利安德巴塞爾 (LYB) 2006 Q1 法說會逐字稿

Hello, and welcome to the Lyondell Chemical first quarter 2006 earnings teleconference. At the request of Lyondell Chemical, this conference is being recorded for instant replay purposes. Following today's presentation we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] I would now like the turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Thank you, Sara. Well, good morning. Welcome to Lyondell's first quarter 2006 teleconference and webcast. I am joined today by Dan Smith, our President and Chief Executive Officer, Morris Gelb, our Chief Operating Officer, and Kevin De Nicola, our Chief Financial Officer. And the agenda for today's call will be as follows: I will review first quarter performance, and then Kevin will then review some financial metrics and activities. And before we open the call up to your questions, Dan will discuss the Rhode Island lead paint trial, MTBE, and the potential LCR sale. And the call is scheduled to last 60 minutes.

But before we begin, I would like for you to note that statements made in this teleconference relating to matters that are not historical fact, are forward-looking statements that are subject to risk and is uncertainties. And actual results could differ materially from those forward-looking statements. And for more detailed information about the factors that cause our actual results to differ materially, please refer to our earnings release issued this morning, and please also refer to Lyondell's, Equistar's and Millennium's annual reports on Form 10-K for the year ended December 31, 2005, and the quarterly results on Form 10-Q for the quarter ended March 31st, 2006, which will be filed with the SEC in May, 2006.

I would also like to point out that a replay of today's call will be available from 1:30 p.m. Eastern time today, until 6 p.m. Eastern time on May 4th. And the replay can be accessed by calling 888-567-0440, or 203-369-3442. And the access code at both numbers is 5549. And the replay can also be accessed beginning at 2:30 p.m. Eastern time today at the Investor Relations page of our website at www.lyondell.com/earnings.

And 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.

Okay, now let's proceed to a discussion of our earnings. During the first quarter of 2006, Lyondell had net income of $290 million, or $1.12 per share on a fully diluted basis. This compares to net income of $141 million in the fourth quarter of 2005. And the first quarter includes a $5 million charge related to an industry mutual insurance consortium. Additionally, it includes $70 million in pre-tax income from the settlement of various LCR related matters. And combined, these contributed $0.16 per share to first quarter earnings. Now, for purposes of comparison, the fourth quarter included $53 million of charges related to the shut down of the Lake Charles toluene diisocyanate facility, debt reduction, and industry mutual insurance consortium. And the fourth quarter also reflected an estimated pre-tax impact on Lyondell's results of $75 million, caused by lost production at LCR due to hurricane-related down time. And these items had a combined negative impact of $0.32 per share during the fourth quarter.

I would like to point out that the first quarter results did not include the benefit from the Bayer arbitration award that is referenced in our quarterly earnings release issued earlier today. The timing of the cash receipts, book recognition, and final value have not yet been defined. Now, compared to the fourth quarter, the underlying first quarter earnings reflect improvements related to strong LCR performance throughout the quarter, as well as moderately stronger combined performance across the 3 chemical product segments. And results by segment will be discussed later in the call. Overall, underlying first quarter 2006 results were relatively unchanged versus the first quarter of 2005. Ethylene segment results declined. But this was offset by strength in the Propylene Oxide and Refining segments.

Lyondell's book tax rate for 2006 currently is estimated to be 38%. From a cash tax basis, I would suggest that you assume the first quarter earnings are effectively offset by our remaining net operating losses, and that going forward we will be a cash tax payer. Finally, our first quarter average outstanding share count was approximately 247 million shares, and the corresponding share count in the diluted earnings calculation is 259 million shares.

Now let's turn our attention to Ethylene Co-products and Derivatives segment. As most of you know, the primary products of this segment are Ethylene, Ethylene Co-products including propylene, butadiene, and benzene, and Derivatives of Ethylene, which include polyethylene, ethylene oxygenates and vinyl acetate monomer [inaudible]. First quarter segment EBITDA was $397 million, down from $438 million during the fourth quarter of 2005. The decrease was primarily due to lower product prices which led to lower margins. Ethylene and Ethylene Derivative sales increased by approximately 3%, or 70 million pounds, versus the fourth quarter. But given historic customer order patterns, we consider an increase of this magnitude to fall within the range of typical volatility.

After increasing significantly during the fourth quarter, Ethylene and Ethylene Derivative product prices declined during the first quarter. Ethylene prices average $0.09 per pound lower in the fourth -- in the first quarter than the fourth, while the corresponding decreases for polyethylene and Ethylene glycol were each approximately $0.04 per pound.

On the cost side, our cost of Ethylene production metric decreased by approximately $0.03 per pound versus the fourth quarter. The decline was attributed to lower natural gas-based raw material costs in the first quarter 2006. CMAI data has indicated that [Naphtha] was a disadvantaged raw material during the first quarter, we were able to secure liquid raw materials that were competitive to ethane, while selling liquids that were not competitive. Additionally, we increased the percentage of ethane in our raw material slate, replacing the liquids that were sold. As a result during the first quarter, we produced 55 to 60% of our Ethylene from natural gas liquids. Now, acetyl's results improved by approximately $10 million during the first quarter due to lower raw material costs.

Looking forward, during April there has been continued upward pressure on costs, and downward pressure on product prices. For example, ethane prices have increased by approximately 35%, or $0.18 per gallon since mid-February. And of course, you're all familiar with the elevated crude oil prices. Based on overall market conditions, we believe the product prices will increase as the second quarter progresses.

Now let's turn our attention to Propylene Oxide and Related Products segment. This segment includes Propylene Oxide, Derivative of Propylene Oxide, toluene diisocyanate, MTBE, and styrene. During the first quarter of 2006, EBITDA for this segment was $175 million which is $71 million increased from the fourth quarter of 2005. Propylene Oxide and PO derivative products continued to have strong results in the first quarter, as increased margins drove the improvement versus the fourth quarter. Volumes were unchanged versus the fourth quarter. But due to the seasonality of aircraft deicer sales, volume comparisons are more relevant when they're compared to the first quarter of the prior year. This comparison shows a 50 million pound decline in aircraft deicer sales, due to this year's warm winter.

TDI benefited from the absence of costs related to the fourth quarter shut down of Lake Charles TDI facility, and by higher prices. Styrene and MTBE results were relatively unchanged versus the fourth quarter. Thus far in the second quarter, business conditions in PO and Derivatives, styrene, and TDI are relatively unchanged from the first quarter. Globally, MTBE margins have increased following typical seasonal trends. However, we are incurring costs related to exporting activities. During April, we will complete scheduled maintenance activity at our POTBA and BDO plants in Rotterdam. But scheduling and inventory efforts should minimize the earnings impact from this maintenance activity.

Now the next segment I'd like to review is Inorganic Chemicals, and the primary product in this segment is titanium dioxide. First quarter EBITDA was $44 million, an $18 million increase versus the fourth quarter of 2005. Following string fourth quarter sales volumes, our first quarter sales declined by approximately 11,000 tons. However, the impact of lower sales volumes was more than offset by a combination of a $50 per ton increase in average quarterly prices, and lower natural gas costs during the first quarter 2006. And operations during the first quarter, and thus far in the second, have been strong, positioning the business well for the spring painting season.

Now let me turn your focus to the Refining segment, which consists of our 58.75% ownership in LCR. Now LCR had net income of $151 million in the first quarter, and this translates to EBITDA of $193 million or 180 -- $186 million increase versus the hurricane impacted fourth quarter. First quarter operations at LCR were strong, and are reflected in the record results. The refinery operated at approximately 98% of name plate capacity, processing 221,000 barrels of crude under the CSA contract, and 40,000 barrels of spot crude per day. Through April, crude throughput, operations and spot crude margins have been strong. However, scheduled catalyst changes and maintenance in 2 refinery units are expected to negatively impact LCR's second quarter results by approximately $30 million. This concludes my prepared remarks. I would like to turn the call over to Kevin.

All right. Well, thanks, Doug. This quarter, in addition to the normal cash flow and debt reduction topics, I thought I would spend a few moments discussing, first the various issues and commercial disputes that we have resolved. And next, an overview of the accounting and finance impacts related to the possible LCR sale. And finally, the status of various insurance items. Now with respect to debt reduction, this was another very strong quarter for us, as we repaid $437 million across the 3 consolidated entities during the first quarter of 2006. The majority of this $237 million was at Millennium. Equistar, we made our first major debt repayment, paying down $150 million that matured during the first quarter. And the balance was repaid through open market purchases of $50 million worth of Lyondell's 9 and five-eighth percent bonds. his brings us to an important milestone, as we have now repaid $2.1 billion of debt versus our $3 billion target. And that's a pace of slightly more than $100 million per month.

Regarding cash flow, capital spending, excluding LCR, was $48 million during the first quarter of 2006. That's significantly below the $100 million quarterly spending rate that we announced in our January press release. At this time I would suggest that you consider full year capital spending to be approximately $400 million, unchanged from our original budget. Working capital increased by approximately $190 million, primarily due to temporary inventory increases. For example, olefins raw material inventories increased due to many feed slate changes. Polyethylene inventories increased in preparation for second quarter maintenance, and propylene glycol inventories increased due to warm weather, and a resulting slower aircraft deicer season. At the close of the first quarter, asset-backed receivables facility was utilized at $275 million, and that's really the same level as at the beginning of the quarter. Details of these items are of course, available in our earnings release.

Now I would like to shift the discussion to some of the specific business items that we have recently concluded. First was the resolution of the disputes among LCR, its owners and their affiliates, in an agreement to jointly pursue the sale of LCR. This led to Lyondell receiving a net cash payment of $74 million during the first quarter. Second item relates to our contracts and joint ventures with Bayer. And during early April through our arbitration process, we resolved a number of disputes in this relationship. When we entered into these complex transactions, the parties realized that their interpretations of the contracts could differ over time. In anticipation of this, the parties developed a third party arbitration procedure during the original negotiations. Through the use of this procedure, the arbitrators interpreted several disputes in our favor, leading to an award of approximately $121 million, plus interest of approximately $23 million, and that's through June 30th of 2005. Final steps of the process are being addressed at this time.

And the final item that was recently resolved was a routine tax audit for a period dating back to the mid 90's. This resulted in the receipt of $18 million in cash early in the second quarter. And including the recognition of $6 million of interest income during the first quarter. While hurricane related insurance claims are proceeding, given the magnitude of the tasks facing the insurance companies, we do not anticipate that they will be resolved prior to the third quarter of 2006. But assuming successful resolution, the combined impact of all reimbursements could be as much as $80 million to Lyondell.

I also want to spend a few minutes discussing the possible LCR sale, and some of the items that you should consider when evaluating this impact. I want to emphasize that we're only at the beginning of this process. We are flexible regarding the structure of the sale, so many details can't be addressed at this time. However, I think I can help answer some questions. First, regarding the crude supply and product off take, you should assume that LCR would be sold based on crude supply and product off takes at market prices. Second, when calculating the value to Lyondell of any sale of LCR, you should first consider LCR's debt. At this time, LCR had a $443 million bank loan, and there are also loans to LCR from the owners. Lyondell's loan to LCR, including deferred interest, equals $279 million. And these loans will be re paid from the sale proceeds. The cash proceeds in excess of loans will be a financial gain for book and tax purposes. Of course, details could vary, depending on the final structure of the sale.

As a last point, Lyondell intends to use our share of the proceeds to continue to reduce debt. This transaction will greatly accelerate our efforts to improve our financial flexibility and the balance sheet. As you know, our target has been to reduce our debt by at least $3 billion. We base this target solely on debt reduction achieved through operating cash flow, and not through the sale of assets. Therefore, I would suggest that you consider any LCR sale proceeds to be over and above this target. I hope this clarifies some of the financial considerations surrounding the potential sale of LCR. And I will turn the call over to Dan for further comments on this, and other topics.

Thank you, Kevin. I would like to start today with some brief words about the Rhode Island lead paint trial. Then I will discuss Refining and MTBE briefly. Regarding the Rhode Island lead paint trial, there have been many media and public reports that I believe incorrectly characterize the facts of this case. I would like to take this opportunity to try to clear up a few points. First, I believe the number of residences requiring abatement assistance has been greatly exaggerated in the media, and by the plaintiff's bar. In fact, the Rhode Island Department of Health lists fewer than 200 residences that are known problems. The number that plaintiffs have been using is equivalent to every home in the state built before 1979. Yet a federal study concludes the risk is generally isolated to a small percentage of pre-1960 homes that have not been properly maintained. There is obviously a vast range between those numbers.

Second, I believe the cost of abatement has also been exaggerated. Across the country, jurisdictions have generally adopted a lead-safe standard. The plaintiffs have introduced a new criterion of lead-free. Yet under the existing lead-safe standard, tremendous progress has been made toward the goal of eliminating childhood risks, including in Rhode Island. Even the state's witnesses called the state's continuing reduction in blood lead levels a public health success story. So how much does it cost? Well, the HUD study indicates that intact lead paint is generally considered safe, and that some -- that same study suggests that the incremental cost of achieving that standard is a small fraction of the number the plaintiffs have been throwing around. So you can see there is much yet to be resolved in this matter, and we believe the rushed judgment made by the market has been very premature.

The bottom line is, the legal process is far from over. The judge has ruled that no damages will be awarded, either compensatory or punitive. No additional lawsuits of this nature have been filed against Millennium Holding LLC since the announcement of the verdict. Abatement expenses have not yet, and may never be incurred. And those costs, if any, are likely to be spread over many years, and a wide pool of parties. If necessary, Millennium Holdings LLC will aggressively pursue its rights against any third parties whom it believes have a responsibility in this case. Millennium Holdings LLC will appeal this case at the earliest opportunity, and it also has insurance and a legal right to indemnification. Millennium Holdings, I will you assure you, Millennium Holdings LLC will continue to defend this, and any other cases.

Now let's shift our focus to Refining and MTBE. I think we can all agree that U.S. gasoline supply is tight, prices are high, and removing MTBE from the U.S. gasoline pool is contributing to that stress. As we mentioned, we have responded to the U.S. refiner's decisions, by shifting most of our sales to the export market. A transition essentially completed during March. While this is not optimal for us, or for the U.S. consumer, we have been able to realize typical seasonal margins on these sales. In fact, the raw material margin in Europe has increased from approximately $0.12 per gallon in mid-February, to more than $0.50 per gallon last week. Overall, this situation appears to be playing out much as we thought it might. But the key question, obviously, is will the U.S. market reopen to MTBE as the summer progresses, and the situation continues to get worse. Unfortunately, we don't know. And although logic would suggest that it certainly should, the inertia may be simply too great to overcome.

Your next question is probably whether we will switch production to iso-octene. While we will be in a position to make this switch later this year, the final decision would be one of comparative economics. Both products provide desirable fuel properties, and should be in strong demand. Hence, our production decision will be based on achieving the best profits for our investors.

Now let's shift to a discussion of the potential LCR sale. Kevin provided you with the framework for modeling and analyzing the economics of any sale of LCR. And I would like to go over the strategic rationale now. The refinery has been a great investment for us. Operationally, it has really come into its own, and has run very well over the past several years. This has coincided with the strength in refined products market, particularly for heavy crude oil processors. Both of these trends leverage LCR's strengths. So in my mind, this is exactly the time to sell the business, and maximize the benefit of years of efforts. We also believe that the value of LCR is not fully appreciated by the chemical investment community, and that the current arrangement doesn't unlock its full value. For example, crude supply contract has been below the market for the past 18 to 24 months. Throughout 2005 and the first quarter of 2006, [inaudible], a refinery consultant, has estimated an industry Gulf Coast coking margin at a level that, if applied to LCR's 268,000 barrels per day crude processing capacity, translates to EBITDA in the range of 1 billion to 1.25 billion each year.

Additionally, a refiner with multiple plants could realize many synergies that would not be available to LCR. So the value to another party is likely higher than what it is in our portfolio, and as reflected in our results. I have to believe this potential has not been reflected in your daily investment decisions and valuations. In summary, we think it is the right time to sell, and we think the value is very significant. If we accomplish this at the right price, it will accelerate achievement of the financial flexibility that we have sought. But I should also remind you, that if we can't realize the right price, we are quite comfortable owning the asset, and we do not feel compelled to sell. It is early in this process. Our options are wide open. And we remain committed to maximizing value for all of our investors. With that, now let me turn the call over to you for questions.

[OPERATOR INSTRUCTIONS] Steven Schuman, Prudential.

I have so many questions, I am not sure to where to start here. Could you comment on turnarounds for the year going forward? I think Bayport has got one.

Steven, as I said, we're just completing turnarounds this month in Europe, the POTBA plants and BDO plants. And then later in the year, we have one other P O turnaround. We don't have any Ethylene turnarounds this year, and we don't have any major Refining units in turnaround this year. Although of course, as you understand a refinery, you always have some catalyst changes and things as you go through the year.

[inaudible] preparing for the second quarter olefin outage, was that for the Bayport plant? Your building inventory in -- ?

No, no. We built some polyethylene inventory in the first quarter, because we have a couple different lines down during the second quarter. So maintenance on those lines. So nothing major.

Okay. Also on LCR, did you guys have an FCC outage recently, and was that a minor incident?

No, Reuters just had an FCC outage report.

Okay. So, no problems so far this quarter?

No.

Great. And then of course, you opened yourself up to this question, but you mentioned that the value of the crude supply agreement has been positive for the last 18 to 20 months by billing to billing a quarter. What was it -- or excuse me, negative. How positive was it for the few years before that?

If you go back to 1993 when this thing started, it was designed to really be middle of the market.

Exactly.

Remember '93 was when we were coming off the first implementation of the Clean Air Act and refining margins were what we thought was high at the time. They were probably about a third of the current level. And the result of the way the contract was constructed, to give stability, it actually worked in the favor of LCR for most of the first 11 or 12 years. We haven't summed up what it was over that whole period of time. But over the last 3 years, with the increased tightness of refining supply, you've seen the margins grow well beyond where the margins were provided for in this contract. Remember, this contract is basically a fixed margin with escalator kind of contract.

Exactly.

So what we're trying to do is give you some flavor for just how much more profitable this thing would be, recognizing current market prices. And that's why we used the consultant information.

Of course, lost profit to you, is gain of profit to [Petavasa] in Venezuela? How do they feel about that?

Well, you certainly should ask them that. But they've been campaigning for 13 years to eliminate the contract.

Great. Thank you.

Mike Judd, Greenwich Consultants.

Again, getting back to the LCR sale, during the last downturn in the petrochemical industry, that business provided a lot of cash flow, which helped you support your dividend. And I am just curious, as you think about at some point obviously, the industry will turn down. What do you think about losing those that wonderfully stable cash flow?

Well, I think you make an excellent point, Mike. But also remember in that last downturn, we were sitting here with north of $7 billion in debt, and therefore the need for that stable cash flow was especially more pronounced. As we reduced the debt, indeed getting the value that we think we ought to get from this, reducing the debt that much more, I think the change in the interest charges were much -- will be much more profound than where the earnings level was, or would be, for this refinery at that point in time. So I think the capital structure considerations overwhelmed the point that you're making. Although it is a valid point, that the duty of that contract over time has been stable earnings, and as long as those were stable at or above market, that was great. If they're stable below market, it's not as much fun.

Do you think that you might have to potentially review your dividend policy, or anything like that?

I think we'll be reviewing our dividend policy as soon as we get our investment grade rating back, but not in the direction you're thinking.

Thank you.

Frank Mitsch, BB&T Capital Markets.

Good afternoon, gentlemen, and nice quarter.

Thank you, Frank.

Dan, I also love the timing on the LCR, putting it up for bid here. But I have a question. I think Kevin made the comment that the -- that going forward the crude supply would be at market prices. Is there going to be any stipulation that the crude supply must be at a market price, and some percentage of that must be from Venezuela? Or the LCR refinery will be -- the new owners will be free to source from wherever they want?

The intent, Frank, is to offer an asset to the market and get maximum value for it, which we obviously achieve by doing it at total market conditions. That does not say that Venezuela would like to lose the ability to supply crude to it. So I think that dynamic is going to be important. But I would also tell you, this refinery runs beautifully on the Venezuelan crude. It is the best fit all the way around. So if there is an opportunity to get Venezuelan crude at market, I would think most buyers would be interested in that. But the conditions of sale are not being restricted in any abnormal way. So I think the way you should look at it is, the most likely outcome is Venezuelan crude supply to this, but at market terms that a buyer would find acceptable.

Okay. Great. And then you made the comment with respect to doing something when you become investment grade. Assuming that you sell this asset, and assuming that the commodity petrochemicals industry cooperates as we assume that it will, A, when may -- when may you become investment grade? I know it is tough for you to say, but if in fact you do, does share buyback enter into the equation?

Let me clarify. I may have left mystery in my answer to the previous call -- caller's question, that I thought he was inferring that we might reduce dividend. And what I was inferring was, as we get our financial flexibility back with much stronger cash flows, I think share buyback and dividend increases are both viable competition for use of some of the cash going forward. But I will let Kevin comment on what he thinks about investment grade rating.

And in the past, Frank, as you know, we've talked about the $3 billion target. And we think and from our discussions with the rating agencies, that that was a pretty good target and indication that that would be investment grade kind of numbers there. Of course, as you point out, there is a lot of different aspects of that that they consider. But anyway, that's where we got those numbers the first time. So obviously anything above that, or anything that accelerates that, puts us in that position. It is still timing. I think having achieved 2 billion now, and in the period of time that we've done this, we still see very strong cash flows going forward. That doesn't change anything about what we see as the timing of a sale here. Sale could just be on top of that. We're shooting for a short time for the sale to occur, probably mid-summer, which we think because of the level of interest there is here, that that is achievable. So I don't know how to answer your question. I think I have given you some direction of where I think we see things by year end, though.

All right. So the press release in the fourth quarter on the share buyback, terrific. Thank you.

Gregg Goodnight, UBS.

Couple questions. You mentioned a potential tax impact of the LCR sale. Could you give us some guidance in terms of what to think about percentage of gross that might be tax impacted?

Yes, I mean, Gregg, this is an asset that has been around a long time. Let's assume the tax basis is very little, or there's nothing there. You actually look in the book value of the thing, and it is negative. You can kind of see that we basically, what we said is it is fully taxable. That's the way you should look at it. Whatever you put in as a guesstimate on the purchase, or the sale price, less as we said, the debt, pretty much is all taxable to us.

Second question. In terms of accessibility of debt pay down, I know you guys have been careful with your current reduction -- debt reduction program not to incur prepayment penalties. And I got the impression you walked a bit of a tight rope on that. Do you see debt available and accessible, where you wouldn't have to pay down significant penalties, say, if you did execute this sale?

Yes, Greg, this is Doug. If you look at the debt that we have and the debt profile in the near term, we've got today, $430 million at Lyondell that we can call at any time, at a premium of 4.75%. We're within -- in '07, in May of '07, we have an $850 million maturity coming up. So right there, you're up about 1.3 billion. We also have a new call option opens up to us in '07 at Lyondell. So at the Lyondell side, you have a fair amount of debt within easy reach and access, and that's all the high yield debt under that indenture. Then if you look forward, we're reaching a point where you can start to think in '07 about the Equistar situation, and we have a call option opens up there relatively soon.

[inaudible] Millennium, as well.

Yes, and we have then the Millennium '08 there. So we think we've got -- it is working out pretty well, it's working out the way people designed it years ago. And we have very inexpensive and efficient access to a large amount of debt.

Okay. Great. Last question, if I could. Other options for the cash. Recently, in some of the journals, there has been implications that you guys have been sniffing around some potential investment opportunities in the Mid East and the like. Could you comment on other strategies or uses for cash?

I think you should presume that we continue doing what we've always done, and that's remain very active looking at opportunities. And we always test what we think the profitability of those opportunities is, compared to what we do with cash right now. And that's a pretty tough comparison, because we have guaranteed return from paying down debt. We also open up future value by getting the debt paid down to where we have more financial flexibility. But that doesn't mean that we don't look at opportunities, and we won't continue to look at opportunities. It just means that we probably have a tougher screen to go through than maybe some competitors might.

Nothing is compelling in the near term that is currently out there?

If it been, it would have been announced.

Okay.

[Inaudible]

Thanks, gentlemen. .

Operator?

Kevin McCarthy, Banc of America Securities.

On the subject of LCR, is it fair to say that the crude supply agreement restrained your profitability by at least $400 million over the trailing 12 months?

I mean our EBITDA has been running, when you take out turnarounds and hurricanes and things, and last year and the prior year averaged about $600 million. So, and then you saw what the new [Stansell] data suggests as a Gulf Coast Coking refinery of 1 billion and 1 billion 2.

4 to 600.

So that kind of, I think, describes a range for you.

Okay. Great. And you mentioned that you swapped some liquid feeds for some alternative liquid feeds, which helped to boost margins in your Ethylene and Derivatives. Can you talk a little bit about what you did there, and how sustainable that transaction or opportunity might be for you here in the second quarter?

I will let Morris talk about it in a minute. But overall, I would like to, if I can, correct a view here that people tend to think about Ethylene plants as either cracking ethane or Naphtha. Indeed, what happens when you have a liquid cracker such as ours, we can crack a range of materials, all the way down through gas oils. But just stay in the natural gasoline condensate range. You're talking about not a few feed stocks, but literally dozens and dozens of feed stocks from all over the world. They don't all march in unison on pricing.

So it is very important if you're active out there, to actively grab the cheapest ones on any 1 day, get them into your system, and if they're still the cheapest, crack them. If they're not, then you resell some of them. So when you get in a zone of volatility like we've been in, some of the traditional Naphthas or condensates have risen much closer to WTI kind of pricing. But many of the other liquids have not. So our job is to find the ones that haven't moved up, and plug those in. And I think what Doug was talking about in the notes was, we've been successful at doing that even though Naphtha blew past ethane. So you would choose to crack ethane versus Naphtha. Many of the liquids we were using were still as cheap as ethane or in some cases, cheaper.

Right. And the ones that weren't, we actually sold. And we moved our system heavily towards lighter feed stocks, so today we're probably approaching 60% NGL's systemwide. I would point out that ethane prices have increased, as Doug said, by something like $0.18 a gallon since mid-February. So those costs are going up as well. And at the same time, co-product prices, led largely by gasoline components, are increasing. So the system does tend to rebalance, and as Dan said, we watch it on a daily basis. And we're pretty comfortable that we're optimizing our system just that way.

Great. And then finally, on PO and PG. I thought results were quite good, given the relatively soft demand from deicing that you alluded to. Can you talk a little bit about where you see industrywide operating rates in that chain, and what your outlook is for the coming quarters?

Yes, I think the industry is probably in the low to mid 90's, which is a pretty good operating rate for that business. I would note that the industry has absorbed a significant new piece of capacity in the Shell plant in China during the first quarter, without much perturbation, and we don't believe there is any significant capacity coming on for a couple of years. So the outlook we think, for the PO business, is pretty solid.

Okay. Thank you, guys.

Don Carson, Merrill Lynch.

Dan, just want to follow-up on the MTBE, and what you're doing going forward. So presumably Europe continues as is, which is what, about 40% of your capacity. For the U.S. business, what -- is that all going to be shifted to alternative gasoline blending stocks, or are you going to -- do you see any opportunities for export going forward? And -- .

I think, Don, let me correct. First of all, what I said was, that we have pretty well shifted our U.S. production to exports over the course of March. What you have here is the oil industry, the Refining industry, has essentially switched and frankly, closed off the avenues to ship and use MTBE in U.S. gasoline, even though many consumers would still love to be seeing it in their gasoline and using it. Because it is a cheaper, more efficient fuel than what they're getting. Because the avenues have been largely closed off, we were making the transition and we sold very little of our MTBE domestically in March. Most of it frankly, by end of the month, was moving to export, and continues that way. And then what I said was, the European market has picked up. So I think you can infer from that what's going on is what we said we thought would go on, that if we adopt this rather asinine U.S. energy policy, then what we're doing is forcing the export of MTBE and we're having to import, if you will, gasoline components from western Europe, every where else in the world. And you're having a rebalancing of the fuel markets then around the world.

So there is a lot of transportation taking place in that rebalancing, but what we've seen happen is the MTBE margins have moved up with gasoline, but not as robustly as they have historically. But seasonally, they are moving up from the $0.12 raw material profit to about $0.50 in Europe, which matches what was going on. And we think that trend will likely continue, and we continue to fight to try to open, reopen, keep open the lanes, if you will, to move this into the fuel market. And I don't think the game is over, but I am also not optimistic that we're going to suddenly win. It just seems to me it is so stupid to be denying this fuel to this market at this time and forcing it somewhere else, paying extra to get it back from another part of the world, just doesn't make sense, when the consumer is seeing, in California $4 a gallon, and every where else $3 a gallon. And we haven't even really started the gasoline season yet.

What would your net back be in exports, if you have, say, representative margins of $0.50?

That probably cost us, we're guessing about $0.15 a gallon, between tariffs and transportation to get it to the right markets at this point in time. And that's a dynamic number, as well, because it depends on which market you're going into, et cetera. So this is a difficult place to call. I empathize with those of you trying model. Because we don't model it very well, either. And I think it is going to continue to be a dynamic situation going through the season. And again, remind you that as it plays out, we'll make our decisions accordingly, because we'll be able to switch the U.S. capacity, the largest part of it, by later in the year, the iso-octene, if that made sense. Right now, that fuel actually looks good.

There was a point instantaneously over the past week, where it was break even or slightly better than MTBE. I haven't looked at it today, so I don't know where it is today. But we're in that zone that this rising tide raises all gasoline components that have octane capability. So DIB is very highly priced, and because MTBE is trailing its actual blending value, it was overcoming if you will, the penalty, volume penalty, from the methanol. So I don't know where we'll be by later in the year. But we'll obviously continue to watch it. We'll continue to fight for all the avenues to make the most money that we can day by day.

And a follow-up on Equistar. What trends are you seeing in April, in terms of pick-up in shipments to domestic customers? Are you seeing any evidence of this long awaited restocking by converters?

We are seeing a significant pick up in demand in April, and not just domestically, but in terms of export markets, as well.

Can you quantify that? I mean, it looks like you were flat year-over-year. In Q1, in terms of shipments, what would you expect Q2 to look like year-over-year?

We don't ordinarily make projections. I don't think this is a good time to start. We think the trends are very solid. We would expect them to go up. I would also say, you were implying this was going to inventory. We still don't see much sign of that. I keep hearing about this, reading about people being fearful of hurricanes and therefore, they are going to stock up. I would say that what we've seen so far in the market doesn't indicate that we're really seeing any inventory build. That would be something we'll watch, as well.

Okay. Thank you.

Jeff Cianci, UBS.

Couple quick ones, guys. The first on just TiO2, just to follow-up. The decline, is that because basically, DuPont is back in the market, albeit with much pricing than the industry?

First quarter decline versus fourth quarter?

Yes.

I think that's just a seasonal move. Now fourth quarter of course, was very strong because of DuPont. And towards the end of the quarter, you started to see more activity from DuPont towards the end of the first quarter.

Does that mean second could be lower volume versus first?

I wouldn't go there, I don't think at this point in time. I mean I think one of the differences when you think about first and second, you point out that DuPont being back, but you also typically in the industry, see a stronger second quarter than a first quarter. So you have got 2 offsetting dynamics taking place, and we'll just see how the quarter works out.

My other one was on polyethylene. It appears that the strength may be -- could it be the strength shifting to the polymer of Ethylene, in terms of tightness in the market? You're only down $0.04 a pound in price. So you almost maintain the margin in the midst of a customer inventory liquidation. And as you look out for the next year, could this be the rate limiting step, so to speak? The tightest product in the chain?

Jeff, this is Doug. I think let me first comment on that comment on the price changes, the average prices in the fourth versus first that we commented on with Ethylene moving 9 and polymers 4. I think that is really more a function of just the dynamics of the way polyethylene moved up in the fourth, and then moved down in the first, and just the timing across the quarter. So I wouldn't make too much into that. And that's the timing in the quarter. Let me turn on over to Morris and Dan to talk a little bit about polymers versus Ethylene.

Polymers certainly looked very strong. I think that if you look at the total Ethylene derivative picture, you probably going to say polymers looked to be recovering sooner and faster than, say, the other products in that chain. PVC, for example, and so on. If that's the point of your question.

But I would tell you that I don't think you're going to be ever rate limited by the polymer capacity. Because polymer capacity tends to outstrip Ethylene capacity, because people have so many flexibility capabilities.

Is that true near term, Dan? Operating -- ?

I think if you look for -- it would be hard get to 100% polyethylene operating rates without being at 100% of Ethylene rates. I think this is more install capacity of polyethylene.

You have to think of it ultimately the Derivatives will have to buy Ethylene away from each other. And so you will see things bid up if you start to get tight.

I think the other important factor here is in world commerce. It is a derivative [inaudible] . It is not the Ethylene that gets shipped around the world. It is important how the polyethylene is moving, both domestically and internationally, to help determine just where the strength in the Ethylene market is.

Okay. Thanks, guys.

Christopher Miller, JPMorgan.

Just a couple quick follow-up questions. When you talk about your debt reduction target, and that LCR is above and beyond that, when you think about Equistar in particular, you really have above market coupons there. I know the debt -- some of it starts to become accessible in '07. How do you think about that? Why wouldn't you consider just a comprehensive refinance there? Or are you?

Well, we'll look at comprehensive debt repayment first, and certainly the Equistar debt, we described over long years, that the way we envision the debt repayment was, priority on the parent company debt repayment, because that helps get the ratings quicker. But we also expected that the biggest piece of the cash flow to support debt reduction would be coming operationally from the Ethylene cycle. And that certainly, as long as that Ethylene cycle played out, we would want to come back and reduce Equistar debt as well. I don't think anything has changed in that. The priority has been on getting the parent company, but I think we expect that we'll be reducing Equistar as well.

You should assume that we're looking at all the options available to us, and what optimizes the use of the proceeds in the capital structure to move where we want to go. So we're thinking about all of those kind of things. But it is premature to really say anything about what we would or wouldn't do at this point.

Okay. And also just going back to TiO2. I was a little unclear in terms of pricing over the summer, kind of where are you in terms of price increases right now? And what do you expect to happen in that industry over the next quarter or 2?

Well what I said, Chris, is looking at the first quarter versus the fourth, prices moved up. There is a price increase that we've announced, which would go in in April. We'll see how the market works out. There is a lot of dynamics there. You're in a stronger season -- seasonally typically, but you also have more capacity in the market now than you had for the last 6 months. So it is just one of those things. We'll see how the market works out, and like any other business, we will work our way through that.

Okay. Thanks so much. I appreciate it.

Nancy Traub, Credit Suisse.

Kevin, I wondered if you could give us your cash interest numbers for Lyondell, Equistar and I guess, Millennium, too?

Cash interest for the quarter?

Yes.

Gees, Nancy, no one has asked me that for awhile.

You got us on that one.

I tell you what, I apologize. I do have that in my office. I can't give it to you right away. But I don't have it sitting here with me.

It's a dynamic number, Nancy.

How about the impact of the turnaround at LCR? For the second quarter?

The second quarter, well, as I said -- .

Excuse me.

Well as I said, we have a couple units going through some catalyst changes, which is normal in a refinery. It will be an impact of about $30 million over the quarter, is what we estimate right now.

30 million for LCR?

Yes, at the LCR level.

Okay. And the PO?

Po, there's -- well we're going to finish up the turnaround, the PO plant and the BDO plant in Europe in the second quarter. We think really we're going to manage through that with inventories and planning and timing. So I don't expect very much impact from that, probably less than 10 type of thing.

Of course, it was also in the first quarter, too. First to second, probably not much.

Okay. Now, you did mention how polyethylene has picked up a lot. I wondered if -- how if there has been more exporting?

Yes, Nancy, our export volumes are up and our domestic volumes are up.

And what about the delta in the pricing, domestic versus export?

Well, the delta in the pricing, you know, the Asian prices actually have gone ahead of -- or have come pretty close to going ahead of U.S. pricing, so the arbitrage is closed, if that's where you're going.

Very good.

Nancy, back to the interest thing. Some folks have helped me out here a bit. My memory is getting weak in age. In Equistar in the second quarter, we look at about 37 million of interest, cash interest payments. Millennium, about 35. And a total of about 185, so the balance would be at Lyondell.

Okay.

That's the way the cash payments will break out in the second quarter.

And how did that compare to the first?

First quarter, well the first quarter is weighed a little differently. Total is about 105 cash. Equistar has more burden in the first. That's 73. And Millennium has very little in the first. It was about 4.

Okay. Great. All right. And Ethylene margins, how would you characterize them now, versus the average in the of the first quarter?

Current Ethylene margin versus first quarter?

Yes.

Well, --

I think you're down now, you're kind of at the point now, where we tend to think the market has turned. As we said, we expect prices increases. Just a week ago, or 3 days ago we had $75 crude. So you're at that point where it looks like everything is making its shift. But clearly you eroded as you went through the first, and then we think you will start moving pricing the other way in the second.

If you look at what we think was going on in the market, as long as that arbitrage was there, customers really had a belief that prices would come down. So they bought as little as they could, which of course helps push pricing down. I think as the volumes continue to pick up, we think that's about over. Which would probably indicate that it would be plausible to expect to see April as kind of inflection point, and things getting better from April. But it is still early in the quarter. So who knows where it really goes at this point in time.

Are you worried about $70 crude doing anything to the economy?

Sure. I think we always worry about demand destruction. We worry, more than that, just simply about shocks to the system. I go back and I've read all the studies, and I am sure you have, that take us back and that crude would have to be $100 a barrel or more to be anywhere near the impact it was during the crises before in '79, and back in '73. But that's not very comforting, because we know what those crises actually did to the economy. So when you get pricing up at these high levels, and it doesn't seem to make sense overall, you worry just how long it can go on without having an impact. We just haven't seen them so far.

Nancy, if you think back a few years, I think we were up at your conference, and we were worried then about the move to 35. And what we've learned over time, is it clearly is operating rates and the balances, and the businesses have passed through the higher costs and the products deliver the value in the end use. So we wouldn't have thought you'd say, well, this is where you are at $70, or at $60, or $50 even along the way.

And importantly, the global economy, Nancy, as you know, is growing. I mean, China came in at 10% in the first quarter. The Japanese economy is growing. We're seeing strength in Europe. And of course, it is domestically here, we still seem to be doing pretty well.

Like Dan did mention, maybe this is holding back the build -- inventory build? Making it be true demand?

Yes, yes. I think so.

Thanks.

Jeffrey Zekauskas, JPMorgan.

A few questions. Would you sell LCR dilutively? And if you did have to pay taxes, what would sort of be the range of the rate?

I think Kevin covered that before. I don't think paying taxes is optional. We'll pay what we have to pay, and I think what he was indicating, you ought to think of it as fully taxable at statutory rates.

So is that 40%?

No, about 35% federal.

Right. And then state, or no?

Well, in the State of Texas we don't have income tax. We have franchise tax.

Okay.

Believe me, you don't want to try to calculate it. There is some tax impact in the State of Texas.

You could probably at a percent or 2.

A percent or 2. And would you sell it dilutively?

I don't know what you mean by dilutively.

That is that your earnings per share would go down?

Well, if you know what my earnings per share are in future years, and can guarantee them for me, I can answer that question.

I mean relative to maintaining your ownership in LCR?

Even there, it is a little difficult to calculate, because you have got to make calls on where the at-market crude is. If we kept going with our 230 under the fixed margin, then the other 40 or so under the at-market. Then you also have to figure out how much CapEx you're going to have to spend to continue to meet environmental regulations, et cetera. And I would argue that the Congress is probably going to become even more testy about regulations, as these high prices continue. And then beyond that, you've also got to look at just how well you operate throughout the period of time. So it is not as straight forward as you think. But net/net, we think this thing should bring a price where the dilution is not really there.

I think that's the point, Jeff. I think what Dan said in his remarks about it strategically, is that we're -- we think it is a time where you can monetize the maximum value of something like that. I.e. kind of expectations of earnings we think we're going to get from it, versus what the sale price is. We also said that we reserve the right, if we don't like the numbers, we're not going to do that. So I think we're obviously conscious of that whole thing and will take into consideration. If it works, great. If it doesn't, well, then, we're going to continue to run, and be in the Refining business.

We know what your question really was, and we think that we'll be able to achieve a number that we would be happy with, and you would be happy with. But we have got to go through the sale process, and see what the market develops.

Second question, did you say that your average polyethylene prices were down $0.04 for the quarter on a sequential basis?

What I said was the fourth quarter average, versus the first quarter average, was a $0.04 difference. Don't take that as a eke in the forest to low in the first. It is just the average for the quarter.

Average to average.

Okay. I guess that's because things ran up very sharply in the fourth quarter because -- haven't polyethylene prices been going down $0.04 a month?

That's exactly what it is, Jeff. It is the average of the course over the 2, and they were going up in the fourth, and they came down from that over the course of the first. People -- and that's exactly why we try to express it that way. Look at the economic value, it changes really $0.04 quarter to quarter. Not in a -- .

We had extraordinary circumstances occurred -- that caused the prices to spike up very high. And then you have extraordinary repositioning as you close the arbitrage with Asia. And looks like we're through most of that at this point in time, and we're going to see the world kind of move up in sync.

To to go back to the lead pigment issue, would you be surprised if other states filed suit against you this year?

I don't think it is very healthy for me to speculate what people might or might not do, especially when you're dealing with plaintiffs bar provocation out there. I think it is important to note that since this decision was announced February 22nd, there has not been any other action. So one would think if there was going to be a ground swell, you would have seen some of it. Now that is no guarantee that you won't see something in the future. But again, you come back to the circumstances, this is sort of an odd circumstance.

I mean, this whole issue has been out there for many years. The industry has never lost a case. This one is not lost yet, at this point in time. This is a nuisance claim, and in a state where the nuisance claims are brought differently, as I understand it, from most other states. Which would also argue that you're not likely to see it replicated across the board in other places. But like many things, time will tell.

I guess sort of a last question, in trying to conceptualize EBITDA and EC&D for the second quarter, obviously, raw materials have gone up and prices have moved down. In a way, it almost seems like a copy of last year. And like last year, there was an acceleration of demand as we got toward the end of the second quarter, and prices firmed. So in very rough terms, do you expect the second quarter to look a lot like the second quarter of last year?

I think the difference is, Jeff, if you look at what happened, we closed out '04 and moved into '05 with everybody thinking that we were in very, very short supply, and there was not enough to go around. Somewhere kind of midway through the first quarter, we figured out that there had been significant inventory builds here, every where else in the world. And by the time we got to the end of the first quarter, we were in head long deinventorying. Which basically took, as I remember, most of the second quarter to achieve, so by the time we got to the end of the second quarter, we had reached what I would call the inflection point. And we're moving up at the start of the third quarter, and then it exacerbated late in the quarter by the hurricanes.

This year, I think what we have is playing out from the hurricanes with extreme shortages domestically, but not necessarily other places in the world to open up that arbitrage. Then we had prices declining in the first quarter. And most importantly, customers around the world believing that prices were declining. Therefore holding off the building of any inventories, despite the fact that volumes were actually good and continuing to grow. So as we enter the second quarter, we still have that price decline, and we were saying that as we got into April, that April certainly is weaker than the first quarter average.

Sure.

But I think we are at the point now, where we think it is much more likely that you see the prices turn, and not at the end of the quarter, but soon. So if we reach that inflection point, then what I would be saying is the inflection point is now the end of the second quarter, which would bode, I think much better for the balance of the year. Is there a up and down trend like last year? Yes. But I think the dynamics are different. The cause and effect will be different, and I think it will play out differently. And we still are very optimistic on the results for the year from that whole segment.

So I think Formosa is back online, and [Enios] is back online.

Yes, the 2 big plants are both back up.

And have been for quite a while now.

You know, Jeff, we try to look at that broader picture. And for multiple years now, it has been looking at Ethylene operating rates kind of in the mid 90's. And in the volatile world we're in right now in energy et cetera, it is going to go up and down by quarter. But so far it's played out as we think, with rates in the mid 90's. Results seem to be able to hold up pretty good, as we thought they would, and I think this quarter showed that and the last year showed that. But we are going to see the volatility, and all we can do is respond and keep our operations and actions flexible to that.

Okay. Thank you very much.

Chris Willis, Impala Asset Management. Chris has just dropped. P.J. Juvekar, Citigroup.

Question on [PO2], seems to me that business has turned the corner in the last few quarters. All of that inventory destocking is behind you. So this $45 million of EBITDA, is this more sustainable rate going forward ?

I wish I knew the answer to that question, P.J. I would agree with you, I think that our situation is much behind us. We took the painful steps last year to get the inventories under tight control. We intend to keep them under tight control. But the market is still better balanced than it has been in recent years, but remind you it is still -- it's probably 90ish percent operation. So it is not like it is super, super tight. And clearly, the return of DuPont to the market has blunted the need for prices to really move up in order to meet demand. So I think as we move through subsequent quarters, we expect very good performance. There is still more things we can do operationally, although I think we're doing very well getting the reliability out of our plants now. And I think we'll be able to sustain these kinds of numbers going forward. But it is still could get bette.

Could get better. I am not trying to pin you down on the EBITDA number, but it could get better from these levels?

Yes.

TDI, you know, Dow Chemical, their called before you were saying also TDI is improving. You saw that. Can you just comment on what's going on there with the restructuring that you've done and -- ?

[inaudible] Dow's call, so we don't know exactly what they were saying.

There is no question there has been improvement in the TDI business, and we're pleased to see that. We did what we had to do in our portfolio, and we're watching it very carefully from here.

There is still a lot of room for improvement in that market, though.

What could be the incremental EBITDA?

Unfortunately for us, I think it is less loss, because the steps we took were to eliminate loss.

I think you also have to recognize that, given the step we've taken, we're relatively small in TDI now.

[inaudible]

So the impact on us is not going to be dramatic.

Okay. Thank you.

I was just speaking to the year-over-year comps will be more dramatic because of that large loss that we eliminated.

John Perry, John S. Harold Incorporated.

I know it's -- the conference is running late. But I did want to ask the question, as you talk about substituting iso-octane for MTBE.

Iso-octene.

Yes, excuse me, bad pronunciation. Where does the possibility of ETBE stand, given that you're a manufacturer of it, is that a dead issue?

No. Absolutely not. It is a very strong product for us. We have 2 facilities in western Europe that manufacture the methanol based or the ethanol based. And 1 of those will be running at about half the ETBE rates over the course of this year. That's the one in the south of France. That market continues to develop rapidly in western Europe. We intend to continue to grow with it. And it is not inconceivable that over some period of time, we could be basically all ETBE in that market. Now, would if the United States was smart enough to do the same thing? If I get on my soap box again, if there is a better blending component than MTBE, it is ETBE. And if you insist on putting ethanol in the gasoline, despite whether it makes sense economically, at least put it in as ETBE, where you get the air benefits and the blending benefits in a much, much stronger way than you do any other way. And I think -- .

What is the octane value of ETBE? I know MTBE is 105.

Actually, when MTBE is about 109, ETBE is actually a few points higher. It is also it's vapor pressure [inaudible] 2 versus about 6. So the point I want to make is, we're now exporting high octane, low vapor pressure gasoline from the U.S. while the U.S. is short.

So ground water contamination would not be an issue, just make the fish drunk?

I guess, as we look at ETBE and I think we think the way Europe is looking at it, it is a very good blending agent. If it were used here, you would keep those pounds and molecules here. And the difference between an ETBE and an ethanol, is hundreds of thousands of barrels a day of gasoline equivalent.

Tell me about it.

[inaudible] We'll have to see how it works. Ether is all smell.

Right. Thank you. I know you're a big -- a pretty good factor in the world on this, and I wanted to see where it stood.

Chris Willis, Impala Asset Management.

Great. Thanks. Just had a quick question regarding styrenics. Is there any hope, or is that going to be a hobby for the foreseeable future?

Can we stop beating our wives, is that what you're asking.

Just wondering if there is any hope of the styrene supply/demand balance getting better? Seems like it is going it be a wash in capacity.

I think the real answer is, there is still too much capacity in the market. There is new capacity coming on. It looks like a tough road to move margins up significantly, in that business. You have the Benzene continues to be driven by crude oil pricing, and so styrene is doing well to stay ahead of the Benzene. And with the pricing, then of styrene moving up, it seems to be very susceptible to switch off's, so that there is actually some demand destruction as the price moves up on it. Which makes it even tougher to get to the margins up. We're not extremely hopeful of getting big moves up in that in the near term. We would love it see it obviously, from the volumes we produce. And I refuse to call it a hobby. But it is a co-product, and it looks like one that's going to be tough to get the margins to grow rapidly over the coming months.

Thanks. And then one quickly on the iso-octene and MTBE, once that plant is completed, you can switch back and forth with relative ease in a very short -- ?

No, not really. It involves really catalyst change, so it is not something you should look at that we would campaign back and forth. We would make a more fundamental shift if we went to the DIB, the iso-octene, and not something that we would change to, and then a couple months later, change back. I don't think that's the way we would look at it. Although the physical plant is there, so if you guessed wrong, you could go out and 6 months later say, gee, we made a fundamental error, and you could switch back at that point in time. I wouldn't look at it as switching back and forth.

It won't be like olefin feed stock, Chris.

Okay. When do you think you will make the commitment to go one way or the other? I realize -- .

When it is economically important for us to do that. I'm not being cute. But this is a moving situation, and while instantaneously last week, we could have been as well off with DIB as we would have been with MTBE, what I think you're going to see happening is, as the gasoline crisis becomes more of a crisis, over the course of the driving season, it is likely that those prices are going to go all over the map, and it is not clear where they're going to end up. So as we get to the point that we're capable of making that switch, we're going to be evaluating not only what is happening instantaneously, but what the trends look like, and where we think the best profits lie. I think it is going to be a moving target. Good thing we don't have to make the call today.

Assuming the volatility is going to be with us for awhile, isn't it?

Yes. But we look at it [inaudible] stabilize again.

Chris, we look through it and say, on a global basis, they're both high octane, they're both good vapor pressure, both no sulfur, no aromatics. So with a good gasoline season, they both should do pretty well as you go forward.

But again, bear in mind that this is a shift, and it is a shift of not small proportions. You've had the oil companies, the refineries, the pipeline operators, the terminal owners try to totally shift away from MTBE. There is a shock to the system when you do that. There is a rebalancing. People like big oil are still producing MTBE, they're. I presume exporting it as well. If they're not using their own gasoline, they have got to be going somewhere with it. So that shift in the world trade patterns, as it occurs, you have go rebalance where the economics come out on it. And it is difficult for that happen smoothly over a period of a month of 2. So if you try to make long-term decisions while you're in the middle of that kind of shift going on, you may well make a mistake in what you're doing.

So we've seen MTBE rachet down from 300 and some odd thousand barrels a day, to 150 or so. If it rachets down further and then you shift patterns, I think the jury is out on where it is going to come out. We're going to watch it. We're going to continue to be active, and we'll put the volumes where they make the most money, and the right kind of product.

Good. Appreciate the detail. Thanks.

Steven Schuman, Prudential.

Was there any opportunity to do an alliance somewhat between -- on your styrenics business, similar to the de novo Innovene deal?

You mean would we like to get into downstream polystyrene?

No. On the styrene side itself. Just starting to take out some capacity. Being proactive in that with other players?

Well, in the past we've taken the approach with our styrene capacity, of sharing that with other people, where we have people have invested in our styrene capacity when we brought it on. So certainly those types of things are always an open door from our standpoint, that we'll look at consider. So we have done it in the past. We were some of the first people to do that.

We actually looked at time share equity deals, if you will. I think it worked for all parties. Again, we produce as a co-product, if you're going to talk about building an all purpose styrene unit, then we would be a good one to talk to about, would you rather take a time share.

It makes sense because ours is a co-product, and other people that are making it on purpose have options that they may not want to pursue continued production. So there are things that can happen in the industry, certainly going forward.

And then if I could follow-up, we're also seeing in addition to -- we were seeing imports of raw plastics coming into the U.S. We are now seeing a lot of imports of finished goods, whether it be toys, bags, whatever it may be. What are your customers saying about that, since they're also affected by that trend that's been happening this year, at least?

Well, as I said earlier, the import of plastic materials was driven by a price differential for a long -- a pretty substantial one, for awhile. But that has closed. And I think that the overall trend of importing toys and finished goods and so on, from other parts of the world, is not something that's going to go away or change.

Not something new.

Not something new, right.

I think the rate is up 20% this year in toys.

And those relative rates, I think you tend to measure them after the fact, and when you have the arbitrage, as we call it, open as much as 25, $0.30 a pound, there was a lot of impetus for that. So you started things moving that way. I think as that arbitrage has closed, that impetus has decreased, and you are going to see a rebalancing. These are going to be dynamic, they're going to go up and down over time. I think what we hear from customers, is same thing that we see, that it is going up and down, and they're living with it as best they can. There is a trend, and as a trend of 38 years or so I've spent in this business, that you're going to see continued flight, if you will, to low feed stock, low labor regimes of products that has largest component on it.

You're going to see continued strength and growth and more technically challenged products, or products that have less labor component, are -- can access feed stock at world market price, where there's not a relative advantage. And that's the way western Europe and North America have been proceeding over that 38 years, and I think you are going to see it continue. Then you get to the argument, are you going to be net export, or net import. Over time you would have to say there are enough of the commodity grades, that you would expect that you would be a net importer. But that doesn't mean you necessarily shut down the industry, because it's continuing to go grow.

It does mean that you probably don't continue to build grassroots capacity in these more developed markets. But you look to developing parts of the world to build more of the grassroots capacity. I think there is a lot of dynamic activity week to week, quarter to quarter. The trends are mega, many year trends that I think will continue, and they're a little easier to deal with if you think about in that light.

Edlain Rodriguez, Goldman Sachs.

This is a strategy question. If you put on your crystal ball let's say to 2009, what do you see the industry conditions looking like? And also with Lyondell's better balance sheet at that time, what could the portfolio look like?

Let's go back again, because -- and I am going to give you a longer answer than you want. If you go back 6, 7, 8 years, we have been consistent in what we thought was going on in the trends here. We thought that this build rate in the Middle East was largely to supply the growth rate in Asia. We thought the build rate would be slower than most other people were projecting. We thought it would occur. We thought the growth rates in Asia would continue to be sustained at higher rates than most people were projecting.

Thus far, I think we tend to be more right than most of the people who were projecting this. The result of that for us, we thought, was going to be a longer, stronger period for Ethylene and Ethylene Derivatives. And I think we're continuing to see that play out. So 2009 is a good point to choose, because I think that we think a good amount of this capacity 2009, 10, 11 will be up. We continue to think that with the continued growth rates in the Asian region, and it's not just China, but if you want to pick on 2 places, China and India continues to be very profound. And I think there is a very good chance that the supply/demand doesn't get nearly as sloppy as many people think it gets, which would mean the industry will be in a much stronger condition than many people think it will be.

Now, play that scenario out, we're in good shape. We have good cash flows. Our balance sheet is in great shape. But everybody else is in pretty good shape, too. And I would argue there is not a real reason for there to be a lot of change in the portfolio. If we're wrong, and suddenly this goes south, there is a big recession worldwide, the supply would still come on. But then you would have demand destruction for some period of time. And you could get a sloppier situation. That could cause a lot more restructuring in the industry quicker. In which case, we'll do what we've always done. We'll be fleet of foot, looking at the opportunities. And if there are opportunities that make sense for our stakeholders, then we would certainly look at those.

Long-term, we still have a desire to be a broader company. That means more product platforms, more geographically diverse, and frankly, a little more derivative capacity, because that helps you differentiate some of the upstream positions, and deal with changes in the market a little easier. But I think we have achieved the size and complexity that makes that not an imperative, but a nice to have, that has to be justified on a basis of adding value. I don't know if that helps you or not.

Definitely does. Thank you.

I am showing no further questions in queue.

Thank you, operator. And, thank you.

Appreciate everybody's attention today.

This does conclude today's conference. You may disconnect at this time. Thank you for your participation.