利安德巴塞爾 (LYB) 2004 Q2 法說會逐字稿

Good morning and welcome to today's Lyondell Chemical second-quarter 2004 earnings release teleconference call. Following today's presentation there will be a formal question and answer session. At that time instructions will be given. Until that time all lines will remain in a listen-only fashion.

At the request of Lyondell today's call will be recorded for instant replay purposes. Any objections, one must disconnect at this time. I would now like to turn the call over to your presenter, Mr. Doug Pike. Sir, you may begin your call when you're ready.

Good morning and welcome to Lyondell's second-quarter 2004 teleconference and webcast. As Anita said, this is Doug Pike, Lyondell's Director of Investor Relations. I'm joined today by Dan Smith, our President and Chief Executive Officer; Morris Gelb, our Chief Operating Officer; and Kevin DeNicola, Lyondell's Chief Financial Officer.

The agenda for today's call will be as follows. I will briefly review our second-quarter performance. Kevin will then review some key metrics and discussed factors related to our cash and cost management efforts, and Dan will then provide a brief recap before we open the call up to your questions. The call is scheduled to last 60 minutes.

Before we begin I'd like for you to note that statements made in this teleconference relating to matters that are not historical factors are forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those forward-looking statements. For more detailed information about the factors that could cause our actual results to differ materially, please refer to our earnings release issued this morning; and please also refer to Lyondell's annual report on Form 10-K for the year ended December 31, 2003, which was filed with the SEC on March 12, 2004; also Lyondell's quarterly report on Form 10-Q for the quarter ended June 30, 2004, which will be filed with the SEC in August of 2004.

In addition, as provided in our earnings release issued this morning, please note that Lyondell filed an amendment to its registration statement on Form S4 with the FTC on June 18, 2004, in connection with the proposed transaction with Millennium. Investors and security holders are urged to read that document and any other relevant documents filed with the SEC as they become available, because they contain or will contain important information. The earnings release also contains information regarding how you can obtain a free copy of the documents that we filed with the SEC.

I also would like to point out that a replay of today's call will be available from 1:30 PM Eastern Time today until 5 PM Eastern Time on July 30. The replay can be accessed by calling 1-800-294-4406 or 1-402-220-9778; and the access code at both members is 5549. The replay can also be accessed beginning at 1:30 PM Eastern Time today at the investor relations page of our website www.Lyondell.com/earnings.

Reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other (inaudible) disclosures including the earnings release, are currently available on our website at www.Lyondell.com/earnings.

During the second quarter of 2004, Lyondell had net income of $3 million or 2 cents per share; and this compares with a $15 million loss in the first quarter of 2004. Compared to the first quarter the principal area of improvement was Equistar product margins. Compared to the second quarter of 2003 net income improved by $71 million. The improvement was driven by strength in results at each of the operating companies. For the first half of the year the improvement is even more significant. During the first half of 2003 Lyondell's net loss was $181 million, while during the first half of this year this loss shrank to $12 million.

I'd like to point out that we currently estimate our full-year effective tax rate to be 35 percent. But since earnings are currently near breakeven the actual rate could be quite volatile.

Before I proceed to discussion of the individual companies there is one item I'd like to mention. Clearly there has been significant amount of focus on the variance between actual results and First Call estimates. Anyone that's been involved in commodity chemicals over the recent years realizes it is very difficult to precisely forecast results. For example, I'd like to point out that in our earnings 5 cents per share is only $9 million. That's well within the range of variability given the volatility of oil prices and our product leverage. I would suggest that the more leveraging data point is the $169 million turnaround in first-half performance versus last year.

Now I would like to briefly summarize performance of the various products beginning with the intermediate chemicals and derivatives segment. This segment includes propylene oxide, derivatives of propylene oxide, toluene diisocyanate, MTBE, and styrene. During the second quarter of 2004, EBITDA for this segment was $82 million. It's essentially unchanged from the first-quarter 2004 results.

Although overall IC&D earnings were relatively unchanged, the contribution from the products within IC&D did vary considerably. For example, the contribution from propylene oxide and derivative products declined by approximately $20 million, while MTBE's contribution increased by approximately 35 million.

The decline in the propylene oxide and PO derivative products is attributed to a 120 million pound decline in sales volumes versus the first quarter. This reduction was seasonal in nature as aircraft deicer sales accounted for the bulk of the change. The balance of the decline was related to the timing of industry maintenance activity, including the second-quarter turnaround of one of our Channelview, Texas, PO/SM plants.

The comparison to last year's second quarter eliminated the seasonality introduced by the deicer business and therefore brings clearer visibility to the underlying growth in sales. On this basis volumes increased by approximately 20 percent.

The margins for the propylene oxide and PO derivative products were relatively unchanged versus the first quarter. Price increases offset increased raw material costs. As compared to the first quarter, second-quarter propylene prices averaged approximately 4.5 cents per pound higher in the U.S. and 3 cents per pound higher in Europe.

As I mentioned previously, results in MTBE improved significantly versus both the first quarter of 2004 and the second quarter of 2003. The improvements are attributed to margins that averaged higher throughout the quarter and improved significantly around the Memorial Day holiday. We attribute this to an MTBE market that is more balanced than it was last year, as well as the tight supply-demand conditions in the gasoline market.

Based on Platz (ph) data raw material margins began the second quarter at approximately 15 to 20 cents per gallon and reached greater than 55 cents per gallon around Memorial Day. By the end of the quarter margins had declined to approximately 20 cents per gallon; and the quarterly average was approximately 30 cents per gallon.

Throughout the quarter the styrene and TDI products were pressured by increased raw material costs, particularly benzene and toluene prices. Styrene product price increases were not sufficient to keep pace with the raw material increases. As a result the combined results for these products decreased by approximately $10 million versus the first quarter, and $20 million versus a year ago. Thus far in the third quarter conditions are relatively unchanged from the second quarter. Platz data indicates that Gulf Coast MTBE margins have averaged slightly more than 30 cents per gallon for the quarter to date; and volumes for the IC&D chemical products, which include PO, PO derivatives, styrene, and TDI, have been fairly stable at fairly strong levels.

However raw material costs have continued to pressure margins and we are attempting to increase pricing in essentially all of these products. I would remind you there's a positive side to this raw material cost pressure in that Equistar and LCR produce propylene, benzene, and toluene, which are the IC&D raw materials. On balance, higher prices for these products are favorable to the overall Lyondell results. A final point regarding IC&D is that there are no major maintenance turnarounds scheduled for the third quarter.

Now I'd like to turn your attention to Equistar's performance. Equistar had second-quarter net income of $43 million versus 5 million first quarter. This translates to an EBITDA of $175 million during the second quarter versus 136 in the first quarter. The second-quarter EBITDA is approximately equal to Equistar's EBITDA for the full year of 2003. In fact EBITDA for the first half of 2004 has surpassed full-year results for each of the recent 2001 to 2003 trough years.

It is important to note that this improvement in quarterly earnings was achieved despite crude oil and natural gas prices that averaged $3 per barrel and 50 cents per million BTUs higher than during the first quarter. These increases brought the quarterly average crude price to $38.40 per barrel, the highest quarterly average since 1981.

Despite these pressures the key drivers of improvement were strong demand and prices for the coproducts that are produced when making ethylene from crude oil based raw materials. These coproducts include propylene, butadiene, benzene, and gasoline components. As a point of reference, when processing crude oil based raw materials you produce more pounds of coproducts than ethylene. In fact, the gasoline components alone surpass the ethylene production. The contributions from sales of these coproducts increased by approximately $100 million versus the first quarter, while the cost of raw materials increased by approximately 50 million.

We often simplify this coproduct economic analysis through reference to the Chemical Market Associates' quarterly cost of ethylene production metric. CMAI's data indicate that on average naphtha raw materials were advantaged versus ethane by approximately 3 cents per pound of ethylene. They further estimated that the advantage grew to approximately 5 cents per pound of ethylene during June.

Regarding product pricing, CMAI reported that industry prices for ethylene were unchanged versus the first quarter, while polyethylene prices were reported to have increased by approximately 1.5 to 2 cents per pound. Their data would suggest that contract polyethylene prices have increased by approximately 6 cents per pound since December. Our actual polyethylene results have followed a similar trend although the increases are slightly less than the reported data.

Equistar's other ethylene derivatives, the ethylene oxygenates, continued to be quite strong during the quarter with price increases offsetting slightly lower volumes. When taken as a whole sales volume for ethylene and ethylene derivatives increased by approximately 3.5 percent versus the first quarter. Compared to last year's second quarter, volumes increased by 520 million pounds or 25 percent; and a comparison to first half volume shows a 14 percent increase versus the same period of 2003.

From an operational standpoint there were a few items during the quarter that cumulatively impacted Equistar's results by approximately 15 to $20 million. These items were all specific to the quarter and included such items as scheduled maintenance activity at the Corpus Christi olefins plants, scheduled maintenance at some coproduct recovery facilities, an unplanned outage at the Chocolate Bayou olefins plant.

I'd now like to turn your attention to the third quarter. July sales volumes in key products have continued at a pace consistent with second-quarter sales. Price negotiations for the majority of the products have been settled for July. Benzene prices increased significantly, while propylene prices decreased slightly. During the third quarter there are no scheduled maintenance turnarounds. However, raw materials continue to be very high and volatile, presenting an uncertainty that makes it difficult to forecast near-term results.

Now let me turn your focus to LCR. LCR's second-quarter net income reached a record $103 million, which translates to $139 million of EBITDA, an $8 million increased versus the first quarter. The refinery operated at essentially full rates during the second quarter processing 273,000 barrels per day. This was accomplished despite having to decrease rates for a period in May to repair some of the weather-related damage. During the quarter Venezuelan contract crude consumption averaged 233,000 barrels per day, and the refinery continued to benefit from strong margins for the 40,000 barrels per day of spot crude that it processed, as well as from its sales of aromatics.

Consistent with the continued strong operating profits, distributions to the owners were stronger in the quarter. Lyondell received a net distribution of $88 million, and this brings year-to-date net distributions to Lyondell to 142 million. To date, during the third quarter, LCR operations, CSA crude oil deliveries, and refining industry conditions have continued to be strong.

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.

Let me start my discussion by addressing our cash position and then provide a quick update on some capital and financing activity as well as the Millennium transaction. Lyondell finished the quarter with 455 million of cash and access to a $350 million revolver with no outstanding borrowings. Availability under this revolver is reduced by $61 million in letters of credit; and this position is essentially unchanged from the liquidity that we held at the beginning of the year.

Equistar finished the quarter with 143 million of cash. The Equistar Accounts Receivable sales facility inventory based revolving credit facility were being utilized to the extent of $122 million. At the end of the second quarter after taking into account 38 million in letters of credit for the remaining availability under the combined Equistar facilities was 465 million. During the quarter Equistar generated excess cash from operating activities, 95 million of which was used to reduce the usage of the receivables sales facility.

On a dollar basis overall working capital level remained quite high relative to recent years due to elevated raw material costs related product pricing. Although the dollar committed to the working capital remains quite high, our employees have continued to control the working capital operating metrics very closely. As presented in our press release the metric that we use to measure this finished the quarter at 34 days for both Lyondell and Equistar. Versus the first quarter this represents a 4-day decrease in the Lyondell metric, a 3-day decrease at Equistar.

During the second-quarter capital spending was 16 million at IC&D, 22 million at Equistar, 14 million at LCR. There are a few other items I would like to briefly review before I turn the call over to Dan.

The first item pertains to Equistar. During the quarter Equistar sold its remaining polymers railcars (technical difficulty) placed them under an operating lease. Sale proceeds were approximately 37 million.

The next item I'd like to mention pertains to IC&D, the potential future conversion of the U.S. MTBE facility to alternative gasoline blending component. Our engineers and business group have been working on this project in an effort to reduce the future spending if conversion should become necessary. These efforts have produced a third conversion alternative in addition to the options to convert either to ETBE or isooctane. This alternative would produce isooctene, also known as diisobutylene or DIB. It is a blending component that is very similar to isooctane. The capital of cost of this option is estimated to be less than $20 million. If in the future neither MTBE nor ETBE is a viable option, it's possible that we would pursue this less capital-intensive conversion route.

The third item pertains to LCR financing. During the second quarter LCR completed a refinancing of its bank facility. The new facility is a 450 million 3-year term loan facility with a $100 million revolver. I'm quite happy that this new facility -- as LCR was able to extend the maturity, lower the borrowing rate, increase revolver capacity versus the prior facility.

The final item of course pertains to the Millennium transaction. Since our last call Lyondell and Millennium teams have made significant progress towards both the completion of the transaction and establishment of the Millennium businesses as part of Lyondell. Let me provide a few points that I believe will anticipate some of your questions.

On the regulatory front the only remaining step is to finalize the Form S4 filing; and we believe that this will be able to be completed very soon. In the financing area we've completed the bank amendments required to complete the transaction. Organizationally we've announced the anticipated operating structure and key leadership personnel for the business; and virtually all the Millennium employees know their future status.

From a transition standpoint Lyondell executives and key personnel have visited each of the Millennium major global locations and personally addressed the questions and concerns of the Millennium employees. We believe we are on track to realize the synergy and transaction cost estimates that were presented to you during our March 29 conference call. We currently expect to hold the shareholder meeting around the end of the third quarter.

This concludes my remarks, but before I turn the call over to Dan I need to remind you that the Millennium transaction has not closed; and hence we don't operate and cannot discuss their operations. Also we're limited in terms of the breadth in discussion we have regarding future operations and the transaction itself. Therefore I will apologize in advance if we have to respond to some of your questions with a fairly minimal answer, even by saying that we can't comment at this time.

Thank you. Now I'll turn it over to Dan.

Thank you, Kevin. Doug and Kevin have covered quite a bit of information, but I think there is a value in a slight recap here before we proceed to questions. Let's start with earnings. It is certainly nice to report a positive number, even though very small; but more important than reaching this milestone is that results are beginning to demonstrate the leverage that these assets have to an economic and chemical industry recovery.

Of course this is particularly apparent at Equistar. The improvements at Equistar place it in a position to make distributions without paying penalty interest as required under certain conditions in the bond (inaudible).

Financial performance for the IC&D chemical products has continued to be pressured by rapidly increasing raw material costs. However, this area has more than 4.5 billion pounds of commodity chemical leverage in the PO, styrene, and TDI areas. Year-on-year sales growth volume has been strong, and we are actually quite pleased that prices have been able to largely keep pace with the increased raw material costs.

Also I would remind you that these raw materials are produced by Equistar and LCR. So on balance we are advantaged by the higher prices.

The third point I want to emphasize is that the Lyondell group of Companies are significant manufacturers of gasoline blending components and fuels. The improved global economy and tightened conditions in the oil and refining industries have converged to create high operating rates and higher margins. This benefits each of our Companies. In IC&D the advantage was seen in MTBE margins around Memorial Day. At Equistar the leverage demonstrated itself in the value of gasoline components produced from the crude oil based liquid raw materials. At LCR the spot crude in our (inaudible) margins benefited.

Let me close by saying I believe we are in the early stages of the recovery. Although I'm sure that were going to see some ups and downs over the coming quarters, I hesitate to predict the exact timing and shape of the industry cycle, but the overall direction seems to be well established. Indeed June was the strongest month we've seen since the recovery began last July and August. And the quarter that we just finished was the strongest we've had in 3 years.

As the economy and our business advance to the next phase of the cycle, so will our financial plan. As a result, our primary focus is turned toward debt reduction and optimization of the debt portfolio. Consistent with this I believe that Equistar will make distributions during the third quarter, and Lyondell will begin reducing its outstanding debt.

Thank you for your continued support and interest in Lyondell. I would now like to turn the call back to the operator to take your questions.

(OPERATOR INSTRUCTIONS) Michael Judd, Greenwich Consultants.

I have a question for you. I am looking through your table 14, and in there you have selected volumes; and you have aromatic. I am just curious why the volume of aromatics declined both year-over-year and sequentially. That is for Equistar.

I'm also curious that you mentioned I guess you can run your reformer harder at LCR. How should we think about the types of volumes of aromatics that you can produce from LCR?

To answer the first question regarding Equistar, what you are seeing is some of the turnaround and maintenance activity, the impacts of that during the quarter. That is why you're seeing lower aromatics volumes there.

If there had not been a turnaround there, what would the number have looked like?

That's a little tough for me to (multiple speakers).

We have for some time been running our liquid crackers rather full. So I would think you would not have seen a big change year-on-year if all the plants had been running this year.

But indeed we had a large liquid cracker down for a month for this period.

Turning to LCR, what kind of volumes should we be thinking about in terms of aromatics there?

I don't think you will see really changes in that. We've been --

I am just trying to get a sense of how many millions of gallons or whatever.

If you look down on table 18, aromatic volumes were about 9,000 barrels a day. They have been running at 7 to 9.

I didn't see that. Thanks a lot.

Don Carson, Merrill Lynch.

A couple questions. One on that same table 14, actually. When you do the math it appears your polymer pricing was flat sequentially at 39.8 cents. Wondering why it wasn't up a bit, given that you got 5 cents on polyethylene in June. And if that 5 cents holds would you expect to be up, say, 3, 4 cents sequentially in the current quarter?

I think they key thing is the point I made. December through to the end of the quarter the prices are up on the range of 6 cents as reported. As I said, ours are slightly below that. What you are seeing in the quarter, it is quite a confusing quarter in that there was a price increase in place, which was taken off the table partway through the quarter and replaced with a new 5 cent price increase.

So there was a lot of moving parts during this particular quarter. I think the key thing is the prices are up from the beginning of the year.

I think what you are talking about in the third quarter is probably right. You are going to see the bulk of it in the third quarter.

Dan, can you comment a bit on the third quarter outlook in polymers. When you talked, I think, Doug, you mentioned that for example that July volumes are still quite strong and in line with Q2, which seems to be relatively strong seasonally.

What is your sense of customer inventories? What kind of push back if any are you getting on this 4 cent July 1 increase?

Obviously you get a lot of push back any time you try to increase prices to polymer customers. But I think, Don, what we are saying is the continual tightening of supply-demand. Again I go back to what I said before. The June month was our strongest month since last July-August. I only go back to last July-August because that's when industrial production started kicking up.

In this recovery a lot of people are very worried it's something really bad going on. I have said that on purpose to indicate when we say the momentum's continuing into the third quarter, it's not that it’s tailing off from the second quarter. The end of the second quarter was the strongest part of the second quarter. So we are continuing to see the volumetric growth there.

Prices are not moving as rapidly as we would like to see. But you know what? That's always the case when you're in the early stages of recovery. We are impatient, we want to push the pricing, we think the market is there to increase the margins. We just have not gotten as much of that done as quickly as we would like. But it inevitably is going that way, because supply-demand is tightening day by day.

As to inventory, we really see more problems with railroads than we see problems with inventories. We have had disruptions in a couple of our polymer facilities simply because the wonderful railroad industry is clogged up and can't get the cars to us and to our customers.

So I still do not believe there is any large amount of inventory out there. I don't think you are going to see inventory correction simply because at 41, $42 crude oil and $6 gas, whether right or wrong, people still believe that sometime that's going to come down and they are going to be able to buy the inventory cheaper then.

We are either going to decide that it's always going to be 40 bucks and people will move inventory; or we're going to see a break. And I think you will see the move to build inventory at that point in time. But this has just continued on month by month. I think we're leading hand to mouth existence across all the supply chains.

As the business increases we are having to increase a little bit of what we have got to work with. But it's simply the growth of business. It's not a fundamental restocking of inventories.

Just one clarification. Doug, you mentioned turnarounds cost you 15 to 20 million. Was that actual expense of the turnarounds themselves, planned and unplanned? Or does that include the opportunity cost of not being able to crank out some of those coproducts?

That includes the opportunity cost.

Thank you.

P.J. Juvekar, Smith Barney.

Other companies are reporting increase in export volumes of polyethylene. Now traditionally you haven't been a big exporter, but have you taken part in any export activity so far?

Yes we have. We opportunistically export. You want to expand on that?

Our volumes are up, but as you noted the bulk of our export business is to Mexico and South America. We don't move a lot of materials to Asia. I will note however that the industry has seen a substantial increase, as you pointed out, in exports.

And that's a positive. Because what that means is pricing in Asia has now reached the point where it makes sense for us to be moving product that way. That was not the case a year ago.

I'll remind you, the shape of the supply-demand curves around the world. The U.S. had more excess supply as we started this. So as you have seen strong economic growth in Asia you are pulling more imports in, and the U.S. is the place with the most capacity to support that. That is why I think you are seeing more of it coming from here. Indeed the Europeans are still disadvantaged by the exchange rate.

On the same point, what's happening to imports and especially the bags? Something that we have talked about before.

We don't spend a lot of time on the bags, P.J., because frankly it is not that big a deal. We have tried to demonstrate it before. It's a nit on the gnat of a whatever. I will answer you directly, some of the importation of bags gone back the other way. Because the ridiculous economics that were causing that have reversed with the strength in Asia.

Also P.J., there were places where there were some imports of resins and things. As prices in Asia have moved up, as Morris said, you see that that incentive is gone now since prices around the world are equilibrating more. So you are not seeing those come in.

I really think it was a dislocation that has really been corrected.

One quick question for Kevin. LCR is running well. You're having record earnings. Any thoughts on refinancing LCR completely and getting your receivable peer (ph)?

We always think about that. I mean what we said earlier in the conference call is that we're very pleased with what we were able to do this time around, which was to get something that was more than just a roll forward. We got a 3-year facility in place. We got better pricing. And that was the right thing to do at this time. We haven't changed our opinion about what we'd like to do down the line, but this was the right thing to do at this point.

But that was the bank facility. I am talking about --

Like you say, I think we will look at other things in the future. But this one was the right thing to do at this point.

Any time sometime this year? Do you think that's a possibility given how well LCR is running?

No, I don't have any particular (multiple speakers).

It's a partnership, P.J. You have got to have agreement from the partners about what you want to do. When we get to that we will come forward and do the right thing to be done.

But partners are likely to be more happy when they are making money.

We're all happy, I agree with that.

Okay. Thank you.

Kevin McCarthy, Banc of America.

My question relates to MTBE volumes. If I look back over the past 3 years volumes there have typically risen sequentially by say 60 to 80 million gallons. This quarter they were up 12 million gallons it looks like. Did the price spike in May back out demand? Or are there other factors that explain the sequential trend there?

I think what you got to recognize is the market for MTBE has declined, has shrunk significantly. And we have quite a bit of flexibility in terms of how much MTBE we can produce. We can vary the ratio at MTBE to PO by a fairly wide margin.

With a market that has contracted we don't want to be pushing material into that market and taking prices down unnecessarily. We are always trying to balance our production with what we see is an optimum in the marketplace. I think that is what you're seeing in those figures.

I think the other thing to bear in mind is just the gasoline season has not been a traditional gasoline, indeed, like last years' has not. We have seen very, very strong gasoline from December on. So some of the seasonal pattern has been blurred simply because the refining industry has been running so hard throughout this period of time.

Dan, I thought I heard you mention that you'd anticipated distribution from Equistar here in the third quarter. Would you care to hazard a range on how large that could be?

It will be however large the excess cash from Equistar is on month by month basis as we go forward. And, no, I'm not going to predict a number right now. But we obviously will tell you as it occurs.

Thank you very much.

David Silver, J.P. Morgan.

This is Jeff Zekauskas at J.P. Morgan. Do you have any plans for your Lake Charles facility over the coming year?

We have two Lake Charles facilities. Would you like to clarify which you are talking about?

The ethylene assets, polyethylene assets.

We're looking at what it would take to restart that facility. So, no. We are not taking any other actions beyond that yet. But I think part of the reason for maintaining that in mothball status is, as the supply demand tightens, we need to look at whether or not it will makes sense to bring it back up and enjoy the top part of the peak.

But it will take some time to do that. So we have just started the early looking at how fast we could do it, what it would cost, etc. Do not take this as an announcement we're getting ready to restart it. It would be certainly driven by the economics and the belief in how long a run it could get profitably. If it looks good then we would come forward and tell you what we were doing at that point in time. But no plans immediately.

You have reported very, very strong ethylene-polyethylene volumes at Equistar, which is consistent with what other producers have said. Can you talk about how tight the U.S. ethylene market is now, compared to what it was 6 months ago?

I think most people would agree it's running in the 90s. Now the debate is, is it 93, 94, or 91, or whatever. But it's running pretty tight. The frustrating thing about a commodity market like this is that sometimes it has to run to the last pound before people really understand that it's that tight and priced accordingly.

So it's a frustrating zone to go through, but having been through multiple cycles it's not unusual. You don't rush to relieve the supply side when you are not getting pricing that justifies it. We are clearly not getting pricing to justify that. But the volumes are strong and we think the pricing will come, because we do not see significant amounts of capacity coming on in time to stop that.

So we think we're headed for that cyclical upturn. It will be jagged, just like downturns are jagged. It's not going to be a straight line, just like it wasn't a straight line down. But generally we expect sequential improvement as we moved forward from here.

A last question, yesterday on Nova's call Jeff Lipton announced a large share buyback. You're in the process of buying Millennium. It seems a very, very different approach to running the two businesses. Do have any general comments on that?

Yes. We have $7.7 billion of debt, when you add Millennium's debt to ours. We've stated that we desired to take 3 billion of that debt off. That's approximately $300 million a year of before tax earnings that we can buy simply by repaying debt. I'll take that over a share repurchase any day.

Thank you very much.

Christopher Miller, J.P. Morgan.

Now you get the bond side of J.P. Morgan. Wanted just a little more color in terms of what you are seeing in styrene prices today; and kind of what your views are out over the third and fourth quarter there. Do you think you're going to see a pick up that will help you outpace some of the raw material cost increases?

The raw material cost increases have been dramatic. Benzene moving up over a dollar a gallon in the quarter; and we understand that some spot business has been reported in the last couple of days in the $4 a gallon range. That is a big issue for styrene.

On the other hand we've seen styrene prices moving as well. Particularly in Asia which historically has been a place we keep our eye on to get a feel for what's happening to styrene. In the last couple of weeks styrene has moved up significantly.

But it's a very, very difficult situation. It's very difficult for us to predict where we're going to end up. The product has a market, there is demand out there, prices are moving up. But what what's happening in benzene is unprecedented, so I am rather hesitant to, as I say, make any predictions here for the third and fourth quarter.

I think it could come back, though, Morris, if the supply-demand balance around the world is tightening in styrene. The ability to get raw material pass-through is better than it would have been a year ago or 2 years ago. But I don't think anybody in their wildest imagination would have forecast $4 benzene.

You alluded to it earlier in terms of the difficulties with rail shipments over the last several months. Can you give us any sort of quantification of the negative impact that might have had in this quarter? And kind of what you see going out there as well?

They are not material.

It hasn't been material. It's more of frustration for the operations and supply chain groups and customers. (multiple speakers)

We have to juggle some things around. But I would point out that is actually another positive sign. Historically when you get to this point in the cycle these kinds of disruptions are what happen.

You don't do view this as much different than what we've seen before? I mean obviously when you had got some of the big railroad mergers, we had some real issues.

This is different from when the UP just couldn't ship, I think this is a system that is clogged through high capacity. Maybe it could be run more efficiently than it is, but I think it is largely as Morris says, that you have used up slack capacity in that system as well. And that's a sign that we're being taxed.

Through past cycles, Chris, when things tighten up, rail tightening up in these kind of things is typical. It's one of the early things that you see, and it has in past cycles too. You always tend to see the railroad have some problems early in the point (ph), as their move volumes start to pick up.

But that is another driver, despite people's lack of interest in restocking. As you have have those disruptions in the supply chain, the only answer to that for customers really is to have more inventory, so that they can protect themselves from outages if the rail system and other transportation slows down.

Just a final big picture question. As you are approaching the completion of the merger with Millennium, there has been speculation out there that potentially you would then look to sell portions of Millennium's asset base. Is that something you may consider? Is it something -- or are you very committed to the full Millennium portfolio at this point?

Let me state unequivocally that rumoring has not come from us.

Understood. Would you care to comment on the Millennium portfolio and your views on it longer term?

I think we have several times. We are pleased with it. We like the structure of the titanium dioxide business. We like the position that Millennium has. Indeed having visited many of the sites we like the people, we like the plants. So I don't see a recent to go that direction.

Now, the flavors and fragrance business they have been trying to sell. And if they accomplish that before the close occurs, that is fine. If they don't and there is momentum we may carry on with that. But if the sale does not happen we are prepared to run that business as well.

So I don't think you ought to look towards big chunks of those assets going to the market. I don't think it is appropriate at this point in time. I don't think you would be able to make a good deal. And the TiO2 is a nice addition to the portfolio.

Great, I appreciate it. Thanks a lot.

Andrew Cash, UBS.

Just a strategic sort of question. As Millennium comes into the portfolio, presumably Lyondell's clearly going to be up there in the big leagues and increasingly investors are going to look at whether they should buy Dow Chemical or Lyondell. If you look at the recent performance on a total return basis including the dividend, it's a close call. But when you look at the longer term Dow has been the clear winner here.

So as investors are contemplating whether or not they should buy Lyondell or Dow, is there something you can point out to them as to what would be a distinguishing factor going forward? Or should they just buy both of them?

I think there is a distinguishing factor, Andy, and I have touched on it before. Over the coming upturn when the cash flow occurs we have been very clear where it goes. We know what happens with that. It's roughly a 10 percent guaranteed return. And because of our tax loss carryforward, it's virtually a 10 percent after-tax for the near future as we repay that debt.

I don't think there's anybody else out there who has the volumetric leverage and the financial leverage that we have. When you put those two together, I don't think there is anybody who can compete with the way we can grow earnings.

Good point. If I could ask one other thing, how do you feel about the oil and gas situation versus Dow going forward?

If you take it from the ethylene side, go back to Equistar's roughly two-thirds liquid based ethylene production. I don't spend a lot of time looking at Dow, but I know they are well lower than that.

I think the natural gas situation in North America is not going to get fixed in the near term. Indeed in the long term I think the way it gets fixed is it becomes a push with the world. Then when you start comparing that versus Middle East capacity, longer term, I don't think that's a good comparison.

But our liquid capacity because of the coproduct credits and the fact that we have always been paying (inaudible) pricing if you will for that feedstock, we compete very well in that situation.

So I think over the medium term gas based producers are going to make out all right; because in a type supply-demand situation that rising tide raises all ships. But I think beyond that, the dislocation of gas pricing in North America is going to be a problem for the industry.

Now we are not immune to that. We certainly have some facilities that are based on natural gas liquid, and we consume natural gas as fuel. But we've gone through all that. We like where we end up in a world competitive position after that.

Dan, thanks a lot and good luck with the Millennium transaction.

Bob Goldberg, Scopus (ph) Asset Management.

Dan, when benzene started to move up earlier this year with crude oil, it was easy just to link the two. But now it's separated. It's well higher than where it should be based on crude. Do you think there's a structural issue now with benzene?

And is it limiting styrene production? I noticed your styrene production was down 100 million kind of consequently. Maybe you could comment on how much of that was due to the turnaround versus how much was due to just very high benzene prices and not running styrene as hard.

Let's talk about both. Morris and I were talking about the structural aspects of this just before the call. Typically in past history, benzene would cycle up sequentially and then get quenched by people starting up HDA units. Those HDA units just to sit there and operate 3 months a year, 6 months year, whatever.

We don't seem to be seeing that to the same extent that we have seen it in past run-ups of benzene pricing. We're speculating to some extent that maybe some of those units how been off-line long enough that they can't really be started up that well; or maybe have been cannibalized.

At any rate the usual peak shaving that you see has not been as apparent this time. The only answer to that then is you go adjust the demand side, because most of these products cannot stand $4 benzene.

So I think you're seeing on-purpose styrene pullback, but you don't see it overnight, because people have to work through their logistics and so forth. They may suck wind for some time before they get the capacity turned back.

Now speaking to us, we don't have on-purpose. We have coproduct. We did trim back our ratios. We are making, if you will, as little styrene as we can make at these kinds of benzene prices consistent with our propylene oxide needs, and we need all the propylene oxide we've got. But we've adjusted the ratios. We're at minimum levels.

In addition we had a turnaround as Doug mentioned at one of our PO styrene facilities.

If the supply of styrene becomes restricted, doesn't that imply that you should be able to increase prices?

And we are. As I said prices for styrene are definitely moving up. The question is, are they going to be able to catch benzene and when are we going to see margin improvement?

The other question is, what does it mean for the demand side over time? Isn't there a threat of substitution?

They're very well could be. But we don't think we are anywhere near those kinds of levels yet. Styrene prices still have some way to go before you could start speculating about substitution. It's a very important product line in the world economy, and we don't see that changing.

Last question, could you remind me, Morris, how much styrene do you have? How much capacity do you have now that is exposed to market prices?

We have about 2 billion pounds.

Thanks.

Greg DeNight (ph), UBS.

Couple questions on the acquisition. Early on you suggested that the synergy possibly would be about $50 million a year with the Millennium acquisition. Have you had a chance to take a look at that and does that still seem to be a reasonably good number?

Doug actually commented; you probably missed it in his comments. Or Kevin did. That we expect that what we told you before is still where we are. If anything we feel better about that, although the shape of how we achieve it is probably a little different from what we thought going in. But we clearly think that is a very doable level.

Is that a mid number or you think it can possibly be higher than that?

I think it can be higher than that. The way you do these things, if I quote you a higher number, then I got to spend a lot of accounting time to justify it for the next X quarters. So I'd rather we prove to you we got the first piece, and then let you see the rest of it in the earnings as we go forward.

Second question, would you comment on your cracking rates today? And do you still believe heavy feedstocks are favored through the third quarter?

No question that heavy feedstocks are favored currently, and we would expect that to continue. We're running our operation pretty much full. Now you've got to remember that we have had some recent turnaround activity and there are some other things like that that influence our current operating rates. The industry, as Dan said, is somewhere in the 90s, but we're a bit higher than that.

I guess you are in catch up mode now. Will that continue through the quarter?

We are in catch up mode, but really the way I would characterize it is we are running 4 liquid crackers as refineries. We're making gasoline.

Last question, LCR you said has continued to run strong rates. If the current operations continue, could you project 130, 140 million EBITDA for the third quarter?

I think the way you look at that is, we don't spend much time talking about the crude that we buy in addition to the contract. And frankly over the past years, there wasn't much reason to talk about it. Because its contribution was very small, because the margins in the industry were much lower.

But over the past 6, 9 months the margins available out in the world market are close to the crude supply contracts. So that incremental 35, 40,000 barrels a day of spot crude we are running is very leveraging. So the answer to your question is if the refining margins stay at that level, yes, I think you could achieve that again. I have no idea if the refining margins can stay at this level.

I think you've seen over the past 6 quarters or so very solid operations from there. You notice the total crude processing has been very strong. The aromatics have been strong in the last few quarters. The spot margins that Dan mentioned, so things have come together pretty well for it. The main thing is operations have been good.

And the people in the operation are doing a great job. Their reliability, their safety, their efficiency have all been just topnotch. We are very proud of their accomplishments. And it's very important because of the environment.

There is no inkling of any PDVSA crude curtailment in the near future?

Not that I'm aware of. I think any oil producer in the world is trying to produce relatively all out. Make all the money they can.

I would imagine. Thank you.

Bill Young, First Boston.

Dan, you mentioned a minute ago that you're running your crackers as gasoline refineries. What would happen if crude oil dropped to $35 or $34 and the gasoline market maybe loosened up a bit? You would obviously give up on some side, like MTBE and the coproducts; but you would gain on cheaper feedstocks for some of your other materials like propylene oxide or polyethylene. How would this balance out in the end as far as you are concerned?

I think you're mixing two different concepts there, Bill. First of all, one of the nice things about running these liquid crackers is the fuel market doesn't always correspond to the chemical market. So what we have here is a strengthening chemical market where supply-demand is getting tighter, and therefore you would expect pricing to move up, margins to expand.

Concomitant with that we have a fuel market that's extraordinarily strong. So the coproducts that are going to the fuel market have enjoyed that great amount of leverage. If the fuel markets cooled off then the straightforward thing that happens is your gasoline coproducts would go down in value. But your feedstock -- which is 100 percent of the material going in rather than a partial amount that is the gasoline -- goes down.

So I would think that because you have a backdrop of strengthening chemical markets the scenario you describe would be net positive and strongly for us. And then I also think that would be the trigger for inventory building.

I think you paraphrased my question pretty well. But here's what I'm getting at. In the past, once the feedstock costs have dropped you've got a temporary lift in margins; but then it kind of reverted to what it might have been anyhow. That's not to say it's not going to go up.

But you might have a temporary blip which is going to disappear after the markets equilibrate. Then you will see an upward bias with supply and demand from there. Do you think that's a reasonable type of analysis?

That is possible. It might be a big blip. But also I would tell you that as the markets continue to strengthen I think the pricing is going to be more driven by the scarcity of supply rather than a fuel push. This business of, we are in these businesses as a public service, has got to stop.

We don't belong to be here just to pass along fuel cost to people. We're providing products that have value and use, and as the supply and demand tightens we expect to be paid for that, regardless of what of our feedstock costs are.

One last question, you said the railroad situation has not really had much of an impact on your financial statements. Do you think it's causing customers to double order, particularly in products like polyethylene, where you might have to settle with a correction a little later on?

We are certainly seeing some situations where people, customers, have had to make adjustments because deliver times have been longer. And they've had to step in and make some adjustments on their side just as we have on our side.

But relatively minor. Not doubling up. We lost we think some business out of one of our polyethylene facilities, simply because we were clogged up and couldn't get it out. But it was not a huge number.

It's an irritant, and it's an irritant for our customers, and we work around it. There have been some truck shipments to replace hopper cars that couldn't get there. But again it's a symptom. It's not a huge disease at this point in time.

Great, thank you.

Cheryl Van Winkle (ph), Independent.

I was calling with a couple questions. First, could you tell us, running with all the capacity that you can on the naphtha and heavy feeds, how much benzene and how much toluene do you typically produce in a year?

Boy, I don't recall those numbers off the top of my head. What I would refer you to though is we have a data book on our website, which has all our capacities by product for each of the companies. I think that could give you a good source of it. I apologize. I don't have that at my fingertips right now.

I didn't remember that it was in there, but I'll take a second look.

In fact, we just put out a new data book just within the last few weeks and updated it for last year. So everything is current and all those capacities are there. You could look also -- Equistar and the refinery are both producers.

We don't seem to be very responsive there. But I would remind you that benzene is maybe about a 3.5, 4 percent yield by weight in the liquid crackers. So it is not one we spend a lot of time focusing on the volumetrics. If you don't find it, give us a call back, and we will dig the number out for you.

Also, I assume that right now you're running everything you can on the heavy feeds within your capacity. Is that correct?

Let me say it differently. We optimize our feed slate and our crackers on basically a daily basis. To make the generalization that you're running everything on heavy -- there are lots of heavies out there, and there is a lot of price variation in them. There is a lot of yield variation in them.

This is a giant jigsaw puzzle that you run by linear programming. And we move the feeds around to achieve the optimum slate in all of the liquid crackers. We do that on a very, very frequent basis. The yield is dollars, it not pounds. This is all done to optimize and maximize the dollars.

I guess what I was trying to get at is, as opposed to running your swing capacity on the ethane and natural gas based feedstocks.

We're maxed pretty much on the heavies. There may be occasions where you have a spot in a unit that is not being filled out, that you can sneak some propane, butane, or ethane in and get more capacity while not hurting the liquid throughput. These are complex plants and the mechanics of them work sometimes -- if you load them up with heavy, you may end up with light ends (ph) area with excess capacity that you can add to and not cost yourself any (indiscernible).

I'm looking for more like as a generalization, when is the last time you'd say you had those swing plants running mostly on the natural gas feedstock slate?

There have been some short periods over the last few years where the feedstock has become lighter, Cheryl, but I would say for the most part, the incremental decision has been to -- the best economics has been to run a heavy feed slate. Now, the advantage has been fairly small while we've been in a low operating rate environment and in an industry trough.

But we're seeing that advantage come back. A classic example is the 5 cents in June versus 3 on average for the quarter. You've seen these things open up as supply/demand tightens.

(indiscernible) would have been coproduct credit, not feedstock, because feedstock actually became stronger during that period of time.

Right. And so it was like more than 2 years ago the last time that you --

I would say that there's never been a prolonged period, but at any given time there has been a month here or a month there where we certainly have lightened up the feed slate where the economics and the models would tell us to do that. But, in general, it's been a heavier --.

If you go back month by month, which is about as finely as you can find the data to slice it, there are periods that ethane cracking has been slightly advantaged to liquids. And when you get one of those zones, we move out and we start purchasing ethane. You know what, that our size when we start purchasing ethane, the price goes up. So then you move back towards advantage to crack the liquid.

But when you were in a very sloppy market over the last 3 years, the advantage for liquids was not as pronounced as it has been over longer periods of time. As you move to tighter supply-demand, history would dictate that that advantage opens up, because the tighter supply-demand is usually not in just ethylene; it's in all the other products as well. So your coproduct credits grow as you move into that stronger market and, therefore, your advantage for liquids grows.

Just on TDI, you said that volumes are up. Could you tell us about how much they were up year-over-year in the second quarter?

I think what we said in TDI is that TDI has seen cost pressure; the raw material costs have been up. One of the raw materials is toluene, so that's an aromatic, and all the aromatics have been moving up much like benzene. So I think that was the comment that we made, Cheryl.

Oh, I'm sorry.

But there has been volume in the DTI business and demand growth. Urethanes in general have seen some significant demand growth thus far this year.

So in the second quarter are we talking about 5 to 6 percent kind of demand growth, or more or less than that?

On an industry basis, I don't have those numbers in front of me, but urethanes are up in that range, 5 or 6 percent.

I think maybe the best measure is if we look at the first half of this year to first half of last year, the PO and PO derivative area had about a 14 percent growth. So there is very strong year-on-year volume growth in those areas.

Is that sort of -- the second quarter is similar to the first quarter in that respect?

That was a first half. There was a full first half. It is a little difficult sometimes to use last year's second quarter to this year's second quarter. Because last year's second quarter was impacted so much by Iraq and SARS and things. And chemical volumes were typically somewhat low.

I think a good comparison is first half of last year to first half of this year; and then I think a good comparison is things have been pretty steady and growing. And volumes basically across chemical chains have been doing quite well.

Okay, thank you.

David Troyer, CSFB.

It's already been answered; thank you.

John Roberts, Buckingham.

It's been so long since we had a distribution out of Equistar. What is the formula, or how should we think? If Equistar did 176 million EBITDA again in the third quarter do we do look to that quarter? Do we look to the prior quarter. What is the thought process in terms of what the distribution would be. Without giving us a number.

I will walk you through the way that we did it, and we have almost forgotten how, because I think the last distribution we made was August of 2000. But basically on a month by month basis as we close the books and look at the cash position, then I sit with the financial folks, the operating folks.

We look at the cash needs over the next month, the shape of the business over the next month, where our working capital is, etc. etc.; and determine how much cash, if any, we should leave on the balance sheet as excess. And whatever we don't think we need to retain in the business is then dividended. That decision rests with me as the CEO with the fiduciary responsibility for Equistar.

All we are telling you is that the second-quarter results past that trigger point, where we meet the multiple test for the trailing 12 months, in order to get us to the point that we can dividend without incurring what we call penalty interest in the bond indentures.

As we do that we will be looking at the shape of the business. The idea is if it is excess it doesn't do any good to leave it on the Equistar balance sheet. We ought to put it to use, delever. Whether that's delivering at Lyondell or delivering at Millennium.

Truing up at some point in time through this, we will also want to delever the Equistar balance sheet. But if I look at where the numbers need to go, just in very round numbers, I would say we probably need about a half billion retired at Equistar; about a half billion (ph) at Millennium; and about 2 billion at Lyondell.

So I think what you are going to see, and we have described this before, is we will -- as the cycle improves and that cash comes out of Equistar -- it will preferentially go up to the Lyondell and Millennium balance sheets first; and then later in the cycle we will trim the Equistar as well. Indeed, if you look at the maturities and the ability to call debt and everything else, it is stacked up that way.

So I think as you look at the shape of the business you can try to calculate in your own estimates what you expect that cash is going to be. But we're not going to be holding a huge balance of cash at Equistar. Because frankly we've already chewed up a big chunk in working capital. The pricing is very high right now, and we don't see consuming a whole lot more in working capital. Indeed we think these levels probably would carry us through most situations.

We still have plenty of room and our asset-backed facility for variations month to month. So we expect to start flowing that cash really very soon.

Once we get into the distributions, they are pretty much going to track the EBITDA numbers without any major capital programs at Equistar?

I wouldn't be that simplistic. I think it's best for you to wait and see how they come out. I go back again to you are going to be passing judgment on cash needs versus cash availability, and the delta gets dividended.

Second, I don't know if you said it, but you are going to be running POMTBE harder, or POSM harder here in the third quarter?

Right now we're running our PO system essentially full. What we're trying to do is adjust the ratios on the coproducts to conform, as I said, to market conditions. If we can move more MTBE profitably, we certainly will take that opportunity. If we can move more styrene profitably we will do that as well.

Thanks.

Les Ravitz, John Levin (ph).

Two quick questions. One, Kevin, help me with maturities at Lyondell. Is their a significant amount of debt you can buy in this quickly?

This quickly? Yes, actually. I am trying to think. It's almost $1 billion or something that is callable now as far as May 1 was concerned. Yes, we've got -- and again that was the way we tried to create the flexibility in what we did in some of the terming out of that debt, so we would have that flexibility to meet -- when we had the cash available for repayment.

We have got the ability to get to the debt. There obviously is a call premium that has to be paid, which declines over time. But we have factored that in as well.

One more question on that; and that is, how much cash do you think you need to keep at the parent level?

That is a very good question.

I think that we have worked on a process that over the past has said we need to make a liquidity. And we have obviously capped this -- we have actually built it, if you look at it over the last year or so. We've built $100 million additional cash.

I know.

I know you know. (multiple speakers) And that's the balancing act. But I think the most important message we have here is that we are generating the excess cash out of Equistar, which was the driver. We can take that cash and put it to debt repayment. And then I think we have to balance what people feel about different things, what we feel about where the businesses are going, and what other people do as well about what we do with that other liquidity.

But obviously we are moving closer to a point where we feel like we can reduce the overall level of cash there. But we're not at that point just debt.

I know what you're asking, Les. Sitting on top of 400 million plus cash at the Lyondell level and a 350 revolver in an improving market doesn't make sense. We agree with that. But it's been so recent that we came out of a zone where people were focused first and foremost that the world is coming to an end next month; how are you going to survive?

It is that mentality that has to move so that bondholders, shareholders, rating agencies are all comfortable we're moving in the right direction. And that's a judgment call. As we get to that point we will be taking that cash that we're holding on the balance sheet, direct to debt repayment. Just as we're going to be taking this incremental Equistar cash flow to debt repayment.

I think it's a month by month, quarter by quarter view as we move on from here. It's really going to be a market view as much as anything else. We have been very conservative on liquidity because we wanted to be able to prove to all of you that we had you protected one way or the other. We intend to keep you there. But I do think the zone is moving and we will be using that cash in the future.

One last quickie; did you reduce your polymer inventories during the quarter? Volumes?

We dropped the overall working capital down a couple of days at each of the businesses. I am trying to recall if -- polymers have been pretty low and I am trying to recall. I don't remember if we specifically dropped the polymer inventory or not. But as we said, we've kept these metrics down awfully low, and we did make another reduction during this quarter.

We think we're about the right place, because we have got our salespeople screaming they don't have enough inventory to do the business. That's the dynamic tension we want to maintain to keep your working capital low.

Thanks.

Tuan Pham, Banc of America.

Following on the debt reduction question, the 2 billion at Lyondell, 500 at Millennium and 500 at Equistar; it's not necessarily in that order, sequentially?

No, no, no. I think what you look at is you look at maturities, ability to get to debt, etc. etc.. If you look at the Millennium balance sheet, I think they've got a tranche of debt coming due in '06.

It's not callable debt.

Since it's not callable, you build the cash to get there, as probably you're going to have to do some of that. Lyondell, we set ourselves up so that we had huge chunks that we could call early. Now it costs money to call it early, but we have a billion and behind that we've got another 900 million that sequentially you can get to. Those are set up well.

And then Equistar has maturities later again. You would think that the logical thing is for the cash to flow and delever the ones where you can get to the debt sooner. And then the Equistar you can't get to quite as soon, and you do it in motion there. But there will be some periods that we are probably taking debt in all three places out.

Also I was wondering, that reduction, I assume you are including operating (technical difficulty) balance?

Sorry, you faded out there.

With regard to say specifically Millennium; they are carrying about 140 million of operating leases. Would that 500 million number conclude that 140 million?

Yes.

But I don't (technical difficulty) little bit ahead of us. Really they have a $500 million maturity in '06. As we look at things I think we've always said since we have gone into this, we have said if we (multiple speakers) 2 billion at Lyondell; and half a billion there; and some in Equistar, another half a billion. That would be 3 and seems to fit together. And it's right in line with the 2 billion target that we talked about pre the merger.

If you want to stay with that thought process again, we are just not talking about the mechanics of how you get debt out of there. Then obviously you've got a reoptimization of your whole debt portfolio at some point there as well. So you're getting into nuances with operating lease I think at that point in time. The main thing that we are focused on is get the debt out, and then you got a lot more opportunities to do things better.

There just seems to be quite a disconnect in our market right now (technical difficulty) structures. Just also wondering with regard to the S4 statement; I think Kevin said that that's really the only remaining regulatory hurdle. I am just wondering what specifically in the S4 needs (technical difficulty)

There is nothing specific. I mean I think we are just finishing up the last stage of this thing. We are very close and I think we are going to be filing it very soon.

Also on an operating question, just (inaudible) the isobutane version, I was wondering if you could maybe elaborate on the chemistry there. And then any sort of transportation bottlenecks, perhaps?

I don't think there will be any transportation bottlenecks. Isobutene is really a precursor to isobutane. If you hydrogenate isobutene you make isobutane. What we're saying is we believe we have identified an opportunity to stop that production process at the isobutene stage.

As far as regulatory approval, is there anything on that front you can talk about regarding (technical difficulty) ?

No. You are talking about gasoline?

These are standard materials that you find in gasoline today, Tuan.

These would be fungible by pipeline etc. etc. Unlike ethanol you don't have to go build a new infrastructure. You just put it in the gasoline and it will ship anywhere. It is kind of middle of the boiling range and high octane. Not nearly as good for air quality, economics, or anything else as MTBE. But in this politically charged environment it's a nice alternative. Much cheaper capital cost.

That is all I have.

Ken Copley (ph), Principal Global.

I've got a real quick question for you, and I apologize if you already elaborated on it. But the $3 billion debt reduction, over what time period do you think you will you be able to accomplish that, roughly?

Over the first 3 billion of cash flow that we get.

Okay.

If I could predict the shape of the recovery and exactly when it is going to happen, I probably wouldn't be sitting here. But obviously we think we're moving in that zone. We've tried to describe historically what has happened in past cycles.

I think the last time we did that -- if you have in up year like the peak year in the '94, '95 time frame, or like the peak year in the '88, '89 time frame, we would expect in that 1 year to free north of 2 billion of cash. You go through the volumetric leverage, and look at where prices move and where margins move, you can get a big chunk of that very quickly.

Now what we're sitting here at the zone we are in now, with our head barely above water, it's difficult for any of us to seriously contemplate 2 billion of free cash flow in 1 year. But it will come, and all we're telling you is you don't have to worry about what we're going to do with it.

If extra come, the happier we will all be. If it takes longer it will take longer, but we will still get to the same place. Realistically I would tell you though in the next 2 to 3 years I would expect we have basically gotten there, unless the economy behaves much differently from what anybody is expecting.

Thank you.

Andy Parr (ph), Andover Capital.

Two quick questions. First off, what was the actual negative impact for the refinery in terms of dollars during the quarter? I know you threw out a number during the (multiple speakers).

From the stack? The weather damage? Stack damage? That was less than 10.

I guess it is nice to actually be talking about distributions again. My question is, if I do recall, it's a 225 interest test for to allow the distribution to happen? Is that right?

No. 1.75 times.

Does the accounts receivable facility balance play into that at all, or is it just a straight interest coverage test?

Interest coverage.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Christopher Miller, J.P. Morgan.

Just a follow-up. I know you have covered this in previous presentations, but the question comes up a lot. (inaudible) the example of a flow of $1 of distributions from Equistar, you touched on the 1.75 interest test at Equistar to avoid the penalty interest. How that relates then is you got call it 29.5 percent that goes to Millennium. What at this point prevents you from dividending up out of Millennium to Lyondell?

Millennium has a basket test in their bond indentures that restricts payment of dividend, which I think if you go back is why they discontinued their dividend to shareholders. That will remain. So what you have to do basically is rebuild that basket first before you can dividend out of Millennium.

When we went through all this in our analysis, we said, yes, that's an impediment. But when you look at the capital structure you need to delever that balance sheet anyway. So as you look at the way cash flows, that 29.5 percent as it flows through there rebuilds the basket, builds the cash to repay the debt. The 70.5 percent coming to Lyondell; and eventually it flows on from Millennium as well.

It acts just like it has been acting now. The 29.5 percent will flow in there along with earnings from the rest of their businesses. You will rebuild the basket. Once the basket is rebuilt then you can dividend out of there. But always bear in mind that you are trying to accumulate about 500 million of debt repayment in there as well. So it's just by happenstance it works out pretty nicely.

I appreciate that.

J.P. Aldoni (ph), Deutsche Bank.

It's C.J. With respect to the basket at Millennium could you tell us where it stands on that (multiple speakers) dividend?

We have not closed the transaction. So I think there are some questions that are more appropriate for you to ask them. But I think we have always told you that if you read their disclosures that there is way to infer that. But they have never announced that either, and we are not in a position to do that as well.

Thinking about the action that could come out of Equistar, you commented about working capital. There is also a sizable cash balance. When you're making this distribution, would there be any scenario where you would actually draw down on the credit facilities to make it? Thinking you will get some of it back from working capital later?

No, I don't think you will ever see us do that. I think that would be imprudent.

The working capital facility that is in place is designed to ebb and flow essentially with the volumes and pricing of the different materials. So it is actually well designed to manage that piece. That's why we put it in place to replace the old kind of revolver that was in there.

Grade, that's all I have.

Thank you. Mr. Pike, at this time, sir, I show no further questions. I would like to turn the meeting back over to you for any closing remarks or final comments.

I will make the closing remarks, this is Dan. We appreciate your interest. We appreciate your support. Apparently the last three years have not been fun for anybody. It's not time to celebrate yet, but things are moving I think strongly in the right direction. We clearly have a trend here and we intend to make all of it that we can to benefit all of you. So again we thank you for your interest.

I would like to think everyone for participating in today's teleconference call. Have a great day.