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 June 30, 2004

OR

¨ 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 June 30,						For the six months ended June 30,
Millions of dollars	2004			2003			2004			2003
Sales and other operating revenues:
Trade	$	1,582		$	1,217		$	3,072		$	2,444
Related parties		517			380			989			794
		2,099			1,597			4,061			3,238
Cost of sales		1,951			1,517			3,808			3,193
Selling, general and administrative expenses		41			44			82			84
Research and development expenses		8			10			15			19
(Gain) loss on asset dispositions		—			2			(4	)		14
		2,000			1,573			3,901			3,310
Operating income (loss)		99			24			160			(72	)
Interest expense		(57	)		(56	)		(114	)		(106	)
Interest income		2			3			4			4
Other expense, net		(1	)		(20	)		(2	)		(21	)
Net income (loss)	$	43		$	(49	)	$	48		$	(195	)

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

Millions of dollars	June 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	143		$	199
Accounts receivable:
Trade, net		565			471
Related parties		167			137
Inventories		512			408
Prepaid expenses and other current assets		43			46
Total current assets		1,430			1,261
Property, plant and equipment, net		3,224			3,334
Investments		61			60
Other assets, net		399			373
Total assets	$	5,114		$	5,028
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	510		$	462
Related parties		61			51
Current maturities of long-term debt		1			—
Accrued liabilities		210			241
Total current liabilities		782			754
Long-term debt		2,312			2,314
Other liabilities and deferred revenues		374			359
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,667			1,619
Accumulated other comprehensive loss		(21	)		(18	)
Total partners’ capital		1,646			1,601
Total liabilities and partners’ capital	$	5,114		$	5,028

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended June 30,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net income (loss)	$	48		$	(195	)
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
Depreciation and amortization		153			154
Deferred revenues		—			159
Deferred maintenance turnaround expenditures		(51	)		(51	)
Debt prepayment premiums and charges		—			19
(Gain) loss on asset dispositions		(4	)		14
Changes in assets and liabilities that (used) provided cash:
Accounts receivable		(124	)		66
Inventories		(104	)		(66	)
Accounts payable		62			23
Other assets and liabilities, net		(36	)		(24	)
Cash (used in) provided by operating activities		(56	)		99
Cash flows from investing activities:
Expenditures for property, plant and equipment		(41	)		(34	)
Proceeds from sales of assets		41			54
Cash provided by investing activities		—			20
Cash flows from financing activities:
Issuance of long-term debt		—			440
Repayment of long-term debt		—			(440	)
Other		—			(3	)
Cash used in financing activities		—			(3	)
(Decrease) increase in cash and cash equivalents		(56	)		116
Cash and cash equivalents at beginning of period		199			27
Cash and cash equivalents at end of period	$	143		$	143

See Notes to the Consolidated Financial Statements.

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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 Millennium, own 100% of Equistar. The proposed transaction is subject to approval by Lyondell and Millennium shareholders and other customary conditions. The proposed transaction is expected to close during the fourth quarter of 2004; however, there can be no assurance that the proposed transaction will be completed.

3. Accounts Receivable

The outstanding amount of Equistar’s accounts receivable sold under its $450 million, four-year accounts receivable sales facility was $122 million at June 30, 2004 and $102 million at December 31, 2003.

4. Inventories

Inventories consisted of the following:

Millions of dollars	June 30, 2004		December 31, 2003
Finished goods	$	270	$	223
Work-in-process		16		12
Raw materials		136		83
Materials and supplies		90		90
Total inventories	$	512	$	408

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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	June 30, 2004			December 31, 2003
Land	$	77		$	76
Manufacturing facilities and equipment		6,015			6,015
Construction in progress		66			63
Total property, plant and equipment		6,158			6,154
Less accumulated depreciation		(2,934	)		(2,820	)
Property, plant and equipment, net	$	3,224		$	3,334

Depreciation and amortization is summarized as follows:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2004		2003		2004		2003
Property, plant and equipment	$	61	$	61	$	121	$	124
Turnaround costs		10		7		19		14
Software costs		4		4		8		8
Other		2		4		5		8
Total depreciation and amortization	$	77	$	76	$	153	$	154

In addition, amortization of debt issuance costs of $2 million for each of the three-month periods ended June 30, 2004 and 2003, and $3 million and $4 million for the six-month periods ended June 30, 2004 and 2003, respectively, is included in interest expense in the Consolidated Statements of Income.

6. Deferred Revenues

Deferred revenues as of June 30, 2004 of $164 million represent advances from customers for partial prepayments for products to be delivered under long-term product supply contracts. Trade sales and other operating revenues include $4 million in each of the three-month periods ended June 30, 2004 and 2003, and $8 million and $4 million in the six- month periods ended June 30, 2004 and 2003, respectively, of such previously deferred revenues.

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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	June 30, 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		3		4
Unamortized premium, net		10		10
Total long-term debt		2,313		2,314
Less current maturities		1		—
Total long-term debt, net	$	2,312	$	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 June 30, 2004.

8. Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefit costs included the following components for the periods presented:

	Pension Benefits												Other Postretirement Benefits
	For the three months ended June 30,						For the six months ended June 30,						For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2004			2003			2004			2003			2004		2003		2004		2003
Components of net periodic benefit cost:
Service cost	$	4		$	5		$	9		$	9		$	—	$	—	$	1	$	1
Interest cost		3			2			6			5			2		2		4		4
Recognized gain on plan assets		(2	)		(2	)		(5	)		(4	)		—		—		—		—
Actuarial and investment loss amortization		1			1			2			3			1		1		1		1
Net periodic benefit cost	$	6		$	6		$	12		$	13		$	3	$	3	$	6	$	6

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, and Equistar elected, to defer recognition of the effects of the Act in accounting for its plans until the FASB developed and issued authoritative guidance on accounting for subsidies provided by the Act. In May 2004, the FASB issued FSP FAS 106-2 of the same title, which gave final guidance on accounting for subsidies under the Act and requires Equistar to implement its

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EQUISTAR CHEMICALS, LP

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

provisions no later than the third quarter 2004, if the effects are significant. Equistar is currently evaluating the impact of FSP FAS 106-2 and the Act. Through June 30, 2004, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy. Equistar does not expect the effects of the Act to be a significant event and will recognize the effects at the next measurement date for plan assets and obligations, which is expected to be December 31, 2004.

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 $148 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. As of June 30, 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 and will continue to remain liable to the same extent after the closing of the proposed transaction between Lyondell and Millennium – see Note 2.

Environmental Remediation—Equistar’s accrued liability for environmental matters as of June 30, 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 June 30, 2004 totaled $85 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 is continuing 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.

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EQUISTAR CHEMICALS, LP

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

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.

10. Comprehensive Income (Loss)

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

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars	2004			2003			2004			2003
Net income (loss)	$	43		$	(49	)	$	48		$	(195	)
Other comprehensive loss		(1	)		—			(3	)		—
Comprehensive income (loss)	$	42		$	(49	)	$	45		$	(195	)

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EQUISTAR CHEMICALS, LP

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

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 then-current market prices.

Millions of dollars	Petrochemicals		Polymers			Unallocated			Eliminations			Total
For the three months ended June 30, 2004:
Sales and other operating revenues:
Customers	$	1,496	$	603		$	—		$	—		$	2,099
Intersegment		471		—			—			(471	)		—
Total sales and other operating revenues		1,967		603			—			(471	)		2,099
Operating income (loss)		136		(6	)		(31	)		—			99
For the three months ended June 30, 2003:
Sales and other operating revenues:
Customers	$	1,152	$	445		$	—		$	—		$	1,597
Intersegment		329		—			—			(329	)		—
Total sales and other operating revenues		1,481		445			—			(329	)		1,597
Operating income (loss)		85		(27	)		(34	)		—			24
For the six months ended June 30, 2004:
Sales and other operating revenues:
Customers	$	2,901	$	1,160		$	—		$	—		$	4,061
Intersegment		932		—			—			(932	)		—
Total sales and other operating revenues		3,833		1,160			—			(932	)		4,061
Operating income (loss)		240		(20	)		(60	)		—			160
For the six months ended June 30, 2003:
Sales and other operating revenues:
Customers	$	2,280	$	958		$	—		$	—		$	3,238
Intersegment		737		—			—			(737	)		—
Total sales and other operating revenues		3,017		958			—			(737	)		3,238
Operating income (loss)		53		(62	)		(63	)		—			(72	)

The unallocated amounts included in operating income (loss) consisted principally of general and administrative expenses.

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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 of Equistar Chemicals, LP (“Equistar”) and the notes thereto.

In addition to comparisons of current operating results with the same period in the prior year, Equistar has included certain “trailing quarter” comparisons of second quarter 2004 operating results to first quarter 2004 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.

The global economy strengthened and chemical industry supply/demand balances improved during the first six months of 2004. However, the high level and volatility of raw material and energy costs during this period offset some of the benefits of the stronger economy and improved supply/demand balances.

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 CMAI’s estimated average ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision.

	Average Benchmark Price
	For the three months ended June 30,		For the six months ended June 30,
	2004	2003	2004	2003
Crude oil – dollars per barrel	38.30	29.03	36.75	31.55
Natural gas – dollars per million BTUs	5.88	5.26	5.60	5.80
Weighted average cost of ethylene production – cents per pound	20.32	17.26	20.92	19.78
Ethylene – cents per pound	31.50	30.33	31.50	29.38
Propylene – cents per pound	30.75	23.50	29.08	23.08

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In the second quarter 2004, as indicated by the benchmark crude oil and natural gas prices in the above table, raw material and energy costs continued in an upward trend, while in the second quarter 2003 these costs moderated somewhat. This resulted in more pressure on industry product margins in the second quarter 2004 compared to the second quarter 2003.

On the other hand, the improvement in the global economy and industry supply/demand balances contributed to steady industry demand in the second quarter 2004, whereas in the second quarter 2003, demand weakened due to economic uncertainties. As a result, the second quarter and first six months of 2004 generally saw higher industry sales volumes than the comparable 2003 periods. Second quarter 2004 U.S. ethylene demand grew 17% compared to a weak second quarter 2003, while six-month 2004 demand grew 9% compared to the first six months of 2003.

For Equistar, the above factors contributed to lower average product margins but higher sales volumes in the second quarter 2004 compared to the second quarter 2003. In the first six months of 2004 compared to the first six months of 2003, Equistar benefited from higher sales volumes and higher average product margins. In the first six months of 2004, Equistar and other ethylene producers using crude oil-based liquid raw materials benefited from significantly higher prices for co-products such as propylene, benzene and fuels, which acted to offset the effect of high crude oil prices on the cost of such raw materials. The stronger domestic gasoline market in 2004 benefited fuels-related products at Equistar.

RESULTS OF OPERATIONS

Net Income—Equistar had net income of $43 million in the second quarter 2004 compared to a net loss of $49 million in the second quarter 2003. The $92 million improvement was primarily due to higher second quarter 2004 ethylene and derivative sales volumes, which increased 25% compared to the second quarter 2003. The improvement in sales volumes was partly offset by lower ethylene and polyethylene product margins as higher raw material and energy costs during the 2004 period were not entirely recovered by increases in sales prices. Raw material costs increased significantly as crude oil prices averaged more than 30% higher than during the second quarter 2003. The second quarter 2003 was negatively affected by $19 million of refinancing costs.

Equistar had net income of $48 million in the first six months of 2004 compared to a net loss of $195 million in the first six months of 2003. The $243 million improvement resulted from higher product margins and sales volumes in the first six months of 2004 compared to the first six months of 2003. Ethylene and derivative sales volumes increased 14% compared to the first six months of 2003. In addition to the $19 million of refinancing costs, the first six months of 2003 included a $12 million loss from the sale of a polypropylene production facility.

Second Quarter 2004 versus First Quarter 2004

Equistar’s second quarter 2004 net income of $43 million compares to net income of $5 million in the first quarter 2004. The $38 million improvement resulted from increases in sales prices of co-products, such as propylene, benzene and fuels, and ethylene derivatives that more than offset increases in raw material costs. The benchmark price of propylene increased nearly 3.5 cents per pound, or 12%, and the benchmark price of benzene increased 51 cents per gallon, or 27%, from the first quarter 2004, while the benchmark price of ethylene was unchanged. Ethylene and derivative sales volumes increased 3.5% compared to the first quarter 2004.

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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 June 30,						For the six months ended June 30,
In millions	2004			2003			2004			2003
Selected petrochemicals products:
Olefins (pounds)		4,383			3,723			8,660			7,644
Aromatics (gallons)		80			98			173			192
Polymers products (pounds)		1,514			1,143			2,915			2,540
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	1,967		$	1,481		$	3,833		$	3,017
Polymers segment		603			445			1,160			958
Intersegment eliminations		(471	)		(329	)		(932	)		(737	)
Total	$	2,099		$	1,597		$	4,061		$	3,238
Cost of sales:
Petrochemicals segment	$	1,826		$	1,392		$	3,587		$	2,956
Polymers segment		596			454			1,153			974
Intersegment eliminations		(471	)		(329	)		(932	)		(737	)
Total	$	1,951		$	1,517		$	3,808		$	3,193
Other operating expenses:
Petrochemicals segment	$	4		$	4		$	5		$	8
Polymers segment		14			18			28			46
Unallocated		31			34			60			63
Total	$	49		$	56		$	93		$	117
Operating income (loss):
Petrochemicals segment	$	136		$	85		$	240		$	53
Polymers segment		(6	)		(27	)		(20	)		(62	)
Unallocated		(31	)		(34	)		(60	)		(63	)
Total	$	99		$	24		$	160		$	(72	)

Petrochemicals Segment

Revenues—Revenues of $2.0 billion in the second quarter 2004 increased 33% compared to revenues of $1.5 billion in the second quarter 2003, while revenues of $3.8 billion in the first six months of 2004 increased 27% compared to revenues of $3.0 billion in the first six months of 2003. The increases reflect higher average sales prices and higher sales volumes during the 2004 periods compared to the 2003 periods. Benchmark ethylene sales prices increased 4% in the second quarter 2004 compared to the second quarter 2003 and 7% in the first six months of 2004 compared to the first six months of 2003, while benchmark propylene sales prices averaged 31% higher in the second quarter 2004 compared to the second quarter 2003 and 26% higher in the first six months of 2004 compared to the first six months of 2003. Sales volumes increased 12% in the second quarter 2004 compared to the second quarter 2003 and 10% in the first six months of 2004 compared to the first six months of 2003 due to increased demand compared to the 2003 periods.

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Cost of Sales—Cost of sales of $1.8 billion in the second quarter 2004 increased 31% compared to $1.4 billion in the second quarter 2003, while cost of sales of $3.6 billion in the first six months of 2004 increased 21% compared to $3.0 billion in the first six months of 2003. The increases reflect the higher sales volumes and the higher cost of raw materials. The cost of liquid raw materials was affected by 32% higher crude oil costs in the second quarter 2004 compared to the second quarter 2003 and 16% higher crude oil costs in the first six months of 2004 compared to the first six months of 2003.

Operating Income—Operating income in the second quarter 2004 of $136 million compares to operating income of $85 million in the second quarter 2003. The improvement of $51 million was primarily due to the higher sales volumes in the second quarter 2004 compared to the second quarter 2003.

Operating income of $240 million in the first six months of 2004 compares to operating income of $53 million in the first six months of 2003. The $187 million improvement resulted from higher product margins and sales volumes compared to the first six months of 2003. The effect of sales price increases in response to higher raw material and energy costs were generally more favorable than in the first six months of 2003 due to improved supply/demand fundamentals, resulting in higher average product margins than in the 2003 period.

Polymers Segment

Revenues—Revenues of $603 million in the second quarter 2004 increased 36% compared to revenues of $445 million in the second quarter 2003, while revenues of $1,160 million in the first six months of 2004 increased 21% compared to revenues of $958 million in the first six months of 2003. The increases were due to higher sales volumes and higher average sales prices in the 2004 periods compared to the 2003 periods. Sales volumes increased 33% in the second quarter 2004 compared to the second quarter 2003 and 15% in the first six months of 2004 compared to the first six months of 2003, reflecting stronger demand. The average sales price increases in the 2004 periods reflected the higher demand and higher raw material costs.

Cost of Sales—Cost of sales of $596 million in the second quarter 2004 increased 31% compared to $454 million in the second quarter 2003, while cost of sales of $1,153 million in the first six months of 2004 increased 18% compared to $974 million in the first six months of 2003. The increases reflect the increases in sales volumes, along with higher raw material costs, primarily ethylene. Benchmark ethylene costs were 4% higher in the second quarter 2004 compared to the second quarter 2003 and 7% higher in the first six months of 2004 compared to the first six months of 2003.

Other Operating Expenses—Other operating expenses of $14 million in the second quarter 2004 compared to $18 million in the second quarter 2003, while other operating expenses of $28 million in the first six months of 2004 compared to $46 million in the first six months of 2003. The first six months of 2003 included a $12 million loss on the sale of Equistar’s polypropylene production facility in Pasadena, Texas.

Operating Loss—For the second quarter 2004, the polymers segment had an operating loss of $6 million compared to an operating loss of $27 million in the second quarter 2003. The $21 million improvement in the second quarter 2004 was primarily the result of the higher sales volumes compared to the second quarter 2003.

For the first six months of 2004, the polymers segment had an operating loss of $20 million compared to an operating loss of $62 million in the first six months of 2003. The lower operating loss in the first six months of 2004 was primarily due to the increase in sales volumes. In addition, the first six months of 2003 included a $12 million loss on the sale of the polypropylene production facility.

13

FINANCIAL CONDITION

Operating Activities—Operating activities used cash of $56 million in the first six months of 2004, but provided cash of $99 million in the first six months of 2003. The $155 million change primarily reflects a $159 million payment received in the first six months of 2003 as a partial prepayment for propylene to be delivered over a period of 15 years in connection with a long-term propylene supply arrangement entered into in March 2003. The earnings improvement to $48 million in the first six months of 2004, compared to a loss of $195 million in the first six months of 2003, was substantially offset by a net increase of $166 million in the main components of working capital – receivables, inventory and payables – in the first six months of 2004 compared to a small net decrease in the 2003 period. The increase in working capital in the first six months of 2004 was primarily due to receivables and reflected higher product sales prices and sales volumes compared to the first six months of 2003.

In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in June 2004 and June 2003 that otherwise would have been expected to be collected in July of the respective years. This included $42 million in June 2004 and $32 million in June 2003 from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).

The outstanding amount of Equistar’s accounts receivable sold under its accounts receivable sales facility increased $20 million to $122 million during the first six months of 2004 which was comparable to an increase of $19 million to $100 million during the first six months of 2003.

Investing Activities—Investing activities were neutral in the first six months of 2004, but provided cash of $20 million in the first six months of 2003. Proceeds from asset sales were $41 million in the first six months of 2004, primarily from sales of railcars. In the second quarter of 2004, Equistar sold certain railcars for $37 million and leased the railcars from the buyer under an operating lease agreement. The first six months of 2003 included $54 million of proceeds from sales of assets, including $35 million from the sale of the polypropylene production facility and $19 million from railcar sale-leaseback transactions.

Equistar’s capital expenditures were $41 million in the first six months of 2004 and $34 million in the first six months of 2003. The higher level of expenditures in the first six months of 2004 reflected 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 or slightly below the budgeted level.

Financing Activities—Financing activities had no cash effect during the first six months of 2004. Cash used by financing activities was $3 million in the first six months of 2003.

The Equistar credit facility was amended in June 2004 to clarify certain provisions relating to, among other matters, the proposed transaction with Millennium Chemicals Inc. (“Millennium”). See “Proposed Transaction Between Lyondell and Millennium.”

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

In April 2003, Equistar completed a private placement of $450 million of 10.625% senior notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of outstanding term loans under Equistar’s credit facility and prepayment premiums of approximately $17 million.

Equistar did not make distributions to its partners in the first six months of 2004 or 2003 as a result of weak business conditions in recent periods. Certain of Equistar’s indentures contain provisions that require payment of penalty interest if distributions are made without meeting certain financial ratio requirements. As of June 30, 2004, Equistar met these financial ratio requirements and is permitted to make distributions during the third quarter 2004 without incurring penalty interest payments.

14

Liquidity and Capital Resources—At June 30, 2004, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 58% of its total capitalization. Equistar had cash on hand of $143 million. In addition, the total amount available at June 30, 2004 under both the $250 million inventory-based revolving credit facility and the $450 million accounts receivable sales facility was approximately $465 million, which gave effect to the borrowing base and was net of a $75 million unused availability requirement, the $122 million sold under the accounts receivable sales facility and $38 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 June 30, 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, ongoing operations and distributions to owners. 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 or distributions to its owners, 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 June 30, 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 June 30, 2004, except as noted below.

At June 30, 2004, the outstanding amount of Equistar’s accounts receivable sold under an accounts receivable sales facility entered into in December 2003 was $122 million compared to $217 million at March 31, 2004. The outstanding amount 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.

The Equistar accounts receivable sales facility was amended in June 2004 to clarify certain provisions relating to, among other matters, the proposed transaction between Lyondell and Millennium. See “Proposed Transaction Between Lyondell and Millennium.”

15

PROPOSED TRANSACTION BETWEEN LYONDELL AND 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 Millennium, own 100% of Equistar. The proposed transaction is subject to approval by Lyondell and Millennium shareholders and other customary conditions. Lyondell and Millennium have obtained amendments to Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility that were required to permit the proposed transaction. The Equistar credit facility and accounts receivable sales facility also were amended in June 2004 to clarify certain provisions relating to, among other matters, the proposed transaction. The proposed transaction is expected to close during the fourth 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

Industry conditions have continued to reflect an improving supply/demand balance. The industry and Equistar’s product lines continue to move through the early phase of a cyclical recovery, and Equistar expects that this trend will continue. However, near-term results will remain vulnerable to the volatility of crude oil and natural gas prices, as well as consumer spending patterns. Equistar anticipates that it will begin making cash distributions to its owners in the third quarter 2004.

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 six months ended June 30, 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 June 30, 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.

16

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 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,

• 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),

• the cyclical nature of the chemical industry,

• competitive products and pricing pressures,

• industry production capacities and operating rates,

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

• access to capital markets,

• 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.

17

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, except as described below:

In August 2003, the EPA notified Equistar that it was seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at Equistar’s Lake Charles plant. Equistar has reached a settlement with the EPA, which includes a civil penalty in the amount of $195,000. On August 2, 2004, the Federal District Court in Louisiana approved the consent decree between Equistar and the EPA.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

4.2(a)	Amendment No. 1 dated as of June 25, 2004 to Credit Agreement dated as of December 17, 2003 among Equistar Chemicals, LP, the subsidiaries of Equistar Chemicals, LP party thereto, the lenders party thereto and Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Bank of America, N.A. and Citicorp USA, Inc. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent
4.8(a)	Amendment No. 1 dated as of June 25, 2004 to Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, Equistar Chemicals, LP as the servicer, the banks and other financial institutions party thereto as purchasers, Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Asset Agents, Citicorp USA, Inc., as Administrative Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Bookrunners
4.9(a)	Amendment No. 1 dated as of June 25, 2004 to Undertaking Agreement dated as of December 17, 2003 by Equistar Chemicals, LP
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 June 30, 2004 and through the date hereof.

18

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: August 6, 2004	/s/ Charles L. Hall
	Charles L. Hall
	Vice President and Controller
	(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

EX-4.2(A)

Exhibit 4.2(a)

AMENDMENT NO. 1 TO CREDIT AGREEMENT

AMENDMENT dated as of June 25, 2004 to the Credit Agreement dated as of December 17, 2003 (the “Credit Agreement”) among EQUISTAR CHEMICALS, LP, a Delaware limited partnership (the “Borrower”); its SUBSIDIARIES from time to time party thereto; the LENDERS from time to time party thereto; BANK ONE, NA, CREDIT SUISSE FIRST BOSTON, and JPMORGAN CHASE BANK, as Co-Documentations Agents; CITICORP USA, INC. and BANK OF AMERICA, N.A., as Co-Collateral Agents; and CITICORP USA, INC., as Administrative Agent (in such capacity, the “Administrative Agent”).

The parties hereto agree as follows:

SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to “hereof”, “hereunder”, “herein” and “hereby” and each other similar reference and each reference to “this Agreement” and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby.

SECTION 2. Amended Definition. The definition of “EBITDA” in Section 1.01 of the Credit Agreement is hereby amended by (i) deleting the word “and” at the end of clause (x)(i) thereof and inserting a comma in place thereof and (ii) inserting the phrase “and (iii) non-cash compensation expense (including deferred compensation expense), determined on a consolidated basis” at the end of clause (x)(ii) thereof.

SECTION 3. Amendment to Article 5. Clause (i) of Section 5.06 of the Credit Agreement is hereby amended by deleting the date “July 31, 2004” therein and inserting the date “December 31, 2004” in the place thereof.

SECTION 4. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 3 of the Credit Agreement will be true in all material respects on and as of the Amendment Effective Date (as defined below) with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date and (ii) no Default will have occurred and be continuing on such date.

SECTION 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 6. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

SECTION 7. Effectiveness. This Amendment shall become effective on the first date when, and simultaneously with the time upon which, the Administrative Agent shall have received counterparts hereof signed by each of the Required Lenders and the Borrowers’ Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Administrative Agent shall have received in form satisfactory to it facsimile or other written confirmation from such party of execution of a counterpart hereof by such party) (the “Amendment Effective Date”). Promptly after the Amendment Effective Date occurs, the Administrative Agent shall notify the Borrower, the other Agents and the Lenders thereof, and such notice shall be conclusive and binding on all parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

EQUISTAR CHEMICALS, LP
By:	/s/    KAREN A. TWITCHELL
Name:	Karen A. Twitchell
Title:	Principal Financial Officer
Citicorp USA, Inc.
By:	/s/    DAVID JAFFE
Name:	David Jaffe
Title:	Vice President
BANK OF AMERICA, N.A.
By:	/s/    KEVIN R. KELLY
Name:	Kevin R. Kelly
Title:	Senior Vice President
JPMorgan Chase Bank
By:	/s/    STACEY L. HAIMES
Name:	Stacey L. Haimes
Title:	Vice President

CREDIT SUISSE FIRST BOSTON, ACTING THROUGH ITS CAYMAN ISLANDS BRANCH
By:	/s/    PETER CHAUVIN
Name:	Peter Chauvin
Title:	Vice President
By:	/s/    DAVID DODD
Name:	David Dodd
Title:	Associate
Bank One, N.A.
By:	/s/    J. DEVIN MOCK
Name:	J. Devin Mock
Title:	Director
Congress Financial Corporation (Southwest)
By:	/s/    KENNETH SEPP
Name:	Kenneth Sepp
Title:	Senior Vice President
Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services, Inc.
By:	/s/    JAMES M. BETZ
Name:	James M. Betz
Title:	Vice President

4

Siemens Financial Services, Inc.
By:	/s/    FRANK AMODIO
Name:	Frank Amodio
Title:	Vice President - Credit
AmSouth Bank
By:	/s/    BRUCE KASPER
Name:	Bruce Kasper
Title:	Attorney-in-Fact
NATIONAL CITY BUSINESS CREDIT, INC.
By:	/s/    MICHAEL S. FINE
Name:	Michael S. Fine
Title:	Director
WELLS FARGO FOOTHILL, LLC
By:	/s/    MIKE BARANOWSKI
Name:	Mike Baranowski
Title:	Vice President
State of California Public Employees’ Retirement System
By:	/s/    KEVIN WINTER
Name:	Kevin Winter
Title:	Senior Portfolio Manager

5

The Bank of New York
By:	/s/    RAYMOND J. PALMER
Name:	Raymond J. Palmer
Title:	Vice President
LaSalle Business Credit, LLC
By:	/s/    A. ROGER CRAIG, JR.
Name:	A. Roger Craig, Jr.
Title:	Vice President
General Electric Capital Corporation
By:	/s/    ROBERT M. KADLICK
Name:	Robert M. Kadlick
Title:	Duly Authorized Signatory
UBS AG, Stamford Branch
By:	/s/    WILFRED V. SAINT
Name:	Wilfred V. Saint
Title:	Director
	Banking Products Services, US
By:	/s/    SALTOZ SIKKA
Name:	Saltoz Sikka
Title:	Associate Director Banking Products Services, US

6

GMAC Commercial Finance, LLC
By:	/s/    ROBERT F. MCINTYRE
Name:	Robert F. McIntyre
Title:	Director

7

EX-4.8(A)

Exhibit 4.8(a)

AMENDMENT NO. 1 TO RECEIVABLES PURCHASE AGREEMENT

AMENDMENT dated as of June 25, 2004 to the Receivables Purchase Agreement dated as of December 17, 2003 (the “Receivables Agreement”) among EQUISTAR RECEIVABLES II, LLC, a Delaware limited liability company (the “Seller”), EQUISTAR CHEMICALS, LP, a Delaware limited partnership (the “Servicer”), the PURCHASERS from time to time party thereto, CITICORP USA, INC., as co-asset agent and administrative agent for the Purchasers (the “Agent”), BANK ONE, NA, CREDIT SUISSE FIRST BOSTON, and JPMORGAN CHASE BANK, as co-documentations agents, and BANK OF AMERICA, N.A., as co-asset agent.

The parties hereto agree as follows:

SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Receivables Agreement has the meaning assigned to such term in the Receivables Agreement. Each reference to “hereof”, “hereunder”, “herein” and “hereby” and each other similar reference and each reference to “this Agreement” and each other similar reference contained in the Receivables Agreement shall, after this Amendment becomes effective, refer to the Receivables Agreement as amended hereby.

SECTION 2. Amended Definition. The definition of “Eligible Receivable” is hereby amended by (i) deleting the words “Millennium or” in the first paragraph thereof, (ii) deleting the words “their respective” in the first paragraph thereof and inserting the word “its” in the place thereof, (iii) deleting the words “Millennium or” in paragraph (c) thereof, and (iv) deleting the words “their respective” in paragraph (c) thereof and inserting the word “its” in the place thereof.

SECTION 3. Representations of Seller and Servicer. Each of the Seller and the Servicer represent and warrant that (i) their respective representations and warranties set forth in Article IV of the Receivables Agreement will be true in all material respects on and as of the Amendment Effective Date (as defined below) with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date and (ii) no Potential Event of Termination or Event of Termination will have occurred and be continuing on such date.

SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

SECTION 6. Effectiveness. This Amendment shall become effective on the first date when, and simultaneously with the time upon which, the following conditions are met (the “Amendment Effective Date”):

(a) the Agent shall have signed a counterpart hereof and shall have received counterparts hereof signed by each of the Purchasers, the Seller and the Servicer (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received in form satisfactory to it facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); and

(b) Lyondell’s acquisition of Millennium shall have been consummated.

Promptly after the Amendment Effective Date occurs, the Agent shall notify the Seller, the Servicer, the Purchasers and the other Facility Agents thereof, and such notice shall be conclusive and binding on all parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

CITICORP USA, INC.
By:	/s/    DAVID JAFFE
Name:	David Jaffe
Title:	Vice President
EQUISTAR RECEIVABLES II, LLC
By:	/s/    KAREN A. TWITCHELL
Name:	Karen A. Twitchell
Title:	Vice President and Treasurer
EQUISTAR CHEMICALS, LP
By:	/s/    KAREN A. TWITCHELL
Name:	Karen A. Twitchell
Title:	Principal Financial Officer
BANK OF AMERICA, N.A.
By:	/s/    KEVIN R. KELLY
Name:	Kevin R. Kelly
Title:	Senior Vice President

JPMorgan Chase Bank
By:	/s/    STACEY L. HAIMES
Name:	Stacey L. Haimes
Title:	Vice President
CREDIT SUISSE FIRST BOSTON, ACTING THROUGH ITS CAYMAN ISLANDS BRANCH
By:	/s/    PETER CHAUVIN
Name:	Peter Chauvin
Title:	Vice President
By:	/s/    DAVID DODD
Name:	David Dodd
Title:	Associate
Bank One, N.A.
By:	/s/    J. DEVIN MOCK
Name:	J. Devin Mock
Title:	Director
Congress Financial Corporation (Southwest)
By:	/s/    M. GALOVIC, JR.
Name:	M. Galovic, Jr.
Title:	First Vice President
Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services Inc.
By:	/s/    JAMES M. BETZ
Name:	James M. Betz
Title:	Vice President

Siemens Financial Services, Inc.
By:	/s/    FRANK AMODIO
Name:	Frank Amodio
Title:	Vice President-Credit
AmSouth Bank
By:	/s/    BRUCE KASPER
Name:	Bruce Kasper
Title:	Attorney-in-Fact
NATIONAL CITY BUSINESS CREDIT, INC.
By:	/s/    MICHAEL S. FINE
Name:	Michael S. Fine
Title:	Director
WELLS FARGO FOOTHILL, LLC
By:	/s/    MIKE BARANOWSKI
Name:	Mike Baranowski
Title:	Vice President
LOAN FUNDING, LLC, a wholly owned subsidiary of Citibank, N.A.
By:	TCW Advisors, Inc., as portfolio manager of Loan Funding I LLC
By:	/s/    G. STEVEN KALIN
Name:	G. Steven Kalin
Title:	Senior Vice President
By:	/s/    JONATHAN R. INSULL
Name:	Jonathan R. Insull
Title:	Managing Director

The Bank of New York
By:	/s/    RAYMOND J. PALMER
Name:	Raymond J. Palmer
Title:	Vice President
LaSalle Business Credit, LLC
By:	/s/    A. ROGER CRAIG, JR
Name:	A. Roger Craig, Jr
Title:	Vice President
General Electric Capital Corporation
By:	/s/     ROBERT M. KADLICK
Name:	Robert M. Kadlick
Title:	Duly Authorized Signatory
UBS AG, Stamford Branch
By:	/s/    WILFRED V. SAINT
Name:	Wilfred V. Saint
Title:	Director
	Banking Products Services, US
By:	/s/    SALTOZ SIKKA
Name:	Saltoz Sikka
Title:	Associate Director
	Banking Products Services, US

GMAC Commercial Finance, LLC
By:	/s/    ROBERT F. MCINTYRE
Name:	Robert F. McIntyre
Title:	Director
KZH CRESCENT-2 LLC
By:	/s/    HI HUA
Name:	Hi Hua
Title:	Authorized Agent
KZH CRESCENT-3 LLC
By:	/s/    HI HUA
Name:	Hi Hua
Title:	Authorized Agent
Webster Business Credit Corporation
By:	/s/    CHRISTOPHER HILL
Name:	Christopher Hill
Title:	Vice President

EX-4.9(A)

Exhibit 4.9(a)

AMENDMENT NO. 1 TO UNDERTAKING AGREEMENT

AMENDMENT dated as of June 25, 2004 to the Undertaking Agreement dated as of December 17, 2003 (the “Undertaking Agreement”) by EQUISTAR CHEMICALS, LP, a Delaware limited partnership (“Equistar”), in favor of the PURCHASERS (as defined in the Receivables Purchase Agreement dated as of December 17, 2003 (the “Receivables Agreement”) among Equistar Receivables II, LLC, as Seller, Equistar, as Servicer, the Purchasers from time to time party thereto, Bank One NA, Credit Suisse First Boston and JPMorgan Chase Bank, as co-documentation agents, Bank of America, N.A. and Citicorp USA, Inc., as co-asset agents, and Citicorp USA, Inc., as administrative agent (the “Agent”) for the Purchasers) and CITICORP USA, INC., as Agent.

The parties hereto agree as follows:

SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Undertaking Agreement, or incorporated by reference therein, has the meaning assigned to such term in the Undertaking Agreement or so incorporated. Each reference to “hereof”, “hereunder”, “herein” and “hereby” and each other similar reference and each reference to “this Agreement” and each other similar reference contained in the Undertaking Agreement shall, after this Amendment becomes effective, refer to the Undertaking Agreement as amended hereby.

SECTION 2. Amended Definition. The definition of “EBITDA” in Section 1.01(b) of the Undertaking Agreement is hereby amended by (i) deleting the word “and” at the end of clause (x)(i) thereof and inserting a comma in place thereof and (ii) inserting the phrase “and (iii) non-cash compensation expense (including deferred compensation expense), determined on a consolidated basis” at the end of clause (x)(ii) thereof.

SECTION 3. Representations of Equistar. Equistar represents and warrants that (i) the representations and warranties of Equistar set forth in Article 2 of the Undertaking Agreement and Article IV of the Receivables Agreement will be true in all material respects on and as of the Amendment Effective Date (as defined below) with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date and (ii) no Potential Event of Termination or Event of Termination will have occurred and be continuing on such date.

SECTION 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 6. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

SECTION 7. Effectiveness. This Amendment shall become effective on the first date when, and simultaneously with the time upon which, the Agent shall have received counterparts hereof signed by each of the Required Purchasers and Equistar (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received in form satisfactory to it facsimile or other written confirmation from such party of execution of a counterpart hereof by such party) (the “Amendment Effective Date”). Promptly after the Amendment Effective Date occurs, the Agent shall notify Equistar and the Purchasers thereof, and such notice shall be conclusive and binding on all parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

EQUISTAR CHEMICALS, LP
By:	/s/    KAREN A. TWITCHELL
Name:	Karen A. Twitchell
Title:	Principal Financial Officer
Citicorp USA, Inc.
By:	/s/    DAVID JAFFE
Name:	David Jaffe
Title:	Vice President
BANK OF AMERICA, N.A.
By:	/s/    KEVIN R. KELLY
Name:	Kevin R. Kelly
Title:	Senior Vice President
JPMorgan Chase Bank
By:	/s/    STACEY L. HAIMES
Name:	Stacey L. Haimes
Title:	Vice President
CREDIT SUISSE FIRST BOSTON, ACTING THROUGH ITS CAYMAN ISLANDS BRANCH
By:	/s/    DAVID DODD
Name:	David Dodd
Title:	Associate

Bank One, N.A.
By:	/S/    J. DEVIN MOCK
Name:	J. Devin Mock
Title:	Director
Congress Financial Corporation (Southwest)
By:	/S/    KENNETH SEPP
Name:	Kenneth Sepp
Title:	Senior Vice President
Siemens Financial Services Inc.
By:	/S/    FRANK AMODIO
Name:	Frank Amodio
Title:	Vice President - Credit
AmSouth Bank
By:	/S/    BRUCE KASPER
Name:	Bruce Kasper
Title:	Attorney-in-Fact
NATIONAL CITY BUSINESS CREDIT, INC.
By:	/S/    MICHAEL S. FINE
Name:	Michael S. Fine
Title:	Director

WELLS FARGO FOOTHILL, LLC
By:	/S/    MIKE BARANOWSKI
Name:	Mike Baranowski
Title:	Vice President
The Bank of New York
By:	/S/    RAYMOND J. PALMER
Name:	Raymond J. Palmer
Title:	Vice President
LaSalle Business Credit, LLC
By:	/S/    A. ROGER CRAIG, JR.
Name:	A. Roger Craig, Jr.
Title:	Vice President
General Electric Capital Corporation
By:	/S/    ROBERT M. KADLICK
Name:	Robert M. Kadlick
Title:	Duly Authorized Signatory
UBS AG, Stamford Branch
By:	/S/    WILFRED V. SAINT
Name:	Wilfred V. Saint
Title:	Director
	Banking Products Services, US
By:	/S/    SALTOZ SIKKA
Name:	Saltoz Sikka
Title:	Associate Director
	Banking Products Services, US
Webster Business Credit Corp.
By:	/S/    CHRISTOPHER HILL
Name:	Christopher Hill
Title:	Vice President

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

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

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

2. 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;

3. 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;

4. 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

5. 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: August 6, 2004	/s/ Dan F. Smith
	Dan F. Smith
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

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:

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

2. 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;

3. 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;

4. 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

5. 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: August 6, 2004	/s/ Charles L. Hall
	Charles L. Hall
	Vice President, Controller and Chief Accounting Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 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: August 6, 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

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 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: August 6, 2004	/s/ Charles L. Hall
	Charles L. Hall
	Vice President, Controller and Chief Accounting Officer (Principal Financial 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-99.1

Exhibit 99.1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars, except per share data	2004			2003			2004			2003
Sales and other operating revenues	$	1,161		$	913		$	2,266		$	1,902
Cost of sales		1,084			866			2,113			1,822
Selling, general and administrative expenses		49			45			94			87
Research and development expenses		8			8			16			17
		1,141			919			2,223			1,926
Operating income (loss)		20			(6	)		43			(24	)
Interest expense		(111	)		(102	)		(222	)		(202	)
Interest income		3			3			5			20
Other income (expense), net		(3	)		(3	)		(4	)		13
Loss before equity investments and income taxes		(91	)		(108	)		(178	)		(193	)
Income (loss) from equity investments:
Equistar Chemicals, LP		33			(32	)		39			(132	)
LYONDELL-CITGO Refining LP		63			37			119			56
Other		1			(4	)		2			(6	)
		97			1			160			(82	)
Income (loss) before income taxes		6			(107	)		(18	)		(275	)
Provision for (benefit from) income taxes		3			(39	)		(6	)		(94	)
Net income (loss)	$	3		$	(68	)	$	(12	)	$	(181	)
Basic and diluted earnings (loss) per share	$	0.02		$	(0.43	)	$	(0.07	)	$	(1.13	)

See Notes to the Consolidated Financial Statements.

1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

Millions, except shares and par value data	June 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	455		$	438
Accounts receivable:
Trade, net		414			365
Related parties		83			84
Inventories		327			347
Prepaid expenses and other current assets		59			82
Deferred tax assets		43			43
Total current assets		1,381			1,359
Property, plant and equipment, net		2,533			2,640
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		1,002			965
Investment in PO joint ventures		831			866
Investment in and receivable from LYONDELL-CITGO Refining LP		209			232
Other investments and long-term receivables		88			85
Goodwill		1,080			1,080
Other assets, net		382			406
Total assets	$	7,506		$	7,633
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	314		$	284
Related parties		156			147
Accrued liabilities		244			268
Total current liabilities		714			699
Long-term debt		4,152			4,151
Other liabilities		686			680
Deferred income taxes		768			792
Commitments and contingencies
Minority interest		138			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, 37,879,455 and 36,823,421 shares issued, respectively		38			37
Additional paid-in capital		1,588			1,571
Retained deficit		(574	)		(474	)
Accumulated other comprehensive loss		(98	)		(54	)
Treasury stock, at cost, 1,718,149 and 2,360,834 shares, respectively		(48	)		(66	)
Total stockholders’ equity		1,048			1,156
Total liabilities and stockholders’ equity	$	7,506		$	7,633

See Notes to the Consolidated Financial Statements.

2

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the six months ended June 30,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net loss	$	(12	)		$(181	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		127			118
(Income) losses from equity investments		(160	)		82
Distributions of earnings from affiliates		120			56
Deferred income taxes		(8	)		(92	)
Gain on sale of equity interest		—			(18	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(56	)		(4	)
Inventories		17			(14	)
Accounts payable		50			34
Income taxes refundable, net of payable		1			33
Other assets and liabilities, net		(1	)		14
Net cash provided by operating activities		78			28
Cash flows from investing activities:
Expenditures for property, plant and equipment		(27	)		(238	)
Distributions in excess of earnings from affiliates		48			102
Contributions and advances to affiliates		(22	)		(78	)
Proceeds from sale of equity interest		—			28
Maturity of other short-term investments		—			25
Net cash used in investing activities		(1	)		(161	)
Cash flows from financing activities:
Dividends paid		(63	)		(57	)
Issuance of long-term debt		—			318
Repayment of long-term debt		—			(103	)
Other		4			(4	)
Net cash (used in) provided by financing activities		(59	)		154
Effect of exchange rate changes on cash		(1	)		1
Increase in cash and cash equivalents		17			22
Cash and cash equivalents at beginning of period		438			286
Cash and cash equivalents at end of period	$	455		$	308

See Notes to the Consolidated Financial Statements.

3

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 six-month periods ended June 30, 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 June 30,					For the six months ended June 30,
Millions of dollars, except per share data	2004		2003			2004			2003
Reported net income (loss)	$	3	$	(68	)	$	(12	)	$	(181	)
Add stock-based compensation     expense included in net income (loss), net of tax		—		—			1			1
Deduct stock-based compensation expense     using fair value method for all awards, net of tax		—		(2	)		(1	)		(4	)
Pro forma net income (loss)	$	3	$	(70	)	$	(12	)	$	(184	)
Basic and diluted earnings (loss) per share:
Reported	$	0.02	$	(0.43	)	$	(0.07	)	$	(1.13	)
Pro forma	$	0.02	$	(0.43	)	$	(0.07	)	$	(1.15	)

4

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 100% owned consolidated subsidiaries of Lyondell.

Summarized financial information for Equistar follows:

Millions of dollars	June 30, 2004		December 31, 2003
BALANCE SHEETS
Total current assets	$	1,430	$	1,261
Property, plant and equipment, net		3,224		3,334
Investments and other assets, net		460		433
Total assets	$	5,114	$	5,028
Current maturities of long-term debt	$	1	$	—
Other current liabilities		781		754
Long-term debt		2,312		2,314
Other liabilities and deferred revenues		374		359
Partners’ capital		1,646		1,601
Total liabilities and partners’ capital	$	5,114	$	5,028

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	2,099		$	1,597		$	4,061		$	3,238
Cost of sales		1,951			1,517			3,808			3,193
Selling, general and administrative expenses		41			44			82			84
Research and development expenses		8			10			15			19
(Gain) loss on asset dispositions		—			2			(4	)		14
Operating income (loss)		99			24			160			(72	)
Interest expense, net		(55	)		(53	)		(110	)		(102	)
Other (expense), net		(1	)		(20	)		(2	)		(21	)
Net income (loss)	$	43		$	(49	)	$	48		$	(195	)
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	77		$	76		$	153		$	154
Expenditures for property, plant and equipment		22			21			41			34

5

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 the amount by which Lyondell’s underlying equity in Equistar’s net assets exceeds the carrying value of Lyondell’s investment in Equistar. At June 30, 2004, Lyondell’s underlying equity in Equistar’s net assets exceeded the carrying value of its investment in Equistar by approximately $158 million. This difference is being 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.

Lyondell’s investment in and receivable from LCR consisted of the following:

Millions of dollars	June 30, 2004			December 31, 2003
Investment in LCR	$	(20	)	$	3
Receivable from LCR		229			229
Investment in and receivable from LCR	$	209		$	232

Summarized financial information for LCR follows:

Millions of dollars	June 30, 2004		December 31, 2003
BALANCE SHEETS
Total current assets	$	418	$	316
Property, plant and equipment, net		1,222		1,240
Other assets		69		81
Total assets	$	1,709	$	1,637
Current maturities of long-term debt	$	5	$	—
Other current liabilities		612		386
Long-term debt		445		450
Loans payable to partners		264		264
Other liabilities		122		114
Partners’ capital		261		423
Total liabilities and partners’ capital	$	1,709	$	1,637

6

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,339		$	905		$	2,493		$	2,088
Cost of sales		1,213			822			2,250			1,955
Selling, general and administrative expenses		15			16			31			28
Operating income		111			67			212			105
Interest expense, net		(8	)		(9	)		(18	)		(19	)
Net income	$	103		$	58		$	194		$	86
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	28		$	29		$	58		$	57
Expenditures for property, plant and equipment		14			13			29			28

Lyondell’s income from its investment in LCR consists of Lyondell’s share of LCR’s net income and accretion of the amount by which Lyondell’s underlying equity in LCR’s net assets exceeds the carrying value of Lyondell’s investment in LCR. At June 30, 2004, Lyondell’s underlying equity in LCR’s net assets exceeded the carrying value of its investment in LCR by approximately $262 million. This difference will be recognized in income over the next 24 years.

In May 2004, LCR refinanced its credit facilities with a new $450 million senior secured term loan and a $100 million senior secured revolver, which mature in May 2007. The term loan requires quarterly amortization payments of $1.125 million beginning September 30, 2004. The new facility replaces LCR’s $450 million term loan facility and $70 million revolving credit facility, which were scheduled to mature in June 2004, and is secured by substantially all of the assets of LCR and contains covenants that require LCR to maintain specified financial ratios.

As part of the refinancing, Lyondell and CITGO also extended the maturity of the loans payable to partners, including $229 million payable to Lyondell and $35 million payable to CITGO, from July 1, 2005 to January 1, 2008.

5. Inventories

Inventories consisted of the following components:

Millions of dollars	June 30, 2004		December 31, 2003
Finished goods	$	246	$	269
Work-in-process		7		7
Raw materials		35		33
Materials and supplies		39		38
Total inventories	$	327	$	347

7

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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	June 30, 2004			December 31, 2003
Land	$	11		$	11
Manufacturing facilities and equipment		3,383			3,453
Construction in progress		46			15
Total property, plant and equipment		3,440			3,479
Less accumulated depreciation		(907	)		(839	)
Property, plant and equipment, net	$	2,533		$	2,640

Depreciation and amortization is summarized as follows:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2004		2003		2004		2003
Property, plant and equipment	$	43	$	43	$	87	$	83
Investment in PO joint ventures		10		7		22		15
Turnaround costs		3		3		6		7
Software costs		3		3		5		5
Other		5		5		7		8
Total depreciation and amortization	$	64	$	61	$	127	$	118

In addition, amortization of debt issuance costs of $5 million and $4 million for the three-month periods ended June 30, 2004 and 2003, respectively, and $9 million and $8 million for the six-month periods ended June 30, 2004 and 2003, respectively, is included in interest expense in the Consolidated Statements of Income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. Long-Term Debt

Long-term debt consisted of the following:

Millions of dollars	June 30, 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		(8	)		(9	)
Total long-term debt		4,152			4,151
Less current maturities		—			—
Long-term debt, net	$	4,152		$	4,151

In February 2004, in response to ongoing adverse conditions in the industry, Lyondell obtained amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements. In June 2004, Lyondell obtained an amendment to its credit facility that permits the proposed transaction with Millennium as described in Note 13.

8. Pension and Other Postretirement Benefits

Net periodic pension and other postretirement benefit costs included the following components for the periods presented:

	Pension Benefits												Other Postretirement Benefits
	For the three months ended June 30,						For the six months ended June 30,						For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2004			2003			2004			2003			2004		2003		2004		2003
Components of net periodic benefit cost:
Service cost	$	7		$	5		$	13		$	10		$	—	$	—	$	1	$	1
Interest cost		10			9			20			19			2		2		3		3
Recognized gain on plan assets		(7	)		(6	)		(14	)		(12	)		—		—		—		—
Actuarial and investment loss amortization		5			6			11			12			—		—		—		—
Net periodic benefit cost	$	15		$	14		$	30		$	29		$	2	$	2	$	4	$	4

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, and Lyondell elected, to defer recognition of the effects of the Act in accounting for its plans until the FASB developed and issued authoritative guidance on accounting for subsidies provided by the Act. In May 2004, the FASB issued FSP FAS 106-2 of the same title, which gave final guidance on accounting for subsidies under the Act and requires Lyondell to implement its provisions no later than the third quarter 2004, if the effects are significant. Lyondell is currently evaluating the impact of FSP FAS 106-2 and the Act. Through June 30, 2004, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy. Lyondell does not expect the effects of the Act to be a significant event and will recognize the effects at the next measurement date for plan assets and obligations, which is expected to be December 31, 2004.

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.

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.

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, which 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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 June 30, 2004, Equistar had incurred the full $7 million with respect to 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 and will continue to remain liable to the same extent after the closing of the proposed transaction between Lyondell and Millennium – see Note 13 – except that Lyondell will own 100% of Millennium and Equistar.

Environmental Remediation—As of June 30, 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.

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 LCR’s refinery and each of Lyondell’s two facilities and Equistar’s six facilities 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 reduction levels from 90% to 80%. Under the revised 80% standard, Lyondell estimates that the incremental capital expenditures would range between $250 million and $300 million for Lyondell, Equistar and LCR, collectively.

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 June 30, 2004 by Lyondell, Equistar and LCR relating to NOx emission reductions totaled $19 million, $85 million and $12 million, respectively. Lyondell’s proportionate share of the spending through June 30, 2004 totaled $85 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

11

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 is continuing 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.

At the state level, a number of states have legislated MTBE bans. Of these, several are midwest 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 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 also will 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/Styrene Monomer (“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. The current estimated costs for converting Lyondell’s U.S.-based MTBE plant to iso-octene production is less than $20 million, whereas the current estimated costs for converting to iso-octane production range from $65 million to $75 million. 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 is currently evaluating the iso-octene alternative prior to making any major capital commitments and any ultimate decision could be influenced by 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.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. The off-road diesel fuel standards, which were finalized during the second quarter of 2004, provide for phased implementation from 2007 to 2014. These gasoline and diesel fuel standards will result in increased capital investment for LCR.

LCR currently estimates that capital spending to comply with the low sulfur gasoline standard and the new diesel fuel standards will range between $165 million and $205 million. In 2003, LCR developed alternative approaches to complying with the low sulfur gasoline standard and the new diesel fuel standard that led 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, which are not included in the current estimate. LCR has spent approximately $31 million, excluding the $25 million charge, as of June 30, 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.

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.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 outstanding stock options and warrants. These stock options and warrants were antidilutive for the six months ended June 30, 2004 and for the three- and six-month periods ended June 30, 2003. Potentially dilutive options and warrants for 16,138,100 shares of original common stock were outstanding at June 30, 2004.

Earnings per share data and dividends declared per share of common stock were as follows:

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Weighted average shares, in thousands:
Basic		177,101			161,023			176,822			160,722
Diluted		177,806			161,023			176,822			160,722
Basic and diluted earnings (loss) per share	$	0.02		$	(0.43	)	$	(0.07	)	$	(1.13	)
Dividends declared per share of common stock	$	0.225		$	0.225		$	0.45		$	0.45
11. Comprehensive Loss
The components of the comprehensive loss were as follows:
	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars	2004			2003			2004			2003
Net income (loss)	$	3		$	(68	)	$	(12	)	$	(181	)
Other comprehensive gain (loss):
Foreign currency translation gain (loss)		(6	)		67			(42	)		119
Other		—			—			(2	)		—
Total other comprehensive income (loss)		(6	)		67			(44	)		119
Comprehensive loss	$	(3	)	$	(1	)	$	(56	)	$	(62	)

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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 MTBE and other TBA derivatives;

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

• Polymers, which primarily include polyethylene; 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:

Millions of dollars	IC&D			Petrochemicals		Polymers			Refining		Unallocated			Total
For the three months ended June 30, 2004:
Sales and other operating revenues	$	1,161		$	—	$	—		$	—	$	—		$	1,161
Operating income		20			—		—			—		—			20
Income (loss) from equity investments		1			96		(4	)		63		(59	)		97
For the three months ended June 30, 2003:
Sales and other operating revenues	$	913		$	—	$	—		$	—	$	—		$	913
Operating loss		(6	)		—		—			—		—			(6	)
Income (loss) from equity investments		(4	)		60		(20	)		37		(72	)		1
For the six months ended June 30, 2004:
Sales and other operating revenues	$	2,266		$	—	$	—		$	—	$	—		$	2,266
Operating income		43			—		—			—		—			43
Income (loss) from equity investments		2			169		(14	)		119		(116	)		160
For the six months ended June 30, 2003:
Sales and other operating revenues	$	1,902		$	—	$	—		$	—	$	—		$	1,902
Operating loss		(24	)		—		—			—		—			(24	)
Income (loss) from equity investments		(6	)		38		(44	)		56		(126	)		(82	)

“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.

15

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Proposed Transaction with Millennium

In 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 Lyondell and Millennium shareholders and other customary conditions. Lyondell and Millennium have obtained amendments to Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility that were required to permit the proposed transaction. Lyondell anticipates that the proposed transaction will close during the fourth quarter of 2004; however, there can be no assurance that the proposed transaction will be completed.

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. The Guarantors are all 100% owned subsidiaries of Lyondell. The guarantees are joint and several and full and unconditional. 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 June 30, 2004 and December 31, 2003 and for the three-month and six-month periods ended June 30, 2004 and 2003. Certain amounts from prior periods have been reclassified to conform to current period presentations.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)

BALANCE SHEET

As of June 30, 2004

Millions of dollars	Lyondell		Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Total current assets	$	829	$	264	$	288		$	—		$	1,381
Property, plant and equipment, net		803		828		902			—			2,533
Investments and long-term receivables		5,279		273		1,877			(5,299	)		2,130
Goodwill		723		349		8			—			1,080
Other assets		278		69		35			—			382
Total assets	$	7,912	$	1,783	$	3,110		$	(5,299	)	$	7,506
Current liabilities	$	431	$	154	$	129		$	—		$	714
Long-term debt		4,150		—		2			—			4,152
Other liabilities		620		43		23			—			686
Deferred income taxes		505		170		93			—			768
Intercompany liabilities (assets)		1,158		188		(1,346	)		—			—
Minority interest		—		25		138			(25	)		138
Stockholders’ equity		1,048		1,203		4,071			(5,274	)		1,048
Total liabilities and stockholders’ equity	$	7,912	$	1,783	$	3,110		$	(5,299	)	$	7,506

BALANCE SHEET

As of December 31, 2003

Millions of dollars	Lyondell		Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Total current assets	$	824	$	223	$	312		$	—		$	1,359
Property, plant and equipment, net		817		879		944			—			2,640
Investments and long-term receivables		5,201		294		1,873			(5,220	)		2,148
Goodwill		723		349		8			—			1,080
Other assets		271		76		59			—			406
Total assets	$	7,836	$	1,821	$	3,196		$	(5,220	)	$	7,633
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)		964		274		(1,238	)		—			—
Minority interest		—		24		155			(24	)		155
Stockholders’ equity		1,156		1,152		4,044			(5,196	)		1,156
Total liabilities and stockholders’ equity	$	7,836	$	1,821	$	3,196		$	(5,220	)	$	7,633

17

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Three Months Ended June 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	676		$	365		$	269		$	(149	)	$	1,161
Cost of sales		629			333			271			(149	)		1,084
Selling, general and administrative expenses		32			7			10			—			49
Research and development expenses		8			—			—			—			8
Operating income (loss)		7			25			(12	)		—			20
Interest income (expense), net		(110	)		—			2			—			(108	)
Other income (expense), net		(12	)		(2	)		10			1			(3	)
Income (loss) from equity investments		91			42			56			(92	)		97
Intercompany income (expense)		(17	)		3			14			—			—
(Benefit from) provision for income taxes		(44	)		23			24			—			3
Net income (loss)	$	3		$	45		$	46		$	(91	)	$	3

STATEMENT OF INCOME

For the Three Months Ended June 30, 2003

Millions of dollars	Lyondell			Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	538		$	264	$	274		$	(163	)	$	913
Cost of sales		559			249		221			(163	)		866
Selling, general and administrative expenses		25			7		13			—			45
Research and development expenses		8			—		—			—			8
Operating income (loss)		(54	)		8		40			—			(6	)
Interest income (expense), net		(107	)		6		2			—			(99	)
Other income (expense), net		(14	)		2		8			1			(3	)
Income (loss) from equity investments		62			34		(32	)		(63	)		1
Intercompany income (expense)		(26	)		12		14			—			—
(Benefit from) provision for income taxes		(71	)		22		10			—			(39	)
Net income (loss)	$	(68	)	$	40	$	22		$	(62	)	$	(68	)

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Six Months Ended June 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	1,368		$	695		$	509		$	(306	)	$	2,266
Cost of sales		1,253			646			520			(306	)		2,113
Selling, general and administrative expenses		65			12			17			—			94
Research and development expenses		16			—			—			—			16
Operating income (loss)		34			37			(28	)		—			43
Interest income (expense), net		(220	)		—			3			—			(217	)
Other income (expense), net		(31	)		(3	)		29			1			(4	)
Income (loss) from equity investments		155			83			78			(156	)		160
Intercompany income (expense)		(40	)		13			27			—			—
(Benefit from) provision for income taxes		(90	)		46			38			—			(6	)
Net income (loss)	$	(12	)	$	84		$	71		$	(155	)	$	(12	)
STATEMENT OF INCOME
For the Six Months Ended June 30, 2003
Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	1,160		$	524		$	539		$	(321	)	$	1,902
Cost of sales		1,203			495			445			(321	)		1,822
Selling, general and administrative expenses		47			13			27			—			87
Research and development expenses		17			—			—			—			17
Operating income (loss)		(107	)		16			67			—			(24	)
Interest income (expense), net		(195	)		10			3			—			(182	)
Other income (expense), net		(32	)		2			42			1			13
Income (loss) from equity investments		76			72			(153	)		(77	)		(82	)
Intercompany income (expense)		(56	)		23			33			—			—
(Benefit from) provision for income taxes		(133	)		42			(3	)		—			(94	)
Net income (loss)	$	(181	)	$	81		$	(5	)	$	(76	)	$	(181	)

19

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income (loss)	$	(12	)	$	84		$	71		$	(155	)	$	(12	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		35			35			57			—			127
Income from equity investments		—			(1	)		(39	)		—			(40	)
Earnings from equity investments in excess of distributions		(117	)		—			—			117			—
Deferred income taxes		(90	)		46			36			—			(8	)
Intercompany (receivables) payables, net		268			(138	)		(130	)		—			—
Net changes in other assets and liabilities		(3	)		8			6			—			11
Net cash provided by (used in) operating activities		81			34			1			(38	)		78
Expenditures for property, plant and equipment		(24	)		(1	)		(2	)		—			(27	)
Distributions from affiliates in excess of earnings		—			7			41			—			48
Contributions and advances to affiliates		—			(2	)		(58	)		38			(22	)
Net cash provided by (used in) investing activities		(24	)		4			(19	)		38			(1	)
Dividends paid		(63	)		—			—			—			(63	)
Other		4			—			—			—			4
Net cash used in financing activities		(59	)		—			—			—			(59	)
Effect of exchange rate changes on cash		—			(1	)		—			—			(1	)
Increase (decrease) in cash and cash equivalents	$	(2	)	$	37		$	(18	)	$	—		$	17

20

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS—(Continued)

For the Six Months Ended June 30, 2003

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income (loss)	$	(181	)	$	81		$	(5	)	$	(76	)	$	(181	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		38			24			56			—			118
Losses from equity investments		—			5			133			—			138
Earnings from equity investments in excess of distributions		(19	)		—			—			19			—
Deferred income taxes		(132	)		45			(5	)		—			(92	)
Gain on sale of equity interest		—			—			(18	)		—			(18	)
Intercompany (receivables) payables, net		73			143			(216	)		—			—
Net changes in other assets and liabilities		59			(1	)		5			—			63
Net cash provided by (used in) operating activities		(162	)		297			(50	)		(57	)		28
Expenditures for property, plant and equipment		(14	)		(219	)		(5	)		—			(238	)
Distributions from affiliates in excess of earnings		—			—			102			—			102
Contributions and advances to affiliates		—			(57	)		(78	)		57			(78	)
Proceeds from sale of equity interest		—			—			28			—			28
Maturity of other short-term investments		25			—			—			—			25
Net cash provided by (used in) investing activities		11			(276	)		47			57			(161	)
Issuance of long-term debt		318			—			—			—			318
Repayment of long-term debt		(103	)		—			—			—			(103	)
Dividends paid		(57	)		—			—			—			(57	)
Other		(4	)		—			—			—			(4	)
Net cash provided by financing activities		154			—			—			—			154
Effect of exchange rate changes on cash		—			(1	)		2			—			1
Increase (decrease) in cash and cash equivalents	$	3		$	20		$	(1	)	$	—		$	22

21