetic. I mean we-we put $100 million in. You know, we funded $100 million of the receivables, but the credit agreement requires us to take the revolver down by $50 million. So it's in place for as long as-obviously the receivables facility is in place and it's a three-year deal with annual renewals.

OK. And then on the Capex, a couple of questions. What do you anticipate your NOX costs to be next year for remediation of that?

We're not anticipating that just yet. As Dan said, we're going to finalize our spending plans later this quarter and then we'll make that available. The other point on NOX is we have publicized our expected costs for the 90% rule. As you know, we're anticipating that rule will change to 80%, but it doesn't involve additional requirements for [VOC] reduction and so the whole situation is a little bit unclear. We are not yet ready to talk about what we would have to spend to comply with the combined 80% and VOC rules.

John, that ruling is anticipated to come out from the state in early December. And that would be the first time we would have anything very concrete to plan on. But I curiously was informed several weeks ago that we were the only entity given the figures for the 90% case which I find very puzzling. So I think you can rest assure that when we have estimates on the revised case we will be forthcoming with them, unlike many of our competitors.

And one quick last question for Kevin. You did do a great break out on the Capex. I was wondering what-you said 55 and 55 for the [ICD]. What was the Capex expenditure that you anticipated for Equistar?

It's been running about-it's going to be 80 for the total year. That's what we're estimating. It actually-there's a possibility it might be a little lower but we've been spending in that pattern or so.

OK. So the total number is 250 for the year including the 55-the additional 55 for-

On a 100% basis, right.

Right. OK. Thanks a lot.

Thank you.

Our next question is from Bob Goldberg, New Vernon Associate.

Good morning, Bob.

I had one quick question on the balance sheet. You did a good job of explaining some of the changes in the footnotes from the Occi [inaudible]. The only other thing that jumped out at me was the $125 million increase and other accrued source of cash in the quarter. Just wondering what happened there.

I think the item you're referring to, Bob-I'm not certain, but I think what you're referring is the accrued interest payments. As we said, Lyondell makes its larger interest payments on the bonds in the second and fourth quarter. And so that payment was not made. So I think that's what you're seeing there.

That payment would have been made-

That payment will be made during the fourth quarter. We'll make a semi-annual payment on the bonds.

Unlike that, at Equistar in the third quarter we did make a payment which was $85 million and that is paid in the first and third quarters at Equistar.

So we'll see an outflow in the fourth quarter on your-on the consolidated cash flow.

Yeah, on the cash flow.

OK, thanks. I appreciate it.

Thank you.

Our next question is from [Nancy Traub] from Credit Suisse First Boston.

Good morning, Nancy.

Hi. I wondered if you could comment a little bit about inventories downstream. The fourth quarter typically is softer than say-definitely the second and maybe the third, too. So are you finding your customers are de-stocking? Or do you think inventories are just about right?

Well, as we told you many times during the year, Nancy, we haven't really seen the customers stock up. So the only de-stocking they can do is to the extent their business disappears. So I think what you're continuing to see is business conditions are in some cases softer than they were, but we're not seeing any big movement one way or the other. I think it's just-the business flow is not continuing to grow at the rate it was before and you are seeing some seasonal patterns. But again, seasonal patterns, I'll remind you, are not all consistent. Because the packaging part of the business actually sees an upturn in the holiday period before it then lulls at the very end of the year and into the first quarter, where other parts of it may lull a little quicker. But we're not seeing any pronounced trend, one way or the other.

OK. And some of your competitors have mentioned how their-the polyethylene price has started to get quite competitive.

The polyethylene price has been quite competitor for about three years, Nancy.

And-well-maybe even starting to-looks like it's falling off. Can you comment on that?

Well, I'd have to know which one of the 250 polyethylene prices you're talking about. Not being facetious, but remember, this is many, many different products and to generalize broadly I think is a mistake at this point in time because what's been going on for the last couple quarters is some pieces are stronger than other pieces and then people are making sweeping statements about the whole. But we're not seeing anything any different than what we've been seeing while we've been in this-up and down in the trough. But certainly the end-use customers are feeling resistance from the Wal-Marts and the K-Marts, et cetera. So they're having a hard time passing prices through and so they're resisting price increases and every time they get a chance to try to reduce the prices they're trying to do that. But it's-the hand-to-hand combat that's been going there-again, I don't think there's anything markedly different anywhere in this.

OK, thank you.

Thank you.

Our next question is from [Greg Goodnight] from UBS Warburg.

Good morning, Greg.

Good morning. I was curious. The [NPRA] production numbers for ethylene came out last week and I noted the two-day-equivalent two-day build in producer inventories of ethylene. About 350 million pounds which is about half of the quarter-to-quarter improvement in rates. My question to you-is your feeling that that was towards the first part of the quarter and we're running-the industry is running more in balance now and will this inventory increase as we're going forward, or where are we at?

Well, I don't think we can speak to the whole industry but we can speak to our own actions here and we read the numbers like you do and try to interpret them. But just in our own case, we had an [olefins] plant turnaround coming up that's under way right now. So we actually had to build some inventory to cover ourselves through that. So to some extent, we could have been contributory to some of this because we have to build the inventories to last us through the turnaround.

And as we go forward, we have two more big turnarounds coming up. We're obviously working as hard as we can to minimize what we have to have. But I think the pattern in turnarounds does have something to do with this quarter to quarter. So I don't think it was people just running a lot of volume into inventory. And if I look at where the operating rates say they are, it looks to me like we should not be building inventory but indeed, probably be stocking inventory.

I think that's right, and you know, we're looking at [Pace] data and the [Pace] data suggests that early in the third quarter the industry got up to the 85, 86% sort of range in terms of operating rates and now, as I said a few moments ago, it appears that the industry is back down into the high 70's. And I think that's the correction that will re-establish inventory levels at a more appropriate level.

If we know what a more appropriate level is.

OK. That sounds good. A question on NOX. Your-as you mentioned, your numbers have the 90% number and they didn't have these highly reactive hydrocarbon numbers. Are you intending to break out capital spending for NOX compliance in the numbers that you publish or give guidance on in your capital program?

Well, again, as we've been told by you and others like you, we're the only people who have broken out NOX spending. Despite that fact, I anticipate we'll continue to do that. We think it's material information that you need to know caused by regulation. The reason we can't give you a better estimate right now is because the rule is not established. It apparently is going from 90 to 80 but the VOC component which, by the way, from everything that we understand should not be more costly than the increment between the 80 and the 90%. So let me put you at rest there. But we just don't know exactly until the rule is formulated. So the net result of the change in the rule could be very important to us or it could be slightly important to us. But we don't think it's going to exceed the 90% expenditures, if that's what you were looking for.

Yeah. Will you break those capital projections out on- ?

We'll break out the total to meet the rules. I'm not sure that we'll get into detail about VOC versus NOX because, again, if our competitors aren't going to do anything, we don't want to give away competitive information. But I'm sure we will give you the total spending to meet the rule.

I anticipate you'll see a similar reporting approach, Greg.

OK. Last question, if I could. The-in terms of meeting the deadlines, there seems to be interim deadlines in '04 and final deadlines in '07. This implies that your total cap that you're going to spend on NOX is going to be more front end loaded if you look at the entire period.

It really doesn't. Because the way we work the system, we have multiple plants within the eight-county area. And so as you make conversions-you make a conversion in a plant during a turnaround and you more than catch up for some other things. So, because of the multitude of plants, we're able to meter this a little better. So I don't think you're going to see any great bulges in spending anywhere and, again, I think we gave you profiles and expected spending under the 90% case. And it's not like half the spending has to be done by the end of '04 and so forth.

Just like many things-you know, the first dollars of spending have a much larger impact than the last dollars spent. That's the 80/20 rule. So you won't necessarily see what you're anticipating there, Greg.

OK. I appreciate the guidance.

Thank you.

Our next question is from [John Roberts] from Buckingham Research.

Good morning, John.

Good morning, guys. You mentioned an adjustment to the formula -a semi- annual adjustment at LCR that reduced margins there. Is there any way to quantify, cents per barrel, how much that adjustment is and- ?

Well, let's go back. You remember something called $10 gas? From several quarters ago? Remember gas was running at $3 a million or so and then zoomed up to about $10 for a few months and then came off to $5 and so forth? The way the cost adjustments work on that contract is there's a lag, but then they go in on an equivalent basis. So if you think in terms of a refinery uses about 10% of its cost is fuel gas, then you can take about 10% of the variable cost is gas and then if that gas more than triples you can see it can have a material difference in the numbers.

So the margin went up as that adjustment went through the numbers, and as gas then trended off, then the adjustment trends off again. So I think you can sort of imply from that kind of a situation plus taking the barrels and dividing them into the profits what you think the margins did.

So when you're calculating the profitability on a quarter-to-quarter basis, you're using some deemed gas price or at least a fixed gas price that's in the-

We have a formula and it's a catch up, if you will. So today's gas price will get reflected in that formula 6 to 12 months hence.

Yeah, there's a lag in the formula, John. So we were calculating that formula last quarter with that $10 period, and now you're down to a more $3, $4 level going forward. So I think if you think about the type of refinery it is, you think about the typical gas consumptions in that type of refinery and the difference between $10 gas or $8 gas and then $3 to $4, you know, that will help guide you, I think, through what you think the differences would be in that formula. The key thing is it's a lag and it's actual. So over time, you're realizing the actual gas prices. You're just going to see when you have a very unusual situation like that a temporary variation that occurs. That's really all you're seeing, John. It's-

Over time, it settles out and has no impact.

We didn't like it when we were paying $10 for the gas and getting three credits in the formula. We liked it when we were getting 10 credits and paying $3. But we can't keep either one of those. They pass through as the cycle passes through.

It's every June 30th and December 31st?

Yes, it's twice a year.

But you should understand-this is-that was an abnormal thing. I mean, yeah. Don't try to get too crazy about it. I think if you go back several quarters over the history of tracking this kind of stuff over several years you're going to find that it averages a certain level which is good for your purposes of estimating going forward.

[inaudible] $20 gas into your future, then you'll know how to calculate it.

No, I was just trying to understand it.

Thanks.

Your next question is from [Andrew Cash] from UBS Warburg.

Good morning, Andy.

Hi, good morning. Just one question on your cash flow for Lyondell Chemical Company. That's my page 10 of your handout. Just the two last items on cash from operations, the prepaid expenses and other assets. The cash contribution of about $150 million or just under half, cash from operations for nine months-could you shed a little light on what's going on there?

Yes, I can help you there, Andy.

OK, thanks.

What we're looking at is-one thing to remember is we had a tax refund early in the year of-I believe it was $97 million if I recall. So you're seeing the impact of that. You're also seeing some reductions in some of the accrued interest and due to some lower turnarounds expenses and some lower spending that's coming in there. So there's a number of factors. One of the key ones is that tax refund is in there.

OK. Thanks a lot.

Our next question is from [Andrew Shirley] from [Irea Capital].

Good morning, Andrew.

Hi. I was wondering if you could tell me what your average realized price was for TDI in the quarter and what the trend is into the fourth quarter?

We don't split that out, but I will tell you that the industry has been moving prices up this year in TDI and we continue to look for further price increases.

Have you announced anything subsequent to the third quarter?

There have been two major price increase announcements this year. In the second quarter there was a 15-cent a pound announcement and in the third quarter there's been an announcement and depending on region I believe it's 8 to 10 cents a pound.

And for the third quarter increase, what was the specific timing of that?

According to contract. It varies by customer. So some immediately, some lagged about a month or so.

OK. And the supply/demand dynamics there are still holding pretty firm?

Yeah, it's a relatively tight situation.

OK, great. Thank you.

Your next question is from [David Phipps] of JP Morgan.

Good morning, David.

Can you remind us when the turnaround is going to be done in Equistar? Is that in the first quarter? Is that when you currently have it scheduled?

Well, there's a few different turnarounds at Equistar. We do have the [Chocolate Bio] ethylene plant in turnaround right now. In March we'll begin one of the olefins plants at [Channel View] and the second olefin plant at Channel View is scheduled for October, I believe it is, of next year.

OK, thank you. All of my other questions are answered.

Our next question is from [TJ Jiviker] from Salomon Smith Barney.

Good morning, TJ.

Good morning. I've got two quick questions. First on the PO operating rates globally because the new [BSS] plant in Singapore has started. Have you seen the impact of that, and what are the operating rates now?

The operating rates in PO-I don't think we actually have any industry publications on that so we can't really say, but-

Can you guesstimate, Morris?

I would give you a guesstimate somewhere in the mid 80s.

OK. The second question I have is for Dan. Dan, you have a pretty good handle on the oil and gas markets and recently what we've seen is oil prices come down when gas prices have stayed up which may be marginally good for you, but overall can you talk about the oil versus gas price relationship as you see it?

Yeah, I think gas is being driven by the demand situation, predominantly in North America, but it is also reacting sympathetically to the war premium that I think is there in crude oil. So when we saw the increase in August/September in crude oil you saw natural gas go up at a time when natural gas storage was very high, supply/demand was sloppy and you would say gas prices shouldn't have gone up. So it's a curious situation. It got notched up, and then it's moved up a little further here in the last couple weeks based on cold weather which is I think a typical reaction.

I think what you may be driving at here is suppose there is some resolution-either we declare inspectors are being successful in Iraq and so the war premium starts to come out of crude oil. What happens in gas? I would anticipate that you're going to see some mitigation of the gas price increase back to just supply/demand scenarios in that situation. If we go to war with Iraq and there's some quick resolution that there's not going to be a huge interruption in the energy markets, then I think you'd see the same thing.

In between we're trading on emotion. You see a press release one morning that the Bush administration is making saber-rattling noises and the crude price goes up, and you get some gas sympathy for that. And then you have a Canadian cold front come down and you get gas go up again. So you're getting a two-for-one on gas. And then when people say, "Well, maybe we're going to settle this a little more peacefully," you know, a little comes out of the crude market but gas doesn't really seem to ratchet back down. And I think we're going to kind of be in that uncertain zone which is unfortunately not really economically driven; it's driven by emotion more than anything else. [inaudible] some resolution here.

If you take the war thing out, then you don't subscribe to the theory that gas production in North America is dropping?

Oh, I do subscribe to that, but I don't think it's as profound as the kind of numbers that we're seeing. I'd remind all of us that we were in a $2 a million gas regime not that long ago and now we're suddenly four plus. I don't think there's been that much fundamental change. I think you're clearly in a $3 plus gas zone but I think there is some sympathy premium in the gas pricing as well that is other than just supply/demand. But clearly, over the long term the life of gas fields are shorter than oilfields. So the depletion rate is faster, the new finds tend to be deep water that are farther away from the existing supply grids so they're not as easily connected.

It used to be we could drill and connect in 18 months or so. That's becoming harder and harder. The other thing that is very important here is whether you think we have an energy policy or not, we do have a policy that's forcing all new consumption of electricity to come from natural gas. And so even as we have coal plants out there, they're falling off line, we're not building new coal, we're not building new nuclear. So we're forcing more and more consumption to natural gas which inevitably is going to drive up the demand and therefore I think the price.

Now, I don't think that's good for the overall industry in this country. But again, back to our ethylene situation, where we're more based on the derivatives of crude oil, as gas becomes more expensive vis-à-vis crude, it puts more pressure on our competitors and if they're going to break even, we're going to open up incremental margin in that situation.

So you're looking at $3 plus gas if you take the war premium out.

Yeah. And if you take the war premium out of crude, I would guess it's $22 to $25 personally. Many other people think there's not that much of a war premium in it, so we'll never know until we get to the point.

Great. Thanks. I appreciate it.

Thank you.

I'm showing no further questions at this time. Mr. Pike, I will turn the meeting back to you for any closing remarks.

OK. Well, thank you very much and we'll close at this point. I'd like to remind everybody that the replays are available to you and those are available both with the phone numbers that we gave earlier and also over our Internet site, www.Lyondell.com. Thank you.

Thank you very much for your attendance and your questions.

This concludes today's conference call. You may disconnect at this time.