利安德巴塞爾 (LYB) 2006 Q4 法說會逐字稿

Hello, and welcome to the Lyondell Chemical fourth quarter and full year 2006 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, Maggie, and good morning, everyone and welcome to Lyondell's Fourth Quarter 2006 Earnings Call. I am joined today at our European headquarters in Rotterdam by Dan Smith, our President and Chief Executive Officer, Morris Gelb our Chief Operating Officer and Kevin DeNicola our Chief Financial Officer.

And the agenda for today's will be as follows. I will review the fourth quarter and full year performance, and Kevin will summarize financing activity and the inorganic strategic considerations, and then Dan will summarize 2006 and the outlook for 2007, and then we'll open the call up to your questions. Today our call is schedule 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 facts are forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially from those forward-looking statements.

For more detailed information about the factors that could cause our actual results to differ materially, please refer to our earnings release issued this morning, and please also refer to Lyondell's, EquiStar's and Millennium's annual reports on form 10-K for the year ended December 31, 2005. A quarterly report on form 10-Q for the quarter ended September 30, 2006, and annual reports on form 10-K for the year ended December 31, 2006, which will be filed with the SEC by March 1, 2007.

I would also like to point out a replay of today's call will be available from 1:30 p.m. Eastern Time today until 6 p.m. Eastern Time on February 2nd. The replay can be accessed by calling (866)465-1303 or (203)369-1420 and the access code at both numbers is 5549. 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.

Now let's proceed to a discussion of the earnings. During the fourth quarter of 2006 Lyondell had net income of $228 million or $0.87 per share on a fully diluted basis, and this compares with a net income of $57 million in the third quarter of 2006. Fourth quarter results included a net benefit consisting of a benefit from lower effective income tax rate, a net credit related to mutual insurance consortium and a charge related to debt repayment. While the third quarter charges related to the refinery acquisition, Lake Charles Ethylene Facility impairment, Insurance consortia and finance activity, and these benefit and is charges are quantified in our earnings release so in interest of time I won't explain them further.

Now, the fourth quarter earnings reflect strength in refining and a full quarter of 100% ownership which largely offset lower MTBE results and declines in the Ethylene and organic segment. On an annual basis results improved due to strength in refining. The Ethylene segments performance remained strong while the PO segment declined in 2006 after benefiting from an extremely strong 2005 MTBE market. Inorganic's results declined after benefiting during 2005 from a competitor's hurricane related down time.

Now, Lyondell's 2006 book tax rate is approximately 36%. This is 3% below our estimate made for the first nine months of 2006 due to an end of the year reduction in the Dutch tax rates and the impact of qualifying a portion of our U.S. income for the domestic manufacturing tax deduction. Cash taxes paid during 2006 were approximately $110 million less than the book taxes due to utilization of our net operating loss carry forward balances.

Looking forward we believe it is reasonable to estimate that both book and cash tax rates at 36% on a combined federal and state basis. Now let us turn our attention to our Ethylene, Co-products and derivative 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 Oxygenate and Vinyl Acetate Monomer or VAM.

Fourth quarter segment EBITDA was $313 million this compares to 372 million of EBITDA during the third quarter of 2006. EBITDA decreased at the industry moved through a period of declining prices which was initiated by raw material cost volatility that ultimately impacted customer buying patterns. So versus the third quarter Ethylene and Ethylene derivative sales volumes decreased by approximately 1% or 25 million pounds and sales of Ethylene declined by approximately 5% due to the slower PVC demand while Ethylene derivative sales volumes were typically maintained through export opportunities at prices that were competitive with the U.S. marketplace. Versus the third quarter Ethylene and Ethylene derivative product prices decreased.

Ethylene and polyethylene prices averaged $0.09 per pound less than the third quarter average prices while Ethylene glycol prices averaged approximately $0.01 less than the third quarter average price. On the cost side our average costs of Ethylene production metric also declined averaging approximately $0.04 per pound less than the third quarter. A significant raw material cost declines were partially offset by declines in co-product values.

For example, our average cost of liquid raw materials declined by approximately $9 per barrel while natural gas liquid based raw materials declined by $6 to $10 per barrel. However, co-product prices also declined offsetting approximately 60% of the drop in the raw material costs. [Anisotil] results were strong increasing by approximately $15 million versus the this third quarter as product price increased while raw material costs declined.

So for the full year 2006 as compared to 2005 industry operating rates and business conditions were relatively unchanged and consistent with this our EBITDA continued to be strong increasing by $27 million. Thus far in 2007 raw material costs volatility has continued to be a factor making it difficult to price products and forecast results. However, we can say that versus the fourth quarter raw material costs have declined several co-product prices have settled either unchanged or higher, and for the most part order volumes are consistent with or ahead of the pace seen during December. Consequently Ethylene and Ethylene derivative products demand appears to be consistent with operating rates in the low to mid-90% range.

Now let's turn our attention to the propylene oxide related product segment. This segment includes propylene oxide, derivatives of propylene oxide, toluene diisocyanate, styrene and fuel products which we define at MTBE and ETBE. During the fourth quarter of 2006 EBITDA for this segment was $105 million which is a $90 million decrease versus the third quarter.

The quarter to quarter decline is primarily attributed to MTBE which declined by approximately $70 million, and two factors influenced this decline. The first is normal seasonal margins that impacted results by approximately $35 million, and the balance of the decline was internal to our operations.

During the fourth quarter we conducted a scheduled turn around of our U.S. MTBE unit during which we installed equipment providing the flexibility to produce either MTBE or isooctane. This work was completed on schedule. The unit was restarted producing isooctane. However, after approximately one week of operations the unit was shut down to address some issues. Subsequently we restarted the facility producing MTBE which will give our technical staff time to address the issues encountered during isooctane operation.

Economically we're currently indifferent as the economics of isooctane and MTBE production are comparable. While I am discussing the fuels area, I would also like to mention some changes that we're making to go our European operations. During the first quarter we will convert our Dutch MTBE production to ETBE. We anticipate that we'll produce ETBE at the facility for the balance of the year, and based on the economic and is demand our French facility will alternate production between MTBE and ETBE. So ultimately we expect that all European fuels production will be ETBE.

In total results for the chemical products in the PO segment were relatively unchanged. Propylene oxide and PO derivative products results declined by approximately $20 million, roughly 50% of which was related to the planned turn around maintenance and the balance was primarily due to lower sales volumes. Styrene was unchanged and TDI benefited by approximately $15 million due to increased margins.

So on an annual basis 2006 results declined by approximately $112 million versus 2005, and MTBE was responsible for the decline as results fell by approximately $200 million versus an extremely strong 2005, that benefited from hurricane and is strong summer demand. Conversely 2006 results were negatively impacted by additional costs related to the export of U.S. production and the fourth quarter events that I just mentioned. However, I don't want you to think that 2006 MTBE results were weak. Actually they were quite good, and, for example, they were approximately $100 million better than the 2004 results.

Among the chemical products although full year TDI results continue to be weak, they did improve by approximately $135 million due to lower operating costs related to the 2005 shutdown of the Lake Charles TDI facility as well as improved margins on our remaining sales, and PO and PO derivative results were relatively unchanged year to year while styrene margins declined reducing results by approximately $40 million, so that's thus far in 2007 business conditions for the chemical products are relatively unchanged versus the fourth quarter.

Fuel product marks have improved slightly but are consistent with typical winter margins, and PO, and PO derivative results are expected to benefit from the absence of maintenance activity and lower raw material costs. The next segment I would like to review is inorganic chemicals, and the primary product is this segment is titanium dioxide. The fourth quarter was disappointing as operating problems and slow U.S. housing activity resulted in negative EBITDA of $10 million, a $35 million decline from the prior quarter.

Quarterly sales declined by approximately 13,000 tons contributing sales declined by approximately 13,000 tons contributing approximately $12 million to the quarterly decline, and margins are relatively unchanged as U.S. price declines were largely offset by increases in Europe and Asia, and increased costs contributed about $20 million to the quarterly decline. This is primarily due to planned down time to correct operating problems at the Stollingsburrow facility and some unplanned down time at two plants.

Year-on-year overall TDI business results were essentially unchanged until the fourth quarter. However, during the fourth quarter 2005 results benefited from DuPont's Hurricane related outage while in 2006 results were negatively impacted by our own down time and a slowdown in U.S. housing.

First quarter operations and order volumes have improved versus the fourth quarter, and as a result first quarter results are expected to be more representative of recent history rather than the fourth quarter.

Now let me turn your focus to the refining segment. Fourth quarter is the first quarter during which we owned 100% of the refining -- other refinery operating under the new crude supply agreement. Therefore, comparisons to prior periods can be somewhat confusing. In an effort to minimize the confusion, I think it is worthwhile to quickly review the third quarter results to help establish a baseline level of profitability. Reported third quarter EBITDA was negative $54 million, but this includes the impact of transaction related charges and timing of the transition to the new contract.

The key factors to consider when looking at the third quarter are, first, there were 300 million in charges related to the cancelation of the prior contract, and, second, timing factors related to the conversion from the old contract basis to the new market based contract had negative impact. For example, during July we operated under the old contract which amount to say an estimated $35 million impact versus having the market-based contract for the full quarter. Additionally, we transitioned between contracts during a very volatile period when crude prices declined by $15 per barrel, and we estimate that the timing of the contract change had approximately a $55 million negative impact.

Now you've had a quick reminder of the third quarter situation, let's turn to the fourth quarter which was very strong for us as most operating factors aligned in a positive manner resulting in $350 million of EBITDA. During the quarter refinery benefited from strong operations, good premium product margins and a favorable crude slate. This occurred while the market experienced a seasonal decline in margins.

For example, the Maya 211 spread declined from $26.30 in the third quarter to $20.50 per barrel during the fourth quarter. There is a number of factors that I think will help you bridge between the third and fourth quarters. First, increased production added approximately $10 million. Second, improved premium product margins added approximately $20 million, and the reduction in crude inventory added approximately $15 million while product inventory changes contributed approximately 25 million, and partial insurance payment added $14 million.

Finally, although the industry Maya 211 spread declined by $5.80 versus the third quarter, our spread only declined by approximately $1.50 per barrel or $35 million. We attribute this significantly smaller decline to the absence of the third quarter timing elements that I previously addressed, a favorable fourth quarter crude mix, and the purchase of several crude cargos at distressed prices. Additionally, I should point out and note that our spreads will not directly match the industry 211 metrics since we don't realize 100% yield to heating oil and gasoline. Clearly, everything aligned ideally in the fourth quarter, and I suspect that results exceeded your expectations. However, I hope this quick review helps you appreciate the quality of the asset and its earnings potential.

I would also like to point out that we've added both the Maya 211 spread and metric that we have named our crude throughput margin to table number 8 of our earnings release, and this metric represents our revenue less raw material costs divided by the barrels of crude oil processed, hence its reasonably comparable to the industry Maya 211 spread. Additionally this metric is comparable to metrics typically disclosed by independent refiners and over time should help you compare our performance to industry data and other refiners. Now let's spend a moment discussing the first quarter before I turn the call over to Kevin.

In summary first quarter will not be a typical quarter for the refinery. Results will be impacted by the scheduled maintenance turn around [inaudible] cracker, and this unit related operations were shut down the week of January 8th, and are anticipated to remain down until late February. The turn around is estimated to cost approximately $50 million, quarterly crude rates are estimated to be reduced by approximately 53,000 barrels per day, and based on current market conditions first quarter results are expected to be impacted by approximately $120 million. These estimates are somewhat higher than reported in the third quarter call as the estimated down time for the turn around has been extended. There is no other major maintenance scheduled at the refinery during 2007.

This concludes the review of the business segment. I will turn the call over to Kevin to discuss some financial factors.

Thanks, Doug. Today I will review some key metrics tore 2006 as well as provide an update on our efforts in the inorganic area. Let me quickly summarize a few items. First, we repaid 917 million of debt during 2006, that brings the total since we started to more than 2.5 billion. Second, we paid 200 million into our pension plans and approximately 150 million of that were voluntary payments. We finished the year utilizing 100 million under our various revolvers and asset backed facilities versus starting the year utilizing 275 million. In capital spending including contributions to the PO joint ventures and 100% of refining capital was 562 million. We accomplished everything we needed to do spending 60 million less than originally budgeted.

As a result of our debt repayment in 2006 of financings we reduced the average coupon on our debt by 80 basis points to 8.8%. Overall I consider 2006 to be a tremendous financial success and a third consecutive year in which we demonstrated the strength of our business portfolio. Since I have raised the topic of the portfolio I am sure you're interested in receiving an update on the inorganic strategic efforts. First I should emphasize we continued to consider all options to be open sale, JV or continued ownership. However, based on the media and your previous questions I think you're probably most interested in a status of the sale process.

Briefly our process continues to move forward. We have narrowed the group of bidders to between 5 and 10 participants including both strategic and financial buyers, and we are currently awaiting binding offers. I will add that the process is meeting our expectations and we expect the decisions be made in the coming weeks. However, it is an appropriate to say any more at this time, and I will turn the call over to Dan.

Thanks, Kevin. I thought I would try to cover a few things today beginning by reflecting on 2006.

In summary we entered that year with a positive outlook and it met our expectations. Ethylene and propylene oxide remained strong while refining certainly turned out to be the largest positive during 2006. We entered the year thinking the strong refining market was a good environment for sale of our ownership position, but of course as you know we ultimately decided we could create better value as a buyer.

Although only a few months have passed since we closed the transaction, I think results are supporting that decision and demonstrating the quality of the asset. As in any year there were some disappointments. Most notably the inorganics business did not meet our expectations, but we do know what we need to do, and I am more confident than ever we will realize value from this business. It is a good business. We just need to make some changes to unlock that value.

When you put it altogether, 2006 was a great year, and I am both very happy and proud of our results. Now I would like spend just a couple minutes to highlight some aspects of our operations that around typically mentioned in these calls. You all know that we are primarily a company of operators, and to get a full flavor for that company, you need to appreciate the activities that are behind the scenes. Its successes like these that differentiate our company and are the focus of the majority of you are resources. Let me provide a few examples from 2006.

First and foremost employee safety is very important to us. We consider it to be a lead indicator of our focus and attention to detail. I am very proud that our 2006 safety statistics improved very well from an instance rate of 0.6 in 2005 down to 0.45 in 2006. Versus the latest available industry statistics, these are industry leading levels. I don't expect this statistic means very much to you, so let me put it in perspective.

The corresponding home injury rate is approximately 4 meaning you would be ten times more likely to be injured at home versus one of our facilities. Next our 2006 Ethylene plant on stream time was approximately 97%, and excluding scheduled turn arounds our propylene oxide plant on stream time was 98%. By comparison CMAI estimates the Ethylene industry averaged 94% on stream time excluding planned down time.

Also during 2006 our refinery personnel were subject to do an emotional roller coaster as we first explored a sale and later bought out our partner. Record results throughout the year confirmed they endured this without missing a beat. Unfortunately, our inorganics employees are facing similar uncertainties. However, their focus has also been superb as evidenced by their safety record which is the best within Lyondell. In our financial area over the past two years we reduced the time requires to complete Sarbanes-Oxley testing by 36%, and we did this while adding the refinery to the portfolio.

In the pension area our portfolio return exceeded our long-term target in returns by approximately 4%, and in the tax area we created a positive from the high energy prices reducing our cash taxes by approximately $50 million through a change in our elected inventory basis. Our information technology group seamlessly moved our backup data center from suburban Houston to Dallas to better protect the integrity of our systems, and in Europe our bio ETBE sales increased by approximately 300% versus 2005. You don't generally hear about these things, but this is the type of blocking and tackling that's produced results for us and of which I am particularly proud.

So what does 2007 hold for us? Overall I don't think that much will change since supply demand balances in each of our key markets are forecast to remain strong. True, there is some data that may indicate a slowing in the U.S. economy, but many people worried about these very same items throughout 2006. Frankly I am very comfortable with any of the growth levels the economists are currently debating.

Outside of the U.S., parts of Europe have shown substantial strength, and although press and economists continue to fret about China during 2006, recently released government statistics indicated a 10.5% growth rate. In addition to this, India's industrial production increased by an estimated 15.5%, and all of this occurred while crude prices reached $78 per barrel during the year, so the recent decline should provide a positive stimulus.

In summary, the economy seems to be holding up reasonably well, so the remaining risk is over building, and while I'm certain this will ultimately occur, I certainly don't see how it can happen in 2007. In fact, with the global tensions, the amount of construction required to support the needs of the developing regions, and increased construction costs, I wouldn't be surprised if we hear about additional delays as we progress through the year.

Specific to Lyondell I think that we entered 2007 better positioned than a year ago. We now own 100% of the refinery which diversifies our portfolio and will be a significant contributor. Additionally, regardless of the outcome of the inorganic strategic efforts I don't expect 2007 to be a repeat of 2006 in terms of this segment's performance.

Needless to say, I am excited about both our 2006 results and the outlook for 2007. Thank you for your continued support, and we will now address your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Bill Young of Credit Suisse.

Good morning, gentlemen or afternoon over there in Europe. I have a question on the refining spreads. With oil down here in the 50 to $55 range, how much of an impact does this have on your light, heavy and sweet/sour spreads compared to see if oil was in the $60 to $65 a barrel range?

Bill, I would draw your attention back to the very same things you look at in ethylene. It is really not the price levels. It is the margin. What we've seen happen through the substantial price swings we've seen over the past three or four weeks, the margins have held remarkably solid, slightly opening up, slightly closing, but it is that tight supply demand that's really setting those margins, so the spreads have moved up and down primarily on the light sweet crudes. The heavy sour has held up well, but net net when you go back to the parameters that Doug is talking about our overall margins have been really pretty solid throughout all of this.

I have seen periods in the past where when oil is real high the price for the heavy stuff goes up, and your advantage tends to narrow a little bit.

Really you have to go back to the overall refining situation. It matters much whether or not you have excess refining or don't have enough.

I understand. I understand.

We're in a zone worldwide where we don't have enough, so I think that's why things are holding up, but you're exactly right in past years with a sloppy refining supply you can see much more substantial changes.

One more follow-up. Why the switch between MTBE and ETBE. What's the advantage to you to run your plants the way Doug described.

We're going to be making more money with ETBE than we do with MTBE.

Sure, but why?

ETB is a great product as you know. It has terrific properties, but ethanol is a bio renewable fuel, and the common market and the member states of the common market are interested in using more ethanol, and they have concluded that using ethanol via ETB makes a lot are sense, and we certainly agree with that.

It would also be smart policy for the U.S., I think to get on board with that instead of concentrating in other areas, but we don't seem to have much impact there.

It is partly political?

Well, I think the view of biofuels, yes.

Okay. Okay. Very good. Thanks, Dan, thanks Morris.

You're William.

Our next question is from Jeffrey Zekauskas of J.P. Morgan.

Hi, Jeff, how are you?

Unmute your phone.

Hello, Jeff. I think we maybe lost Jeff, Maggie.

To the next question. Our next question comes from Sergey Vasnetsov of Lehman Brothers.

Hi, Sergey.

[inaudible] There were rumored to be three more large corporate bidders for this asset, and yet came a little short of the desired price. You out bid them. In your view collectively what's the part of refinery story supply demand I missed?

I think the value part.

Okay. The value is vis-a-vis the expectations --

Sergey, I don't mean to be flippant. If you look at this refinery, it is unique in the world in its ability to process 100% of the kind of crude it processes and generate a yield slate very much like a like crude refinery, and I think anywhere else you look, people just don't see that kind of asset. When they look at their own, they don't see the same mix. Therefore it is difficult to pony up the true value of the asset. We on the other hand already own 58.75%, so buying the other 41.25% unlocked the value on the whole thing for us, so if you look at the investment for us, much better investment for anybody else, and you clearly would have been well up into the record stratus atmosphere on pricing, so difficult for anybody to pony up that kind of money, but we very firmly believe in the strength we think we're in for a fair amount of time where this tightness in refining is going to be evident in the world markets, and there is a lot of money to be made, and we're very happy with our decision.

Okay. Good. Secondly, when I am looking at your EquiStar performance so far to consider PS was roughly 1.3 billion EBITDA pretty good results with all the puts and takes you mentioned in [highly accented] are they in consideration in Ethylene worlds what's your view for the Ethylene world into '07 EBITDA wise for you, flat, down?

I think same kind of performance is very reasonable. If you go back over quarter by quarter in 2006 it was not a level playing field. It was up and down on all over the place. I frankly think you're going to see similar volatility through the year, but the overall worldwide basic balances are still very strong, and I think you ought to be performing in the same region. The volatility can strongly affect one quarter to the next, and therefore you can't be too precise, but I don't think we're going to see anything substantially different unless it is a little bit better.

Okay. Thank you.

You're welcome.

Our next question comes from PJ Juvekar of Citigroup.

Hi, PJ.

You may need to unmute your phone. Move to go the next question, the next question is from Steve Schuman of New Vernon Associates.

Hi, guys.

How are you today?

A question for you on polyethylene here in the first quarter. We see crude prices coming down. We've got situation where product prices are coming down. We saw demand okay here in the first few weeks. What does it look like now in polyethylene in particular?

I think we continue to see good volumes in the business. I think the overall balances look good, and I would slightly correct what you said. We saw crude prices come down a lot. They've now in the last few days come back up some, so it is not at all clear exactly where that's going to go, but I would tell you that the volumes moving look very good. The spot prices for the monomers are in good shape that moved up, so I don't see any reason to expect you're going to have a lot of weakness.

Follow-up question on tax rate. Bounces around quite a bit, assume some of that is due to special items, but again this quarter lower than expected. What should we forecast going forward?

Steve, what I would do, this is Doug speaking, I would use the 36%. What happened is when you understand this is the Dutch government in the last week or so of December lowered their effective tax rate, and obviously we have quite a few operations in the Holland with the PO plants here and things. That of the 3% change from 39 to 36, that was 2 plus percent of that change. That tax rate will be in effect next year, so we're looking at a situation where right now we would have to estimate about 36% going forward.

One final. You mentioned that you felt the crude contract added some anomaly to your earnings in the third quarter which made them too low for the refinery and fourth quarter do you feel it was right on target or do you feel maybe it made the earnings a little too high?

I don't think the contract had any impact in the fourth quarter, but obviously we had very strong operations, some changes on inventories and things, and values there, and benefited us, the insurance, so there were a number of things positive for us, but I think you have to look and say what it is really led by is very strong operations operating at better than design rates. The premium products aromatic, et cetera, helped us in the quarter, so we're well positioned there. Ultra low sulfur diesel is coming into play now. We make about 100% ultra low sulfur diesel there, but it is -- there was things lined well.

The other thing back to the third quarter explanation, I think what Doug was trying prig to get across is we changed contract basis in the middle of the quarter at a time of high flux and pricing. That's really what caused some distortion in the third quarter, and then you have all the other things Doug was talking about in the fourth quarter. It really wasn't a contract making in the third quarter look strange, it was the change over in the flux in the third quarter.

Thank you.

You're welcome.

Our next question comes from Don Carson of Merrill Lynch.

Hi, Don.

Hi. Question on demand. Obviously a lot of people focus on the supply slide of the whole Ethylene chain, but demand in 2006 seemed a little lighter than originally expected. There was expectations that post the hurricane induced outages and things we might see, 6% to 8% bounce in Ethylene demand in the U.S., and looks like it was only around 3. Just wondering what your thoughts are on the demand outlook and why demand for key derivatives was lower than initial expectations?

First of all, when you go back and you have anomalies like the hurricane, it is always difficult to figure out exactly what happened, but I think if you draw a line through several years, then what you see is we're really continuing to see trend line growth, and therefore if you project that forward, we ought to continue to see pretty good situation going forward. So I would agree at threeish or so for 2006 it looks a little light. You could look on the bright side that far and say maybe catch-up in '07, and I think that's likely, but we'll just have to wait and see.

I think the important thing to remember, whether it is 3, 4, 5, those are all good numbers in an industry that's already pretty tight, and supply is not growing that rapidly. So I think we're in good solid shape to have decent pricing, decent margins and carry through the year. The watch out is always this extreme volatility we see which can pinch you from week to week but in a tight spot it tends to even out over months. I think we're in pretty good shape.

As you put supply and command together, where do you see U.S. effective operating rates this year in Ethylene?

Mid-90's.

And then just question on the refinery. I notice, Doug, you were using 211 spread. Should we be focused for on the 3-2-1 spread as a benchmark to look at?

No. our refinery being a heavy refinery, Coking refinery if you use the 211 that will be yourself best measure.

Okay. Thank you.

You're welcome.

Our next question comes from Frank Mitsch of BB&T Capital Markets.

Good morning.

How are you?

I am doing fine. I apologize I jumped on the call a little late, but I did hear you say your safety rate is a tenth of what it is in terms of living at home and given the lower taxes that are in Holland now, I hope you guys don't mind I state your facility next I am I am visiting over there.

The rent is pretty expensive. (laughter). You will be safer.

Just a follow-up on the refining because obviously it was a fantastic result. I understand around 300 million in earnings you claimed 25 million. You flagged strong operations in premium margins and perhaps it is not something we ought to hang our hat on in terms of normalized operations so gets you down to about 275, and you talked about the partial resolution of insurance claims, about 14 million, so gets you down to about 260 so basically if we're looking at the same sort of 211 spreads and heavy light spreads, kind of normalized what we had in the fourth quarter we ought to be looking at a number closer to 260. Is that fair?

260 for what quarter?

Well, the fourth quarter if we had the same crack spreads --

Let me back up a minute, Frank and Doug can correct this, but I would go back to when we bought the refinery, the pro forma we did, we showed you an actual for the first six months of the year of 650, 670, and the pro forma would indicate a billion two plus range for the year. I think what we've seen since we owned the whole thing would tell us we're very comfortable with a billion twoish for the year and going forward we would expect the same kind of thing. There is seasonality, and I think one thing you look at is the fourth quarter because of all the things Doug was talking about the seasonality was not that apparent. We did very well in the fourth quarter. Bit if I think if you're looking the on ravage 300ish per quarter that's not a bad way it look at it. As we get into the gasoline season this next year, I would expect we'll well exceed that.

Did you size the impact of the turn around that you're having?

Yes, Frank, this is Doug. We think in the first quarter the impact of the turn around will reduce operating rates by about 53,000 barrels a day on average, and the impact on earnings will be about $120 million on results.

All right. When you anticipate that's going to be back up at full rates?

We'll be back at full rates in late February.

Late February.

Yes.

Terrific. And then it just on the titanium dioxide, I am sure you discussed where you are in the process, and I assume your droughters is a clean sale of that business as opposed to entering in a JV, but are there realistic scenarios out there that you would JV that business as opposed to sell it?

Let me go back and tell you the whole process we're going through is a value realization process, so we went through a strategic analysis, we clearly know what it takes to fix the business, and what it takes in time and effort to get there. That sets the floor on what we expect to have a value. If we can exceed equal or exceed that value by selling, we would be interested in doing that, and anything else we would consider, but frankly our experiencing and going through this is full control of what you're doing is always preferable to putting things in partial control. We wouldn't rule out anything.

Terrific. Lastly, Dan, on that topic, did you talk at all about a potential time frame?

We did.

We said next several weeks or something like that we'll probably have some information.

Terrific. Thanks a lot.

Thank you.

Our next question comes from Mike Judd of Greenwich Consultants.

Hi, Mike.

Hi. Thanks for taking my question. A couple of questions, one on the price increase in polyethylene and Ethylene on the table. How is that moving forward, and, secondly, are there -- what in particular are you doing at the refinery and why is it taking longer than you had expected earlier? I guess I think we had thought that the turn around cost would be 75 million, and now it looks like it is 120. I realize it is you're taking a little bit more time, but what are the issues behind that? Is there anything significant we need to be aware of?

Hi, Mike. This is Doug. Let me hit the refinery here for you and talk about that. Really the longer duration is now that we've got it more defined. There is no problems at all. It is just we're doing a lot of equipment. When you do a fluid unit there is a lot of peripheral equipment. We found with that, the labor situation, we're estimates it is going to take a little longer. The difference in costs of it, the impact of it, the 75 to 120 is that, and looking at where the market is right now, comes out to rounds up us to that kind of range. There is really no change in the scope and plans, no problems encountered, just our estimates are a little better. You have to also remember when we spoke about the other, we owned the fa silt for about a month or so at that point fully, and so --

I think the early estimates also, Mike, were more to the actual cost of the turn around rather than a very good estimate of the opportunity costs, so when Doug talks about the 120, we have a better fix on opportunities costs. If you're at reduced rates and less than optimum operations on what you're running, then depends on the price environment you're in, the manche environment you're in. It is a little more expensive because frankly we're in a pretty good margin environment.

Okay. On Ethylene and polyethylene prices.

It has been our habit to talk about pricing with our customers as opposed to these calls, and to the extent that pricing is not settled, we prefer to continue that way.

However, if you look at where spot pricing is which is available for people to look at, spot pricing has moved up in Ethylene and propylene which I think indicates rather healthy nature of where the business is. When prices are resolved, we hope they resolve in the better ends of things. They're not resolved at this point in time.

Thank you.

You're welcome.

Our next question comes from Gregg Goodnight of UBS.

Hi, Greg.

Good morning. If I recall properly, you were going to have some modifications to that FCC cracker you're going to have down that would give you some sort of proved operations.

Absolutely.

Could you please remind me what that's going to be worth in terms of operating rate or reduced fixed cost or variable costs or whatever?

What we discussed, Greg, was improved conversion and see about an annual impact of about $85 million we've estimated from that conversion, so you'll have the down time but then you're going to come up with a stronger operation post that.

Okay. And that will be effective as of when you bring the FCC up?

Think of that beginning in March.

Okay.

Of course more valuable during the gasoline season, so completing this and getting it back up before we hit the part of the gasoline season that's usually more profitable is even more important.

Great. Second question is would you talk about your integration between your Ethylene crackers and the refinery, how is that going? Are you where you need to be? Are there still more benefits out there you're going to go after?

There were very early easy to do things which are obviously done, but the list grows as we go forward. We put some teams of people looking at opportunities there, and they continue to uncover things day by day, so we're not talking about big capital projects. We're talking about modifications in the way we operate day by day. We're talking about small things that we do as a matter of course, but they're adding up very nicely, and I expect we're going to see month more than we described before.

Not a lot of capital. Remember, these Olsen plants at Channelview were built to connect to that refinery, so we have a lot of opportunities in terms of optimization.

One of the things you see is when you get the management's together and they optimized on a daily basis, they will see opportunities that you can take advantage of with common ownership that frankly you couldn't because of governance the other way, so we actually hear about some things weeks after they're done. It is just the supervisors between the two plants say if we did this, it would save you money here, and et cetera. Places like where we purchase hydrogen outside and also manufacturer within, there is place to optimized the balances there and avoid higher-cost purchases, and they've done that on a day by day basis since the deal was closed.

Have you attempted to quantify the opportunity in '07 that the integration will give ?

We haven't really taken a hard look at it since we did the earlier, and I think we quoted 50 to 100 million a year as being a reasonable area, and that's what I was referring to. I think we'll realize more than that, the best way to report that to you is part of the quarterly earnings, just report higher earnings and it is in there.

That sounds great. Congratulations on the safety target. I can remember when a one was almost thought to be an unobtainable goal in the industry.

Our folks have done a wonderful job here. It is one that we'll rest when we get it to 0.

Thank you.

Our next question comes from Jeffrey Zekauskas of J.P. Morgan.

Hi, Jeff.

Hi. How are you, Dan?

Good.

Are you satisfied with the propylene oxide operating income this quarter?

We're never satisfied with any income. It could always be higher, but we're practical. It was pretty good.

You know, that is -- shouldn't you have gotten to maybe a larger raw material benefit in the PO businesses?

You have to remember part of our PO is sold on a P plus basis, so propylene can go up or down, it doesn't change the margin. The other part where we actually take the price risk on a propylene, yes, you got a benefit when it goes down. You pay the price when it goes up. Overall I think we're about where we should have been.

Jeff, the other thing is remember we typically have a lot of visibility in the U.S. prices, and European prices sometimes because the quarterly go in different directions. You get impacts there, and the fourth quarter we should remember is also typically our aircraft beginning of our aircraft deicer season, and kind of had a pretty warm Europe and U.S. East Coast, so deicer was somewhat weak for us.

We need to go into a global cooling period to stimulate that business.

Pretty cold here today, so it is probably looking better.

Thank you very much.

You're welcome.

Our next question comes from PJ of Citigroup.

Hi, PJ.

Hi, there, just a couple of questions. First on the refinery, how do you expect the refining margins to fluctuate between the summer driving season and the winter heating season?

I expect in the U.S. you're going to continue to see the summer driving season stronger simply because that's where the dominate demand factors are, so I would always anticipate that you would expect second and third quarters to be stronger than first and fourth, but what we're seeing is in a tight supply and demand situation the differences are more muted than maybe historically.

PJ, just to quantify a little bit, I think you want to look at of course is the forward curve, and in the first quarter the forward curve kind of gone from eight up to about 10 in March, summer months it is about twelve dollars a barrel and in the fourth quarter it moves whack down to about $8 a birl is where it is right now, and I would also note that that's what the forward curve looked like at the time we made the acquisition, about $8 in the winter months and 12 in the summer months.

Okay. The second question I had was in the polyethylene export market, that was very strong in the fourth quarter. Can you comment on what's going on here in the first quarter before the Chinese new year?

It still looks fairly strong, and January looks good, and we're thinking February is going to be pretty good as well.

If you go back to where spot pricing is on the three regions, United States continues to be much, much lower than Europe and Asia, and I think as long as that window is open, you're going to continue to have a lot of international trade, so eventually those are going to come closer together, but the way they come closer together is by moving more volume.

Right. How much did you export in the fourth quarter? Typically you don't export a whole lot. What was your export level in Q4?

Total industry export levels I think were around 23%, and we were just a little below there, about 20, 21%, so somewhat in line with the industry in the fourth quarter.

Okay. Thank you.

Remember for us that includes a lot of export south.

Yes.

Rather than to Asia.

Mexico.

Mexico.

Thank you.

You're welcome.

Our next question comes from Steve Schuman of New Vernon Associates.

Hi, Steve.

Hi. Quick follow up on the refinery. You mentioned you bought distressed cargos, and that gave you a basis to offset. Is that something you're going to expect going forward or is that sort of a one-time issue you saw in the fourth quarter.

Because this is the crudes that it can take and got such a broad range, we're able to look at things in the Gulf and see whether there is cargos out from that are going to sell at deeper discounts and with the volatility certainly been some opportunities in the heavy crude area, so we've kept roughly 40,000 barrels of spot and purchases that are not in the Venezuela contract. We have windows of opportunity there, and we'll keep pursuing that.

If I am correct, you guys were actually buying diesel sulfur credits and not making low sulfur diesel. Have those projects been completed and you're now not buying credits any more?

You're exactly right, Steve. That's what we did earlier in the past couple years, and now we're producing basically 100% ultra low sulfur diesel.

Did that start in the third quarter, fourth quarter? I thought it was going to go more towards this year actually.

That was a fourth quarter operation.

Great. Do you think that was also a benefit being able to produce it yourself and not have to purchase credits?

Yes, I think we're well situated on the sulfur side with the tightening spec and is what we have. I think we're sitting pretty good. Morris?

I think we reached that position later in the fourth quarter. I think it was in the second part of the fourth quarter.

The other thing is it is going to be an ongoing benefit.

Very quickly on polyethylene, Ethylene side, do you think you guys, your position sort of down in Channelview gave you an advantage to export? There was a lot of back up of people trying to export product. Was it a factor of being close to the water, a factor of your sending cargos as opposed to bags or something out to Asia?

To be candid we suffered from the back up as well, but we did okay.

Great. Thank you.

You're welcome.

Our next question is from Edlain Rodriguez of Goldman Sachs.

Good afternoon. I apologize if you already went through that. I jumped in late. Given the low inventory levels in Ethylene, polyethylene, are you seeing any evidence of inventory restocking taking place in the U.S. in polyethylene?

We're beginning to see a little bit of that in terms of rail cars and so on, but a little early to tell.

Okay. And also given the decline we've seen in energy costs, do you expect that to make the current price creases we currently have on the table a little tough to implement?

I would tell you if the price of the feed stocks had not turned you certainly would have had more pressure there. You saw crude come off hard, it's gone back up 10% in the last week, natural gas went up $1 so about a 12% increase, and when you look at those movements, it is a little difficult to tell, but it is not a clear trend that it is all one-way at this point in time. Frankly I think that will give people pause about getting too cavalier with lowering prices. Notwithstanding that, we all know the customers always want the lowest price available, and they're going to continue to push, so I think this is going to be really thought out week by week over the coming weeks until we figure out exactly where things level out.

I personally think that the energy pricing coming off you can argue how much was fundamental and how much was psychological, et, et cetera, but just remember as we go into the first quarter and second quarter we're entering the gasoline season for the U.S. where demand usually picks up. You will probably tend to get more firming of crude pricing in that range from what other range it would be. I don't know that it is clear one-way or the other. I think you will see polyethylene prices go up based on history they'll always go up slower than we would like for them to, but we're going to try to move them up as well as we can.

Okay. Thank you then.

You're welcome.

Our next question comes from [inaudible] Banc of America Securities.

My question is regarding the refinery, first the $50 million of costs, how much is expensed and how much is capitalized?

That $50 million for the turn around, that will be amortized. I believe it is amortized over five years.

Okay. My next question is regarding the premium product, can we expect premium product in Q1 as well?

I think the premium products as we look at them include the ultra low sulfur diesel, premium gasoline, aromatics. A big piece of what we saw is aromatics. We'll see how the aromatics market works in it, and we'll benefit from that over gasoline.

Also bear in mind during the period of time of the turn around a lot of key units are not operating, so compared to normal optimized operations you are not -- you're selling some materials as partial finished products, others as absolutely finished products, very, very difficult for you to be able to calculate exactly what the value is, so unfortunately the first quarter is not going to be an easy one to anticipate. That's why Doug was trying to get guidance on what we think the combination of expense and opportunity costs are. It'll will probably be March before it makes sense again, and unfortunately March will be mixed with January/February, so the second quarter will be when you get a much better picture of how it all fits together again.

And my final question is regarding throughput. It appears to me that when you can you run flat out. Is that the case?

We run flat out when it makes sense to do so, so clearly when margins are high and there is a way to get more volume through there, we do that. Now, you can reach a point of diminishing returns by pushing too hard, so it is $1 a dollar optimization not a volume optimization. It is done very frequently.

It is not driven by demand, it is driven by your economics.

Yes, because there is plenty of demand out there.

Okay. Thank you.

You're welcome.

Our next question come from Steven Turner of [inaudible].

This question is really directed towards Doug and refining metrics. You touched upon sometimes you get situations where you have a spot price where you have a large discount in the going rate, and I was wondering if you had like a VLC container out there and you had a huge spot price and do you have enough elasticity in your refining capacity to go like 10% above to 75 out of 1,000 barrels a day.

On given days our capacity we state is 268, and on given days we certainly have run over 275, it is a matter of operations, so we've been as high as I think 280 for periods of time. We still would say it is a 268,000 barrel a day refinery over time. It is a matter of circumstances and what we can take advantage of.

It is a matter of economics as Dan said.

We keep flexibility in the crude purchases because we know those opportunities open up for us, and we'll keep pursuing those.

Okay. And my second question has to do with the catalytic converter conversion.

Yes.

And overhauling. How many more years would that process have to take? How many years do you buy when you do such a major overhaul?

Typically I think we go five years between turn arounds.

As far as overhauls, the other things we're doing, the modifications, I mean 20, 30 years sometimes, so it depends on where technology goes. If technology continues to improve and makes sense to make more modifications, you do so during a turn around which is what we're doing, but you should look at these at permanent modifications and then the maintenance turn arounds as being roughly a five-year invoice.

Thank you very much and congratulations.

Thank you.

Our next question comes from Roger Spitz of Merrill Lynch.

Hi, Roger.

A couple questions on Tio2 would be helpful. What is the tax basis of Tio2 under your preferred transaction structure and could you shield any tax on any potential gain?

I am not going to give you exactly the tax basis, but it is pretty good. We just bought these things so we have a pretty good situation as far as that's concerned. It is not a tax inefficient situation. Let's put it that way.

Okay. And in terms of debt paydown, would you consider taking out the 26's, the benchers, have you thought further on that?

We'll for sure be willing to take them out in 26.

Yes.

Before then we'll consider all sorts of things. We're not going to get any what trunch of debt we'll repay when. You'll have to regain that like everybody else.

Finally, after whatever debt you decide to pay down, would you look to distribute any excess cash proceeds up to the parent company?

If you look at the whole situation, we've got indenture and is bonds that dictate what we do restriction wise. They're not much of a hindrance at this point in time. We have a lot of debt coming do you in Equistar. We have other tranches we can access in Lyondell. We have debt we can access on the Millennium balance sheet. It is a day by day optimization that Kevin's group continues to work on, and I think he will continue to do the same thing, let's find the most advantageous place to retire the debt and move forward.

And quickly on isooctane, is it potentially trickier to make if you're starting from TBA or somehow associated with a PO facility?

I wouldn't say it is trickier to make, but it is a little bit different.

Okay. Thanks very much.

Thank you.

Our next question comes from Mike Siegel of Deutsche Bank Securities.

Good afternoon, a couple questions. If you can describe the feed stock you're using the Equistar, what it was in the fourth quarter and what it is currently and also away from the refinery, what other planned maintenance work is on schedule?

In the fourth quarter we were about 50% liquid feed stock, and thus far in the first quarter we're roughly at the same place.

Okay. As far as other planned maintenance work away from the refinery?

The only other significant turn around we have I believe is at our Bayport facility where a PO plant is coming down in the fourth quarter.

I see. Thank you.

La Porte as well.

La Porte. Okay. That's all I had. Thank you.

Thank you.

Our next question comes from Kevin McCarthy of Banc of America.

Hi, Kevin.

Yes, hi, guys, how are you? Apologize I, too, joined the call a little bit late, sorry if you covered this already, but a couple questions relating to ultra low sulfur diesel. Is it possible to quantify the dollar impact in the fourth quarter from ramping that up and then in more conceptual terms, Doug, is there a way where we can think about a premium spread relative to the 211 that you have available to you from that product specifically.

Kevin, I don't have a good handle on specific ultra low sulfur diesel and the impact, but you can follow that. That data is available, the pricing of ultra low sulfur, and what you want to do is compare that to heating oil number two and where that spread is, and if I recall ultra low sulfur diesel has been selling for about $5 a barrel, $5.50 a barrel over heating oil recently. Of course you also have to invest, and you have to process it and to make it, so there is some costs, but the spread is about if I recall about $5.50 a barrel.

And just to follow up, then, can I add that $5.50 to the spread less some factor for your costs?

Yes. We will be making the ultra low sulfur diesel going forward is all we expect, so we expect a little benefit from that going forward.

And on the TIO2 side, what are your volume expectations in the first quarter of 2007 assuming you own the business for that entire time?

It is kind of a normal first quarter is what we see, volumes have picked up from where they were in the fourth quarter, so in the first quarters is one of owes businesses where second and third typically are a little bit stronger than first and fourth.

Thank you very much.

Thanks, Kevin. [OPERATOR INSTRUCTIONS]

Any more questions, operator?

We have one more question from Greg Hillman of First Willshire Securities.

Hi. Yes, good morning. I just had a question about you talked about earlier about the valuation of refineries, and your refinery being unique, and I was wondering if you could talk about Wall Street's evaluation of refineries in general and whether you think they're value the properly or whether they're missing something of the value in strategic assets?

We're not in the business of analyzing everybody else's. I was speaking specifically to the unique properties of our refinery and what we know about it. I don't feel very qualified to make comments about anybody else's mix or Wall Street in general, but specifically I think ours was a little difficult for people to ascertain because it is different.

Okay. And just a further question about your refinery. You mentioned conversion either that you're doing to increase the value. Could you talk about any other conversions that you could do to increase the value of your refinery?

We're looking at a lot of that, but we're not ready to come forward with anything else. The way you all look at this is this refinery has been a joint venture for 13 years. It was optimized as part that far venture, but frankly there was not a lot of thought given to put ago lot of capital investment into it. It is conceivable there are other projects there that could be very attractive, and we'll certainly attempt to uncover those, but I would say the early looks are not -- you shouldn't expect big huge investments at this point in time although we may discover some over the coming months.

Okay. And finally, I got on the call a little late, too. Did you say anything about the millennium division in the led-based paint litigation during the call and could you comment on that?

We said as much as in the way of developments which was nothing. There really hasn't been anything occur, and it didn't come up in the call up until now.

Okay. Thank you.

You're welcome.

Thanks, Gregg.

Our next question comes from -- we have a follow-up question from Steven Turner.

Hello, Steven.

Hi. I guess no one else asked this question. Do you expect any more payments from the insurance company from the hurricane damage science.

Yes. Yes, we do. We've gotten small payments so far, but it is taking a fair amount of time unfortunately, but we still expect to receive payment from that, yes.

Are you able to say how much you expect?

I think that's part of the complexity of these things, so, no, can't really say that right now.

Okay. Thank you.

It appears we have no further questions.

Again, thank everyone for your interest, and we look forward to visiting with you again next quarter. Thank you.

Thank you for participating in today's conference. You may disconnect.