利安德巴塞爾 (LYB) 2004 Q4 法說會逐字稿

Hello and welcome to the Lyondell Chemical fourth-quarter 2004 earnings teleconference. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Doug Pike, Director of Investor Relations. Sir, you may begin.

Good morning, and welcome to Lyondell's fourth-quarter 2004 teleconference and webcast. As Eric said, this is Doug Pike, and I am joined today by Dan Smith, our President and Chief Executive Officer; Morris Gelb, our Chief Operating Officer, and Kevin DeNicola, our Chief Financial Officer.

The agenda for today's call will be as follows. I will review our fourth-quarter and full-year 2004 performance, Kevin will then review some financial metrics, and before we open the call up to your questions, Dan will summarize the events of the year and provide a foundation for our outlook into 2005. And the call is scheduled to last 60 minutes.

Now before we begin, I would like for you to note that statements in this teleconference relating to matters that are not historical facts are forward-looking statements including, but not limited to, Lyondell's earnings guidance, preliminary financial information and the information regarding the restatement of Millennium's financial statements for prior periods and the impact thereof. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based on factors including but not limited to, the timing and nature of the final resolution of the accounting matters discussed in this teleconference, and until the restatement on Millennium's financial statements for prior periods has been completed, no assurance can be given with respect to the financial statement adjustments, the impacts resulting from such adjustments or the periods affected by such adjustments. All of such forward-looking statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties.

And additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the Lyondell and Millennium annual reports on Form 10-K for the year ended December 31st, 2003 as amended, the Lyondell and Millennium quarterly reports on Form 10-Q for the quarter ended September 30th, 2004, and the Lyondell and Millennium annual reports on Form 10-K for the year ended December 31st, 2004, which will be filed with the SEC in March 2005.

I would also like to point out that replay of today's call will be available from 1:30 PM Eastern time today until 5:00 PM Eastern time on February 11. And the replay can be accessed by calling 1-800-216-3058 or 1-402-220-3764, and the access code at both numbers is 5549. The replay can also be accessed beginning at 2:30 PM Eastern time 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 applicable disclosures, including the earnings release, are currently available on our website at www.Lyondell.com/earnings.

Before I proceed to a discussion of our financial results, I would like to make a few points to help you understand our post-Millennium transaction reporting. First, I'm sure that you have noticed that we do not include the Millennium financial statements in this report. In the future, we intend to include these reports much as we have the Equistar results, but due to the restatement of historical results, they are not available at this time.

You should have also noticed we are now and in the future will report in four segments. The first is ethylene coproducts and derivatives, and this includes 100 percent of the Equistar businesses and the Millennium acetyls business. The second is called propylene oxide and related products. This was formerly referred to as IC&D, but is otherwise unchanged.

And the third segment is organic chemicals, which includes the titanium dioxide business.

And the four segment is refining, which reflects our equity interest in LCR. Millennium's flavor and fragrance business will be recorded under the other category.

The transaction costs related to the Millennium acquisition are as follows. Those incurred by Millennium were accrued by Millennium prior to the close of the transaction, and as a result, the 70 million charge is not reported in Lyondell's fourth-quarter results. The $20 million of transaction costs incurred by Lyondell have been accounted for through purchase accounting and also do not impact Lyondell's fourth-quarter results.

Another mechanical item to consider is our share count. For the fourth quarter, our average diluted share count is 207,700,000, and the corresponding share count for the full-year is 186 million. At year-end, we had 243,700,000 shares outstanding.

Now during the fourth quarter of 2004, Lyondell had net income of 16 million or 8 cents per share. The fourth-quarter results include a 64 million charge related to end process R&D from the Millennium acquisition as required by GAAP. And this charge is not tax effective and, therefore, reduced quarterly results by 31 cents per share. Fourth-quarter results also include a $12 million expense related to the early retirement of debt and $12 million reflecting a portion of future insurance premiums expected to be paid to industry mutual insurance Consortium.

Additionally I should point out that the fourth-quarter results include only one month of ownership of Millennium Chemicals.

The fourth-quarter results compared to net income of $50 million in the third quarter of 2004, and as compared to the third quarter, performance of the ethylene coproducts and derivatives segments improved significantly, while performance of the PO and related segments was lower primarily due to seasonal factors. For both the quarter and full year, the results were also reduced by larger accruals for employee incentive pay plans. And for the full-year 2004, Lyondell had net income of 54 million or 29 cents per share. This is an improvement of $356 million or $2.13 per share versus 2003. And each of Lyondell's operating segments showed significant improvement versus 2003, being led by the ethylene coproducts and derivatives segment in which the operating income (inaudible) $591 million.

The Lyondell final book tax rate for 2004 was 30 percent. But I need to point out that this is impacted by transaction costs and a change in Dutch tax rates that was enacted at year-end. Our cash income taxes during 2004 were minimal as earnings continue to be protected by significant net operating losses.

Looking forward, it is very difficult to estimate our 2005 tax rate. Since at this time, we are not able to provide a clear estimate, I would suggest that you use the 35 percent statutory rate in your models. We will update the estimated book rate as the year progresses.

Keeping the financial results in mind, I would now like to briefly summarize the performance of the various products that support these results. I will begin with the ethylene coproduct and derivative segment. In order to simplify discussion in comparison for the balance of the ethylene coproduct and derivative (technical difficulty)-- discussion, I will present comparisons on a 100 percent ownership basis for all products. However, since the acetyls business was only included in the segment for one month, I will exclude it from today's discussion unless specifically highlighted.

Now versus the third quarter, fourth-quarter operating income improved by approximately $84 million, excluding acetyls' December operating income of approximately 10 million. And for 2004 operating income was $502 million, excluding the contribution from acetyls. This is a $591 million increase over 2003 results.

As compared to the third quarter, ethylene and derivative volumes increased slightly during the fourth quarter. However, prices increased significantly as ethylene and polyethylene prices averaged 6 to 7 cents per pound higher than the third-quarter averages. Ethylene oxygenates were also strong as average prices ranged from 3 to 8 cents per pound higher than third-quarter average prices.

Our average cost of ethylene production metric increased by approximately 1.5 cents per pound versus the third quarter. Essentially all of this increase is attributed to natural gas based raw materials. Now the raw materials cost for crude oil based raw materials also increased during the fourth quarter, but those increases were offset by corresponding increases in coproduct prices.

Ethylene margins increased over the course of the fourth quarter, and as a result, December was the strongest month in the quarter despite a slight seasonal slowdown in sales volume. In fact, including acetyl, December was responsible for approximately 50 percent of the fourth-quarter segment EBITDA.

A comparison with 2004 versus 2003 reveals many of the same characteristics. 2004 ethylene and ethylene derivative volumes increased by slightly more than 1 billion pounds, a 10 percent increase versus 2003. Ethylene and polyethylene prices averaged approximately 6 to 6.5 cents per pound higher in 2004 than 2003, while our ethylene oxygenates prices averaged 6 to 9 cents per pound higher. Our cost of ethylene production metric increased by close to 2 cents per pound and as in the fourth quarter comparison the increase can be attributed to natural gas based raw material. Coproduct price increases offset a $12 per barrel increase in the cost of crude oil based raw materials during the year.

Now January sales volumes were slightly below fourth-quarter average levels, but are consistent with December. Ethylene and coproduct supply and demand balances have tightened as a consequence of competitor operating problems. And within Lyondell's system, crude oil based raw materials continue to enjoy a significant cost advantage versus natural gas based raw materials.

Now let's turn our attention to the PO and related products section. During the fourth quarter of 2004, this segment had an operating loss of $26 million, and this is a $75 million decrease versus third quarter of 2004. The majority of the decrease in results comes from seasonally lower MTBE margins. MTBE results fell by approximately $60 million as industry margins averaged 27 to 29 cents per gallon below third-quarter levels. It is quite typical for fourth-quarter results to decline by this magnitude, and a comparison to the fourth quarter of 2003 indicates that MTBE results are relatively unchanged.

Now performance of the PO and PO derivative products, which includes propylene glycol, propylene glycol ethers and butane diol, continued to improve as both margins and volumes increase. Margins improved by several cents per pound as price increases outpaced raw material propylene prices, which average 5 cents per pound above the third-quarter average price. Volumes increased by approximately 90 million pounds, approximately 55 million pounds of which are related to the seasonal aircraft deicer business. And these margins and volume improvements resulted in more than a $40 million improvement in results versus the third quarter.

Styrene results were relatively unchanged versus the third quarter, while TDI results declined by approximately 10 million pounds, partially related to a fourth-quarter maintenance turnaround.

Now results during the quarter were also impacted by higher employee payroll expense as improved financial results during the latter half of the year resulted in an increase in bonus and incentive plan costs. Since the improved performance occurred during the fourth quarter, our accounting had to take the full impact into account in the fourth quarter, thus creating a large quarter to quarter impact. The resulting increase was approximately $20 million, and this takes into account all active long-term incentive programs.

For the full-year 2004, operating income improved by approximately $67 million. PO and PO derivative products results improved by approximately 100 million as margin and volume improvements contributed relatively equally to the strong performance. And versus 2003, MTBE results increased by approximately 40 million pounds, primarily from stronger margins. And combined styrene and TDI results decreased by approximately $50 million primarily because prices did not keep pace with increased raw material costs. Early debt retirement costs, employee incentive claim costs and other increased expenses partially offset the improved business results.

Thus far in the fourth quarter, conditions for the PO and BDO derivative products have continued to be quite good. Demand has continued to the strong, and supply/demand conditions are tight. Most of these products have had significant price increases in response to tight market conditions and increased raw materials cost. MTBE margins have increased much earlier than normal seasonal trends would predict; however, it is unclear whether these increased margins will continue, but the industry has not yet entered the gasoline blending season.

Now as a result of Lyondell's November 30th, 2004 acquisition of Millennium Chemicals, Lyondell's reported results for the inorganic chemical segment include only one month, the month of December, during which the operating income was $5 million, and this correlates to an EBITDA of approximately $12 million. Now for purposes of comparison my discussion of the operating environment will compare the full periods rather than being limited to the time of Lyondell's ownership. Additionally in order to focus on business trends, I have excluded the impact of any asset write-downs, reorganization costs and transaction costs.

Now fourth-quarter volume declined by about 30,000 metric bonds versus the third quarter. This is considered to be consistent with normal historical seasonal decline. On a dollar basis, prices increased by approximately $100 per metric ton, but cost increases of approximately the same magnitude resulted in unchanged margins versus the third quarter.

On a full-year basis, 2004 operational results were up moderately from 2003. Sales volume increases of approximately 75,000 metric tons or 13 percent were offset by lower margins. And I would like to also point out that our TiO 2 inventories were reduced by 29,000 metric tons during the year, a decrease of approximately 20 percent.

Now thus far in the first quarter, sales are following seasonal expectations, and the sales price increases realized over the past several months are contributing to increased margins.

Now let me turn your focus to LCR. LCR's fourth-quarter operating income reached yet another record at $165 million. This equates to EBITDA of 193 million, a $10 million increase versus the third quarter. Full-year 2004 EBITDA of $645 million surpasses the previous best full-year results by $268 million.

During the fourth quarter, the refinery operated at 268,000 barrels a day, slightly below third-quarter rates of 278,000 barrels per day. Processing volumes of CSA crude from Pedavesa continued to be very strong, averaging 235,000 barrels per day. And the primary contributors to the stronger fourth-quarter results were spot crude margins and contract timing factors within the CSA contract. You should also note that a schedule maintenance turnaround of the magnaformer resulted in approximately $20 million lower profits versus the third quarter.

Full-year 2004 results represented record performance and strong operations contributed above record crude runs and margins. Performance was also enhanced by the expansion of industry sour crude spreads and strong aromatics markets. And the latter items combined to contribute approximately 30 percent of the year-to-year improvement.

Now looking forward to the first quarter, results are expected to be quite good, but less than the record profitability enjoyed during the latter half of 2004. And the reasons for these reduced expectations are a combination of some minor January operating disruptions, coupled with lower spot crude margins and the anticipation that the favorable contract timing factors experienced in the fourth quarter will not reoccur during the first quarter. I would also like to mention that the refinery will have (inaudible) turnarounds at two major units during the second quarter, and this is likely to have a $30 to $50 million impact on second-quarter results.

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

Since the cash discussion is important to our debtholders, we will structure this discussion around the legal entities rather than the consolidated segments. However, to avoid confusion, we will refer to the former IC&D segment as PO and related products. Our cash story continues to be very positive. Let's begin with a review of our debt reduction activities.

During the fourth quarter, Lyondell called an additional 300 million of debt, bringing the total debt reduction to 500 million for the year. And there is a 30-day lag between the call and the actual payment. As a result, the 2004 balance sheet reflects repayment of only 300 million. The remaining 200 million was paid in January.

On other financing activities during the fourth quarter we refinanced Lyondell's revolver. We have a new $475 million five-year facility in place now. In terms of fourth-quarter cash distributions across the operating companies, LCR's net distributions to Lyondell were 61 million. Equistar distributed 215 million to Lyondell and Millennium combined. Please remember that although we now own 100 percent of Equistar, we directly hold 70.5 percent and own the remaining 29.5 percent through Millennium. So, therefore, 29.5 percent of the Equistar distributions went to Millennium rather than going to Lyondell.

And for the year, LCR's net distribution to Lyondell were 345 million, and Equistar distributed a total of 315 million to Lyondell and Millennium.

Now liquidity has continued to be a good story. On a consolidated basis, Lyondell finished the year with 804 million of cash, of which Equistar held 39 million and Millennium 344 million. Additionally Lyondell had 940 million available under various revolvers and facilities, of which Equistar had availability of 394 million under its facilities, and Millennium 119 million under its revolver.

In the area of working capital at Equistar, we continued to build working capital in dollar terms, while our operating metrics continued to hold roughly steady within 10 percent of the third quarter and beginning of 2004. Equistar's working capital committed to inventory receivables and payables increased by 219 million versus the third quarter and 463 million for the year. This increase is primarily caused by the substantial price of raw material cost increases at Equistar coupled with increased sales volumes.

I will put this in context. Revenues increased by almost 2.8 million or 40 percent over 2003.

Now to complete the cash story, the last item I would like to summarize is capital spending. During the fourth quarter, the capital spending was 19 million at PO and related products, 32 million at Equistar, 19 million at Millennium and 29 million at LCR. This brings to 2004 capital spending to 62 million at PO and related products, 101 million at Equistar, 57 million at Millennium and 71 million at LCR.

Now that is a quick summary of our financing activities and cash position, and I will turn the call over to Dan.

Thanks, Kevin. I would like to close our prepared comments with a discussion of 2004 highlights and an outlook for 2005. Obviously the most significant events of 2004 were the improvements in the health of the chemical industry and, from our own standpoint, the acquisition of Millennium. Both of these events seem to develop slowly, but have been worth the wait.

For example, since we announced the transaction in the first quarter of 2004, market conditions have improved significantly, and Millennium's cash position inquiries about $135 million during the year. Most importantly, over the course of 2004, the value of an investment in either Lyondell or Millennium increased by more than 70 percent.

Now that we have owned Millennium for a couple of months and have had an opportunity to work with the people and assets, we are even more convinced that the businesses are solid and poised to benefit over the coming years. We were also impressed with the progress that the operating personnel have made during a rather stressful year. I will discuss some of their accomplishments in a few minutes as part of my discussion of the broader company.

As most of you know, over the past years in our meetings and teleconferences, we have emphasized several items that we believe position us well within the industry. First, we have always believed that the industry is cyclical and that as the economy recovers so will the industry. I have often said and continue to believe that Lyondell's combined product and financial leverage to this recovery is second to none.

Second, Lyondell has potential advantages that enable us to take advantage of an improving marketplace.

And third, the effectiveness of our operational excellence process adds significant value, particularly during strong industry conditions.

Let's talk about these one at a time, beginning with the cyclicality of the chemical market. Clearly we have moved into the early phase of a cyclical upturn that I believe can remain strong for sometime into the future. There are several reasons why I believe that it is early in the cycle.

First, the ethane-based ethylene margin has not made any significant moves as yet. In fact, the 2004 Chem Data Cash Margin Estimate is only 4/10 of a cent per pound better than the 2002 margin. The improvements in our results have come largely from increased sales volumes, as well as coproducts and derivatives prices rather than the core ethylene margin.

Second, the industry has experienced a few production outages. These have not lead to panic buying and ethylene margin expansion like they have in past peaks. Chem Data's historic database estimates that ethane-based ethylene cash margins were approximately 18.5 cents per pound during peak years. Their estimate for 2004 was only approximately 8 cents per pound. This history and the behavior of industry participants leads me to conclude that we have plenty of potential left in the system. So in my assessment, we are in a tightening period, but I think it is early in the cycle.

During 2004 our differential advantages significantly impacted our bottom-line. Within our ethylene system, it is our crude oil-based crackers that provide this advantage. Chem Data reported that during 2004 this advantage grew to more than 6.5 cents per pound, which is worth approximately $400 to $500 million in our system.

In the propylene oxide and related products segment, our strength is in propylene oxide and propylene oxide derivative chemicals. During 2004 our results in these products improved by $100 million compared to 2003, and these improvements were achieved while propylene prices almost doubled. Unfortunately the other chemical products in this segment have yet to see this recovery, but we are optimistic that they will also advance in the future. And at Lyondell-CITGO Refining, our differential advantages are the crude oil contract and the ability to process heavy sour crude into premium fuel products and aromatics.

As Doug mentioned, the latter advantage alone contributed approximately $80 million towards the improved 2004 results. I think that these examples provide some visibility into the advantages that exist within our assets. The market improvements and the asset position are important, but neither can be brought to the bottom-line without the skill of our employees.

This brings me to one of my favorite topics, our operational excellence process and the results that our people bring to the bottom-line. The value of this process becomes more apparent as we enter a period of tight market conditions, and our employees have certainly stepped up to the challenges. I would like to share with you just a few of their 2004 accomplishments.

14 of our sites set annual production records. Within our polymer operations, five sites set annual quality records. Our two newest plants, the PO and BDO plants in the Netherlands, both demonstrated the ability to operate at greater than design rates. And our reliability and energy conservation programs generated approximately $60 million of savings compared to 2003.

This strong performance is not limited to the original Lyondell facilities. The plants that joined our system from Millennium also had a great year. In aggregate, the TiO operations set both annual production and quality standards. Four of the individual sites set production records, and four established new quality standards. This is quite an accomplishment when you consider the distractions and uncertainties that accompanies an acquisition that required the majority of the year to complete.

So what is ahead for Lyondell? Assuming that the global economy expands during 2005, we expect to see further tightening in the supply/demand balances in essentially all of our chemicals. How much and how fast I will not venture to guess, but since most chemicals are already operating at high rates and reasonable profitability, we don't need to experience major step changes to have an extremely successful year.

It appears that crude oil and natural gas prices will continue to be a source of both concern and volatility during 2005. But I believe that our products hold an established position in the economy and have demonstrated their value and use. Therefore, in the near-term the price of raw materials has become more of a tactical pricing consideration rather than a major strategic issue.

How will we behave in this environment? This is an area in which nothing will change. Our behavior and actions will be consistent. Internally we will focus on reliability through operational excellence. Financially we will continue to apply excess cash to debt reduction, and strategically we will remain focused on regeneration of shareholder value. I have often said that cyclicality has not been revealed, and after saying this for several difficult years, I believe we're steadily moving up the cycle. While we intend to enjoy this period, we will also remain focused on maximizing Lyondell's near-term value, as well as positioning Lyondell for the long-term when the next downturn occurs.

Thank you for your continued support, and I look forward to seeing all of you in 2005. I would now like to turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS). Michael Judd, Greenwich Consultants.

Good morning and congratulations on a good quarter. I have a question. There was an article in the Wall Street Journal yesterday about Chavez saying that Venezuela would like to sell its interest in eight U.S. oil refineries. Evidently CITGO or CITGO's spokesperson in Houston did not have any comment. But I'm wondering if you could comment on this in the sense of, if the other part of LCR were available, would you be interested in buying it?

And then from the other perspective, if for some strange reason, Venezuela decided for political ways or whatever they did not want to supply the heavy sour crude to the U.S. what your options might be, please?

Well, first of all, let me tell you there has been a lot of confusing publicity on this. There have probably been 8 or 10 articles that have said that Chavez wants to sell or does not want to sell, etc..

Let me give you a few facts. We have got new administration in Pedavesa. We just learned that we have a new CEO of CITGO. One of the difficulties that we have had over the last six years has been that no administration seems to stay in place long enough to really establish much of a dialogue. So we don't know anymore or any less than anybody else at this point in time, but I would tell you it looks like a lot of noise.

Factually we have a long-term contract, which is being honored, has been honored throughout this period of time, say for the force majeure events that we contested and continue to contest in a suit that is proceeding through the court system. But the relationship remains very strong operationally. We're not receiving any changes in our shipments, and also importantly for the last year, this contract has been more valuable to Venezuela than it has been to us. That is the formula as it is calculated would indicate a crude price that is higher than what we could have bought in the open market.

So the one thing that has changed here in the recent months or the year has been that the value in this proposition has been shifting more from the contract to the assets per se. Now who knows if margins remain as strong and refining going forward, but no matter what eventualities somebody wants to come to with ownership, I think we are in a much stronger position now that we have ever been, and we intend to continue to gain the value from this refinery over time.

Just as a follow-up to that, if you were offered the opportunity to buy out the other portion, it seems to me like that would be an attractive investment.

I think the most attractive investment to us right now is repayment of debt. That would have to be extremely attractive to come anywhere near the attractiveness we have from just continuing to reduce our debt position. But I'm not -- I don't think it's healthy to speculate on propositions in the future. We do not even know if there are any out there.

The other thing I would point out, though, is this refinery is capable of handling very heavy crude and not just Venezuela on heavy crude. So the value of the asset resides in its value to the marketplace.

P.J. Juvekar, Smith Barney.

Good morning. I was surprised to see that despite the $100 price increase in TiO 2, it was all offset by increased cost. Can you go through what those costs are?

Of course, first to remind you, that you are only looking at one month. So it is hard to draw any particular conclusions, and of course, it is a month of which the transaction was just closed and various taken place with that, with people and things. So I would not draw any conclusions or directions from that one particular point.

I think probably the most important thing is more looking forward price increases are taking effect. You are moving out of the seasonally slow period into the coating season, and as we said we feel quite good about the investment in organic chemicals.

So this is not an issue of quality as you continue to expect in 2005.

No, we are quite pleased with where everything is going.

Okay. And secondly, on polyethylene in 2004 you had 10 percent volume growth. I was wondering how much of that was domestic growth versus how much of it came from higher exports?

I will jump into that first, and then see if anybody wants to add on. Our polyethylene growth itself was about 13 percent. The number I quoted was the ethylene and ethylene derivatives in total.

And if you look at industry -- if you look at it from an industry standpoint, the APC data would say that the industry grew close to 9 percent, about 7 domestically and about 18 percent from an export side. Our side, you know, we have not radically changed our mix of exports versus domestic sales. There have been opportunities open up and we have pursued those, but it continues to be Asia in particular is an opportunistic situation for us.

I think most of that growth is taking place in the U.S.. I was wondering if you have any idea about the inventories in the system?

The inventories in the system?

Right.

As you know, we tend to watch the railcars out there. We did see around Christmas some increase in our railcars in the holding time of those cars. But I would say I want to point out to you that we have also seen that start to turn. So over the last couple of weeks, that situation has turned, and we have started to see those come back down. The increase was visible, but not a particularly large increase.

If I can just add as a general comment, inventories continue to be quite low.

I think the overriding consideration is one we talked about back in the third quarter when we talked about -- we thought we were entering a period of improvement in the cycle, and I said at point in time that the most interesting thing to watch would be behavior through the fourth quarter and proceeding into the first quarter because seasonally for most of these businesses the fourth and the first are weaker quarters.

I think looking back on the fourth quarter what we saw was the seasonal pattern we really did not see until mid to late December. We saw it continue into the first part of January, but then pick up again. So very very muted, and very important, as I said in the third quarter, if the fourth quarter outperformed the third, that is a sure sign there we are headed in the right direction. So clearly there is still some seasonality, but it was very very muted this year because of the expansion in the industry.

Kevin McCarthy, Banc of America Securities.

I was wondering if you could comment on your fourth-quarter operating rate in ethylene, PO and also TiO 2, and elaborate on how you see that changing moving into the first quarter, please?

Let me just tell you that in the ethylene area we are running the plants that are operating essentially at full rates. That is also true of PO, and that is also true of our TiO 2 business. We don't see that changing going forward.

Okay. Second, just a follow-up on the LCR issue. If CITGO were ever sold, do you have a right of first refusal to take out the minority stake there?

We do.

Okay. And then on TDI, you know it has been a tough business for quite some time. Another tough quarter. Is there a light at the end of the tunnel in that business, or is capacity rationalization required in the industry?

I think there is a light at the end of the tunnel, but I think you hit the nail on the head. The capacity was expanded probably more than it was needed in the world, and the urethane market itself was one of the weaker links in the propylene oxide chain for a while.

That has picked up very nicely, but because of the capacity and the relative growth rates of rigid versus flexible urethanes, I think you're seeing TDI being the lagger here. But I think it will. I think we see signs of continued improvement in the business. But when you're at the bottom of the gutter looking up, it looks like a long way. So it's going to take a while yet before it really produces results we are looking for.

If I can just add, the fundamentals in TDI are no different than they are in these other business we have been talking about. Operating rates in that business we estimate on a global basis are still in the mid to upper '80s, and we're going to need to see those numbers move up before we see the business improve.

That is very helpful. Thanks a lot. I will get back in queue.

Don Carson, Merrill Lynch.

A question on the cycle. What I found interesting was your Table 7 where you showed how Equistar did in the month of December. It would seem that if you just multiply that by 12, you get almost $3.00 of earnings from Equistar alone without an improvement in the cycle. You know you're running flat out, things here are going well, is it time to restart Lake Charles?

I think it is still premature. I take you back again, there really is no margin increase in the ethylene-based crackers. I reminded you that is largely an ethylene-based cracker. The numbers that you are going through, and I can do the same arithmetic, and while that is pleasing, when you look at the ethylene margins, we have still not seen the cyclical takeoff of ethylene margins. I think we would want to see that profoundly there with assurance it was going to be there for a sufficient period of time to make it worth our while to go through starting that plant up and making sure we are going to make a lot of money off it. I just don't think we're there yet.

Now with ethylene-based margins looking like they were approaching about 17 cents in January and you talk about kind of 18, 19 cents previous pace, it would seem we are starting to get close though?

What I think -- this is Doug speaking -- you have seen what what the fourth-quarter price increase is and some of the movements in raw materials around that period. You have seen some movement up, but we are kind of feeling like we still want to see it. Remember, we always tend to think about this with the other 10.5 billion pounds first. Then, we think about that 800 and how the whole system is impacted. So that is really the thought process we are still going through.

And, Dan, you've got a potential overhang out there with the Oxy shares. They have made some comments about what they might do. Would Lyondell be a participant or would you give any thought to buying back some of those shares yourself?

I think you've got to go back to the debt indentures, and we are precluded from share buyback. So we have substantially reduced the amount of debt we have got out there and changed debt indentures that exist in the high yield debt. So I think the answer to that is no.

Rich Von Karp (ph), Sage Asset Management.

Good afternoon, gentlemen. I had a couple. Just clarify for me, if you don't mind, just help me out. In the propylene business, there was a bonus accrual or something like this that reduced the results in the quarter. Could you just clarify that for me and tell me what was its nature, cash or non-cash?

This is Doug speaking. I will provide that. The bonus accruals, we have a couple of bonus systems that followed the performance of the Company in the stock market and the price of the stock. So obviously in the fourth quarter things moved up quite well, and obviously over the last several years, the Company has been our top performer in the chemical space. And so the movement of those up caused us to have to increase the expense and the accrual for the programs that were active. So a portion of that will be cash that will be paid out as we move into '05, and a portion of that is expense for future programs. So that is what you're seeing. The rather rapid nature of movement in stock price in the fourth quarter is why you see it as a large jump rather than something more steady over the course of the year.

How much was that in the propylene business in the quarter?

Well, it was about $20 million, a little over $20 million impact.

And let me ask one other question if you don't mind. Just clarify you were giving giving guidance sort of segment by segment, right, for the first quarter?

Yes, discussing (multiple speakers)

So when you said that profits would be down because of the refinery outage and so forth, you were talking about the refinery as a segment, not that the quarter would be down sequentially in the first quarter for the Company as a whole? Am I right?

(multiple speakers). Yes, that is a very good point. But it was segment by segment. We're addressing that specific area.

I don't want to push you too far, push you where you don't want to go giving guidance, but if we think about the Company as a whole, you said I think you said that the ethylene business margins would be a little better or looking better in January or something like this. And then, of course, obviously there's a seasonal uptick TiO 2 and a seasonal uptick in the propylene business. Would we expect that the first quarter could be in excess of the fourth-quarter earnings?

I think you got the picture.

Say that again?

I think you got the picture.

Thank you, sir.

Nancy Tully, Credit Suisse First Boston.

Most of my questions have been answered, but as a follow-on to Rich's question, how much of that 20 million in bonus accruals, etc. is going to be cash and the rest being like unrealized?

I don't know to that precision. But I think it is about 50 to 75 percent is more current, and the rest is for future accruals. If you think about it, there are several years of programs involved in this. So you can think of it that way.

So more than half is being paid out now?

You know that is an estimate. I don't have give a precise number.

One other thing. A lot of people like to focus on China. I know you don't do any PE over there, but what have you seen -- China seemed to get out of the market, and have you seen any activity over there, increased activity in recent weeks? What do you expect?

Yes, we have, Nancy. China did pull back late in the fourth quarter, November/December, but in January things picked up again. For most of the products that we're concerned about, we have seen demand and pricing begin to move up. Now we have not gotten back to where we were early in the fourth quarter, but the trend is encouraging.

And what products would those be?

Well, again, as you indicated, our business in China is mostly on the PO side. But we track ethylene and polyethylene and everything else very closely as well. So I'm speaking generally of the chemical products that we are interested in.

Greg Goodnigh, UBS.

A couple of questions. Your special charges are you quoting those on a pretax or after-tax basis?

You're referring to the $12 million (multiple speakers)

Yes, 64, 12 and 12.

The 64 is not going to be tax effective because that is part of purchase accounting, and that is (multiple speakers). The 12, the 212s will be because those are pre-tax numbers and should be tax effective.

Okay. Would you comment on the polyethylene price increases that are impending? In fact, if you add the two most recent increases, the converters are looking at 9 cents potentially March 1st. Could you comment on -- are you giving price protection this year, or do you think demand is strong enough to have that much of a price increase push through?

I don't think we want to comment specifically on the amount of price increases and so on. But I will tell you that demand is remaining reasonably strong. We think that we have the ability to move prices up, and we are going to continue to look for opportunities to do that.

On price protection, I think that we and others in the industry have made an effort during the last year or so to limit the impact of price protection, to remove price protection where we could, and I think that is part of the reason that prices have been moving up as successfully as they have been.

Okay. Another question, your cost synergies that you had previously estimated for the combined companies, I believe were on the order of $50 million a year. I know it as early, does that number still qualitatively look right? When would the cost synergies kick in?

Yes, I think that number is still a good number. I think the first month is a little soon to realize it all. I think it will be over the course of the next year to year and a half.

Okay. By the end of a year and a half, your run-rate should be 50 million if not more?

I would expect that would be the case.

Debt reduction targets, do you have targets for this year and next year in terms of what you might anticipate your debt reduction would be?

We do. Mine are probably larger than the organizations and, therefore, probably not very productive to discuss. Because it comes back to every dollar we can generate is going to go to debt reduction, and we have another 2.5 billion to go to get to that marker that we have put in the ground. But I would also tell you that if that 2.5 comes easily, we will repay more than that.

Kunal Bannerjee, Morgan Stanley.

First, I just wanted to come back to MTBE because this is a product for which we have dire projections now for three years running. I look at my blue book screen here and MTBE has taken off -- it is hitting levels obtained last August during the peak of the driving season, and we're not in driving season yet.

So can you just talk about what are the dynamics? What is exactly going on there that is supporting this sort of profitability because again each year we kind of tone done our estimates, and they seem to be going the other way?

Well, the dynamics are it is a good product, and it makes sense to use it in gasoline. It is good for the environment as we have been saying for many years.

I think what has been happening is that the market has adjusted to the changes that have taken place out there. In other words, demand is considerably lower today as a result of the actions of a number of states, but supply has also been cutback significantly. And it is the old story of supply and demand and value and use. And so we have continued to enjoy our position in that marketplace, not as much as we have in the past, but certainly the dire predications have not come to pass, and we think there may still be some life in the product.

Is it similar -- is it fair to draw a comparison to something like petro lead or something like that that got phased out of gasoline as well and then enjoyed a pretty good period of profitability?

That is possibly conceivable, but I think the dynamics are enough different that I would hesitate to draw direct parallels. But it is not all that different in concept.

Now what is happening right now I read with dismay and a little bit of amusement the other day, Governor Schwarzenegger of California was bemoaning the fact that air quality was degrading in California because of the use of ethanol, which is not rocket science. If you put a more volatile material in the gasoline that does not have air quality benefits and you blend to the same level of oxygen, you're going to get worse quality air. But more importantly you get less gasoline volume and you get less gasoline octane.

I think what is happening is in the parts of the world that continue to use MTBE this tightening of supply/demand in the overall gasoline market is driving the value of MTBE where it is still used. And the parallel with PEL then if you continue down this path, that could happen. But I don't think we want to be in the business predicting such things because it is so politically loaded.

Okay. All right. And then just on the methanol that you got via the Millennium acquisition, would it be reasonable to assume that (inaudible) outsource to Methanex as well somewhere down the road here?

I think it is probably not appropriate for us to comment on potentials like that.

Okay. And then just one question for Kevin on the debt prepayment. My understanding was you had restructured your maturities to kind of eliminate prepayment or minimize prepayment penalties. Is that correct, or if not can you give us some sense for what we should be assuming in terms of some of these prepayment penalties as you start deleveraging here in '05?

I think I understand what you're saying. Again, these were -- they scale back as you get closer to the date at which it matures. So we actually have a change that occurs this May in the existing debt that we have been (multiple speakers) nibbling at. So it would drop, the prepayment penalties would drop.

So obviously if the economics start to favor, as you get closer to that, decide when you really want to do that and save some money. I think that is what you're asking.

I think maybe you're asking -- this is Doug -- and let me see if I'm understanding it and Kevin could add. When Kevin and Karen refinanced a lot of these things, purposely but in call options so that we would have calls on these debts on this debt as we move through the cycle, and of course those are the pieces we are calling now and those call options, particularly around 5 percent. And as Kevin says, as you get closer, then you can be reduced. But if you put that ability in is what we have stated before. So that may be where you were going with that.

Yes because the 12 million I don't think it is going to be called out as an unusual -- we should start modeling some sort of expenses related (multiple speakers)

I agree with that.

(multiple speakers) -- debt paydown, so I just wanted to get a sense of that.

Effectively what we ought to do -- all these are public record anyway -- approximately what we ought to do is make these more user-friendly as far as what comps are there and what prepayments look like on them so that you can model as we go forward with your own cash projections.

Yes, that would be really helpful. All right. Thank you.

Tuan Pham, Banc of America Securities.

Just a few questions on Millennium. The acetyls segment, I think I might have missed it, but did you say that the contribution from that from December was 10 million of EBITDA?

Operating income was 10.

Okay. So then the EBITDA is even higher because that seems extraordinarily high relative to, say, the 50 million or so per year that was generated out of that segment at Millennium in the past.

I think it is. I don't think anybody ought to multiply it by 12 in the case.

Could you elaborate on what you're seeing in that market at this point? (multiple speakers)

I think that is following much as all the other chemicals are relatively tight in pricing versus activity. So it is going forward really much as the other (multiple speakers) chemicals.

Maybe a little more volatility month-to-month than the others did. (multiple speakers)

Of course, natural gas is a big component of your raw materials. So obviously you have to be aware of where natural gas prices go.

Okay. So I guess that covers the acetyls segment. As far as consolidating the Millennium structure, could you talk about what is driving your decision there?

As far as consolidating the structure?

Yes, that is right.

We will look in the future as we retire debt to the first opportunity to eliminate the remaining confusion that exists from maintaining the separate balance sheets. But I think it would be not genuine for us to point to that in the short-term, because we've got to get that chunk of debt out of there before it become feasible to refinance and, therefore, eliminate the separate balance sheets. But it is certainly something that we aspire to in future years.

But keep in mind again that Lyondell consolidated will include the Millennium. And so it is all there in the consolidated, but there is also stand-alone financials for the debtholders there.

Yes, that is what I was just asking about. Kevin, could you give us a range at this point? I know you have got net income moving around a little bit in Millennium, but what the kind of range is for the restrictive payments basket there?

Well, as we have said before, it is a negative. It was negative when we closed the transaction. There are some charges that you know we have disclosed that went to that balance sheet essentially at the end of the -- at close as well. So it's more negative, I think that is the best way I can describe that right now.

I think we're probably best to not address that at this point in time.

Okay. That is all I have. Thank you.

Robert Reichs (ph), Bear Stearns.

Just a couple of housekeeping questions. The first thing is, you might have said it, but for the new company what is your CapEx and depreciation going to be for '05?

The CapEx we put out a press release on that earlier, and if you look at the consolidated, CapEx will be 332 million. And at LCR, which, of course, we don't consolidate on 100 percent basis, it is $187 million for '05. So that is the '05 CapEx.

As far as -- it is a little difficult for me to give you precisely the consolidated depreciation. Let me give you the pieces on that, what we have by piece if can do that if you don't mind.

Go ahead.

We have been around for the -- propylene oxide and related products have been around 250 million per year. Equistar is around 315. Millennium has been running depreciation about 100 million. Now if you go to our proxy, you will see estimates of the step-ups in the proxy so I think that is really about the best guidance to give you at this time.

And one other question. It sounds to me that basically when someone was talking about price increases and inventories, I just wanted to see if I understood this. It sounded to me that you guys believe that based on current demand, that demand has been picking up, and you saw strong demand through December and you are going to see a dramatic falloff in January that you guys don't believe inventories have been built? Is that correct?

To any great extent, that is correct.

Is there -- just again I don't know what kind of looks EBIT, do you think February, is it business as usual? Can you see so far any view into February?

I think what we have said we seen is we saw a little seasonal slowdown primarily December, January and some pickup again from that. So we think we're moving out of that --

The one other thing to add is that February will be an interesting month. We talked earlier about China, and I indicated that we have seen things begin to pickup there. But we will be watching China very closely in February, so that will be a pretty good indicator of the direction of these businesses globally.

Make sure you call me when China starts picking up, will you?

I find the China debate interesting when their GDP grew at a percent higher than they were expecting. Everybody is talking about soft landings, but the dialogue seems to be more about (multiple speakers) it is going to zero.

It's going to be interesting to see how it plays out. But I think there is much ado about nothing there, that this is a seasonal thing, and we will come back and put it -- it grows at 7.5, 8.5 or 9.5, it is almost indifferent. It is going to be good growth.

David Silver, J.P. Morgan.

I'm hoping you could help me strip out or segregate the effect of having Millennium on your books for the last month. It seems like parts of the operations are included, parts are not, and then of course there are the charges. I was wondering if maybe we could go at it from the point of view of, what was the net income or the effect of having Millennium on the books? And then if you could strip out any of those charges that you highlighted yesterday.

Let me try to take you through the key pieces. I would refer you to Table 10 and refer you to Table 7 of the earnings release. And you will see there where we reconcile, you will see the December Equistar operations, and of course, 29.5 percent of that was Millennium. And then you will look at the Millennium operations that you brought in in operating income, and the key thing to remember is that $64 million in process R&D charge. So that is really the operating income that we brought in in December.

Okay.

Put another way roughly 30 million from Equistar and then the 10 out of acetyls and the 5 of inorganic chemicals.

Okay. So in addition to the wholly-owned business of Millennium been excluded for October and November of the quarter, it is also true that the Equistar portion that belongs to Millennium, the 29.5 percent, their results from October and November are excluded from your fourth quarter reported --?

That is exactly right. The 29.5 percent for December, so Millennium's 29.5 percent of Equistar for December only is included in the consolidated results, and I think this reconciliation will help you understand how much is in that consolidated.

Okay. And I apologize, I'm pretty dense. But the 213 million of operating income that is presented in here, that includes or excluded that snippet, that two-month portion of Millennium?

Equistar is presented on 100 percent basis, so that is Equistar as a subsidiary on a 100 percent basis. I'm sorry if I was not clear.

No, no that is fine. That helps me put the pieces together. Thank you very much.

it is confusing. We apologize. Unfortunately the rules are such that it makes it confusing when you have a one-month consolidation like that.

P.J. Juvekar, Smith Barney.

Just a quick question on TiO 2. Dan, you said that you guys can run these businesses better than Millennium and maybe reduce costs further. But (inaudible) is already sold out, running full out. How much more can you do there?

Let me slightly rephrase, P.J.. I don't think we said we could run them better. What we observed was that the operating rates were low compared to the industry leader. (multiple speakers). Reliability. So you can get more out of the same asset if you move your reliability up. We think the good old hard blocking and tackling that you do to improve all of your systems, which involves some investment with some change in procedures, best practices, etc., will over time move those reliability numbers up. And we, as we said before, don't operate at a penalty and reliability to anybody else in the industry, and we don't intend to in this business.

So we expect to earn that, and I think that the people in Millennium have a good start on that. They know a lot of the things that they would like to do, and we intend to unlock that potential as soon as we can.

But the translation, if you're already running all-out, basically it's got getting another several percent capacity without having to buy it. So all-out gets bigger.

Are there any cheaper debottlenecks that you can do there?

I think it is too soon for us to really have assessed that, but there are some.

I think the cheapest, P.J., is what Dan was just talking about, getting the reliability up. That would probably --

That is usually the very cheapest.

Right.

But we have not actually gone in and said do we have other chunks that we could do in addition to that?.

Any update on the high-cost plant in France?

We do have work going on to improve the cost position, if you're referring to Lahas (ph). I think you will see that continue to gradually improve over time. And as the industry gets stronger, I think the margins overall will improve and all of those facilities will look better. But clearly that one needs some extra work to get it up to where we want it to be.

John Roberts, Buckingham Research.

Have you had any discussions with Occidental yet around their ownership, and if they were interested in selling across this cycle, would you be a buyer of their interest given the cash flow that is improving?

No, we have not had any discussions, but I think we answered before that we are precluded from buying stock by debt indentures that we have in high-yield debt.

And at that point do you declare that indenture?

I'm sorry?

At what point -- do you have to pay off that debt completely or --?

You have either got to pay it off or refinance it, yes. You would have to remove that indenture from the debt.

Bob Cort (ph), Goldman Sachs.

Dan, I don't want to snatch the lovely upcycle that is staring us in the face away, but if I was trying to do my 15-year DCF model, and we know that there's going to be a downcycle somewhere out in the horizon, a lot of your competitors seem to be scrambling to low-cost regions in terms of their olefins capacity. Have you got any strategy in place yourself to sort of diversify your olefins base either towards faster growth regions or lower-cost regions, or will you rely mostly on your derivative and specialty products to provide you that support once we get to another downturn?

Let's start with I would examine the people who are rushing to the low-cost speed stocks in my mind are the ones predominantly based on natural gas liquids in this country, who in my opinion are going to be in a distressed situation in the next downturn.

We on the other hand are heavily loaded towards the crude oil-based facilities, which are world pricing right now and compete on a world basis. We think we can compete effectively on a world basis going forward, and further we expect those facilities to grow in value because most of the new capacity in the Middle East is ethane-based. Therefore, it produces virtually no coproducts, but because growth in the coproducts continues, we would expect the liquid advantage to widen over time and, therefore, these facilities to remain very viable. That applies to all the liquid plants in this country, and Western Europe is heavily loaded that way, and most of the construction in Asia has been liquid.

So we don't think these facilities get endangered there. We think the squeeze is most likely going to come when you have excess supply on the high-cost producer, which is likely to be the U.S. natural gas based facilities at least until you see gas prices equilibrate around the world with LNG facilities.

So we don't equate the pressure to go somewhere else. We do continue to look at the opportunities, and if a compelling opportunity came along and we do evaluate real-time -- we're evaluating a couple right now -- then we would be tempted to participate as well. But simply to join a rush to go build something somewhere without all the fundamentals being there for us, we don't think is smart. So we will continue to evaluate those opportunities.

(OPERATOR INSTRUCTIONS). Kevin McCarthy, Banc of America Securities.

I was wondering if you could give us a Washington update. There has been some speculation that liability protection for MTBE could be stripped from the energy bill. Meanwhile torte reform seems like it's a very act of topic of discussion. What are your expectations for 2005?

My expectations are we're going to have a lot of arguing about this again this year like we had last year. What I hear and that is the only value it is, and the same thing that you hear, there are sources on the Senate side, particularly Pete Domineci who heads the committee that operates on energy in the Senate, has indicated that he does not care to have liability protection in a Senate bill. But on the other hand, Joe Barton, who heads the committee on the House side, has made it clear that he intends to basically pass the same energy as legislation that not only passed the House, but passed committee last year, just never got voted on in the Senate.

So I think you're going to have a lively debates. I think the outcome is uncertain. We clearly favor getting the liability protection. I think it is the equitable thing to do if you're going to have liability protection for ethanol that you have it for all products that were intended to meet the air quality standards. But we will continue to voice our opinions going forward and hope for the best outcome.

We will stay tuned. Kevin, a question for you. What were your NOL carryforwards at year-end? I remember at one point they were close to a billion, and now you have a merger and a cyclical upturn going on. I'm trying to get a sense for when you might have to start paying cash taxes.

Yes, we still have anywhere from $800 to $1 billion worth of NOLs there. So maybe you could use Bob Cort's (ph) 15-year DCF model and figure out what our earnings are going to be over a period of time. (multiple speakers). I can tell you we can cover the next 8 to a billion anyway. (multiple speakers)

I tell you what I got in my own tenure. I have you paying no cash taxes through 2006. Is that still a reasonable --?

No, no, no. We want to pay taxes a lot more than that.

You do?

It depends on the strength of the cycle, but obviously we have got a very strong start here where things are going.

Okay, great. And then finally one clarification on the Oxy overhang issue. Are there limits on the amount that can be sold at any one time by Oxy, and if so, what might those be?

This is Kevin. There really is not. I mean they are building things in it, but frankly it could all be brought to market.

The other thing -- I would prefer we not keep referring to that as overhang. Those shares are in the fully diluted shares. It is not new shares, other than it is a movement of shares in the market should they decide the move them all at once.

I understand.

I think it is important that I think that obviously this is one situation where for Oxy to achieve value in these things as well, I think they need to be careful how they bring them out on the market, too. Just like to benefit of all of us (multiple speakers)

I think they should behave like any large shareholder in trying to protect value if they decide to monetize it.

Real quick if I may, was there any impact from the catalyst change at LCR in the quarter?

Yes. During the fourth quarter, Kevin?

Yes.

Yes, I think I mentioned that there is about -- the Magnaformer was down. That affected Aromatics about $20 million.

20 million. Okay. Thank you very much.

Michael Judd, Greenwich Consultants.

Just to beat the Oxy question to death, the thing is they have been awarded a number of investment opportunities in Libya, and so they might be interested in trying to get the money sooner rather than later. What have you heard about any type of plans that they have to actually register the shares?

We have not. I would also remind you they have been getting all that $50 crude oil revenue as well. So I'm not sure if their opportunities have yet outrun the stash they have built, so. But we have not heard anything.

At this time, there are no further questions. I would like to turn the call back over to Doug Pike.

Okay. Well, I would like to think everybody for attending the call and look forward to working with you throughout the year. Thanks.

Thank you and this concludes today's call.