Form 10-Q

LYONDELL CHEMICAL COMPANY

/s/ JoAnn L. Beck

/s/ Dan F. Smith

Assistant Secretary

Dan F. Smith

President and Chief Executive Officer

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MwrPsd0daisnb7zK1vBonVDVrKyQMWkNYcVBGd531aO8lDHgaHdqKTMOxnpZUeKY gyA96u5KZugoWcjCnFuEjw== 0001193125-04-082241.txt : 20040507 0001193125-04-082241.hdr.sgml : 20040507 20040507170243 ACCESSION NUMBER: 0001193125-04-082241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUISTAR CHEMICALS LP CENTRAL INDEX KEY: 0001081158 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 76055048 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-76473 FILM NUMBER: 04789939 BUSINESS ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527300 MAIL ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-76473

EQUISTAR CHEMICALS, LP

(Exact name of registrant as specified in its charter)


Delaware		76-0550481
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1221 McKinney Street, Suite 700, Houston, Texas		77010
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 652-7200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There is no established public trading market for the registrant’s equity securities.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME


	For the three months ended March 31,
Millions of dollars	2004			2003
Sales and other operating revenues:
Trade	$	1,490		$	1,227
Related parties		472			414

		1,962			1,641

Cost of sales		1,857			1,676
Selling, general and administrative expenses		41			40
Research and development expenses		7			9
(Gain) loss on asset dispositions		(4	)		12

		1,901			1,737

Operating income (loss)		61			(96	)

Interest expense		(57	)		(50	)
Interest income		2			1
Other expense, net		(1	)		(1	)

Net income (loss)	$	5		$	(146	)

See Notes to the Consolidated Financial Statements.

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS


Millions of dollars	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	111		$	199
Accounts receivable:
Trade, net		472			471
Related parties		136			137
Inventories		473			408
Prepaid expenses and other current assets		33			46

Total current assets		1,225			1,261

Property, plant and equipment, net		3,293			3,334
Investments		61			60
Other assets, net		387			373

Total assets	$	4,966		$	5,028

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	468		$	462
Related parties		36			51
Current maturities of long-term debt		1			—
Accrued liabilities		183			241

Total current liabilities		688			754

Long-term debt		2,313			2,314
Other liabilities and deferred revenues		361			359
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,624			1,619
Accumulated other comprehensive loss		(20	)		(18	)

Total partners’ capital		1,604			1,601

Total liabilities and partners’ capital	$	4,966		$	5,028

See Notes to the Consolidated Financial Statements.

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the three months ended March 31,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net income (loss)	$	5		$	(146	)
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
Depreciation and amortization		76			78
Deferred revenues		—			159
Deferred maintenance turnaround expenditures		(17	)		(27	)
(Gain) loss on asset dispositions		(4	)		12
Changes in assets and liabilities that (used) provided cash:
Accounts receivable		—			62
Inventories		(65	)		(49	)
Accounts payable		(12	)		60
Accrued interest		(17	)		(45	)
Other assets and liabilities, net		(39	)		(37	)

Cash (used in) provided by operating activities		(73	)		67

Cash flows from investing activities:
Expenditures for property, plant and equipment		(19	)		(13	)
Proceeds from sales of assets		4			35

Cash (used in) provided by investing activities		(15	)		22

Cash flows from financing activities:
Repayment of long-term debt		—			(1	)
Other		—			(3	)

Cash used in financing activities		—			(4	)

(Decrease) increase in cash and cash equivalents		(88	)		85
Cash and cash equivalents at beginning of period		199			27

Cash and cash equivalents at end of period	$	111		$	112

See Notes to the Consolidated Financial Statements.

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Equistar Chemicals, LP (“Equistar”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Equistar 2003 Annual Report on Form 10-K.

2. Company Ownership

Equistar, a Delaware limited partnership which commenced operations on December 1, 1997, is owned 70.5% by Lyondell Chemical Company (“Lyondell”) and 29.5% by Millennium Chemicals Inc. (“Millennium”).

In late March 2004, Lyondell and Millennium executed a definitive agreement for Lyondell to acquire Millennium in a stock-for-stock business combination of the two companies. Upon completion of the transaction, Lyondell would, through subsidiaries of Lyondell and Millenium, own 100% of Equistar. The proposed transaction is subject to approval by both Lyondell and Millennium shareholders, the amendment of Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility and other customary conditions. The proposed transaction is expected to close during the third quarter of 2004; however, there can be no assurance that the proposed transaction will be completed.

3. Accounts Receivable

At March 31, 2004, the balance of Equistar’s accounts receivable sold under its $450 million, four-year accounts receivable sales facility was $217 million. The balance sold at December 31, 2003 was $102 million.

4. Inventories

Inventories consisted of the following:


Millions of dollars	March 31, 2004		December 31, 2003
Finished goods	$	272	$	223
Work-in-process		11		12
Raw materials		102		83
Materials and supplies		88		90

Total inventories	$	473	$	408

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

5. Property, Plant and Equipment, Net

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:


Millions of dollars	March 31, 2004			December 31, 2003
Land	$	77		$	76
Manufacturing facilities and equipment		6,036			6,015
Construction in progress		60			63

Total property, plant and equipment		6,173			6,154
Less accumulated depreciation		(2,880	)		(2,820	)

Property, plant and equipment, net	$	3,293		$	3,334

Depreciation and amortization is summarized as follows:


	For the three months ended March 31,
Millions of dollars	2004		2003
Property, plant and equipment	$	60	$	63
Turnaround costs		9		7
Software costs		4		4
Other		3		4

Total depreciation and amortization	$	76	$	78

In addition, amortization of debt issuance costs of $1 million and $2 million for the three-month periods ended March 31, 2004 and 2003, respectively, is included in interest expense in the Consolidated Statements of Income.

6. Deferred Revenues

On March 31, 2003, Equistar received an advance of approximately $159 million, representing a partial prepayment for product to be delivered under a long-term product supply arrangement, primarily at cost-based prices. Equistar will recognize this deferred revenue over 15 years, as the associated product is delivered.

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

7. Long-Term Debt

Long-term debt consisted of the following:


Millions of dollars	March 31, 2004		December 31, 2003
Inventory-based revolving credit facility	$	—	$	—
Other debt obligations:
Notes due 2006, 6.50%		150		150
Senior Notes due 2008, 10.125%		700		700
Notes due 2009, 8.75%		600		600
Senior Notes due 2011, 10.625%		700		700
Debentures due 2026, 7.55%		150		150
Other		4		4
Unamortized premium, net		10		10

Total long-term debt		2,314		2,314
Less current maturities		1		—

Total long-term debt, net	$	2,313	$	2,314

Lyondell remains a guarantor of $300 million of Equistar debt, consisting of the 6.5% notes due 2006 and the 7.55% debentures due 2026. The unaudited consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.

8. Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefit costs included the following components for the three months ended March 31:


	Pension Benefits						Other Postretirement Benefits
Millions of dollars	2004			2003			2004		2003
Components of net periodic benefit cost:
Service cost	$	5		$	4		$	1	$	1
Interest cost		3			3			2		2
Recognized gain on plan assets		(3	)		(2	)		—		—
Actuarial and investment loss amortization		1			2			—		—

Net periodic benefit cost	$	6		$	7		$	3	$	3

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted in December 2003. In January 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP FAS 106-1 permitted Equistar to make a one-time election to defer recognition of the effects of the Act in accounting for its plans until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Equistar elected to make the one-time deferral and is currently awaiting further FASB guidance as well as pending regulatory guidance which will enable it to conclude whether the benefits provided under its plan are actuarially equivalent to the benefits under the Act and, therefore, entitled to a subsidy. Accordingly, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy.

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

9. Commitments and Contingencies

Leased Facility—Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. The facility and land, which are included in property, plant and equipment at a net book value of $150 million, are leased from a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, “Occidental”). In May 2003, Equistar and Occidental entered into a new one-year lease, which has renewal provisions for two additional one-year periods at either party’s option. Equistar exercised its first one-year renewal option in April 2004.

Indemnification Arrangements—Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar has agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. From formation through March 31, 2004, Equistar had incurred the full $21 million assumed for these claims and liabilities. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.

Environmental Remediation—Equistar’s accrued liability for environmental matters as of March 31, 2004 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liability recorded for environmental remediation.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”) under a “one-hour” ozone standard. Emission reduction controls for nitrogen oxides (“NOx”), which contribute to ozone formation, must be installed at each of Equistar’s six plants located in the Houston/Galveston region prior to a November 2007 compliance deadline for the one-hour ozone standard. Revised rules adopted by the regulatory agencies changed the required NOx emission reduction levels from 90% to 80%. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Equistar’s cumulative capital expenditures through March 31, 2004 totaled $80 million. This estimate could be affected by increased costs for stricter proposed controls over highly reactive, volatile organic compounds (“HRVOCs”). The regulatory agency for the state of Texas, the Texas Commission on Environmental Quality, or “TCEQ,” plans to finalize the HRVOC rules by December 2004. Equistar is still assessing the impact of the proposed HRVOC revisions. In addition, in April 2004, the EPA designated the eight-county Houston/Galveston region a moderate non-attainment area under an “eight-hour” ozone standard. As a result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010. The TCEQ will continue with its current plan to revise the HRVOC rules in 2004. The timing and amount of the estimated expenditures are subject to these regulatory and other uncertainties, as well as to obtaining the necessary permits and approvals. There can be no assurance as to the ultimate cost of implementing any plan developed to comply with the final ozone standards.

General—Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

10. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:


	For the three months ended March 31,
Millions of dollars	2004			2003
Net income (loss)	$	5		$	(146	)
Other comprehensive loss		(2	)		—

Comprehensive income (loss)	$	3		$	(146	)

11. Segment and Related Information

Equistar operates in two reportable segments:

•	Petrochemicals, including ethylene, ethylene glycol, ethylene oxide and derivatives, propylene, butadiene, and aromatics; and

•	Polymers, primarily polyethylene.

Summarized financial information concerning Equistar’s reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.


Millions of dollars	Petrochemicals			Polymers			Unallocated			Eliminations			Total
For the three months ended March 31, 2004:
Sales and other operating revenues:
Customers	$	1,405		$	557		$	—		$	—		$	1,962
Intersegment		461			—			—			(461	)		—

Total sales and other operating revenues		1,866			557			—			(461	)		1,962
Operating income (loss)		104			(14	)		(29	)		—			61
Interest expense		—			—			(57	)		—			(57	)
Interest income		—			—			2			—			2
Other expense, net		—			—			(1	)		—			(1	)
Net income														5

For the three months ended March 31, 2003:
Sales and other operating revenues:
Customers	$	1,128		$	513		$	—		$	—		$	1,641
Intersegment		408			—			—			(408	)		—

Total sales and other operating revenues		1,536			513			—			(408	)		1,641
Operating loss		(32	)		(35	)		(29	)		—			(96	)
Interest expense		—			—			(50	)		—			(50	)
Interest income		—			—			1			—			1
Other expense, net		—			—			(1	)		—			(1	)
Net loss														(146	)

The unallocated amounts included in operating losses consisted principally of general and administrative expenses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto.

In addition to comparisons of current operating results with the same period in the prior year, Equistar Chemicals, LP (“Equistar”) has included certain “trailing quarter” comparisons of first quarter 2004 operating results to fourth quarter 2003 operating results. Equistar’s businesses are highly cyclical in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Equistar.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

Overview

General—Equistar produces and markets olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”) in its petrochemical segment. Additionally, Equistar produces and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders in its polymers segment.

In the first quarter 2004, the chemical industry benefited from improvement in economic conditions and supply/demand balances, resulting in a stronger pricing environment and improved product margins compared to the first quarter 2003. Both the first quarter 2004 and 2003 were adversely affected by high and volatile raw material and energy costs. In the first quarter 2004, the benefits of sales price increases in response to the high raw material and energy costs were generally more favorable than in the first quarter 2003, with the result that the industry generally experienced higher product margins in the first quarter 2004 than in the 2003 period.

In the first quarter 2004, ethylene producers experienced significantly higher prices for co-products such as propylene and benzene, contributing to a lower net cost of ethylene production for producers using liquid raw materials, which yield a higher ratio of co-products. Supply/demand fundamentals also improved, as evidenced by higher operating rates for ethylene producers. U.S. demand for ethylene in the first quarter 2004 grew an estimated 3% compared to the first quarter 2003.

The improving economic conditions and tight supply/demand balances in several of its products contributed to improved operating results at Equistar during the first quarter 2004 compared to the first quarter 2003. Despite first quarter 2004 crude oil prices that exceeded those experienced during the first quarter 2003, the economics of ethylene production from Equistar’s liquid-based crackers improved compared to the first quarter 2003. This was due to the significantly higher co-product sales prices in the first quarter 2004 that more than offset the impact of the higher crude oil prices. These factors contributed to generally higher product margins at Equistar in the first quarter 2004 compared to the first quarter 2003.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Olefins are produced from two major raw material groups:

•	crude oil-based liquids (“liquids”), including naphthas, condensates, and gas oils, the prices of which are generally related to crude oil prices; and

•	natural gas liquids (“NGLs”), principally ethane and propane, the prices of which are generally affected by natural gas prices.

Equistar has the ability to shift its ratio of raw materials used in the production of olefins to take advantage of the relative costs of liquids and NGLs.

The following table shows the average benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark sales prices for ethylene and co-product propylene, which Equistar produces and sells. The benchmark weighted average cost of ethylene production is based on the estimated average ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision by CMAI.


	Average Benchmark Price and Percent Change Versus Prior Year Period Average
	First Quarter 2004	Percent Change		First Quarter 2003
Crude oil – dollars per barrel	35.20	3	%	34.07
Natural gas – dollars per million BTUs	5.31	(16	)%	6.33
Weighted average cost of ethylene production– cents per pound	21.37	(4	)%	22.30
Ethylene – cents per pound	31.50	11	%	28.42
Propylene – cents per pound	27.42	21	%	22.67

While the average benchmark price of natural gas decreased 16% in the first quarter 2004 compared to the first quarter 2003, the average benchmark price of ethane, the primary NGL raw material was comparable between the two periods as first quarter 2004 ethane prices were also influenced by the high crude oil prices.

RESULTS OF OPERATIONS

Net Income (Loss)—Equistar had net income of $5 million in the first quarter 2004 compared to a net loss of $146 million in the first quarter 2003. The improvement was primarily due to higher first quarter 2004 product margins as a result of higher sales prices, especially for co-products propylene and benzene, which increased more than increases in the costs of raw materials compared to the first quarter 2003. In addition, the first quarter 2004 benefited from 5% higher ethylene and derivative sales volumes and included a $4 million gain on the sale of an idled denatured alcohol facility, while the first quarter 2003 included a loss of $12 million from the sale of a polypropylene production facility.

First Quarter 2004 versus Fourth Quarter 2003

Equistar’s first quarter 2004 net income of $5 million compares to a net loss of $104 million in the fourth quarter 2003. The $109 million improvement resulted from increases in sales prices of ethylene and ethylene derivatives, such as ethylene oxygenates and polyethylene, and co-products, such as propylene, benzene, and fuels, that more than offset an approximate $100 million increase in raw material costs. The benchmark price of ethylene in the first quarter 2004 increased nearly 3.5 cents per pound, or 13%, from the fourth quarter 2003, while the benchmark price of propylene increased nearly 7.5 cents per pound, or 36%. Co-product sales price increases alone more than offset the impact of liquid raw material cost increases, making the liquid raw materials the preferred raw material for Equistar during the first quarter 2004. Ethylene and derivative sales volumes were relatively unchanged compared

to the fourth quarter 2003. Scheduled maintenance turnaround activity at Equistar’s Corpus Christi, Texas olefins plant started during the latter weeks of the first quarter 2004. The fourth quarter 2003 included $18 million in financing costs and $6 million of charges related to employee severance.

Segment Data

The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for Equistar’s business segments.


	For the three months ended March 31,
In millions	2004			2003
Selected petrochemicals products:
Olefins (pounds)		4,277			3,921
Aromatics (gallons)		93			94
Polymers products (pounds)		1,401			1,397

Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	1,866		$	1,536
Polymers segment		557			513
Intersegment eliminations		(461	)		(408	)

Total	$	1,962		$	1,641

Cost of sales:
Petrochemicals segment	$	1,761		$	1,564
Polymers segment		557			520
Intersegment eliminations		(461	)		(408	)

Total	$	1,857		$	1,676

Other operating expenses:
Petrochemicals segment	$	1		$	4
Polymers segment		14			28
Unallocated		29			29

Total	$	44		$	61

Operating income (loss):
Petrochemicals segment	$	104		$	(32	)
Polymers segment		(14	)		(35	)
Unallocated		(29	)		(29	)

Total	$	61		$	(96	)

Petrochemicals Segment

Revenues—Revenues of $1.9 billion in the first quarter 2004 increased 21% compared to revenues of $1.5 billion in the first quarter 2003 due to higher sales prices and an 8% increase in sales volumes. Benchmark ethylene sales prices averaged 11% higher in the first quarter 2004 compared to the first quarter 2003, while benchmark propylene sales prices averaged 21% higher. Sales volumes increased in the first quarter 2004 compared to the first quarter 2003 primarily due to higher sales of co-products, such as propylene, as a result of increased co-product production, reflecting the timing of scheduled maintenance turnarounds of liquids-based ethylene plants in the first quarter 2004 relative to the first quarter 2003.

Cost of Sales—Cost of sales of $1.8 billion in the first quarter 2004 increased 13% compared to $1.6 billion in the first quarter 2003. The increase reflects the higher sales volumes and the higher cost of liquids and, to a lesser extent, NGL raw materials. The cost of liquids raw materials was affected by 3% higher crude oil costs in the first quarter 2004 compared to the first quarter 2003. Equistar also used a higher proportion of liquid raw materials in the first quarter 2004 as a result of the timing of scheduled maintenance turnarounds in the first quarter 2004 relative to the first quarter 2003.

Operating Income (Loss)—Operating income in the first quarter 2004 of $104 million compares to an operating loss of $32 million in the first quarter 2003. The improvement of $136 million was primarily due to higher product margins in the first quarter 2004 compared to the first quarter 2003.

Polymers Segment

Revenues—Revenues of $557 million in the first quarter 2004 increased 9% compared to revenues of $513 million in the first quarter 2003. The increase was primarily due to higher average sales prices in the first quarter 2004 compared to the first quarter 2003, as first quarter 2004 average sales prices were increased in response to higher raw material costs. While sales volumes in both periods were comparable, first quarter 2003 sales volumes included approximately 85 million pounds of sales related to the Pasadena, Texas polypropylene plant, which was sold on March 31, 2003. On a comparable basis, sales volumes increased 7% in the first quarter 2004 compared to the first quarter 2003.

Cost of Sales—Cost of sales of $557 million in the first quarter 2004 increased 7% compared to $520 million in the first quarter 2003. This increase reflected higher raw material costs, primarily ethylene. Benchmark ethylene costs were 11% higher in the first quarter 2004 compared to the first quarter 2003, while the first quarter 2003 included cost of sales related to the Pasadena, Texas polypropylene plant.

Other Operating Expenses—Other operating expenses were $14 million in the first quarter 2004 and $28 million in the first quarter 2003. The first quarter 2003 included the sale of Equistar’s polypropylene production facility in Pasadena, Texas, which resulted in a loss on the sale of $12 million.

Operating Loss—For the first quarter 2004, the polymers segment had an operating loss of $14 million compared to an operating loss of $35 million in the first quarter 2003. The first quarter 2003 included the sale of Equistar’s polypropylene production facility in Pasadena, Texas, which resulted in a loss on the sale of $12 million. The remainder of the improvement in the first quarter 2004 was primarily the result of higher product margins as sales prices increased more than raw material costs compared to the first quarter 2003.

FINANCIAL CONDITION

Operating Activities—Operating activities used cash of $73 million in the first quarter 2004, but they provided cash of $67 million in the first quarter 2003. The $140 million change primarily reflects a $159 million customer prepayment received in the first quarter 2003. The effect of the $5 million first quarter 2004 net income, compared to a $146 million net loss in the first quarter 2003, was substantially offset by the effect of a net increase in the main components of working capital – receivables, inventory and payables – in the first quarter 2004 compared to a net decrease in the 2003 period. In addition, the first quarter of each year includes significant payments of annual and semiannual property taxes, interest and compensation related items, which totaled $116 million in 2004 and $152 million in 2003.

In the first quarter 2004, the main components of working capital used cash of $77 million compared to providing cash of $73 million in the first quarter 2003. The increase in working capital in the first quarter 2004 reflected further escalation in product sales prices and raw material costs as well as higher sales volumes compared to the first quarter 2003. Equistar mitigated this impact through additional utilization of its accounts receivable sales facility.

In total, receivables showed no increase in the first quarter 2004 compared to a $62 million decrease in the first quarter 2003. The balance of Equistar’s accounts receivable sold under its accounts receivable sales facility increased $115 million during the first quarter 2004 to $217 million. During the first quarter 2003, the balance of accounts receivable sold increased $15 million to $96 million. This $100 million cash flow benefit was partly offset by a $30 million decrease in prepayments of receivables. In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in March 2004 and 2003 that otherwise would have been expected to be collected in April of the respective years. This included $39 million from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) in March 2004 and, in March 2003, $46 million from Occidental and $23 million from Lyondell Chemical Company (“Lyondell”).

In addition, payables decreased $12 million in the first quarter 2004 compared to a $60 million increase in the first quarter 2003. The first quarter 2003 payables increase primarily reflected the effect of high natural gas prices, which spiked to $8.79 per million BTUs in March 2003 compared to $4.88 per million BTUs in March 2004.

In the first quarter 2003, Equistar received $159 million as a partial prepayment for propylene to be delivered over a period of 15 years in connection with a long-term propylene supply arrangement.

Investing Activities—Investing activities used cash of $15 million in the first quarter 2004 and provided cash of $22 million in the first quarter 2003. The first quarter 2003 included $35 million of proceeds from sales of assets compared to $4 million in the first quarter 2004.

Equistar’s capital expenditures were $19 million in the first quarter 2004 and $13 million in the first quarter 2003. The higher level of expenditures in the first quarter 2004 reflects increased spending for regulatory and environmental compliance projects. Equistar’s capital budget for 2004 is $148 million. Equistar expects that full year 2004 capital spending will be at the budgeted level.

Financing Activities—There were no financing activities during the first quarter 2004. Cash used by financing activities was $4 million in the first quarter 2003.

In the first quarter 2003, Equistar repaid $104 million borrowed during the quarter under the revolving credit facility with a portion of the proceeds received from the 15-year propylene supply arrangement and sale of a polypropylene production facility in March 2003.

Equistar did not make distributions to its partners in the first quarter 2004, nor were any made in 2003.

Liquidity and Capital Resources—At March 31, 2004, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 59% of its total capitalization. Equistar had cash on hand of $111 million. In addition, the total amount available at March 31, 2004 under both the $250 million inventory-based revolving credit facility and the $450 million accounts receivable sales facility was approximately $384 million, which gives effect to the borrowing base and is net of a $75 million unused availability requirement, the $217 million sold under the accounts receivable sales facility and $19 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. There was no borrowing under the revolving credit facility at March 31, 2004.

Equistar’s ability to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. Management believes that conditions will be such that cash balances, cash flow from operations, cash generated from higher utilization of the accounts receivable sales facility and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. However, if future operating cash flows are less than currently anticipated, due to raw material prices or other factors, Equistar may be forced to reduce or delay capital expenditures, sell assets, or reduce operating expenditures.

Long-Term Debt—The $250 million inventory-based revolving credit facility and the indentures governing Equistar’s senior notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The breach of these covenants would permit the lenders or noteholders to declare any outstanding debt immediately payable and would permit the lenders under Equistar’s new credit facility to terminate future lending commitments. Equistar was in compliance with all covenants under these agreements as of March 31, 2004.

Off-Balance Sheet Arrangements—Equistar’s off-balance sheet arrangements are described in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2003. Equistar’s off-balance sheet arrangements did not change materially in the quarter ended March 31, 2004, except as noted below.

At March 31, 2004, the balance of Equistar’s accounts receivable sold under an accounts receivable sales facility entered into in December 2003 was $217 million. The balance sold at December 31, 2003 was $102 million. The facility accelerates availability to the business of cash from product sales that otherwise would have been collected over the normal billing and collection cycle. The availability of the accounts receivable sales facility provides one element of Equistar’s ongoing sources of liquidity and capital resources. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold, but Equistar would in no event be required to repurchase such interest.

PROPOSED TRANSACTION BETWEEN LYONDELL AND MILLENNIUM

In late March 2004, Lyondell and Millennium Chemicals Inc. (“Millennium”) executed a definitive agreement for Lyondell to acquire Millennium in a stock-for-stock business combination of the two companies. Upon completion of the transaction, Lyondell would, through subsidiaries of Lyondell and Millennium, own 100% of Equistar. The proposed transaction is subject to approval by both Lyondell and Millennium shareholders, the amendment of Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility and other customary conditions. The proposed transaction is expected to close during the third quarter of 2004; however, there can be no assurance that the proposed transaction will be completed. Lyondell and Millennium will send their respective shareholders a joint proxy statement/prospectus in connection with the proposed transaction. Investors and security holders are urged to read that document for more information about the proposed transaction.

CURRENT BUSINESS OUTLOOK

Improving industry conditions have enabled Equistar to deal with continuing high and volatile raw material and energy prices more successfully than at any other time in the past three years. Although it may be premature to say that the economy and the chemical industry have entered a sustained strong upturn, with continued solid global economic growth and some stabilization of energy prices, Equistar could benefit from improvement in both demand and product margins during the course of 2004.

Equistar’s sales volumes for key products have improved thus far in the second quarter 2004. Equistar completed a major maintenance turnaround in the second quarter of 2004, which will have some effect on the quarter’s operating results.

Item 3. Disclosure of Market and Regulatory Risk

Equistar’s exposure to market and regulatory risks is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2003. Equistar’s exposure to market and regulatory risks has not changed materially in the quarter ended March 31, 2004, except as discussed in the “Clean Air Act” section of Note 9 to the Consolidated Financial Statements.

Item 4. Controls and Procedures

Equistar performed an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer (principal executive officer) and Vice President and Controller (principal financial officer), of the effectiveness of Equistar’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of March 31, 2004. Based upon that evaluation, the Chief Executive Officer and the Vice President and Controller concluded that Equistar’s disclosure controls and procedures are effective.

There were no changes in Equistar’s internal control over financial reporting that occurred during Equistar’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Equistar’s internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget” or other words that convey the uncertainty of future events or outcomes. Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond Equistar’s control. Equistar’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to:

•	the cyclical nature of the chemical industry,

•	the availability, cost and price volatility of raw materials and utilities,

•	uncertainties associated with the United States and worldwide economies, including those due to political tensions in the Middle East and elsewhere,

•	current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries,

•	industry production capacities and operating rates,

•	the supply/demand balances for Equistar’s products,

•	competitive products and pricing pressures,

•	access to capital markets,

•	terrorist acts,

•	operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failures, unscheduled downtimes, labor difficulties, transportation interruptions, spills and releases and other environmental risks),

•	technological developments, and

•	Equistar’s ability to implement its business strategies.

Any of the factors, or a combination of these factors, could materially affect Equistar’s future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Equistar’s future performance, and Equistar’s actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and in Equistar’s Annual Report on Form 10-K for the year ended December 31, 2003. These factors are not necessarily all of the important factors that could affect Equistar. Use caution and common sense when considering these forward-looking statements. Equistar does not intend to update these statements unless securities laws require it to do so. In addition, this Form 10-Q contains summaries of contracts and other documents. These summaries may not contain all of the information that is important to an investor, and reference is made to the actual contract or document for a more complete understanding of the contract or document involved.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments with respect to Equistar’s legal proceedings previously reported in the Annual Report on Form 10-K for the year ended December 31, 2003.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


10.1(a)		Amendment No. 1 dated as of March 26, 2004 to Amended and Restated Lyondell Chemical Company Executive Severance Pay Plan

31.1		Rule 13a – 14(a)/15d – 14(a) Certification of Principal Executive Officer

31.2		Rule 13a – 14(a)/15d – 14(a) Certification of Principal Financial Officer

32.1		Section 1350 Certification of Principal Executive Officer

32.2		Section 1350 Certification of Principal Financial Officer

99.1		Consolidated Financial Statements (Unaudited) of Lyondell Chemical Company

(b) Reports on Form 8-K

There were no Current Reports on Form 8-K filed or furnished by Equistar during the quarter ended March 31, 2004 and through the date hereof.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				Equistar Chemicals, LP

Dated: May 7, 2004				/s/ Charles L. Hall
				Charles L. Hall
				Vice President and Controller (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

EX-10.1(A) 2 dex101a.htm LYONDELL CHEMICAL COMPANY EXECUTIVE SEVERANCE PAY PLAN Lyondell Chemical Company Executive Severance Pay Plan

Exhibit 10.1(a)

INSTRUMENT AMENDING

LYONDELL CHEMICAL COMPANY

EXECUTIVE SEVERANCE PAY PLAN

LYONDELL CHEMICAL COMPANY hereby amends the Lyondell Chemical Company Executive Severance Pay Plan, effective March 26, 2004, to read as follows:

SECTION 5, COMPANY BENEFIT PLANS, Subsection (a), Funding of Supplemental Executive Benefit Plans Trust, is amended to read as follows:

5. Company Benefit Plans

(a) Funding of Supplemental Executive Benefit Plans Trust. Immediately upon a Change in Control, the Company shall deposit with the trustee under the Company’s Supplemental Executive Benefit Plans Trust Agreement (the “Trust”) an amount which, together with the value of the assets then held under the Trust, will be sufficient to fund, and to enable the trustee to timely pay, the benefits due under the Supplementary Executive Retirement Plan, the Executive Deferral Plan and any other plans funded by the Trust, taking into consideration such factors as the person serving as the Chief Executive Officer of the Company immediately prior to the Change in Control or his designee deems relevant. This provision shall not be operative if the terms of the Trust otherwise would not require immediate funding.

IN WITNESS WHEREOF, LYONDELL CHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on this 22^nd day of April, 2004.

EX-31.1 3 dex311.htm CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Certification of Principal Executive Officer

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify that:

I have reviewed this quarterly report on Form 10-Q of Equistar Chemicals, LP;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 7, 2004		/s/ Dan F. Smith

		Dan F. Smith
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2 4 dex312.htm CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Certification of Principal Financial Officer

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Charles L. Hall, Vice President, Controller and Chief Accounting Officer of Equistar Chemicals, LP, certify that:

I have reviewed this quarterly report on Form 10-Q of Equistar Chemicals, LP;

(a)

(b)

(c)

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 7, 2004		/s/ Charles L. Hall

		Charles L. Hall
		Vice President, Controller and Chief Accounting Officer
		(Principal Financial Officer)

EX-32.1 5 dex321.htm CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Certification of Principal Executive Officer

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (the “Periodic Report”), I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

(2)

the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP.


Date: May 7, 2004		/s/ Dan F. Smith

		Dan F. Smith Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Equistar Chemicals, LP and will be retained by Equistar Chemicals, LP and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 6 dex322.htm CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Certification of Principal Financial Officer

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (the “Periodic Report”), I, Charles L. Hall, Vice President, Controller and Chief Accounting Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

(2)

the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP.


Date: May 7, 2004		/s/ Charles L. Hall

		Charles L. Hall Vice President, Controller and Chief Accounting Officer (Principal Financial Officer)

EX-99.1 7 dex991.htm CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF LYONDELL CHEMICAL COMPANY Consolidated Financial Statements (Unaudited) of Lyondell Chemical Company

Exhibit 99.1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	For the three months ended March 31,
Millions of dollars, except per share data	2004			2003
Sales and other operating revenues	$	1,105		$	989

Cost of sales		1,029			956
Selling, general and administrative expenses		45			42
Research and development expenses		8			9

		1,082			1,007

Operating income (loss)		23			(18	)
Interest expense		(111	)		(100	)
Interest income		2			17
Other income (expense), net		(1	)		16

Loss before equity investments and income taxes		(87	)		(85	)

Income (loss) from equity investments:
Equistar Chemicals, LP		6			(100	)
LYONDELL-CITGO Refining LP		56			19
Other		1			(2	)

		63			(83	)

Loss before income taxes		(24	)		(168	)

Benefit from income taxes		(9	)		(55	)

Net loss	$	(15	)	$	(113	)

Basic and diluted loss per share	$	(0.08	)	$	(0.70	)

See Notes to the Consolidated Financial Statements.

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


Millions, except shares and par value data	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	471		$	438
Accounts receivable:
Trade, net		401			365
Related parties		66			84
Inventories		334			347
Prepaid expenses and other current assets		84			82
Deferred tax assets		43			43

Total current assets		1,399			1,359
Property, plant and equipment, net		2,566			2,640
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		969			965
Investment in PO joint ventures		840			866
Investment in and receivable from LYONDELL-CITGO Refining LP		234			232
Other investments and long-term receivables		86			85
Goodwill		1,080			1,080
Other assets, net		390			406

Total assets	$	7,564		$	7,633

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	282		$	284
Related parties		134			147
Accrued liabilities		326			268

Total current liabilities		742			699
Long-term debt		4,151			4,151
Other liabilities		688			680
Deferred income taxes		768			792
Commitments and contingencies
Minority interest		134			155
Stockholders’ equity:
Common stock, $1.00 par value, 340,000,000 shares authorized, 142,330,000 shares issued		142			142
Series B common stock, $1.00 par value, 80,000,000 shares authorized, 37,347,341 and 36,823,421 shares issued, respectively		37			37
Additional paid-in capital		1,580			1,571
Retained deficit		(536	)		(474	)
Accumulated other comprehensive loss		(92	)		(54	)
Treasury stock, at cost, 1,785,522 and 2,360,834 shares, respectively		(50	)		(66	)

Total stockholders’ equity		1,081			1,156

Total liabilities and stockholders’ equity	$	7,564		$	7,633

See Notes to the Consolidated Financial Statements.

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the three months ended March 31,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net loss	$	(15	)	$	(113	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		63			57
(Income) losses from equity investments		(6	)		102
Deferred income taxes		(10	)		(54	)
Gain on sale of equity interest		—			(18	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(26	)		(48	)
Inventories		11			(5	)
Accounts payable		(6	)		36
Accrued interest		78			67
Income taxes refundable, net of payable		1			34
Other assets and liabilities, net		(22	)		(12	)

Net cash provided by operating activities		68			46

Cash flows from investing activities:
Expenditures for property, plant and equipment		(11	)		(9	)
Distributions from affiliates in excess of earnings		18			71
Contributions and advances to affiliates		(13	)		(51	)
Proceeds from sale of equity interest		—			28
Purchase of other short-term investments		—			(9	)

Net cash (used in) provided by investing activities		(6	)		30

Cash flows from financing activities:
Dividends paid		(31	)		(28	)
Other		3			(3	)

Net cash used in financing activities		(28	)		(31	)

Effect of exchange rate changes on cash		(1	)		—

Increase in cash and cash equivalents		33			45
Cash and cash equivalents at beginning of period		438			286

Cash and cash equivalents at end of period	$	471		$	331

See Notes to the Consolidated Financial Statements.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company (“Lyondell”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Lyondell 2003 Annual Report on Form 10-K.

2. Employee Stock Options

In the first quarter 2003, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. Lyondell is using the prospective transition method, one of three alternatives under SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, for a voluntary change to the fair value method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. This change resulted in an after-tax charge of approximately $1 million for each of the three-month periods ended March 31, 2004 and 2003.

Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized in connection with stock options granted prior to 2003 under Lyondell’s plans. The pro forma effect on net income and earnings per share of measuring compensation expense for such grants in the manner prescribed in SFAS No. 123 is summarized in the table below:


	For the three months ended March 31,
Millions of dollars, except per share data	2004			2003
Reported net loss	$	(15	)	$	(113	)
Add stock-based compensation expense included in net loss, net of tax		1			1
Deduct stock-based compensation expense using fair value method for all awards, net of tax		(1	)		(2	)

Pro forma net loss	$	(15	)	$	(114	)

Basic and diluted loss per share:
Reported	$	(0.08	)	$	(0.70	)
Pro forma	$	(0.09	)	$	(0.71	)

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Equity Interest in Equistar Chemicals, LP

Lyondell’s operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar Chemicals, LP (“Equistar”). Lyondell has a 70.5% interest in Equistar, while Millennium Chemicals Inc. (“Millennium”) has a 29.5% interest. Because the partners jointly control certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership, Lyondell accounts for its investment in Equistar using the equity method of accounting. As a partnership, Equistar is not subject to federal income taxes.

As described in Note 13, the partners have agreed to a transaction under which, if completed, Equistar, as well as Millennium, will become wholly owned consolidated subsidiaries of Lyondell.

Summarized financial information for Equistar follows:


Millions of dollars	March 31, 2004		December 31, 2003
BALANCE SHEETS
Total current assets	$	1,225	$	1,261
Property, plant and equipment, net		3,293		3,334
Investments and other assets, net		448		433

Total assets	$	4,966	$	5,028

Current maturities of long-term debt	$	1	$	—
Other current liabilities		687		754
Long-term debt		2,313		2,314
Other liabilities and deferred revenues		361		359
Partners’ capital		1,604		1,601

Total liabilities and partners’ capital	$	4,966	$	5,028


	For the three months ended March 31,
	2004			2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,962		$	1,641
Cost of sales		1,857			1,676
Selling, general and administrative expenses		41			40
Research and development expenses		7			9
(Gain) loss on asset dispositions		(4	)		12

Operating income (loss)		61			(96	)
Interest expense, net		(55	)		(49	)
Other (expense), net		(1	)		(1	)

Net income (loss)	$	5		$	(146	)

SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	76		$	78
Expenditures for property, plant and equipment		19			13

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell’s income or loss from its investment in Equistar consists of Lyondell’s share of Equistar’s income or loss and accretion of Lyondell’s investment in Equistar up to its underlying equity in Equistar’s net assets. At March 31, 2004, Lyondell’s underlying equity in Equistar’s net assets exceeded the carrying value of its investment in Equistar by approximately $162 million. This difference will be recognized in income over the next 14 years.

4. Equity Interest in LYONDELL-CITGO Refining LP

Lyondell’s refining operations are conducted through its joint venture ownership interest in LYONDELL-CITGO Refining LP (“LCR”). Lyondell has a 58.75% interest in LCR, while CITGO Petroleum Corporation (“CITGO”) has a 41.25% interest. Because the partners jointly control certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of debt and the appointment of the executive management of the partnership, Lyondell accounts for its investment in LCR using the equity method of accounting. As a partnership, LCR is not subject to federal income taxes.

Summarized financial information for LCR follows:


Millions of dollars	March 31, 2004		December 31, 2003
BALANCE SHEETS
Total current assets	$	328	$	316
Property, plant and equipment, net		1,230		1,240
Other assets		78		81

Total assets	$	1,636	$	1,637

Bank loan facility	$	450	$	450
Other current liabilities		381		386
Loans payable to partners		264		264
Other liabilities		118		114
Partners’ capital		423		423

Total liabilities and partners’ capital	$	1,636	$	1,637


	For the three months ended March 31,
	2004		2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,154	$	1,183
Cost of sales		1,037		1,133
Selling, general and administrative expenses		16		12

Operating income		101		38
Interest expense, net		(10)		(10)

Net income	$	91	$	28

SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	30	$	28
Expenditures for property, plant and equipment		15		15

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell’s income from its investment in LCR consists of Lyondell’s share of LCR’s net income and accretion of Lyondell’s investment in LCR up to its underlying equity in LCR’s net assets. At March 31, 2004, Lyondell’s underlying equity in LCR’s net assets exceeded the carrying value of its investment in LCR by approximately $256 million. This difference will be recognized in income over the next 24 years.

At March 31, 2004, LCR had $450 million outstanding under a bank loan facility and a $70 million working capital revolving credit facility, both of which expire in June 2004. LCR has entered into agreements with a major financial institution to refinance the facilities with a $450 million senior secured term loan facility and a $100 million senior secured revolving credit facility. The new three-year facilities would have terms similar to the existing facilities, would be secured by substantially all of the assets of LCR and would contain covenants that require LCR to maintain specified financial ratios. The refinancing is expected to be completed in May 2004.

Also, during May 2004, Lyondell and CITGO extended the maturity of the loans payable to partners, including $229 million payable to Lyondell and $35 million payable to CITGO, from March 31, 2005 to July 1, 2005. As part of the refinancing, the maturity would be further extended to a date six months after the maturity of the new senior secured facilities.

5. Inventories

Inventories consisted of the following components:


Millions of dollars	March 31, 2004		December 31, 2003
Finished goods	$	257	$	269
Work-in-process		7		7
Raw materials		32		33
Materials and supplies		38		38

Total inventories	$	334	$	347

6. Property, Plant and Equipment, Net

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:


Millions of dollars	March 31, 2004			December 31, 2003
Land	$	11		$	11
Manufacturing facilities and equipment		3,390			3,453
Construction in progress		38			15

Total property, plant and equipment		3,439			3,479
Less accumulated depreciation		(873	)		(839	)

Property, plant and equipment, net	$	2,566		$	2,640

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Depreciation and amortization is summarized as follows:


	For the three months ended March 31,
Millions of dollars	2004		2003
Property, plant and equipment	$	44	$	40
Investment in PO joint ventures		12		8
Turnaround costs		3		4
Software costs		2		2
Other		2		3

Total depreciation and amortization	$	63	$	57

In addition, amortization of debt issuance costs of $4 million for each of the three-month periods ended March 31, 2004 and 2003 is included in interest expense in the Consolidated Statements of Income.

7. Long-Term Debt

Long-term debt consisted of the following:


Millions of dollars	March 31, 2004			December 31, 2003
Bank credit facility:
Revolving credit facility	$	—		$	—
Other debt obligations:
Senior Secured Notes, Series A due 2007, 9.625%		900			900
Senior Secured Notes, Series B due 2007, 9.875%		1,000			1,000
Senior Secured Notes due 2008, 9.5%		730			730
Senior Secured Notes due 2012, 11.125%		278			278
Senior Secured Notes due 2013, 10.5%		325			325
Senior Subordinated Notes due 2009, 10.875%		500			500
Debentures due 2005, 9.375%		100			100
Debentures due 2010, 10.25%		100			100
Debentures due 2020, 9.8%		225			225
Other		2			2
Unamortized discount		(9	)		(9	)

Total long-term debt		4,151			4,151
Less current maturities		—			—

Long-term debt, net	$	4,151		$	4,151

In February 2004, in response to ongoing adverse conditions in the industry, Lyondell obtained further amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefit costs included the following components for the three months ended March 31:


	Pension Benefits						Other Postretirement Benefits
Millions of dollars	2004			2003			2004		2003
Components of net periodic benefit cost:
Service cost	$	6		$	5		$	1	$	1
Interest cost		10			10			1		1
Recognized gain on plan assets		(7	)		(6	)		—		—
Actuarial and investment loss amortization		6			6			—		—

Net periodic benefit cost	$	15		$	15		$	2	$	2

Lyondell previously disclosed, in its financial statements for the year ended December 31, 2003, that it expected to contribute approximately $57 million to its pension plans in 2004. As a result of pension funding relief legislation enacted in April 2004, Lyondell estimates that the 2004 pension contribution will decrease to approximately $36 million.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted in December 2003. In January 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP FAS 106-1 permitted Lyondell to make a one-time election to defer recognition of the effects of the Act in accounting for its plans until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Lyondell elected to make the one-time deferral and is currently awaiting further FASB guidance as well as pending regulatory guidance, which will enable it to conclude whether the benefits provided under its plan are actuarially equivalent to the benefits under the Act and, therefore, entitled to a subsidy. Accordingly, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy.

9. Commitments and Contingencies

Crude Supply Agreement—Under a crude supply agreement (“Crude Supply Agreement” or “CSA”), PDVSA Petróleo, S.A. (“PDVSA Oil”) is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of LCR’s rated refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. At such times, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments to LCR under a different provision of the CSA in partial compensation for such reductions.

LCR has consistently contested the validity of the reductions in deliveries by PDVSA Oil and Petróleos de Venezuela, S.A. (“PDVSA”) under the CSA. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, in February 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations, which LCR is continuing to litigate.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

From time to time, Lyondell and PDVSA have had discussions covering both a restructuring of the CSA and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances.

Depending on then-current market conditions, any breach or termination of the CSA, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. There can be no assurance that alternative crude oil supplies with similar margins would be available for purchase by LCR.

Indemnification Arrangements Relating to Equistar—Lyondell, Millennium and Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of March 31, 2004, Equistar had incurred the full $7 million with respect to the indemnification basket for the business contributed by Lyondell. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.

Environmental Remediation—As of March 31, 2004, Lyondell’s environmental liability for future remediation costs at current and former plant sites and a limited number of Superfund sites totaled $15 million. Substantially all amounts accrued are expected to be incurred over the next ten years. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the range of projected capital expenditures for Lyondell and its joint ventures to comply with the one-hour ozone standard and the 80% NOx emission reduction requirements:


Millions of dollars	Range of Estimates
NOx capital expenditures – 100% basis:
Lyondell	$	35 - 45
Equistar		165 - 200
LCR		50 - 55

Total NOx capital expenditures	$	250 - 300

NOx capital expenditures – Lyondell proportionate share:
Lyondell – 100%	$	35 - 45
Equistar – 70.5%		115 - 140
LCR – 58.75%		30 - 35

Total Lyondell proportionate share NOx capital expenditures	$	180 - 220

Cumulative capital expenditures through March 31, 2004 by Lyondell, Equistar and LCR totaled $11 million, $80 million and $11 million, respectively. Lyondell’s proportionate share of the spending through March 31, 2004 totaled $74 million.

The above range of estimates could be affected by increased costs for stricter proposed controls over highly reactive, volatile organic compounds (“HRVOCs”). The regulatory agency for the state of Texas, the Texas Commission on Environmental Quality, or “TCEQ,” plans to finalize the HRVOC rules by December 2004. Lyondell, Equistar and LCR are still assessing the impact of the proposed HRVOC revisions. In addition, in April 2004, the EPA designated the eight-county Houston/Galveston region a moderate non-attainment area under an “eight-hour” ozone standard. As a result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010. The TCEQ will continue with its current plan to revise the HRVOC rules in 2004. The timing and amount of the estimated expenditures are subject to these regulatory and other uncertainties, as well as to obtaining the necessary permits and approvals. There can be no assurance as to the ultimate cost of implementing any plan developed to comply with the final ozone standards.

The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether (“MTBE”), in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. During 2003, the U.S. House of Representatives and the U.S. Senate produced an energy bill that would have phased out the use of MTBE over 10 years, but also provided limited liability protection for MTBE. The House of Representatives passed the bill as reported out of conference, but the Senate has not. Various versions of an energy bill have been considered in the Senate in 2004 that would phase out use of MTBE, but would not provide liability protection. The final form and timing of the reconciliation of these competing versions of the energy bill in the U.S. Congress is uncertain.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At the state level, a number of states have legislated MTBE bans. Of these, several are mid-West states that use ethanol as the oxygenate of choice. Therefore, bans in these states do not impact MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective January 1, 2004. These bans started to negatively affect MTBE demand during late 2003. In addition, in 2003 several major oil companies substantially reduced or discontinued the use of MTBE in gasoline produced for California markets, negatively affecting 2003 demand. Lyondell estimates that, in 2003, California, Connecticut and New York combined represented approximately one-fourth of U.S. MTBE industry demand. Other Northeastern states have enacted or have proposed future MTBE bans and gasoline blenders in these states are making decisions that would lead to deselection of MTBE, which will also negatively impact U.S. MTBE industry demand.

At this time, Lyondell cannot predict the full impact that these potential U.S. federal and state governmental initiatives and state bans will have on MTBE margins or volumes longer term. Lyondell’s North American MTBE sales represented approximately 17% of its total 2003 revenues. Lyondell intends to continue marketing MTBE in the U.S. In the short term, in response to market conditions, Lyondell is capable of adjusting, within design limits, the relative ratios of propylene oxide (“PO”) and tertiary butyl alcohol (“TBA”) produced at its PO/TBA plants. It can also shift more of its PO production to PO/SM plants from PO/TBA plants, as necessary. This flexibility has increased with the fourth quarter 2003 startup of the Maasvlakte PO/SM plant. However, should it become necessary or desirable to significantly reduce MTBE production, Lyondell would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene or ethyl tertiary butyl ether (“ETBE”), at its U.S.-based MTBE plant. Under the more expensive iso-octane alternative, the current estimated costs for converting Lyondell’s U.S.-based MTBE plant to iso-octane production range from $65 million to $75 million. Alternatively, Lyondell’s U.S.-based MTBE plant could be converted to ETBE production with minimal capital expenditure. Lyondell is pursuing ETBE viability through legislative efforts. One key hurdle is equal access to the federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE. Lyondell has not made any capital commitments regarding any of these alternatives at this time, and any ultimate decision will depend upon further regulatory and market developments. The profit contribution related to alternative gasoline blending components is likely to be lower than that historically realized on MTBE.

The Clean Air Act also specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and required refiners to phase in production of a lower sulfur-content gasoline in 2004, with final compliance by 2007. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel fuel to produce 80% as ultra low sulfur diesel (“ULSD”) by June 2006 and 100% by the end of 2009, with less stringent standards for “off road” diesel fuel. To date, the off-road diesel fuel standards have not been finalized. These gasoline and diesel fuel standards will result in increased capital investment for LCR.

In 2003, LCR developed alternative approaches to complying with the low sulfur gasoline standard and the new diesel fuel standard that will lead to an approximate $300 million reduction in overall estimated capital expenditures for these projects. As a result, LCR recognized impairment of value of $25 million of project costs incurred to date. The revised estimated spending for these projects, excluding the $25 million charge, totaled between $165 million to $205 million. LCR significantly reduced the estimated costs for implementing the new diesel standards as a result of its ability to retrofit current production units. The revised estimated cost for the new diesel standards also reflects LCR’s implementation strategy for producing ULSD and “off road” diesel. LCR has spent approximately $28 million, excluding the $25 million charge, as of March 31, 2004 for both the gasoline and diesel fuel standards projects. Lyondell’s 58.75% share of these incremental capital expenditures for these projects is not expected to exceed $120 million. In addition, these standards could result in higher operating costs for LCR. Equistar’s business may also be impacted if these standards increase the cost for processing fuel components.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

General—Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material effect on the financial position, liquidity or results of operations of Lyondell.

In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on Lyondell’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of others, or by any insurance coverage that may be available.

10. Per Share Data

Basic earnings per share for the periods presented are computed based upon the weighted average number of shares of original common stock and Series B common stock outstanding during the periods. Diluted earnings per share also include the effect of stock options issued and outstanding warrants. These stock options and warrants were antidilutive for the periods presented. Loss per share data and dividends declared per share of common stock were as follows:


	For the three months ended March 31,
	2004		2003
Basic and diluted weighted average shares, in thousands		176,543		160,419

Basic and diluted loss per share	$	(0.08)	$	(0.70)

Dividends declared per share of common stock	$	0.225	$	0.225

11. Comprehensive Loss

The components of the comprehensive loss were as follows:


	For the three months ended March 31,
Millions of dollars	2004		2003
Net loss	$	(15)	$	(113)
Other comprehensive gain (loss):
Foreign currency translation gain (loss)		(36)		52
Other		(2)		—

Total other comprehensive gain (loss)		(38)		52

Comprehensive loss	$	(53)	$	(61)

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Segment and Related Information

Lyondell operates in four reportable segments:

•

Intermediate chemicals and derivatives (“IC&D”), including PO, propylene glycol, propylene glycol ethers, butanediol, toluene diisocyanate, styrene, and TBA and its primary derivative, MTBE;

•

Petrochemicals, which include ethylene, propylene, butadiene, oxygenated products and aromatics;

•

Polymers, which primarily include polyethylene and polypropylene; and

•

Refining of crude oil.

Lyondell’s entire $1.1 billion balance of goodwill is allocated to the IC&D segment.

Summarized financial information concerning reportable segments is shown in the following table for the three months ended:


Millions of dollars	IC&D			Petrochemicals			Polymers			Refining		Unallocated			Total
March 31, 2004:
Sales and other operating revenues	$	1,105		$	—		$	—		$	—	$	—		$	1,105
Operating income		23			—			—			—		—			23
Interest expense					—			—			—		(111	)		(111	)
Interest income					—			—			—		2			2
Other expense, net		(1	)		—			—			—		—			(1	)
Income (loss) from equity investments		1			73			(10	)		56		(57	)		63
Loss before income taxes																(24	)

March 31, 2003:
Sales and other operating revenues	$	989		$	—		$	—		$	—	$	—		$	989
Operating loss		(18	)		—			—			—		—			(18	)
Interest expense		—			—			—			—		(100	)		(100	)
Interest income		—			—			—			—		17			17
Other income, net		16			—			—			—		—			16
Income (loss) from equity investments		(2	)		(22	)		(25	)		19		(53	)		(83	)
Loss before income taxes																(168	)

“Income (loss) from equity investments - Unallocated” as presented above consists of Equistar items not allocated to segments, principally general and administrative expenses and interest expense, net.

13. Proposed Transaction with Millennium

In late March 2004, Lyondell and Millennium executed a definitive agreement for Lyondell to acquire Millennium in a stock-for-stock business combination of the two companies. The proposed transaction is subject to approval by both Lyondell and Millennium shareholders, the amendment of Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility and other customary conditions. Lyondell anticipates that the proposed transaction will close during the third quarter of 2004; however, there can be no assurance that the proposed transaction will be completed.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Supplemental Guarantor Information

ARCO Chemical Technology Inc. (“ACTI”), ARCO Chemical Technology L.P. (“ACTLP”) and Lyondell Chemical Nederland, Ltd. (“LCNL”) are guarantors, jointly and severally, (collectively “Guarantors”) of the following (see Note 7):

•

Senior Secured Notes, Series A due 2007, 9.625%

•

Senior Secured Notes, Series B due 2007, 9.875%

•

Senior Secured Notes due 2008, 9.5%

•

Senior Secured Notes due 2012, 11.125%

•

Senior Secured Notes due 2013, 10.5%, and

•

Senior Subordinated Notes due 2009, 10.875%.

LCNL, a Delaware corporation and a wholly owned subsidiary of Lyondell, owns a Dutch subsidiary that operates chemical production facilities near Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of March 31, 2004 and December 31, 2003 and for the three-month periods ended March 31, 2004 and 2003.

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)

BALANCE SHEET

As of March 31, 2004


Millions of dollars	Lyondell		Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Total current assets	$	837	$	239	$	323		$	—		$	1,399
Property, plant and equipment, net		808		845		913			—			2,566
Investments and long-term receivables		5,683		612		1,863			(6,029	)		2,129
Goodwill, net		723		130		227			—			1,080
Other assets		268		72		50			—			390

Total assets	$	8,319	$	1,898	$	3,376		$	(6,029	)	$	7,564

Current liabilities	$	468	$	138	$	136			—		$	742
Long-term debt		4,149		—		2			—			4,151
Other liabilities		619		44		25			—			688
Deferred income taxes		507		174		87			—			768
Intercompany liabilities (assets)		1,495		130		(1,625	)		—			—
Minority interest		—		—		134			—			134
Stockholders’ equity		1,081		1,412		4,617			(6,029	)		1,081

Total liabilities and stockholders’ equity	$	8,319	$	1,898	$	3,376		$	(6,029	)	$	7,564

BALANCE SHEET

As of December 31, 2003


Millions of dollars	Lyondell		Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Total current assets	$	824	$	212	$	323		$	—		$	1,359
Property, plant and equipment, net		817		879		944			—			2,640
Investments and long-term receivables		5,655		630		1,861			(5,998	)		2,148
Goodwill, net		723		130		227			—			1,080
Other assets		271		76		59			—			406

Total assets	$	8,290	$	1,927	$	3,414		$	(5,998	)	$	7,633

Current maturities of long-term debt	$	—	$	—	$	—		$	—		$	—
Other current liabilities		441		142		116			—			699
Long-term debt		4,149		—		2			—			4,151
Other liabilities		609		44		27			—			680
Deferred income taxes		517		185		90			—			792
Intercompany liabilities (assets)		1,418		145		(1,563	)		—			—
Minority interest		—		—		155			—			155
Stockholders’ equity		1,156		1,411		4,587			(5,998	)		1,156

Total liabilities and stockholders’ equity	$	8,290	$	1,927	$	3,414		$	(5,998	)	$	7,633

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Three Months Ended March 31, 2004


Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	692		$	330		$	240		$	(157	)	$	1,105
Cost of sales		624			313			249			(157	)		1,029
Selling, general and administrative expenses		33			5			7			—			45
Research and development expenses		8			—			—			—			8

Operating income (loss)		27			12			(16	)		—			23
Interest income (expense), net		(110	)		—			1			—			(109	)
Other income (expense), net		(19	)		(1	)		19			—			(1	)
Income (loss) from equity investments		102			—			63			(102	)		63
Intercompany income		(24	)		10			14			—			—
(Benefit from) provision for income taxes		(9	)		8			30			(38	)		(9	)

Net income (loss)	$	(15	)	$	13		$	51		$	(64	)	$	(15	)

STATEMENT OF INCOME

For the Three Months Ended March 31, 2003


Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	622		$	260		$	555		$	(448	)	$	989
Cost of sales		644			246			514			(448	)		956
Selling, general and administrative expenses		22			6			14			—			42
Research and development expenses		9			—			—			—			9

Operating income (loss)		(53	)		8			27			—			(18	)
Interest income (expense), net		(88	)		4			1			—			(83	)
Other income (expense), net		(18	)		—			34			—			16
Income (loss) from equity investments		22			(2	)		(81	)		(22	)		(83	)
Intercompany income		(31	)		10			21			—			—
(Benefit from) provision for income taxes		(55	)		7			1			(8	)		(55	)

Net income (loss)	$	(113	)	$	13		$	1		$	(14	)	$	(113	)

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2004


Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income (loss)	$	(15	)	$	13		$	51		$	(64	)	$	(15	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		17			17			29			—			63
Income from equity investments		—			—			(6	)		—			(6	)
Deferred income taxes		(4	)		(6	)		—			—			(10	)
Intercompany (receivables) payables, net		7			(15	)		(18	)		26			—
Net changes in other assets and liabilities		53			1			(18	)		—			36

Net cash provided by (used in) operating activities		58			10			38			(38	)		68

Expenditures for property, plant and equipment		(8	)		(2	)		(1	)		—			(11	)
Distributions from affiliates in excess of earnings		—			10			8			—			18
Contributions and advances to affiliates		—			(2	)		(11	)		—			(13	)

Net cash provided by (used in) investing activities		(8	)		6			(4	)		—			(6	)

Dividends paid		(31	)		—			(38	)		38			(31	)
Other		3			—			—			—			3

Net cash used in financing activities		(28	)		—			(38	)		38			(28	)

Effect of exchange rate changes on cash		—			12			(13	)		—			(1	)

Increase (decrease) in cash and cash equivalents	$	22		$	28		$	(17	)	$	—		$	33

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS—(Continued)

For the Three Months Ended March 31, 2003


Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income (loss)	$	(79	)	$	13		$	1		$	(48	)	$	(113	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization		18			12			27			—			57
Losses from equity investments		—			2			100			—			102
Deferred income taxes		(68	)		—			14			—			(54	)
Gain on sale of equity interest		—			—			(18	)		—			(18	)
Intercompany (receivables) payables, net		104			9			(104	)		(9	)		—
Net changes in other assets and liabilities		104			(2	)		(30	)		—			72

Net cash provided by (used in) operating activities		79			34			(10	)		(57	)		46

Expenditures for property, plant and equipment		(6	)		(1	)		(2	)		—			(9	)
Distributions from affiliates in excess of earnings		—			—			71			—			71
Contributions and advances to affiliates		—			(27	)		(24	)		—			(51	)
Proceeds from sale of equity interest		—			—			28			—			28
Purchase of other short-term investments		(9	)		—			—			—			(9	)

Net cash provided by (used in) investing activities		(15	)		(28	)		73			—			30

Dividends paid		(28	)		—			(57	)		57			(28	)
Other		(3	)		—			—			—			(3	)

Net cash used in financing activities		(31	)		—			(57	)		57			(31	)

Increase in cash and cash equivalents	$	33		$	6		$	6		$	—		$	45

-----END PRIVACY-ENHANCED MESSAGE-----