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 September 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 September 30,						For the nine months ended September 30,
Millions of dollars	2004			2003			2004			2003
Sales and other operating revenues:
Trade	$	1,816		$	1,225		$	4,888		$	3,669
Related parties		623			417			1,612			1,211
		2,439			1,642			6,500			4,880
Cost of sales		2,255			1,561			6,063			4,754
Selling, general and administrative expenses		47			47			129			131
Research and development expenses		8			10			23			29
(Gain) loss on asset dispositions		—			12			(4	)		26
		2,310			1,630			6,211			4,940
Operating income (loss)		129			12			289			(60	)
Interest expense		(57	)		(53	)		(171	)		(159	)
Interest income		2			2			6			6
Other expense, net		(2	)		(1	)		(4	)		(22	)
Net income (loss)	$	72		$	(40	)	$	120		$	(235	)

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

Millions of dollars	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	147		$	199
Accounts receivable:
Trade, net		651			471
Related parties		162			137
Inventories		497			408
Prepaid expenses and other current assets		34			46
Total current assets		1,491			1,261
Property, plant and equipment, net		3,198			3,334
Investments		60			60
Other assets, net		376			373
Total assets	$	5,125		$	5,028
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	522		$	462
Related parties		59			51
Current maturities of long-term debt		1			—
Accrued liabilities		233			241
Total current liabilities		815			754
Long-term debt		2,312			2,314
Other liabilities and deferred revenues		380			359
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,639			1,619
Accumulated other comprehensive loss		(21	)		(18	)
Total partners’ capital		1,618			1,601
Total liabilities and partners’ capital	$	5,125		$	5,028

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the nine months ended September 30,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net income (loss)	$	120		$	(235	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		234			230
Deferred revenues		—			159
Deferred maintenance turnaround expenditures		(55	)		(65	)
(Gain) loss on asset dispositions		(4	)		26
Debt prepayment premiums and charges		—			19
Changes in assets and liabilities that (used) provided cash:
Accounts receivable		(205	)		56
Inventories		(89	)		(36	)
Accounts payable		80			(8	)
Accrued interest		(16	)		(29	)
Other assets and liabilities, net		11			(19	)
Cash provided by operating activities		76			98
Cash flows from investing activities:
Expenditures for property, plant and equipment		(69	)		(62	)
Proceeds from sales of assets		41			69
Cash (used in) provided by investing activities		(28	)		7
Cash flows from financing activities:
Distributions to owners		(100	)		—
Issuance of long-term debt		—			439
Repayment of long-term debt		—			(469	)
Net borrowing under lines of credit		—			29
Other		—			(3	)
Cash used in financing activities		(100	)		(4	)
(Decrease) increase in cash and cash equivalents		(52	)		101
Cash and cash equivalents at beginning of period		199			27
Cash and cash equivalents at end of period	$	147		$	128

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. 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 after the close of business on November 30, 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 $120 million at September 30, 2004 and $102 million at December 31, 2003. The Equistar accounts receivable sales facility was amended in June 2004 to clarify certain provisions.

4. Inventories

Inventories consisted of the following:

Millions of dollars	September 30, 2004		December 31, 2003
Finished goods	$	264	$	223
Work-in-process		12		12
Raw materials		131		83
Materials and supplies		90		90
Total inventories	$	497	$	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	September 30, 2004			December 31, 2003
Land	$	77		$	76
Manufacturing facilities and equipment		6,037			6,015
Construction in progress		75			63
Total property, plant and equipment		6,189			6,154
Less accumulated depreciation		(2,991	)		(2,820	)
Property, plant and equipment, net	$	3,198		$	3,334

Depreciation and amortization is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2004		2003		2004		2003
Property, plant and equipment	$	64	$	61	$	185	$	185
Turnaround costs		10		8		29		22
Software costs		4		4		12		12
Other		3		3		8		11
Total depreciation and amortization	$	81	$	76	$	234	$	230

In addition, amortization of debt issuance costs of $1 million and $2 million for the three-month periods ended September 30, 2004 and 2003, respectively, and $4 million and $6 million for the nine-month periods ended September 30, 2004 and 2003, respectively, is included in interest expense in the Consolidated Statements of Income.

6. Deferred Revenues

Deferred revenues at September 30, 2004 of $161 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 September 30, 2004 and 2003, and $12 million and $8 million in the nine-month periods ended September 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	September 30, 2004		December 31, 2003
Inventory-based revolving credit facility	$	—	$	—
Other debt obligations:
Notes due 2006, 6.5%		150		150
Senior Notes due 2008, 10.125%		700		700
Notes due 2009, 8.75%		600		600
Senior Notes due 2011, 10.625%		700		700
Debentures due 2026, 7.55%		150		150
Other		4		4
Unamortized premium, net		9		10
Total long-term debt		2,313		2,314
Less current maturities		1		—
Total long-term debt, net	$	2,312	$	2,314

The Equistar credit facility was amended in June 2004 to clarify certain provisions. 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 September 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 September 30,						For the nine months ended September 30,						For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2004			2003			2004			2003			2004		2003		2004		2003
Components of net periodic benefit cost:
Service cost	$	5		$	4		$	14		$	13		$	1	$	1	$	2	$	2
Interest cost		3			3			9			8			2		2		6		6
Recognized gain on plan assets		(3	)		(2	)		(8	)		(6	)		—		—		—		—
Actuarial and investment loss amortization		1			2			3			5			—		—		1		1
Net periodic benefit cost	$	6		$	7		$	18		$	20		$	3	$	3	$	9	$	9

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. As permitted by FSP FAS 106-1, 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

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EQUISTAR CHEMICALS, LP

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

same title, which gave final guidance on accounting for subsidies under the Act and requires Equistar to implement its provisions no later than the third quarter 2004, if the effects are significant. Equistar does not expect the Act to have a significant effect on its financial statements. Through September 30, 2004, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy.

9. Commitments and Contingencies

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 $146 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 September 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 September 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 September 30, 2004 totaled $96 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 (“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

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

	For the three months ended September 30,					For the nine months ended September 30,
Millions of dollars	2004		2003			2004			2003
Net income (loss)	$	72	$	(40	)	$	120		$	(235	)
Other comprehensive loss		—		—			(3	)		—
Comprehensive income (loss)	$	72	$	(40	)	$	117		$	(235	)

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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 September 30, 2004:
Sales and other operating revenues:
Customers	$	1,772	$	667		$	—		$	—		$	2,439
Intersegment		505		—			—			(505	)		—
Total sales and other operating revenues		2,277		667			—			(505	)		2,439
Operating income		132		32			(35	)		—			129
For the three months ended September 30, 2003:
Sales and other operating revenues:
Customers	$	1,125	$	517		$	—		$	—		$	1,642
Intersegment		366		—			—			(366	)		—
Total sales and other operating revenues		1,491		517			—			(366	)		1,642
Operating income (loss)		66		(19	)		(35	)		—			12
For the nine months ended September 30, 2004:
Sales and other operating revenues:
Customers	$	4,673	$	1,827		$	—		$	—		$	6,500
Intersegment		1,437		—			—			(1,437	)		—
Total sales and other operating revenues		6,110		1,827			—			(1,437	)		6,500
Operating income		372		12			(95	)		—			289
For the nine months ended September 30, 2003:
Sales and other operating revenues:
Customers	$	3,404	$	1,476		$	—		$	—		$	4,880
Intersegment		1,104		—			—			(1,104	)		—
Total sales and other operating revenues		4,508		1,476			—			(1,104	)		4,880
Operating income (loss)		119		(81	)		(98	)		—			(60	)

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 third quarter 2004 operating results to second 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 petrochemicals 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.

A stronger global economy led to increased demand and tighter chemical industry supply/demand balances in the third quarter and first nine months of 2004 compared to the third quarter and first nine months of 2003. U.S. ethylene demand grew an estimated 9% in the third quarter and first nine months of 2004 compared to the same periods in 2003. In this improved business environment, the industry experienced higher sales volumes and generally higher product margins in the third quarter and first nine months of 2004 compared to the same periods in 2003.

Equistar was generally able to implement sales price increases that more than offset the effect of significantly higher raw material and energy costs. In addition to higher sales prices for ethylene and derivatives, Equistar benefited from significantly higher prices for co-products such as propylene, benzene and fuels. The higher raw material and energy costs in the third quarter and first nine months of 2004 reflected the effect of a significant escalation in crude oil prices and ongoing high natural gas costs compared to the same periods in 2003.

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

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

• natural gas liquids (“NGL’s”), 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 NGL’s.

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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 September 30,		For the nine months ended September 30,
	2004	2003	2004	2003
Crude oil – dollars per barrel	43.87	30.20	39.12	31.10
Natural gas – dollars per million BTUs	5.68	4.95	5.62	5.51
Weighted average cost of ethylene production – cents per pound	23.92	18.84	21.79	19.50
Ethylene – cents per pound	32.83	27.25	31.94	28.67
Propylene – cents per pound	30.83	19.33	29.67	21.83

In the third quarter and first nine months of 2004, as indicated in the above table, benchmark crude oil prices continued to escalate compared to the same periods in 2003, putting upward pressure on the cost of crude oil-based liquid raw materials.

RESULTS OF OPERATIONS

Net Income—Equistar’s net income was $72 million and $120 million in the third quarter and first nine months of 2004, respectively, compared to net losses of $40 million and $235 million in the third quarter and first nine months of 2003, respectively. The improvements were due to higher sales prices and margins, and to higher sales volumes. The higher sales prices more than offset the effect of significantly higher raw material and energy costs compared to the 2003 periods. In addition to higher sales prices for ethylene and derivatives, Equistar benefited from significantly higher prices for co-products such as propylene, benzene and fuels compared to the 2003 periods. The higher raw material and energy costs during the 2004 periods reflected the effect of 45% and 26% higher average benchmark crude oil prices in the third quarter and first nine months of 2004, respectively, as well as ongoing high natural gas prices compared to the 2003 periods. As a result of higher demand, ethylene and derivative sales volumes for the third quarter and first nine months of 2004 were 6% and 11% higher, respectively, compared to the 2003 periods. The third quarter 2003 was negatively affected by an $11 million charge for the write-off of a polymer research and development (“R&D”) facility. In addition to the $11 million charge for the write-off of the polymer R&D facility, the first nine months of 2003 included $19 million of refinancing costs and a $12 million loss from the sale of a polypropylene production facility.

Third Quarter 2004 versus Second Quarter 2004

Equistar’s third quarter 2004 net income of $72 million compares to net income of $43 million in the second quarter 2004. The $29 million improvement primarily resulted from higher sales prices of ethylene derivatives, which more than offset the higher raw material costs compared to the second quarter 2004. In addition, ethylene and derivative sales volumes were 3% higher compared to the second quarter 2004. Ethylene margins were relatively unchanged as the increase in raw material costs of approximately $160 million compared to the second quarter 2004 was substantially offset by higher sales prices for ethylene and co-products, particularly benzene. The average benchmark price of benzene was $3.62 per gallon, which was 50% higher than in the second 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 September 30,						For the nine months ended September 30,
In millions	2004			2003			2004			2003
Selected petrochemicals products:
Olefins (pounds)		4,568			3,976			13,228			11,620
Aromatics (gallons)		99			96			272			288
Polymers products (pounds)		1,536			1,405			4,451			3,945
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	2,277		$	1,491		$	6,110		$	4,508
Polymers segment		667			517			1,827			1,476
Intersegment eliminations		(505	)		(366	)		(1,437	)		(1,104	)
Total	$	2,439		$	1,642		$	6,500		$	4,880
Cost of sales:
Petrochemicals segment	$	2,141		$	1,421		$	5,728		$	4,377
Polymers segment		619			506			1,772			1,481
Intersegment eliminations		(505	)		(366	)		(1,437	)		(1,104	)
Total	$	2,255		$	1,561		$	6,063		$	4,754
Other operating expenses:
Petrochemicals segment	$	5		$	4		$	10		$	12
Polymers segment		15			30			43			76
Unallocated		35			35			95			98
Total	$	55		$	69		$	148		$	186
Operating income (loss):
Petrochemicals segment	$	132		$	66		$	372		$	119
Polymers segment		32			(19	)		12			(81	)
Unallocated		(35	)		(35	)		(95	)		(98	)
Total	$	129		$	12		$	289		$	(60	)

Petrochemicals Segment

Revenues—Revenues of $2,277 million in the third quarter 2004 increased 53% compared to revenues of $1,491 million in the third quarter 2003, while revenues of $6,110 million in the first nine months of 2004 increased 36% compared to revenues of $4,508 million in the first nine 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 were 20% and 11% higher in the third quarter and first nine months of 2004, respectively, compared to the third quarter and first nine months of 2003. Increases in sales prices of co-products were much more significant. Benchmark benzene sales prices averaged 158% and 70% higher and benchmark propylene sales prices averaged 59% and 36% higher in the third quarter and first nine months of 2004, respectively, compared to the third quarter and first nine months of 2003. Sales volumes were 13% higher in the third quarter 2004 compared to the third quarter 2003 and 11% higher in the first nine months of 2004 compared to the first nine months of 2003.

Cost of Sales—Cost of sales of $2,141 million in the third quarter 2004 increased 51% compared to $1,421 million in the third quarter 2003, while cost of sales of $5,728 million in the first nine months of 2004 increased 31% compared to $4,377 million in the first nine months of 2003. The increases reflect the higher cost of raw materials and the higher sales volumes. The cost of liquid raw materials was affected by 45% higher average benchmark crude oil costs in the third quarter 2004 compared to the third quarter 2003 and 26% higher average benchmark crude oil costs in the first nine months of 2004 compared to the first nine months of 2003.

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Operating Income—Operating income in the third quarter 2004 was $132 million compared to operating income of $66 million in the third quarter 2003, while operating income was $372 million in the first nine months of 2004 compared to operating income of $119 million in the first nine months of 2003. The increases were primarily due to higher product margins and higher sales volumes in the 2004 periods due to improved supply/demand fundamentals compared to the 2003 periods. The effect of sales price increases in response to higher raw material and energy costs were generally more favorable in the 2004 periods than in the 2003 periods, resulting in higher average product margins in the 2004 periods.

Polymers Segment

Revenues—Revenues of $667 million in the third quarter 2004 increased 29% compared to revenues of $517 million in the third quarter 2003, while revenues of $1,827 million in the first nine months of 2004 increased 24% compared to revenues of $1,476 million in the first nine months of 2003. The increases were due to higher average sales prices and higher sales volumes in the 2004 periods compared to the 2003 periods. The average sales price increases in the 2004 periods reflected higher demand and higher raw material costs. Sales volumes were 9% higher in the third quarter 2004 compared to the third quarter 2003 and 13% higher in the first nine months of 2004 compared to the first nine months of 2003, reflecting the stronger demand.

Cost of Sales—Cost of sales of $619 million in the third quarter 2004 increased 22% compared to $506 million in the third quarter 2003, while cost of sales of $1,772 million in the first nine months of 2004 increased 20% compared to $1,481 million in the first nine months of 2003. The increases reflect higher raw material costs, primarily ethylene, along with the increases in sales volumes. Benchmark ethylene costs were 20% higher in the third quarter 2004 compared to the third quarter 2003 and 11% higher in the first nine months of 2004 compared to the first nine months of 2003.

Other Operating Expenses—Other operating expenses were $15 million in the third quarter 2004 compared to $30 million in the third quarter 2003, while other operating expenses were $43 million in the first nine months of 2004 compared to $76 million in the first nine months of 2003. The third quarter and first nine months of 2003 included the $11 million charge for the write-off of the polymer R&D facility. In addition, the first nine months of 2003 included the $12 million loss on the sale of Equistar’s polypropylene production facility in Pasadena, Texas.

Operating Income—Operating income was $32 million and $12 million in the third quarter and first nine months of 2004, respectively, compared to operating losses of $19 million and $81 million in the third quarter and first nine months of 2003, respectively. The improvements in the 2004 periods were the result of higher product margins, especially in the third quarter 2004, and higher sales volumes compared to the 2003 periods. In addition, operating income in the third quarter and first nine months of 2003 reflected the charges noted above under “Other Operating Expenses.”

FINANCIAL CONDITION

Operating Activities—Operating activities provided cash of $76 million in the first nine months of 2004 and $98 million in the first nine months of 2003. The earnings improvement, resulting in net income of $120 million in the first nine months of 2004 compared to a net loss of $235 million in the first nine months of 2003, was substantially offset by a net increase of $214 million in the main components of working capital – receivables, inventory and payables – in the first nine months of 2004 compared to a net decrease of $12 million in the 2003 period. In addition, a payment of $159 million was received in the first nine 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 increase in working capital in the first nine months of 2004 was primarily due to higher accounts receivable balances, which reflected higher product sales prices and sales volumes compared to the first nine months of 2003. The increase in receivables was partly offset by an $18 million increase in the outstanding amount of accounts receivable sold under Equistar’s accounts receivable sales facility in the 2004 period compared to a $4 million decrease in the first nine months of 2003. The outstanding amount of Equistar’s accounts receivable sold under this facility was $120 million at September 30, 2004 and $77 million at September 30, 2003.

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In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in September 2004 and September 2003 that otherwise would have been expected to be collected in October of the respective years. This included $51 million in September 2004 and $33 million in September 2003 from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).

Investing Activities—Investing activities used cash of $28 million in the first nine months of 2004, but provided cash of $7 million in the first nine months of 2003. Proceeds from asset sales were $41 million in the first nine months of 2004 and $69 million in the first nine months of 2003. 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 proceeds from asset sales in the first nine months of 2003 included $35 million from the sale of the polypropylene production facility and $34 million from railcar sale-leaseback transactions.

Equistar’s capital expenditures were $69 million in the first nine months of 2004 and $62 million in the first nine months of 2003. Equistar’s capital budget for 2004 is $148 million, reflecting increased anticipated spending for regulatory and environmental compliance projects. Equistar expects that full year 2004 capital spending will be between $30 million and $40 million below the budgeted level. Certain expenditures that had been expected to occur in 2004, primarily related to environmental compliance projects, are expected to occur in 2005.

Financing Activities—Financing activities used cash of $100 million during the first nine months of 2004 and $4 million in the first nine months of 2003.

In August 2004, Equistar resumed making distributions to its owners, distributing a total of $100 million to Lyondell Chemical Company (“Lyondell”) and Millennium Chemicals Inc. (“Millennium”).

The Equistar credit facility was amended in June 2004 to clarify certain provisions.

In March 2003, Equistar repaid $104 million borrowed during the quarter under its 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. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility.

Liquidity and Capital Resources—At September 30, 2004, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 59% of its total capitalization. Equistar had cash on hand of $147 million. In addition, the total amount available at September 30, 2004 under both the $250 million inventory-based revolving credit facility and the $450 million accounts receivable sales facility was approximately $475 million, which gave effect to the borrowing base and was net of a $75 million unused availability requirement, the $120 million sold under the accounts receivable sales facility and $30 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 September 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

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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 September 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.

At September 30, 2004, the outstanding amount of Equistar’s accounts receivable sold under an accounts receivable sales facility entered into in December 2003 was $120 million compared to $102 million at December 31, 2003. 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.

RECENT LEGISLATIVE DEVELOPMENT

In October 2004, the American Jobs Creation Act of 2004, which, among other things, overhauls the federal income tax treatment of a wide variety of nonqualified compensation arrangements, was signed into law. Equistar is assessing the impact of this legislation on its deferred compensation arrangements.

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. 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 proposed transaction is expected to close after the close of business on November 30, 2004; however, there can be no assurance that the proposed transaction will be completed. Lyondell and Millennium have sent the definitive joint proxy statement/prospectus to their respective shareholders in connection with the proposed transaction. Investors and security holders are urged to read that document for more information about the proposed transaction.

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CURRENT BUSINESS OUTLOOK

Industry conditions have continued to strengthen through October 2004. Product price increase initiatives are underway for almost all products in response to both the strong supply/demand fundamentals and the high level of and volatility in crude oil and natural gas prices. Solid global sales volume growth has tightened industry supply/demand conditions, which, in turn, has led to modest margin improvement despite significant increases in raw material costs. Subject to the uncertainties of any significant economic slowdown or global disruption, these industry conditions and resulting improving cyclical trends are expected to continue. While there is significant uncertainty related to the potential near-term earnings impacts of raw material price volatility and seasonality, positive longer-term trends appear to be established.

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 nine months ended September 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 September 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.

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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 in other countries,

• terrorist acts and international political unrest,

• 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.

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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 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

Item 6. Exhibits

10.15	Amended and Restated Ethylene Sales Agreement between Equistar Chemicals, LP and Occidental Chemical Corporation dated as of August 20, 2004
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

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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: November 8, 2004	/s/ Charles L. Hall
	Charles L. Hall
	Vice President and Controller
	(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

EX-10.15

Exhibit 10.15

AMENDED AND RESTATED ETHYLENE SALES AGREEMENT

between

EQUISTAR CHEMICALS, LP

and

OCCIDENTAL CHEMICAL CORPORATION

Effective as of April 1, 2004

This Amended and Restated Ethylene Sales Agreement (this “Agreement”) is dated as of April 1, 2004, between Equistar Chemicals, LP, a Delaware Limited Partnership (“Seller”) and Occidental Chemical Corporation, a New York Corporation (“Buyer”);

RECITALS

WHEREAS, Seller and Buyer entered into that Ethylene Sales Agreement dated as of May 15, 1998 (the “1998 Ethylene Sales Agreement”), pursuant to which Buyer agreed to purchase and Seller agreed to sell certain quantities of Ethylene; and

WHEREAS, Seller and Buyer amended the 1998 Ethylene Sales Agreement by a letter agreement dated November 26, 2001, letter agreement dated August 5, 2002, Amendment No. 1 dated as of August 6, 2002, Amendment No. 2 dated as of May 23, 2003, and a letter agreement dated November 26, 2003 (the “Formosa letter agreement”); and

WHEREAS, the parties desire that the Price, as set forth in this Agreement, reflect the price paid for Ethylene by a large contract buyer of Ethylene; and

WHEREAS, the Quantity provisions of this Agreement promote larger quantities of Ethylene purchases under this Agreement; and

WHEREAS, the Seller and Buyer wish to amend and restate the 1998 Ethylene Sales Agreement so as to incorporate such prior amendments which continue in effect in this Agreement as well as the amendment provisions hereby made effective as of April 1, 2004;

AGREEMENTS

NOW THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree, effective as of April 1, 2004, as follows:

1. DEFINITIONS

“Affiliate(s)” means any person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the party specified. For purposes of this definition, the term or “control” shall have the meaning as set forth in 17 C.F.R. § 230.405 as in effect on the date hereof.

“Agreement” means this Amended and Restated Ethylene Sales Agreement dated as of April 1, 2004.

“Annual Maximum” has the meaning set forth in Schedule 2(a) of this Agreement and the meaning ascribed in Paragraph 2(d) for the Phase Down period.

“Asset Contribution Agreement” means the Agreement and Plan of Merger and Asset Contribution, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar Chemicals, LP, executed on May 15, 1998.

“Bank Rate” means, with respect to any period for which interest is to be calculated under the Agreement, the rate of interest publicly announced from time to time by J. P. Morgan Chase (or its successor) at its principal office as its prime commercial lending rate. Each change in this rate resulting from a change in the prime rate shall take effect on the day on which the announced rate changes.

“Buyer’s U.S. Plants” means the manufacturing plants owned or operated by the Buyer and set forth on Schedule 1, incorporated herewith. Schedule 1 also includes, for each of Buyer’s U.S. Plants, the current practical production capacity, approximate ethylene use when operating at current practical production capacities and the 2004 Plan Ethylene Requirements.

“Delivery Point(s)” means the exit flange on the metering station measuring Ethylene deliveries to each of Buyer’s U.S. Plants.

“Ethylene” means ethylene having the specifications set forth in Exhibit A to this Agreement, or in the event of ethylene delivered to Buyer hereunder and not conforming to such specifications, such ethylene as to which specifications have been waived by Buyer in order to accept delivery.

“OxyMar” means that certain Texas general partnership between Occidental Chemical Corporation, a New York corporation, and Oxy Vinyls, LP, a Delaware limited partnership.

“OxyMar Plant” means that certain vinyl chloride monomer manufacturing facility, owned by OxyMar and located at Highway 361, Gregory, Texas and which is operated by OxyChem for the benefit of OxyMar.

“Phase Down” has the meaning set forth in Paragraph 2(d) of this Agreement.

“Phase Down Annual Maximum” has the meaning set forth in Paragraph 2(d) of this Agreement.

“Phase Down Annual Minimum” has the meaning set forth in Paragraph 2(d) of this Agreement.

“Phase Down Basis Quantity” has the meaning set forth in Paragraph 2(d) of this Agreement.

“Phase Down Notice” has the meaning set forth in Paragraph 2(d) of this Agreement.

“Reduction Event” means, as to each of Buyer’s U.S. Plants, (i) a shut down of such plant, (ii) a reduction in practical production capacity of such plant, or (iii) the taking out of service (other than for maintenance or repair) of all or any portion of the practical production capacity of such plant.

“Superfund” means the assessment on the production and sale of Ethylene imposed pursuant to the Comprehensive Environment Response, Compensation and Liability Act, as the same may be from time to time amended or reauthorized and in effect.

“Term” has the meaning set forth in Section 3 of this Agreement.

2. QUANTITY

(a) Requirements. Buyer shall purchase each year ethylene feedstock for Buyer’s U.S. Plants from Seller in accordance with Schedule 2(a), incorporated herewith.

(b) Annual Maximum Adjustment. If a Reduction Event occurs, then the Annual Maximum will be reduced by an amount equal to the reduction in ethylene use attributable to the reduction in practical production capacity resulting from such Reduction Event. If all or any portion of such practical production capacity is placed back into service, then the Annual Maximum will be increased by the amount of the increased ethylene feedstock requirements due to such capacity having been restored to service subject to the inclusions and exclusions of Schedule 2(a), incorporated herewith. Any such changes will be prorated for the remainder of any year in which such Reduction Event occurs.

(c) Forecasts. Buyer shall provide to Seller an annual forecast of quantities of Ethylene expected to be purchased from Seller and shipment dates 90 days prior to the start of each calendar year, supplemented by quarterly updates 30 days prior to the start of each calendar

quarter. Such forecasts are for planning purposes only and will not affect the obligations of either party.

(d) Phase Down. Both parties have the right to elect to reduce the parties’ Ethylene quantity obligations so long as any such reduction is accomplished in accordance with and subject to the following (“Phase Down”):

i. Either party may exercise its right of Phase Down by providing at least 3 full calendar years irrevocable written notice (the “Phase Down Notice”) to the other party for each calendar year affected by such Phase Down Notice, but in no event will Phase Down affect any calendar year prior to the calendar year beginning January 1, 2014. The party providing a Phase Down Notice shall state therein the Phase Down quantity such party elects for any Phase Down year specified in such Phase Down Notice. The timely delivery of the Phase Down Notice specifying the Phase Down quantity is an essential term of this Agreement.

ii. In order to effect the parties’ intention that Phase Down of the entire quantity hereunder could be completed in no less than 5 years and that the Phase Down quantity in any year may never exceed the quantity reduction that would occur in a 5 year uniform quantity Phase Down, the parties agree that a Phase Down Basis Quantity will be the basis for calculating the maximum Phase Down quantity in any year, as set forth in Subparagraphs iii. and iv., below.

iii. As used herein, the “Phase Down Basis Quantity” will be the annual average of the purchased Ethylene quantity hereunder (plus any quantity Buyer may have been obligated to purchase but did not) for the 3 calendar years immediately preceding the first Phase Down year.

iv. As used herein, the “Phase Down Annual Minimum” will equal Buyer’s purchase obligation in the Phase Down period. In the first Phase Down year the Phase Down Annual Minimum shall not be less than 83.33% of the Phase Down Basis Quantity, and in any subsequent year, the reduction of the Phase Down Annual Minimum for that year as compared to the previous year may not exceed 16.67% of the Phase Down Basis Quantity. Subject to Subparagraph 2(d) vii, the party exercising its right to reduce the Ethylene quantity obligations under Paragraph 2(d) of this Agreement may elect to reduce the Phase Down Annual Minimum by said 16.67% or any lesser quantity. If a Reduction Event occurs during the Phase Down, the Phase Down Annual Minimum for the year in which the Reduction Event occurs and is continuing will be reduced by an amount equal to the product of (A) the reduction in ethylene use attributable to the reduction in practical production capacity resulting from such Reduction Event multiplied by (B) a fraction, the numerator of which is the Phase Down Annual Minimum for such year without giving effect to reduction for any Reduction Event, and the denominator of which is the Phase Down Basis Quantity. If all or any portion of the practical production capacity is placed back in service, then the Phase Down Annual Minimum will be increased by the same amount as it previously had been reduced as a result of the reduction of such practical production capacity. Any such changes will be prorated for the remainder of any year in which such Reduction Event occurs.

v. As used herein, the “Phase Down Annual Maximum” will be, in each year, 115% of the Phase Down Annual Minimum for that year.

vi. Beginning with the first Phase Down year, the quantity obligations of the parties will cease to be on a requirements basis for Buyer and the then applicable Annual Maximum for Seller shall be phased down. Beginning with the first Phase Down year the quantity obligations will apply in accordance with this Paragraph 2(d) in that the Annual Minimum for any year will be the applicable Phase Down Annual Minimum and the Annual Maximum for such year will be the applicable Phase Down Annual Maximum.

vii. If one party has furnished the Phase Down Notice to the other, the other party may elect to reduce the quantity in the affected year by a greater amount, but not exceeding, in total reduction quantity, the upper limit specified in Subparagraph 2 (d) iv., provided that the election is made by written notice at least 3 full calendar years prior to the affected Phase Down year, or within 10 days after receipt of the Phase Down Notice, whichever is later.

viii. There will be no automatic reduction of quantity unless the Phase Down Notice for a given Phase Down year is provided at least 3 full calendar years prior to such Phase Down year. Phase Down may be effected over any number of years and this Agreement shall not be terminated in accordance with Section 3 until the quantity is reduced to zero under the provisions of this Paragraph 2(d).

An example of a Phase Down of the entire quantity (assuming a Phase Down Basis Quantity of 2,200 MM lbs), in 5 consecutive years would occur as follows:

Phase Down Year	Annual Minimum	Annual Maximum
	(MM lbs.)	(MM lbs.)
1	1,833	2,108
2	1,467	1,687
3	1,100	1,265
4	733	844
5	367	422
6	0	0

(e) Audit of Books. Seller will have the right to have a third party recognized national accounting firm audit Buyer’s books and records for any months hereunder for up to 2 years after such month, upon reasonable prior notice and during normal business hours, provided that the designated auditor may not disclose to Seller the information examined in the audit other than to corroborate compliance with the quantity obligations hereunder according to the quantities of Ethylene ordered hereunder as compared with requirements, growth of requirements and toll quantities, in each case, for Buyer’s U.S. Plants, and report the quantity discrepancy and circumstances of any alternative supply or ethylene feedstock consuming capacity or production changes for the relevant period.

3. TERM

The term of this Agreement (the “Term”) will begin on the Effective Date and will continue in effect until, and terminate on, such date as the Phase Down Annual Minimum calculated as set forth in Paragraph 2(d) equals zero; it being understood and agreed that in no event shall such Phase Down Annual Minimum decline to zero prior to December 31, 2018.

4. PRICE

(a) Price Computation. The price for Product shall be market based in accordance with Schedule 4(a) incorporated herewith.

(b) Audit of Books. Buyer will have the right to have a third party recognized national accounting firm audit Seller’s books and records for any months hereunder for up to 2 years after any such month, upon reasonable prior notice and during normal business hours, provided that the designated auditor may not disclose to Buyer the information examined in the audit other than to corroborate accuracy according to the price terms hereunder and report the dollar sum of the discrepancy for any month in which any discrepancy was found.

5. DELIVERY

(a) Method of Delivery. Seller shall deliver Ethylene or cause Ethylene to be delivered to the Delivery Points . Except as expressly provided in this Agreement, Ethylene will be delivered free and clear of pipeline transportation or other delivery charges, which are for Seller’s account.

(b) Seller’s Access to Pipelines and Equipment. Buyer shall provide such easements of access onto the premises of Buyer’s U.S. Plants as shall enable the Seller to operate and maintain its pipelines and metering equipment for the delivery and measurement of Ethylene provided to the Buyer, in accordance with Seller’s normal pipeline operating and maintenance procedures.

(c) Monthly Delivery Instructions. Five days prior to the first day of each month, Buyer shall furnish to Seller in writing a good faith estimate of the quantities of Ethylene to be delivered to each of Buyer’s U.S. Plants during each of the next three months and such instructions and estimates for the month immediately following such notice shall be final and binding, subject to commercially reasonable variations due to fluctuations in the ordinary course of operation of Buyer’s U.S. Plants. The parties shall cooperate reasonably to distribute deliveries of Ethylene in approximately equal daily quantities during each year taking into consideration, however, fluctuations in daily demand due to maintenance, turnarounds, or otherwise occurring in the ordinary course of business.

(d) Title and Risk of Loss. Title to and risk of loss of Ethylene delivered hereunder shall pass to Buyer at the Delivery Point(s).

(e) Capital Improvement Cost. Seller and Buyer shall cooperate reasonably to continue effective utilization of delivery logistics systems affected by this Agreement, including, without limitation, the pipeline systems operated by Seller to deliver Ethylene to Buyer. The obligation of reasonable cooperation pursuant to this Paragraph includes reasonable capital improvement costs allocated between Buyer and Seller in accordance with then current industry practice.

(f) Toll Ethylene. Buyer shall deliver, or cause to have delivered, toll ethylene into Seller’s pipeline system of like quality to Ethylene supplied hereunder, at the pressure required by Seller and without Seller incurring any fees or charges by third parties. Third party pipeline fees arising from such tolling shall be paid by Buyer.

(g) OxyMar Supply from Javelina Exchange. Ethylene supplied to OxyChem hereunder shall be supplied and accepted from the Javelina Ethylene exchange deliveries first, and if OxyMar requirements exceed the Javelina quantities, then such supplemental quantities will be supplied and accepted from Seller’s own system. In either case the quality and pressure conditions of the Ethylene, upon delivery, must conform with the Agreement specifications and the pressure conditions of the exchange contract between Seller and Javelina. If, at any time, these quality specifications or pressure conditions are not met on Javelina system Ethylene, Buyer may reject such Ethylene during the period of nonconformity, in which event Seller shall supply and Buyer shall accept Ethylene from Seller’s system to fulfill Buyer’s purchase obligations.

6. QUANTITY MEASUREMENT AND QUALITY TESTING

(a) Determination of Quantity. Seller, Seller’s agent or Seller’s carrier, as applicable, shall own, operate and maintain metering equipment at the Delivery Point where quantities of Ethylene delivered to Buyer shall be measured and its temperature and pressure recorded. The primary device for each meter installation shall be a metering tube constructed in accordance with the specifications recommended by ANSI/API Report 2530 and AGA3/API 14.3, as amended or supplemented from time to time. Sharp-edged orifice plates shall be retained with a standard orifice fitting (senior type) equipped with flange type pressure taps. The diameter of the orifice in the plate shall be in standard one-eighth inch increments. The density of the Ethylene shall be determined by calculation performed continuously using API

Report 2565 “Density of Ethylene”. The flowing temperature and pressure determined from Seller’s meters will be used for the calculation of density. The volume of Ethylene delivered at the Delivery Point for each day shall be determined by reference to an on-site Daniels electronic micro-processor which shall receive the electronic signals from the primary metering device and calculate pounds of Ethylene through the orifice meter using the latest version of AGA3/API 14.3, as amended or supplemented from time to time. A day shall be deemed the period from 7:00 a.m. on one day to 7:00 a.m. on the next succeeding day. Correction factors and calibrations from such meter readings for the purpose of determining daily quantities of Product delivered will conform with procedures set forth below. If the parties are unable to agree upon the quantity delivered, quantities will be determined by a mutually agreed upon inspector. The parties will be bound by the inspector’s determination and will equally bear inspection costs. Buyer shall provide, at its sole cost, quantities of steam, electricity, nitrogen, and instrument air required for the operation of the metering equipment.

(b) Temperature Corrections. All quantities of Ethylene will be corrected for temperature to sixty degrees Fahrenheit (60°F) in accordance with current methods which are set forth in American Petroleum Institute Routine Catalog Number 852-25650 (Chapter 11.3.2.1) or other method mutually agreed to by both parties.

(c) Calibration of Measuring Equipment. Seller shall calibrate flow meters, pressure recorders and temperature recorders at least once each month and at such other times as the parties may mutually agree. Seller shall provide reasonable notice to Buyer of the time of calibrations and Buyer shall have the right to witness the calibrations. If following a calibration, any metering equipment is found to be inaccurate by one half percent or more, then the quantity of Ethylene previously delivered shall be retroactively adjusted at the rate of such inaccuracy for any period of inaccuracy which is definitely known, provided, however, that if such period is not definitely known and if the parties cannot otherwise mutually agree upon a period of time for such retroactive adjustment, then such adjustment shall be for a period of one-half the number of days from the last previous calibration.

(d) Measuring Equipment Out of Service. If for any reason the metering equipment is out of service so that the quantity of Ethylene delivered to the Delivery Point through such equipment cannot be ascertained, Seller shall notify Buyer and the quantity of Ethylene delivered through such equipment during such period shall be estimated and agreed upon by the parties upon the basis of the best available data, using, in order of preference, the following methods:

(i) The registration of any check measuring equipment of Buyer, if installed and properly operating; or

(ii) Any measurement equipment which Seller may have in the flowing stream of Ethylene, if agreed upon by Buyer.

(e) Determination of Quality. Samples taken on mutually agreed occasions and at mutually agreed input sampling points shall be the basis for determining compliance with specifications for the quality of Ethylene delivered hereunder. Subject to the remaining provisions of this section, Seller’s laboratory analysis, conducted in accordance with the provisions of Exhibit A, shall conclusively determine whether Ethylene specifications have been met. Seller shall retain analytical data for at least 90 days. Seller shall monitor the quality of Ethylene introduced into the delivery pipelines to each of the Delivery Points. If abnormalities occur in the operation of Buyer’s U.S. Plants supplied hereunder or in plant operations downstream of any other mutually agreed upon Delivery Points, Buyer may provide notice requiring Seller, for a reasonable period of time, to take three representative

samples of Ethylene from the relevant sampling point each day. Two of such samples shall be delivered to Buyer and one shall be retained by Seller for analysis in accordance with the provisions of Exhibit A. Buyer shall arrange for analysis of one of the samples in its custody in accordance with the provisions of Exhibit A. Seller and Buyer shall promptly advise each other of the results of their respective analyses. If Buyer deems there to be a material difference in the parties’ analysis of their respective samples and if such difference cannot be reconciled within one week of Buyer’s notice thereof, the remaining sample shall be submitted to a nationally recognized independent testing laboratory, agreeable to both Buyer and Seller, for analysis in accordance with the provisions of Exhibit A. The parties will be bound by the independent laboratory’s determination and will equally bear the cost of such independent analysis.

7. PAYMENT AND CREDIT

Terms and Payment Default. Buyer shall pay Seller for Ethylene by wire transfer into Seller’s account, per Seller’s instructions, net 20 days from last day of the shipment month for purchases. Seller shall invoice promptly after the last day of the month. Adjustment credits or debits shall be shown on the invoice issued at the end of the month in which the adjustment was made net 10 days from date of adjustment invoice. If Buyer fails to pay Seller in accordance with said terms, Seller may either (i) suspend deliveries until all indebtedness is paid in full, or (ii) place Buyer on a cash-in-advance status until arrangements are made for security satisfactory to Seller or, at Seller’s option, until all indebtedness to Seller is paid in full. If Buyer, within 30 days of notice of payment default, fails to make payment in full for all sums due and payable which are not reasonably in dispute, Seller may terminate the Agreement forthwith upon reasonable notice. All timely payments under this Agreement shall be made without early payment discount. Any overdue balance owed shall accrue daily interest charges at a rate equal to the greater of (i) 100% of the Bank Rate (as in effect from time to time) calculated on the basis of a 360 day year or (ii) the cost of borrowing of the non-defaulting party. If the invoice is received after noon on one day, such invoice will be deemed received on the next day. If the payment due date falls on a Saturday or a bank or federal holiday, other than Monday, the payment shall be due on the past preceding business day. If the payment due date falls on a Sunday or Monday bank or federal holiday, the payment shall be due on the following business day. Any preexisting obligation of Buyer to make payment for Product delivered hereunder shall survive termination of this Agreement.

8. TAXES

(a) Pass Through. Any taxes, excises, fees, duties or other charges, or any increase therein, now or hereafter imposed directly or indirectly by law upon Ethylene, components of Ethylene, or raw material from which Ethylene is derived, sold or delivered to Buyer under this Agreement, or on the production, manufacture, storage, sale, transportation or delivery thereof, which Seller is required to pay or collect, (including, without limitation, Superfund, gasoline blendstocks and additives excise taxes) and any retroactive impositions thereof or adjustments thereto (“Tax or Taxes”), shall be passed on to Buyer as an explicit surcharge and shall be paid by Buyer to Seller in addition to the price (including any interest thereon for which Seller is liable) whether included in the applicable invoice, or added retroactively to the price, provided, that the pass-through of any such Tax is in accordance with then prevailing industry practice. If Buyer furnishes Seller with a timely and valid resale or other exemption certificate or proof of export acceptable to Seller, sufficient to support an exemption from any Tax, then such Tax will not be added to the price of Ethylene, provided, however, if Seller is ever liable for such Tax on the sale of Ethylene hereunder, Buyer will promptly reimburse Seller from such Tax, including any interest, penalties and attorneys’ fees related thereto provided, that the pass-through of any such Tax is in accordance with then prevailing industry practice. Tax collection will be applied and administered in the same manner as for the other Ethylene customers of Seller.

(b) Duty Drawback. Each of Seller and Buyer reserve their respective rights to claim U.S. Customs duty drawback and each party hereto acknowledges and consents to such reservation by the other party. The parties shall cooperate so as to facilitate Seller’s ability to promptly claim and/or so that Buyer may promptly claim, and collect duty drawbacks. If Buyer’s use of Ethylene sold hereunder, including but not limited to Buyer’s use of Ethylene sold hereunder in a U.S. manufacturing process or Buyer’s use or sale, in U.S. or international markets, of products manufactured in whole or in part from Ethylene sold hereunder, would entitle either party to claim a duty drawback under applicable U.S. Customs practices and procedures, then Buyer and Seller, as the case may be, shall file a duty drawback entry for the maximum quantity of eligible Ethylene and such party shall promptly remit to the other party 50% of all duty drawback proceeds, net of any filing fees, obtained by such party with respect to such Ethylene and/or its derivatives.

9. WARRANTIES

(a) Seller’s Warranty. SELLER’S SOLE AND EXCLUSIVE WARRANTY IS THAT THE ETHYLENE COMPLIES WITH THE PHYSICAL AND CHEMICAL SPECIFICATIONS SET FORTH IN EXHIBIT A TO THIS AGREEMENT AND THAT SELLER SHALL CONVEY TITLE THERETO FREE OF ANY LIENS OR ENCUMBRANCES. SELLER MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, WHETHER WITH RESPECT TO ITS RECOMMENDATIONS, INSTRUCTIONS, OR OTHERWISE AND SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES, WHETHER OF MERCHANTABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE.

(b) Patents. Seller’s recommendations or instructions are not intended to suggest operations which would infringe any patents and Seller assumes no liability to Buyer of any kind or responsibility for any such infringement.

(c) Uses and Safe Handling. Buyer hereby acknowledges receipt of Seller’s material safety data sheet with respect to Ethylene. Buyer shall maintain prudent safe handling and use procedures. Buyer will apprise its employees, contractors and customers of the hazards, proper use and handling requirements of Ethylene and shall comply with all applicable statutes, rules and regulations pertaining thereto.

10. CLAIMS

Buyer shall be deemed to have waived all claims with respect to any Ethylene sold hereunder for which Buyer’s notice of insufficient quality has not been given to Seller in writing within 100 days of Buyer’s receipt of such Ethylene. Any such claim which is not asserted as a claim, counterclaim, defense or set-off in a judicial proceeding instituted within two years after the cause of action arises shall be forever waived, barred and released.

11. LIMITATION ON DAMAGES

(a) Limitation on Certain Buyer Remedies. Buyer’s exclusive remedy and the sole liability of Seller or any Affiliate of Seller for any shortfall in delivery of Ethylene or failure of any Ethylene to meet the specifications in Exhibit A, including, but not limited to, claims for breach of warranty, breach of contract, negligence or strict liability, shall be limited at Seller’s sole option, to (i) payment to Buyer of the cover cost to replace such Ethylene, or (ii) Seller’s replacement of the Ethylene in respect of which a valid claim is made.

(b) No Special Damages. In no event shall Seller or Buyer or any Affiliate of either be liable for indirect, consequential, special, incidental, contingent or punitive damages, costs of litigation or for loss of business or business opportunities.

12. LIABILITY AND RESPONSIBILITY

(a) Buyer’s Obligation. Subject to the further provisions of this Paragraph, Buyer assumes full responsibility for any liability arising out of the receipt, unloading, discharge, storage, handling, use and disposal of any Ethylene purchased hereunder, including the use of such Ethylene alone or in combination with other substances and compliance or non-compliance with any law or regulations relating thereto. Buyer agrees to indemnify, protect, defend and hold Seller and/or any of its Affiliates, agents, officers, directors, employees and representatives (the “Seller Group”) harmless from and against any and all claims, actions, liability, loss, cost and expense (including reasonable attorney’s fees) for damages to any private or public property or resources, personal injury or death, fines or penalties (“Loss”), made against or incurred by Seller Group relating to Ethylene sold or the performance of either party hereunder, or by the agents, servants, employees or contractors of either party, where such Loss was caused by acts or omissions that occurred at the time of or subsequent to the delivery of Ethylene to the Buyer hereunder, or arose in any way out of violations of any federal, state or local statute or governmental rule or regulation by Buyer or its agents, servants, employees or contractors. IT IS THE EXPRESS INTENTION OF THE PARTIES THAT THE INDEMNITY PROVIDED FOR IN THIS PARAGRAPH SHALL REQUIRE BUYER TO DEFEND, HOLD HARMLESS AND INDEMNIFY THE SELLER GROUP AS PROVIDED ABOVE EXCEPT TO THE PROPORTIONATE EXTENT THAT THE ACTIONABLE NEGLIGENCE OF THE SELLER GROUP IS THE SOLE OR A CONCURRING CAUSE OF THE LOSS ALLEGED. FOR APPLICATION OF THE PROVISIONS OF THIS PARAGRAPH, THE EXTENT OF ANY SUCH NEGLIGENCE OF SELLER GROUP SHALL BE DETERMINED EXCLUSIVELY IN A SEPARATE ARBITRATION PROCEEDING REQUESTED BY BUYER AND IN ACCORDANCE WITH MUTUALLY AGREED ARBITRATOR(S), RULES AND VENUE IN ACCORDANCE WITH THE PROVISIONS OF EXHIBIT B, HEREOF. SUCH ARBITRATION AND THE RESULTING ALLOCATION OF NEGLIGENCE TO SELLER GROUP WILL TAKE PLACE AFTER BUYER HAS DEFENDED SELLER GROUP AGAINST AND FINALLY RESOLVED SUCH THIRD PARTY CLAIMS BY JUDGMENT OR SETTLEMENT.

(b) Seller’s Obligation. Seller agrees to indemnify, protect, defend and hold Buyer and/or any of its Affiliates, agents, officers, directors, employees and representatives (the “Buyer Group”) harmless from and against any and all Loss made against or incurred by Buyer Group relating to Ethylene sold or the performance of either party hereunder, or by the agents, servants, employees or contractors of either party, where such Loss was caused by acts or omissions that occurred prior to the delivery of Ethylene to the Buyer hereunder, or arose in any way out of violations of any federal, state or local statute or governmental rule or regulation by Seller or its agents, servants, employees or contractors. IT IS THE EXPRESS INTENTION OF THE PARTIES THAT THE INDEMNITY PROVIDED FOR IN THIS PARAGRAPH SHALL REQUIRE SELLER TO INDEMNIFY THE BUYER GROUP EXCEPT TO THE PROPORTIONATE EXTENT THAT THE ACTIONABLE NEGLIGENCE OF THE BUYER GROUP IS THE SOLE OR A CONCURRING CAUSE OF THE LOSS ALLEGED. FOR APPLICATION OF THE PROVISIONS OF THIS PARAGRAPH THE EXTENT OF SUCH NEGLIGENCE SHALL BE DETERMINED EXCLUSIVELY IN A SEPARATE ARBITRATION PROCEEDING REQUESTED BY SELLER AND IN ACCORDANCE WITH MUTUALLY AGREED ARBITRATOR(S), RULES AND VENUE IN ACCORDANCE WITH THE PROVISIONS OF EXHIBIT B, HEREOF. ANY SUCH ARBITRATION AND THE RESULTING ALLOCATION OF NEGLIGENCE WILL TAKE PLACE AFTER SELLER HAS DEFENDED BUYER GROUP AGAINST AND FINALLY RESOLVED SUCH THIRD PARTY CLAIMS BY JUDGMENT OR SETTLEMENT.

13. EXCUSE OF PERFORMANCE

(a) Performance Excused. Continued performance of any obligation (except payment of money due), may be suspended immediately to the extent made impossible by any event or condition beyond the reasonable control of the party suspending such performance (except its inability to

discharge obligations of a financial nature), including without limitation (to the extent beyond such control) acts of God, fire, labor or trade disturbance, war, civil commotion, compliance in good faith with any applicable legal requirements (whether or not it later proves to be invalid), unavailability of materials, or other event or condition whether similar or dissimilar to the foregoing (a “Force Majeure Event”).

(b) Notice and Cure. The party claiming suspension due to a Force Majeure Event will give prompt notice to the other of the occurrence of the Force Majeure Event giving rise to the suspension and of its nature and anticipated duration, and said party will use its best efforts to promptly cure the cause of the suspension, it being understood, however, that labor disputes shall be a continuing cause of suspension, and settlement of the same shall be entirely within the discretion of the party experiencing such difficulty. The parties shall cooperate with each other to find alternative means and methods for the provision of the suspended Ethylene shipments or receipts, as applicable.

(c) Recommencement of Performance. Upon termination of the Force Majeure Event, performance will recommence.

(d) No Extension of Term. The term of this Agreement shall not be extended by the duration of any Force Majeure Event.

(e) Right to Terminate. If the Force Majeure Event continues for a period in excess of three years, the party not claiming suspension due to the Force Majeure Event may elect to terminate this Agreement with respect to the Ethylene so suspended upon written notice to the party claiming suspension, which termination will be effective ten days after receipt of such notice unless the Force Majeure Event has ceased and the Ethylene shipments and receipts have recommenced within such ten day period.

(f) Allocation. If caused by any of the above stated causes, or if caused by any other unanticipated shortage not due to Seller’s negligence or mismanagement of its ethylene business, the quantity of Ethylene available at Seller’s (or Seller’s supplier’s) plant ordinarily producing Ethylene and deliverable to the agreed upon delivery location for sale hereunder should be insufficient to fulfill Seller’s Ethylene volume commitments, Seller has the right and obligation to allocate its available supply of Ethylene equitably among all term contract customers of Seller and Seller’s (and Seller’s affiliates’) own requirements during the period of such shortage. In order to achieve an equitable allocation result, Seller shall consider its customers’ supply alternatives and if the allocation is expected to cause greater hardship to Buyer due to its dependence on Seller as a sole supplier, then Seller’s allocation arrangements will reflect Buyer’s and other sole sourced customers’ greater need for Seller’s Ethylene. During any such period of allocation in which Buyer is unable to satisfy its requirements, Buyer may purchase ethylene from another supplier to the extent necessary to satisfy such requirements. If a Force Majeure Event that reduces Buyer’s capability to accept ethylene occurs during the Phase Down, Buyer shall allocate its purchases of ethylene among all of its suppliers equitably. Any ethylene purchased from a third party, or which Buyer made a good faith effort to purchase from a third party, to substitute for volume not supplied by Seller in a period affected by its allocation, sales control or voluntary relief granted by Buyer from Seller’s volume obligations (collectively “Sales Control Actions”), will be added to the volume purchased from Seller in that year for the purpose of determining rebate applicability. Seller shall use reasonable commercial efforts to assist Buyer in delivering the ethylene supplied by a third party, including, but not limited to, the use of Seller’s pipelines at no cost to Buyer, provided such effort and use is at no cost to Seller. If purchase or attempt to purchase from a third party is not commercially practicable, then Seller shall use Buyer’s forecasts and recent purchasing activity to determine the disparity between the volume of ethylene sold to Buyer during the affected period and the volume that would have been sold absent the Sales Control Actions. Such disparity will be deemed substitute volume for the purpose of determining the purpose of adding volume to the volume actually sold to determine the rebates.

14. ASSIGNMENT

(a) Assignment and Consent. This Agreement shall bind the respective successors and assigns of the parties hereto, provided however, that neither party may assign or otherwise transfer or delegate its rights or obligations hereunder to a third party without the prior written consent of the other party hereto; provided further, that no such consent shall be required for assignment to an Affiliate or for assignment to a successor to the business in the case of transfer of all of Buyer’s U.S. Plants or all of Seller’s ethylene production facilities in a single transaction, so long as such assignee executes a written assumption of such party’s obligations hereunder with respect to the rights or obligations assigned in a form reasonably satisfactory to the other party and delivers such written assumption to the other party within a reasonable period of time after the effective date of such assignment. Buyer represents that it shall assign all of its rights and obligations under this Agreement only to a transferee of all of Buyer’s U. S. Plants in a single transaction. Any permitted assignment shall not relieve the assignor of its obligations hereunder. Any attempted assignment without such consent as may be required by this provision shall be void.

(b) Transfer of Buyer’s Plants. The parties acknowledge and agree that this Agreement is integral to the operation of Buyer’s U.S. Plants and therefore in the event that Buyer shall sell, transfer, pledge, hypothecate or assign (“Transfer”) any of Buyer’s U.S. Plants to be supplied Ethylene in accordance with this Agreement to any person (“Assignee”), Buyer shall give written notice to Seller of such Transfer and the identity of the proposed Assignee as soon as the intended Transfer becomes known to Buyer, however in no event less than 30 days prior to the date such Transfer becomes effective. In connection with such Transfer, Buyer shall (i) assign the rights and obligations of Buyer pursuant to this Agreement with respect to such transferred Buyer’s U.S. Plant(s) to the Assignee, and (ii) cause Assignee to accept such assignment as if such Assignee was a party to this Agreement as of the Effective Date, unless Seller shall provide Buyer (within 10 business days after receiving notice pursuant to the previous sentence) with written notice that it will not consent to such assignment, in which event (i) Buyer may elect to proceed with the Transfer but without assigning the rights and obligations of the Buyer pursuant to this Agreement with respect to such of Buyer’s U.S. Plants as are the subject of the Transfer and (ii) if Buyer shall elect to proceed with such Transfer the ethylene feedstock requirements of such of Buyer’s U.S. Plants as are the subject of the Transfer shall be removed from this Agreement. The requirements of Paragraph 14(b) do not apply to the NGO facility in the event of a sale by Buyer of the NGO facility.

(c) Liquidated Damages. If Buyer fails to fulfill its obligations stated in Paragraphs 14(a) or 14 (b) to assign this Agreement (or a portion thereof) to the transferee or successor to any or all of Buyer’s U.S. Plants and to cause such transferee or successor to accept such assignment and assume such transferee’s or successor’s obligations under this Agreement, Buyer shall pay Seller, as liquidated damages, and not as a penalty, for such failure, 4¢/lb. multiplied by three multiplied by the three year average of the quantity of Ethylene purchases, during the 36 month period preceding Transfer, at Buyer’s U.S. Plant(s) which were transferred. The parties agree that the damages incurred by Seller from Buyer’s failure to assign this Agreement (or a portion thereof) are substantial but difficult to measure and have therefore agreed upon this amount as a fair statement of damages continuing for three years.

(d) Financial Responsibility for Transferee. With respect to the Ethylene deliveries to be made to any of Buyer’s U.S. Plants that are not owned by an Affiliate of a partner in Seller, if, at any time, in the sole opinion of Seller, the financial responsibility of the owner of such plant is impaired or unsatisfactory, Seller shall have the right to restrict or suspend Ethylene deliveries to such plant unless (i) such owner pays on a cash-in-advance of delivery basis, (ii) such owner delivers to Seller a letter of credit, in form and substance acceptable to Seller and from a financial institution acceptable to Seller, or (iii) such owner and Seller agree upon other arrangements to secure future deliveries of Ethylene to such plant.

15. MISCELLANEOUS

(a) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be sufficiently given when duly mailed, postage prepaid, and addressed as follows (or to such other address or facsimile number as either party shall have specified by notice in writing to the other party) or personally delivered or transmitted electronically.

If to Buyer:	Occidental Chemical Corporation
	5005 LBJ Freeway
	Dallas, Texas 75244
	Attention: General Counsel
	Facsimile: (972) 404-3957
If to Seller:	Equistar Chemicals, LP
	One Houston Center
	1221 McKinney, Suite 1600
	Houston, Texas 77010
	Attention: Ethylene Business Manager
	Facsimile: (713) 652-7283

(b) Jurisdiction; Dispute Resolution. THE PARTIES HERETO AGREE THAT ALL OF THE PROVISIONS OF THIS AGREEMENT AND ANY QUESTIONS CONCERNING ITS INTERPRETATION AND ENFORCEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS AND THE EXECUTION AND DELIVERY OF THIS AGREEMENT SHALL BE DEEMED TO BE THE TRANSACTION OF BUSINESS WITHIN THE STATE OF TEXAS FOR PURPOSES OF CONFERRING JURISDICTION UPON COURTS LOCATED WITHIN THE STATE. THE PARTIES AGREE THAT ANY LITIGATION ARISING OUT OF THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE FEDERAL OR STATE COURTS IN THE STATE OF TEXAS AND BOTH PARTIES CONSENT TO THE JURISDICTION OF SAID COURTS. ALL DISPUTES UNDER THIS AGREEMENT SHALL BE RESOLVED IN ACCORDANCE WITH THE “DISPUTE RESOLUTION PROCEDURES” SET FORTH IN EXHIBIT B OF THIS AGREEMENT.

(c) Confidentiality. Each of the parties hereto shall, and shall cause their respective employees, agents and other representatives to, hold in strict confidence and not utilize for any commercial or other purpose or disclose to any other person, except with the prior written consent of the other party hereto, which consent shall not be unreasonably withheld, any of the terms and provisions of Schedule 2(a) – Quantity or Schedule 4(a) – Price, of this Agreement; provided, however, that the foregoing obligation of confidentiality shall not apply to (i) any such information that is or shall become generally available to the public other than as a result of a disclosure by or on behalf of such party, (ii) any such information that was available to a party on a non-confidential basis prior to the Effective Date of this Agreement, (iii) any such information that comes into a party’s possession after the Effective Date of this Agreement from a third party not under any obligation of confidentiality with respect to such information, (iv) any such information disclosed to a third party who has undertaken a written obligation of confidentiality with respect to such information that is substantially the same as the obligation of confidentiality contained in this section, or (v) any information that shall be required to be disclosed by or on behalf of a party as a result of any applicable law, rule or regulation of any governmental authority having competent jurisdiction, provided that such party shall give the other party 30 day’s prior written notice before making any such disclosure in accordance with the provisions of this clause.

(d) Amendment. Neither party shall be bound by any change in, addition to or waiver of any of the provisions hereof unless approved in writing by its authorized representative.

(e) Waiver. Any waiver of any particular breach or default of this Agreement shall be in writing and shall not constitute a continuing waiver or a waiver of any other breach or default. The failure of either party to require performance of any provision of this Agreement shall not affect either party’s right to full performance thereof at any time thereafter.

(f) Headings. Section and Paragraph headings or titles are included for ease of reference and do not constitute any part of the text or affect its meaning or interpretation.

(g) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall be deemed to be one and the same instrument.

This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior documents, understandings and Agreements, oral or written, relating to this transaction.

IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement, as of the date first written above.

EQUISTAR CHEMICALS, LP		OCCIDENTAL CHEMICAL CORPORATION
(SELLER)		(BUYER)
By:	/s/ Edward J. Dineen	By:	/s/ Jim R. Thomas
Print Name:	Edward J. Dineen	Print Name:	Jim R. Thomas
Title:	Sr. Vice President, Chemicals & Polymers	Title:	Director Purchasing
Date:	Aug. 20, 2004	Date:	August 16, 2004

EXHIBIT – A

ETHYLENE PRODUCT SPECIFICATIONS

Component	Contract Specification	Test Methods
Ethylene; mol %	99.90 min.	LYON 5602
Methane; mol %	0.0350 max.	LYON 5602
Ethane; mol %	0.0400 max.	LYON 5602
Propylene and Heavier; mol ppm	5 max.	LYON 5602
Carbon Monoxide; mol ppm	0.10 max.	On-Line
Carbon Dioxide; mol ppm	1.0 max	On-Line
Sulfur; ppm by wt.	0.05 max.	LYON 5898
Water; ppm by wt.	2 max.	On-Line
Acetylene; mol ppm	1.5 max.	LYON 5602
Oxygen; mol ppm	4 max.	On-Line
Hydrogen; mol ppm	2 max	On-Line
Carbonyls as Acetone, wt. ppm	no spec
Ammonia, wt. ppm	1 max*	LYON 5234
Methanol; ppm by wt.	1 max	LYON 5881

* Seller or designated supplier delivering ethylene to the Oxy Deer Park, or OxyMar plant will notify Buyer when ammonia levels exceed 0.15 ppmw. If ammonia levels exceed 0.15 ppmw at Oxy Deer Park or OxyMar, Seller will make best efforts to switch the ethylene supply to an alternative source. If Seller is unable to supply Oxy Deer Park or OxyMar with ethylene with an ammonia concentration at or below 0.15 ppmw, and Buyer exercises its right to reject ethylene supply with an ammonia concentration above 0.15 ppmw, Buyer will have the option to obtain ethylene from a third party until such time as Seller can supply ethylene with an ammonia concentration at or below 0.15 ppmw. Ethylene volume corresponding to the time period between when Seller discontinues supply and when Seller is capable to continue supply shall be included in the rebate volumes. For all other Buyer plants, Seller will notify Buyer when ammonia levels exceed 1 ppmw. Seller will report ammonia levels to Buyer on a schedule as mutually agreed.

EXHIBIT – B

Dispute Resolution Procedures

(1) Binding and Exclusive Means. The dispute resolution provisions set forth in this Exhibit B shall be the binding and exclusive means to resolve all disputes arising under this Agreement (each a “Dispute”).

(2) Standards and Criteria. In resolving any Dispute, the standards and criteria for resolving such Dispute shall, unless the parties in their discretion jointly stipulate otherwise, be as set forth in Exhibit 1 to this Exhibit B.

(3) ADR and Binding Arbitration Procedures. If a Dispute arises, the following procedures shall be implemented:

(a) Any party may at any time invoke the dispute resolution procedures set forth in this Exhibit B as to any Dispute by providing written notice of such action to the other party, who within five Business Days after such notice shall schedule a meeting to be held in Houston, Texas between the parties. The meeting shall occur within 10 Business Days after notice of the meeting is delivered to the other party. The meeting shall be attended by representatives of each party having decision-making authority regarding the Dispute as well as the dispute resolution process and who shall attempt in a commercially reasonable manner to negotiate a resolution of the Dispute.

(b) The representatives of the parties shall cooperate in a commercially reasonable manner and shall explore whether techniques such as mediation, minitrials, mock trials or other techniques of alternative dispute resolution might be useful. In the event that a technique of alternative dispute resolution is so agreed upon, a specific timetable and completion date for its implementation shall also be agreed upon. The representatives will continue to meet and discuss settlement until the date (the “Interim Decision Date”) that is the earliest to occur of the following events: (i) an agreement shall be reached by the parties resolving the Dispute; (ii) one of the parties shall determine and notify the other party in writing that no agreement resolving the Dispute is likely to be reached; (iii) if a technique of alternative dispute resolution is agreed upon, the completion date therefor shall occur without the parties having resolved the Dispute; or (iv) if another technique of alternative dispute resolution is not agreed upon, two full meeting days (or such other time period as may be agreed upon) shall expire without the parties having resolved the Dispute.

(c) If, as of the Interim Decision Date, the parties have not succeeded in negotiating a resolution of the dispute pursuant to subsection (b), the parties shall proceed under subsections (d), (e) and (f).

(d) After satisfying the requirements above, such Dispute shall be submitted to mandatory and binding arbitration at the election of any party involved in the Dispute (the “Disputing Party”). The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Appendix. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date the notice of arbitration is served, other than as specifically modified herein. In the absence of an agreement to the contrary, the arbitration shall be held in Houston, Texas. The Arbitrator (as defined below) will allow reasonable discovery in the forms permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. During the pendency of the Dispute, each party shall make available to the Arbitrator and the other party all books, records and other information within its control requested by the other party or the Arbitrator subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by law. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the Arbitrator may limit the scope of discovery

between the parties as may be reasonable under the circumstances. In deciding the substance of the parties’ claims, the laws of the State of Texas shall govern the construction, interpretation and effect of this Agreement (including this Appendix) without giving effect to any conflict of law principles. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each party involved in the Dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by the parties, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration proceeding, and the Arbitrator shall have the right and authority to issue monetary sanctions against any of the parties if, upon a showing of good cause, that party is unreasonably delaying the proceeding. To the fullest extent permitted by law, the arbitration proceedings and award shall be maintained in confidence by the Arbitrator and the parties.

(e) The Disputing Party shall notify the American Arbitration Association (“AAA”) and the other party involved in the Dispute in writing describing in reasonable detail the nature of the Dispute (the “Dispute Notice”). The arbitrator (the “Arbitrator”) shall be selected within 15 days of the date of the Dispute Notice by all of the parties from the members of a panel of arbitrators of the AAA or, if the AAA fails or refuses to provide a list of potential arbitrators, of the Center for Public Resources and shall be experienced in commercial arbitration. In the event that the parties are unable to agree on the selection of the Arbitrator, the AAA shall select the Arbitrator, using the criteria set forth in this Appendix, within 30 days of the date of the Dispute Notice. In the event that the Arbitrator is unable to serve, his or her replacement will be selected in the same manner as the Arbitrator to be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the authority to assess the costs and expenses of the arbitration proceeding (including the arbitrators’, and attorneys’ fees and expenses) against any or all parties.

(f) The Arbitrator shall decide all Disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitrator shall have the authority to issue injunctive relief; however, the Arbitrator shall not have any power or authority to (i) award consequential, incidental, indirect or punitive damages or (ii) amend this Agreement. The Arbitrator shall render the arbitration award, in writing, within 20 days following the completion of the arbitration hearing, and shall set forth the reasons for the award. In the event that the Arbitrator awards monetary damages in favor of any party, the Arbitrator must certify in the award that no indirect, consequential, incidental, indirect or punitive damages are included in such award. If the Arbitrator’s decision results in a monetary award, the interest to be granted on such award, if any, and the rate of such interest shall be determined by the Arbitrator in his or her discretion. The arbitration award shall be final and binding on the parties, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act.

(4) Continuation of Business. Notwithstanding the existence of any Dispute or the pendency of any procedures pursuant to this Exhibit B, the parties agree and undertake that all payments not in dispute shall continue to be made and all obligations not in dispute shall continue to be performed.

APPENDIX 1 TO EXHIBIT B

(a) First priority shall be given to maximizing the consistency of the resolution of the Dispute with the satisfaction of all express obligations of the parties and their Affiliates as set forth in the Agreement.

(b) Second priority shall be given to resolution of the Dispute in a manner which best achieves the objectives of the business activities and arrangements under the Agreement and permits the parties to realize the benefits intended to be afforded thereby.

(c) Third priority shall be given to such other matters, if any, as the parties or the Arbitrator shall determine to be appropriate under the circumstances.

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: November 8, 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: November 8, 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 September 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: November 8, 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 September 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: November 8, 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 September 30,						For the nine months ended September 30,
Millions of dollars, except per share data	2004			2003			2004			2003
Sales and other operating revenues	$	1,307		$	954		$	3,573		$	2,856
Cost of sales		1,195			891			3,308			2,713
Selling, general and administrative expenses		55			34			149			121
Research and development expenses		8			9			24			26
		1,258			934			3,481			2,860
Operating income (loss)		49			20			92			(4	)
Interest expense		(111	)		(107	)		(333	)		(309	)
Interest income		3			1			8			21
Other income (expense), net		(9	)		2			(13	)		15
Loss before equity investments and income taxes		(68	)		(84	)		(246	)		(277	)
Income (loss) from equity investments:
Equistar Chemicals, LP		54			(26	)		93			(158	)
LYONDELL-CITGO Refining LP		89			43			208			99
Other		1			(4	)		3			(10	)
		144			13			304			(69	)
Income (loss) before income taxes		76			(71	)		58			(346	)
Provision for (benefit from) income taxes		26			(27	)		20			(121	)
Net income (loss)	$	50		$	(44	)	$	38		$	(225	)
Basic and diluted earnings (loss) per share	$	0.28		$	(0.27	)	$	0.21		$	(1.40	)

See Notes to the Consolidated Financial Statements.

1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

Millions, except shares and par value data	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	531		$	438
Accounts receivable:
Trade, net		471			365
Related parties		71			84
Inventories		369			347
Prepaid expenses and other current assets		70			82
Deferred tax assets		243			43
Total current assets		1,755			1,359
Property, plant and equipment, net		2,521			2,640
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		985			965
Investment in PO joint ventures		826			866
Investment in and receivable from LYONDELL-CITGO Refining LP		161			232
Other investments and long-term receivables		89			85
Goodwill		1,080			1,080
Other assets, net		380			406
Total assets	$	7,797		$	7,633
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	307		$	284
Related parties		166			147
Current maturities of long-term debt		100			—
Accrued liabilities		332			268
Total current liabilities		905			699
Long-term debt		3,952			4,151
Other liabilities		705			680
Deferred income taxes		1,003			792
Commitments and contingencies
Minority interest		142			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, 38,302,364 and 36,823,421 shares issued, respectively		38			37
Additional paid-in capital		1,597			1,571
Retained deficit		(569	)		(474	)
Accumulated other comprehensive loss		(78	)		(54	)
Treasury stock, at cost, 1,426,341 and 2,360,834 shares, respectively		(40	)		(66	)
Total stockholders’ equity		1,090			1,156
Total liabilities and stockholders’ equity	$	7,797		$	7,633

See Notes to the Consolidated Financial Statements.

2

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the nine months ended September 30,
Millions of dollars	2004			2003
Cash flows from operating activities:
Net income (loss)	$	38		$	(225	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		186			184
(Income) losses from equity investments		(304	)		69
Distributions of earnings from affiliates		281			101
Deferred income taxes		16			(122	)
Gain on sale of equity interest		—			(18	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(98	)		3
Inventories		(24	)		12
Accounts payable		47			(5	)
Accrued interest		74			79
Income taxes refundable, net of payable		2			36
Other assets and liabilities, net		38			22
Net cash provided by operating activities		256			136
Cash flows from investing activities:
Expenditures for property, plant and equipment		(43	)		(247	)
Distributions in excess of earnings from affiliates		105			118
Contributions and advances to affiliates		(32	)		(102	)
Proceeds from sale of equity interest		—			28
Maturity of other short-term investments		—			44
Net cash provided by (used in) investing activities		30			(159	)
Cash flows from financing activities:
Dividends paid		(95	)		(85	)
Issuance of long-term debt		—			318
Repayment of long-term debt		(105	)		(103	)
Other		8			(3	)
Net cash (used in) provided by financing activities		(192	)		127
Effect of exchange rate changes on cash		(1	)		3
Increase in cash and cash equivalents		93			107
Cash and cash equivalents at beginning of period		438			286
Cash and cash equivalents at end of period	$	531		$	393

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. Proposed Transaction with Millennium

In March 2004, Lyondell and Millennium Chemicals Inc. (“Millennium”) executed a definitive agreement for Lyondell to acquire Millennium in a stock-for-stock business combination. 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 expects that the proposed transaction will close after the close of business on November 30, 2004; however, there can be no assurance that the proposed transaction will be completed.

3. 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. The effect of this change for the three- and nine-month periods ended September 30, 2004 and 2003 is shown in the table below.

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 September 30,						For the nine months ended September 30,
Millions of dollars, except per share data	2004			2003			2004			2003
Reported net income (loss)	$	50		$	(44	)	$	38		$	(225	)
Add stock-based compensation expense included in net income (loss), net of tax		1			1			2			2
Deduct stock-based compensation expense using fair value method for all awards, net of tax		(1	)		(2	)		(2	)		(6	)
Pro forma net income (loss)	$	50		$	(45	)	$	38		$	(229	)
Basic and diluted earnings (loss) per share:
Reported	$	0.28		$	(0.27	)	$	0.21		$	(1.40	)
Pro forma	$	0.28		$	(0.28	)	$	0.21		$	(1.42	)

4

LYONDELL CHEMICAL COMPANY

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

4. 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 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 2, 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	September 30, 2004		December 31, 2003
BALANCE SHEETS
Total current assets	$	1,491	$	1,261
Property, plant and equipment, net		3,198		3,334
Investments and other assets, net		436		433
Total assets	$	5,125	$	5,028
Current maturities of long-term debt	$	1	$	—
Other current liabilities		814		754
Long-term debt		2,312		2,314
Other liabilities and deferred revenues		380		359
Partners’ capital		1,618		1,601
Total liabilities and partners’ capital	$	5,125	$	5,028

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	2,439		$	1,642		$	6,500		$	4,880
Cost of sales		2,255			1,561			6,063			4,754
Selling, general and administrative expenses		47			47			129			131
Research and development expenses		8			10			23			29
(Gain) loss on asset dispositions		—			12			(4	)		26
Operating income (loss)		129			12			289			(60	)
Interest expense, net		(55	)		(51	)		(165	)		(153	)
Other (expense), net		(2	)		(1	)		(4	)		(22	)
Net income (loss)	$	72		$	(40	)	$	120		$	(235	)
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	81		$	76		$	234		$	230
Expenditures for property, plant and equipment		28			28			69			62

5

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(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 September 30, 2004, Lyondell’s underlying equity in Equistar’s net assets exceeded the carrying value of its investment in Equistar by approximately $156 million. This difference is being recognized in income over the next 14 years.

5. 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	September 30, 2004			December 31, 2003
Investment in LCR	$	(68	)	$	3
Receivable from LCR		229			229
Investment in and receivable from LCR	$	161		$	232
Summarized financial information for LCR follows:
Millions of dollars	September 30, 2004			December 31, 2003
BALANCE SHEETS
Total current assets	$	409		$	316
Property, plant and equipment, net		1,209			1,240
Other assets		66			81
Total assets	$	1,684		$	1,637
Current maturities of long-term debt	$	5		$	—
Other current liabilities		662			386
Long-term debt		444			450
Loans payable to partners		264			264
Other liabilities		105			114
Partners’ capital		204			423
Total liabilities and partners’ capital	$	1,684		$	1,637

6

LYONDELL CHEMICAL COMPANY

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

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,546		$	1,030		$	4,039		$	3,118
Cost of sales		1,393			939			3,643			2,894
Selling, general and administrative expenses		14			14			45			42
Operating income		139			77			351			182
Interest expense, net		(6	)		(8	)		(24	)		(27	)
Other income		14			—			14			—
Net income	$	147		$	69		$	341		$	155
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	29		$	28		$	87		$	85
Expenditures for property, plant and equipment		13			8			42			36

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 September 30, 2004, Lyondell’s underlying equity in LCR’s net assets exceeded the carrying value of its investment in LCR by approximately $259 million. This difference is being recognized in income over the next 24 years.

In May 2004, LCR refinanced its credit facilities with a new facility, consisting of a $450 million senior secured term loan and a $100 million senior secured revolver, which matures in May 2007. The term loan requires quarterly amortization payments of $1.125 million beginning in September 2004. The new facility replaced LCR’s $450 million term loan facility and $70 million revolving credit facility, which were scheduled to mature in June 2004, is secured by substantially all of the assets of LCR and contains covenants that require LCR to maintain specified financial ratios. In September 2004, LCR obtained an amendment to the new facility that reduced the interest rate and eased certain financial covenants, including the debt-to-total-capitalization ratio.

As part of the May 2004 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 2005 to January 2008.

6. Accounts Receivable

During the third quarter 2004, Lyondell amended its accounts receivable sales facility, increasing it from $100 million to $150 million. The $150 million accounts receivable sales facility currently permits the sale of up to $125 million of total interest in its eligible domestic accounts receivable, which amount would decline by $25 million if Lyondell’s credit facility were fully drawn. The outstanding amount of receivables sold under the facility was $75 million as of September 30, 2004 and December 31, 2003. In addition, in June 2004, Lyondell’s accounts receivable sales facility was amended to permit the proposed transaction with Millennium, as described in Note 2.

7

LYONDELL CHEMICAL COMPANY

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

7. Inventories

Inventories consisted of the following components:

Millions of dollars	September 30, 2004		December 31, 2003
Finished goods	$	270	$	269
Work-in-process		7		7
Raw materials		52		33
Materials and supplies		40		38
Total inventories	$	369	$	347

8. Deferred Tax Assets

Beginning in the third quarter of 2004, Lyondell’s pre-tax earnings, after taking into account applicable permanent tax differences, resulted in a provision for related income tax effects. This provision, and the resulting provision relating to pre-tax earnings for the nine months ended September 30, 2004, will be substantially offset, for tax return purposes, by the utilization of net operating loss carryforwards. Previously recognized benefits of approximately $200 million have been reclassified from non-current net deferred tax liabilities to current deferred tax assets, to allow for the estimated amount of net operating loss carryforwards that may be utilized within the next year.

9. 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	September 30, 2004			December 31, 2003
Land	$	11		$	11
Manufacturing facilities and equipment		3,405			3,453
Construction in progress		52			15
Total property, plant and equipment		3,468			3,479
Less accumulated depreciation		(947	)		(839	)
Property, plant and equipment, net	$	2,521		$	2,640

Depreciation and amortization is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2004		2003		2004		2003
Property, plant and equipment	$	39	$	50	$	126	$	133
Investment in PO joint ventures		11		9		33		24
Turnaround costs		3		3		9		10
Software costs		3		2		8		7
Other		3		2		10		10
Total depreciation and amortization	$	59	$	66	$	186	$	184

In addition, amortization of debt issuance costs of $5 million and $4 million for the three-month periods ended September 30, 2004 and 2003, respectively, and $14 million and $12 million for the nine-month periods ended September 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 (UNAUDITED)—(Continued)

10. Long-Term Debt

Long-term debt consisted of the following:

Millions of dollars	September 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%		900			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		4,052			4,151
Less current maturities		100			—
Long-term debt, net	$	3,952		$	4,151

In September 2004, Lyondell prepaid $100 million of the 9.875% Senior Secured Notes, Series B, which mature in 2007, as well as a $5 million prepayment premium, and wrote off $1 million of unamortized debt issuance costs. Also in September 2004, Lyondell called an additional $100 million of the 9.875% Senior Secured Notes, Series B, for prepayment. The debt and a prepayment premium of $5 million were paid in October 2004.

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 to permit the proposed transaction with Millennium as described in Note 2.

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

11. 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 September 30,						For the nine months ended September 30,						For the three months ended September 30,						For the nine months ended September 30,
Millions of dollars	2004			2003			2004			2003			2004			2003			2004			2003
Components of net periodic benefit cost:
Service cost	$	6		$	5		$	19		$	15		$	1		$	1		$	2		$	2
Interest cost		10			9			30			28			1			1			4			4
Recognized gain on plan assets		(6	)		(6	)		(20	)		(18	)		—			—			—			—
Actuarial and investment loss (gain) amortization		5			7			16			19			(1	)		(1	)		(1	)		(1	)
Net periodic benefit cost	$	15		$	15		$	45		$	44		$	1		$	1		$	5		$	5

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. Lyondell currently estimates that its 2004 pension contributions will total approximately $43 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. As permitted by FSP FAS 106-1, 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 does not expect the Act to have a significant effect on its financial statements. Through September 30, 2004, the accumulated postretirement benefit obligation and the net periodic postretirement benefit costs do not reflect any potential benefit associated with the subsidy.

12. 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 crude oil refining capacity of 268,000 barrels per day. 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.

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

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. During the first nine months of 2004, Lyondell received crude oil under the CSA at or above contract rates.

Indemnification Arrangements Relating to Equistar—Lyondell, Millennium and Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of September 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 2 – except that Lyondell will own 100% of Millennium and Equistar.

Environmental Remediation—As of September 30, 2004, Lyondell’s environmental liability for future remediation costs at current and former plant sites and a limited number of Superfund sites totaled $19 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.

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

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

Millions of dollars	Range of Estimates
NOx capital expenditures – 100% basis:
Lyondell	$	35   -     45
Equistar		165   -   200
LCR		50   -     55
Total NOx capital expenditures	$	250   -   300
NOx capital expenditures – Lyondell proportionate share:
Lyondell – 100%	$	35   -     45
Equistar – 70.5%		115   -   140
LCR – 58.75%		30   -     35
Total Lyondell proportionate share of NOx capital expenditures	$	180   -   220

Cumulative capital expenditures through September 30, 2004 by Lyondell, Equistar and LCR relating to NOx emission reductions totaled $27 million, $96 million and $12 million, respectively. Lyondell’s proportionate share of the cumulative spending through September 30, 2004 totaled $101 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 (“TCEQ”), plans to finalize the HRVOC rules by December 2004. Lyondell, Equistar and LCR are still assessing the impact of the proposed HRVOC revisions. In addition, in April 2004, the EPA designated the eight-county Houston/Galveston region a moderate non-attainment area under an “eight-hour” ozone standard. As a result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010. The TCEQ 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

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LYONDELL CHEMICAL COMPANY

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

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 revenues for 2003 and for the first nine months of 2004. 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 (also known as “di-isobutylene”) 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 di-isobutylene 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 was equal access to the federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE, which was addressed in recently enacted tax legislation. Lyondell is currently evaluating the effects of the new tax legislation, as well as the di-isobutylene alternative, prior to making any ultimate decision, which will 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.

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 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, which are not included in the current estimate. LCR has spent approximately $36 million, excluding the $25 million charge, as of September 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 (UNAUDITED)—(Continued)

13. 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 and restricted stock. Outstanding stock options, warrants and restricted stock had no effect on the calculation of the diluted loss per share for the three- and nine-month periods ended September 30, 2003.

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

	For the three months ended September 30,					For the nine months ended September 30,
	2004		2003			2004		2003
Weighted average shares, in millions:
Basic		178.1		161.6			177.5		161.0
Diluted		179.9		161.6			178.7		161.0
Basic and diluted earnings (loss) per share	$	0.28	$	(0.27	)	$	0.21	$	(1.40	)
Dividends declared per share of common stock	$	0.225	$	0.225		$	0.675	$	0.675

Warrants to purchase five million shares of original common stock were outstanding at September 30, 2004, but were not included in the diluted earnings per share calculation, because the exercise price was greater than the average market price of the common stock and, therefore, the effect would have been antidilutive.

14. Comprehensive Income

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

	For the three months ended September 30,					For the nine months ended September 30,
Millions of dollars	2004		2003			2004			2003
Net income (loss)	$	50	$	(44	)	$	38		$	(225	)
Other comprehensive gain (loss):
Foreign currency translation gain (loss)		20		22			(22	)		141
Other		—		—			(2	)		—
Total other comprehensive income (loss)		20		22			(24	)		141
Comprehensive income (loss)	$	70	$	(22	)	$	14		$	(84	)

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LYONDELL CHEMICAL COMPANY

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

15. 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 September 30, 2004:
Sales and other operating revenues	$	1,307		$	—	$	—		$	—	$	—		$	1,307
Operating income		49			—		—			—		—			49
Income (loss) from equity investments		1			93		23			89		(62	)		144
For the three months ended September 30, 2003:
Sales and other operating revenues	$	954		$	—	$	—		$	—	$	—		$	954
Operating income		20			—		—			—		—			20
Income (loss) from equity investments		(4	)		46		(14	)		43		(58	)		13
For the nine months ended September 30, 2004:
Sales and other operating revenues	$	3,573		$	—	$	—		$	—	$	—		$	3,573
Operating income		92			—		—			—		—			92
Income (loss) from equity investments		3			262		9			208		(178	)		304
For the nine months ended September 30, 2003:
Sales and other operating revenues	$	2,856		$	—	$	—		$	—	$	—		$	2,856
Operating loss		(4	)		—		—			—		—			(4	)
Income (loss) from equity investments		(10	)		84		(57	)		99		(185	)		(69	)

“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 (UNAUDITED)—(Continued)

16. 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 10):

- 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 100% 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. The following condensed consolidating financial information present supplemental information for the Guarantors as of September 30, 2004 and December 31, 2003 and for the three-month and nine-month periods ended September 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 (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)

BALANCE SHEET

As of September 30, 2004

Millions of dollars	Lyondell		Guarantors		Non - Guarantors			Eliminations			Consolidated Lyondell
Total current assets	$	1,127	$	283	$	345		$	—		$	1,755
Property, plant and equipment, net		798		824		899			—			2,521
Investments and long-term receivables		5,404		275		1,807			(5,425	)		2,061
Goodwill		723		349		8			—			1,080
Other assets		273		75		32			—			380
Total assets	$	8,325	$	1,806	$	3,091		$	(5,425	)	$	7,797
Current maturities of long-term debt	$	100	$	—	$	—		$	—		$	100
Other current liabilities		512		190		103			—			805
Long-term debt		3,950		—		2			—			3,952
Other liabilities		634		45		26			—			705
Deferred income taxes		714		173		116			—			1,003
Intercompany liabilities (assets)		1,325		102		(1,427	)		—			—
Minority interest		—		26		142			(26	)		142
Stockholders’ equity		1,090		1,270		4,129			(5,399	)		1,090
Total liabilities and stockholders’ equity	$	8,325	$	1,806	$	3,091		$	(5,425	)	$	7,797

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

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

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Three Months Ended September 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors		Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	749		$	398		$	292	$	(132	)	$	1,307
Cost of sales		687			366			274		(132	)		1,195
Selling, general and administrative expenses		40			6			9		—			55
Research and development expenses		9			(1	)		—		—			8
Operating income		13			27			9		—			49
Interest income (expense), net		(108	)		—			—		—			(108	)
Other income (expense), net		(34	)		—			25		—			(9	)
Income from equity investments		143			51			93		(143	)		144
Intercompany income (expense)		(14	)		1			13		—			—
(Benefit from) provision for income taxes		(50	)		27			49		—			26
Net income	$	50		$	52		$	91	$	(143	)	$	50

STATEMENT OF INCOME

For the Three Months Ended September 30, 2003

Millions of dollars	Lyondell			Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	574		$	272	$	252		$	(144	)	$	954
Cost of sales		599			255		181			(144	)		891
Selling, general and administrative expenses		16			5		13			—			34
Research and development expenses		9			—		—			—			9
Operating income (loss)		(50	)		12		58			—			20
Interest income (expense), net		(112	)		5		1			—			(106	)
Other income (expense), net		(10	)		3		9			—			2
Income (loss) from equity investments		76			29		(16	)		(76	)		13
Intercompany income (expense)		(18	)		2		16			—			—
(Benefit from) provision for income taxes		(70	)		19		24			—			(27	)
Net income (loss)	$	(44	)	$	32	$	44		$	(76	)	$	(44	)

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LYONDELL CHEMICAL COMPANY

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

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Nine Months Ended September 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	2,117		$	1,093		$	801		$	(438	)	$	3,573
Cost of sales		1,940			1,012			794			(438	)		3,308
Selling, general and administrative expenses		105			18			26			—			149
Research and development expenses		25			(1	)		—			—			24
Operating income (loss)		47			64			(19	)		—			92
Interest income (expense), net		(328	)		—			3			—			(325	)
Other income (expense), net		(65	)		(3	)		54			1			(13	)
Income from equity investments		298			134			171			(299	)		304
Intercompany income (expense)		(54	)		14			40			—			—
(Benefit from) provision for income taxes		(140	)		73			87			—			20
Net income	$	38		$	136		$	162		$	(298	)	$	38

STATEMENT OF INCOME

For the Nine Months Ended September 30, 2003

Millions of dollars	Lyondell			Guarantors		Non- Guarantors			Eliminations			Consolidated Lyondell
Sales and other operating revenues	$	1,734		$	796	$	791		$	(465	)	$	2,856
Cost of sales		1,802			750		626			(465	)		2,713
Selling, general and administrative expenses		63			18		40			—			121
Research and development expenses		26			—		—			—			26
Operating income (loss)		(157	)		28		125			—			(4	)
Interest income (expense), net		(307	)		15		4			—			(288	)
Other income (expense), net		(42	)		5		51			1			15
Income (loss) from equity investments		152			101		(169	)		(153	)		(69	)
Intercompany income (expense)		(74	)		25		49			—			—
(Benefit from) provision for income taxes		(203	)		61		21			—			(121	)
Net income (loss)	$	(225	)	$	113	$	39		$	(152	)	$	(225	)

19

LYONDELL CHEMICAL COMPANY

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

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2004

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income	$	38		$	136		$	162		$	(298	)	$	38
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		54			52			80			—			186
Income from equity investments		(298	)		(134	)		(171	)		299			(304	)
Distributions of earnings from affiliates		38			134			148			(39	)		281
Deferred income taxes		(140	)		73			83			—			16
Intercompany (receivables) payables, net		550			(253	)		(297	)		—			—
Net changes in other assets and liabilities		67			(5	)		(23	)		—			39
Net cash provided by (used in) operating activities		309			3			(18	)		(38	)		256
Expenditures for property, plant and equipment		(38	)		(2	)		(3	)		—			(43	)
Distributions in excess of earnings from affiliates		—			5			100			—			105
Contributions and advances to affiliates		—			(1	)		(69	)		38			(32	)
Net cash provided by (used in) investing activities		(38	)		2			28			38			30
Repayment of long-term debt		(105	)		—			—			—			(105	)
Dividends paid		(95	)		—			—			—			(95	)
Other		8			—			—			—			8
Net cash used in financing activities		(192	)		—			—			—			(192	)
Effect of exchange rate changes on cash		—			(2	)		1			—			(1	)
Increase in cash and cash equivalents	$	79		$	3		$	11		$	—		$	93

20

LYONDELL CHEMICAL COMPANY

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

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2003

Millions of dollars	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
Net income (loss)	$	(225	)	$	113		$	39		$	(152	)	$	(225	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		58			39			87			—			184
(Income) loss from equity investments		(152	)		(101	)		169			153			69
Distributions of earnings from affiliates		102			113			(11	)		(103	)		101
Deferred income taxes		(203	)		62			19			—			(122	)
Gain on sale of equity interest		—			—			(18	)		—			(18	)
Intercompany (receivables) payables, net		170			83			(247	)		(6	)		—
Net changes in other assets and liabilities		163			(15	)		(7	)		6			147
Net cash provided by (used in) operating activities		(87	)		294			31			(102	)		136
Expenditures for property, plant and equipment		(15	)		(223	)		(9	)		—			(247	)
Distributions in excess of earnings from affiliates		—			—			118			—			118
Contributions and advances to affiliates		—			(77	)		(127	)		102			(102	)
Proceeds from sale of equity interest		—			—			28			—			28
Maturity of other short-term investments		44			—			—			—			44
Net cash provided by (used in) investing activities		29			(300	)		10			102			(159	)
Dividends paid		(85	)		—			—			—			(85	)
Issuance of long-term debt		318			—			—			—			318
Repayment of long-term debt		(103	)		—			—			—			(103	)
Other		(3	)		—			—			—			(3	)
Net cash provided by financing activities		127			—			—			—			127
Effect of exchange rate changes on cash		—			—			3			—			3
Increase (decrease) in cash and cash equivalents	$	69		$	(6	)	$	44		$	—		$	107

21