10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (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.

The Registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, therefore, is filing this form with a reduced disclosure format.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

Millions of dollars	For the three months ended June 30,						For the six months ended June 30,
	2006			2005			2006			2005
Sales and other operating revenues
Trade	$	2,476		$	2,002		$	4,769		$	4,127
Related parties		802			698			1,545			1,434
		3,278			2,700			6,314			5,561
Operating cost and expenses
Cost of sales		3,028			2,447			5,698			4,864
Selling, general and administrative expenses		61			48			109			98
Research and development expenses		9			9			17			17
		3,098			2,504			5,824			4,979
Operating income		180			196			490			582
Interest expense		(54	)		(57	)		(109	)		(113	)
Interest income		2			3			4			5
Other expense, net		—			—			(1	)		—
Net income	$	128		$	142		$	384		$	474

See Notes to the Consolidated Financial Statements.

1

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

Millions of dollars	June 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	132		$	215
Accounts receivable:
Trade, net		787			685
Related parties		371			239
Inventories		713			657
Prepaid expenses and other current assets		45			53
Total current assets		2,048			1,849
Property, plant and equipment, net		2,999			3,063
Investments		61			58
Other assets, net		316			350
Total assets	$	5,424		$	5,320
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Current maturities of long-term debt	$	—		$	150
Accounts payable:
Trade		789			622
Related parties		151			113
Accrued liabilities		245			275
Total current liabilities		1,185			1,160
Long-term debt		2,160			2,161
Other liabilities and deferred revenues		412			416
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,687			1,603
Accumulated other comprehensive loss		(20	)		(20	)
Total partners’ capital		1,667			1,583
Total liabilities and partners’ capital	$	5,424		$	5,320

See Notes to the Consolidated Financial Statements.

2

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions of dollars	For the six months ended June 30,
	2006			2005
Cash flows from operating activities
Net income	$	384		$	474
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		164			159
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(232	)		(68	)
Inventories		(56	)		(67	)
Accounts payable		204			112
Other, net		(37	)		(39	)
Net cash provided by operating activities		427			571
Cash flows from investing activities
Expenditures for property, plant and equipment		(63	)		(69	)
Other		2			3
Net cash used in investing activities		(61	)		(66	)
Cash flows from financing activities
Distributions to owners		(300	)		(475	)
Repayment of long-term debt		(150	)		(1	)
Other		1			—
Net cash used in financing activities		(449	)		(476	)
Increase (decrease) in cash and cash equivalents		(83	)		29
Cash and cash equivalents at beginning of period		215			39
Cash and cash equivalents at end of period	$	132		$	68

See Notes to the Consolidated Financial Statements.

3

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

1.	Basis of Preparation	5
2.	Company Ownership	5
3.	Accounting and Reporting Changes	5
4.	Accounts Receivable	5
5.	Inventories	6
6.	Property, Plant and Equipment, Net	6
7.	Accounts Payable	6
8.	Deferred Revenues	7
9.	Long-Term Debt	7
10.	Pension and Other Postretirement Benefits	8
11.	Commitments and Contingencies	8
12.	Comprehensive Income	10
13.	Segment and Related Information	11

4

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Equistar Chemicals, LP and its subsidiaries (“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 audited consolidated financial statements and notes thereto included in the Equistar Annual Report on Form 10-K for the year ended December 31, 2005. Certain previously reported amounts have been reclassified to conform to current period presentation.

2. Company Ownership

Equistar, a Delaware limited partnership, is owned 70.5% by Lyondell Chemical Company (“Lyondell”) and 29.5% by Millennium Chemicals Inc. (“Millennium”). Equistar became a wholly-owned subsidiary of Lyondell as a result of Lyondell’s acquisition of Millennium in 2004. The consolidated financial statements of Equistar reflect its historical cost basis, and, accordingly, do not reflect any purchase accounting adjustments related to the acquisition by Lyondell of Millennium and Millennium’s interest in Equistar.

3. Accounting and Reporting Changes

Effective January 1, 2006, Equistar adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment using the modified prospective method and, consequently, has not adjusted results of prior periods. Equistar previously accounted for these plans according to the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Equistar’s application of SFAS No. 123 (revised 2004) had no material effect on its consolidated financial statements.

Effective April 1, 2006, Equistar adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF Issue No. 04-13, requires that inventory purchases and sales transactions with the same counterparty that are entered into in contemplation of one another be combined for purposes of applying Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. The effect was to reduce reported revenues and cost of sales for affected transactions. Equistar’s application of EITF Issue No. 04-13 had no material effect on its consolidated financial statements.

4. Accounts Receivable

Equistar has a $600 million accounts receivable sales facility that matures in November 2010. Pursuant to this facility, Equistar sells, through a wholly-owned, bankruptcy-remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. The outstanding amount of receivables sold under the facility as of June 30, 2006 and December 31, 2005 was $200 million.

5

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Inventories

Inventories consisted of the following:

Millions of dollars	June 30, 2006		December 31 ,2005
Finished goods	$	403	$	400
Work-in-process		15		11
Raw materials		180		132
Materials and supplies		115		114
Total inventories	$	713	$	657

6. Property, Plant and Equipment, Net

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

Millions of dollars	June 30, 2006			December 31, 2005
Land	$	78		$	78
Manufacturing facilities and equipment		6,226			6,184
Construction in progress		113			98
Total property, plant and equipment		6,417			6,360
Less accumulated depreciation		(3,418	)		(3,297	)
Property, plant and equipment, net	$	2,999		$	3,063

Depreciation and amortization is summarized as follows:

Millions of dollars	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006		2005
Property, plant and equipment	$	63	$	63	$	126	$	126
Turnaround costs		10		9		20		18
Software costs		4		5		9		9
Other		5		3		9		6
Total depreciation and amortization	$	82	$	80	$	164	$	159

7. Accounts Payable

Accounts payable at each of June 30, 2006 and December 31, 2005 included liabilities in the amount of $6 million for checks issued in excess of associated bank balances but not yet presented for collection.

6

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Deferred Revenues

Deferred revenues at June 30, 2006 and December 31, 2005 of $166 million and $171 million, respectively, represent advances from customers as partial prepayments for products to be delivered under long-term product supply contracts. Trade sales and other operating revenues included $9 million and $3 million in the three-month periods ended June 30, 2006 and 2005, respectively, and $14 million and $7 million in the six-month periods ended June 30, 2006 and 2005, respectively, of such previously deferred revenues.

9. Long-Term Debt

Long-term debt consisted of the following:

Millions of dollars	June 30, 2006		December 31, 2005
$400 million inventory-based revolving credit facility	$	—	$	—
Other debt obligations:
Senior Notes due 2008, 10.125%		700		700
Senior Notes due 2011, 10.625% ($7 million of premium)		707		708
Debentures due 2026, 7.55%		150		150
Notes due 2006, 6.5%		—		150
Notes due 2009, 8.75%		600		600
Other		3		3
Total long-term debt		2,160		2,311
Less current maturities		—		(150	)
Total long-term debt, net	$	2,160	$	2,161

Lyondell is a guarantor of Equistar’s $150 million, 7.55% Debentures due 2026. The unaudited interim consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Quarterly Report on Form 10-Q for the period ended June 30, 2006.

In February 2006, Equistar repaid, at maturity, the $150 million of 6.5% Notes outstanding.

Amortization of debt issuance costs of $1 million and $2 million for each of the three- and six-month periods ended June 30, 2006 and 2005, respectively, is included in interest expense in the Consolidated Statements of Income.

7

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Pension and Other Postretirement Benefits

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

Millions of dollars	For the three months ended June 30,						For the six months ended June 30
	2006			2005			2006			2005
Pension benefits:
Service cost	$	5		$	5		$	11		$	10
Interest cost		4			3			7			6
Recognized return on plan assets		(3	)		(3	)		(6	)		(6	)
Amortization		1			1			2			2
Net periodic pension benefit cost	$	7		$	6		$	14		$	12
Other postretirement benefits:
Service cost	$	—		$	—		$	1		$	1
Interest cost		2			1			3			3
Amortization		—			1			—			1
Net periodic other postretirement benefit cost	$	2		$	2		$	4		$	5

11. Commitments and Contingencies

Leased Facility—Equistar has an ethylene facility in Lake Charles, Louisiana, which 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 $133 million, are leased from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively (“Occidental”). In May 2006, Equistar and Occidental entered into a new three-year lease. If Equistar were to determine that the facility will not be used to produce olefins in the future, the resulting impairment of the net book value of the facility could represent an after-tax charge of between $65 million and $85 million, depending upon the alternative uses that might be identified for the facility and other factors.

Asset Retirement Obligation—Equistar believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Equistar continually reviews the optimal future alternatives for its facilities. The amount and timing of costs, if any, that may be incurred as a result of such reviews are not known, and no decisions have been reached, but if a decision were reached to retire one or more facilities in the foreseeable future, the asset retirement costs could range from $0 to $30 million, depending upon the scope of the required work and other factors. At June 30, 2006, the balance of the liability that had been recognized for all asset retirement obligations was $11 million. In addition, any decision to retire a facility would result in other costs, including employment related costs.

8

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

11. Commitments and Contingencies – (Continued)

Environmental Remediation—Equistar’s accrued liability for future environmental remediation costs totaled $1 million as of June 30, 2006 and December 31, 2005. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liability 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 investigations by regulatory agencies, could require Equistar to reassess its potential exposure related to environmental matters.

Equistar currently estimates that environmentally related capital expenditures at its facilities will be approximately $50 million for 2006 and $27 million in 2007.

MTBE—In the U.S., the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether (“MTBE”), used in gasoline sold as reformulated fuel 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 led to public concern about the use of MTBE and resulted in the U.S. federal Energy Policy Act of 2005 and U.S. state governmental initiatives to reduce the use of MTBE.

The federal Energy Policy Act of 2005, which was enacted in the U.S. in August 2005, did not phase-down or ban the use of MTBE. However, the Act eliminated the oxygen standard for reformulated fuels, effective May 6, 2006, and also contained a renewable fuel standard that mandated the use of ethanol in gasoline. As a result of the elimination of the oxygen standard for reformulated fuels, companies are no longer required to use MTBE or any other oxygenate for this purpose. Various U.S. states have banned or are considering banning the use of MTBE. For example, California, Connecticut and New York banned MTBE, effective January 2004, and New Jersey banned MTBE, effective January 2009. In addition, at this time, the majority of refiners and blenders have discontinued the use of MTBE in the U.S.

The combination of these actions is negatively affecting U.S. MTBE demand. Equistar’s North American MTBE business accounted for approximately $378 million of Equistar’s revenues in 2005. At this time, Equistar cannot predict the full impact that the U.S. federal legislation, state governmental initiatives and bans, and these commercial actions will have on MTBE margins or volumes longer term. Equistar intends to continue offering MTBE either in the U.S. or outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Should it become necessary or desirable to significantly reduce MTBE production as a result of state bans or the commercial decisions by refiners and blenders to discontinue use of MTBE, Equistar may make capital expenditures to add flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene (also know as “di-isobutylene”) or ethyl tertiary butyl ether (“ETBE”), at its MTBE plant. Conversion and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to the non-ether alternative gasoline blending components may be lower than that historically realized on MTBE.

9

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Commitments and Contingencies – (Continued)

Other—Equistar is, from time to time, a defendant in lawsuits and other commercial disputes, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of any liability and resulting financial impact with respect to any such matters cannot be ascertained with any degree of certainty, management does not believe that any ultimate uninsured liability resulting from these matters in which it currently is involved will, individually or in the aggregate, have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

General—In the opinion of management, the matters discussed in this note are not expected to have a material adverse effect on the financial position or liquidity of Equistar. However, the adverse resolution in any reporting period of one or more of these matters could have a material impact on Equistar’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.

12. Comprehensive Income

The components of comprehensive income were as follows:

Millions of dollars	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006		2005
Net income	$	128	$	142	$	384	$	474
Other comprehensive loss -
Derivative instruments		—		—		—		(2	)
Other		—		—		—		(1	)
Total other comprehensive loss		—		—		—		(3	)
Comprehensive income	$	128	$	142	$	384	$	471

10

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Segment and Related Information

Equistar operates in one reportable segment, which is part of Lyondell’s ethylene, co-products and derivatives (“EC&D”) segment. Equistar’s EC&D segment includes: the ethylene and co-products product group, including primarily manufacturing and marketing of ethylene, its co-products, including propylene, butadiene, fuels and aromatics; and the derivatives product group, including primarily manufacturing and marketing of ethylene oxide, ethylene glycol and polyethylene.

Although Equistar operates in one integrated reportable segment, Equistar has provided certain additional data, as shown below, for two product groups: the ethylene and co-products group, reflecting the products of the core ethylene manufacturing processes, and the derivative products group.

In Millions	Ethylene & co-products		Derivatives		Eliminations			Consolidated
For the three months ended June 30, 2006
Sales and other operating revenues
Customers	$	2,184	$	1,094	$	—		$	3,278
Inter-product group		683		—		(683	)		—
		2,867		1,094		(683	)		3,278
Operating income		153		27		—			180
For the three months ended June 30, 2005
Sales and other operating revenues
Customers	$	1,862	$	838	$	—		$	2,700
Inter-product group		493		—		(493	)		—
		2,355		838		(493	)		2,700
Operating income		129		67		—			196
For the six months ended June 30, 2006
Sales and other operating revenues
Customers	$	4,179	$	2,135	$	—		$	6,314
Inter-product group		1,384		—		(1,384	)		—
		5,563		2,135		(1,384	)		6,314
Operating income		396		94		—			490
For the six months ended June 30, 2005
Sales and other operating revenues
Customers	$	3,752	$	1,809	$	—		$	5,561
Inter-product group		1,092		—		(1,092	)		—
		4,844		1,809		(1,092	)		5,561
Operating income		429		153		—			582

11

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

This discussion should be read in conjunction with the 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, as additional disclosure, certain “trailing quarter” comparisons of second quarter 2006 operating results to first quarter 2006 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 manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene. Equistar also manufactures and markets ethylene derivatives, primarily polyethylene (including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear-low density polyethylene (“LLDPE”)), ethylene glycol, ethylene oxide and its other derivatives, and ethanol. Equistar also manufactures and markets fuels, such as methyl tertiary butyl ether (“MTBE”) and alkylate, as well as polypropylene. Equistar is a wholly-owned subsidiary of Lyondell Chemical Company (“Lyondell”).

For the second quarter and first six months of 2006, Equistar’s operating results reflected the effects of higher costs, primarily higher raw material costs, that were not entirely offset by higher average sales prices. As a result, average product margins were lower in the first six months of 2006 compared to the same period in 2005.

U.S. market demand in the second quarter and first six months of 2006 increased an estimated 2% and decreased an estimated 1%, respectively, for ethylene, and increased an estimated 9% and 4%, respectively, for polyethylene, compared to the second quarter and first six months of 2005.

Benchmark Indicators—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. Ethylene and its co-products are produced from two major raw material groups:

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

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

Equistar has the ability to shift its ratio of raw materials used in the production of ethylene and co-products to take advantage of the relative costs of heavy liquids and NGLs.

12

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

	Average Benchmark Price
	For the three months ended June 30,		For the six months ended June 30,
	2006	2005	2006	2005
Crude oil – dollars per barrel	70.47	53.04	66.88	51.35
Natural gas – dollars per million BTUs	6.48	6.57	7.00	6.28
Weighted average cost of ethylene production – cents per pound	32.19	25.71	30.89	24.52
Ethylene – cents per pound	46.50	38.33	48.42	39.92
Propylene – cents per pound	48.17	36.17	45.83	39.83
Benzene – cents per gallon	301.67	305.67	285.00	311.33
HDPE – cents per pound	67.00	66.50	70.00	69.50

As indicated in the table above, benchmark crude oil prices increased significantly in the second quarter and first six months of 2006 compared to the same periods in 2005. Although natural gas prices decreased during the second quarter 2006, they averaged higher for the first six months of 2006 compared to the same period in 2005, negatively affecting energy costs. Despite the second quarter 2006 decrease in natural gas prices, the prices of NGL-based raw materials remained at high levels. As a result, raw material costs were significantly higher in the second quarter and first six months of 2006 compared to the same periods in 2005.

RESULTS OF OPERATIONS

Revenues—Equistar’s revenues of $3,278 million in the second quarter 2006 were 21% higher compared to revenues of $2,700 million in the second quarter 2005, while revenues of $6,314 million in the first six months of 2006 were 14% higher compared to revenues of $5,561 million in the first six months of 2005. The higher revenues in the second quarter and first six months of 2006 reflected the effects of higher average sales prices and higher sales volumes compared to the same periods in 2005. Ethylene and derivative sales volumes were 5% and 2% higher, respectively, in the second quarter and first six months of 2006 compared to the second quarter and first six months of 2005.

Cost of Sales—Equistar’s cost of sales of $3,028 million in the second quarter 2006 was 24% higher compared to $2,447 million in the second quarter 2005, while cost of sales in the first six months of 2006 of $5,698 million was 17% higher compared to $4,864 million in the first six months of 2005. The increases reflect the effects of higher raw material costs, primarily resulting from the effects of higher crude oil prices. Higher natural gas prices in the first six months of 2006 also contributed to higher energy costs compared to the first six months of 2005.

SG&A Expenses—Selling, general and administrative (“SG&A”) expenses were $61 million in the second quarter 2006 compared to $48 million in the second quarter 2005, and $109 million for the six-month period ended June 30, 2006 compared to $98 million for the six-month period ended June 30, 2005. The increase in the second quarter 2006 compared to the second quarter 2005 was primarily due to higher compensation expense, including higher incentive compensation. The increase in the first six months of 2006 compared to the same period in 2005 was primarily due to higher other compensation expense as incentive compensation expense was comparable.

13

Operating Income—Equistar had operating income of $180 million in the second quarter 2006 compared to $196 million in the second quarter 2005, and operating income of $490 million in the first six months of 2006 compared to $582 million in the first six months of 2005. The decreases in the second quarter and first six months of 2006 were due to higher costs, primarily higher raw material costs, which were not entirely offset by the effects of higher average sales prices and higher sales volumes compared to the same periods in 2005.

Net Income—Equistar had net income of $128 million in the second quarter 2006 compared to $142 million in the second quarter 2005, and $384 million in the first six months of 2006 compared to $474 million in the first six months of 2005. The decreases were primarily attributable to the lower operating income in the second quarter and first six months of 2006 compared to the same periods in 2005.

Second Quarter 2006 versus First Quarter 2006

Equistar’s second quarter 2006 net income was $128 million compared to net income of $256 million in the first quarter 2006. The decrease of $128 million was primarily due to lower margins, which were partially offset by the effects of higher sales volumes compared to the first quarter 2006. The lower margins were primarily due to higher crude-oil and NGL-based raw material costs, which were not completely offset by the effects of higher average sales prices. The increase in average sales prices in the second quarter 2006 reflected higher average sales prices for co-products, which were partially offset by decreases in the average sales prices for ethylene and polyethylene. Sales volumes for ethylene and derivatives in the second quarter 2006 increased by 2% compared to the first quarter 2006.

Product Group Analysis

The following analysis discusses Equistar’s operating results, focusing on two product groups: ethylene and co-products; and derivatives. Ethylene co-products primarily include propylene, butadiene, fuels, which include MTBE and alkylates, and aromatics, which include benzene and toluene. Derivatives primarily include polyethylene, ethylene glycol, ethylene oxide and its derivatives, and ethanol and polypropylene.

The following tables reflect selected sales data, including sales of ethylene and co-products used as derivative raw materials, and summarized financial information for the two product groups.

Millions of dollars	For the three months ended						For the six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Sales and other operating revenues:
Ethylene and co-products	$	2,867		$	2,355		$	5,563		$	4,844
Derivatives		1,094			838			2,135			1,809
Ethylene and co-products included in derivatives		(683	)		(493	)		(1,384	)		(1,092	)
Total	$	3,278		$	2,700		$	6,314		$	5,561
Operating income:
Ethylene and co-products	$	153		$	129		$	396		$	429
Derivatives		27			67			94			153
Total	$	180		$	196		$	490		$	582
Volumes in millions
Selected ethylene and co-products:
Ethylene and co-products (pounds)		4,542			4,247			9,028			8,768
Aromatics (gallons)		88			107			177			209
Derivatives products (pounds)		1,912			1,696			3,632			3,450

14

Ethylene and co-products

Revenues—Revenues of $2,867 million in the second quarter 2006 were 22% higher compared to $2,355 million in the second quarter 2005, while revenues of $5,563 million in the first six months of 2006 were 15% higher compared to $4,844 million in the first six months of 2005. The increases in the second quarter and first six months reflected the effects of higher average sales prices and higher sales volumes compared to the second quarter and first six months of 2005. Higher average sales prices in the second quarter and first six months of 2006 for most fuel-related products, propylene and ethylene were partially offset by lower average sales prices for benzene, compared to the same periods in 2005. Sales volumes were 7% and 3% higher, respectively, in the second quarter and first six months of 2006 compared to the same periods in 2005.

Operating Income—Operating income in the second quarter 2006 was $153 million compared to $129 million in the second quarter 2005 and $396 million in the first six months of 2006 compared to $429 million in the first six months of 2005. The improvement of $24 million in the second quarter 2006 was primarily due to the effect of higher margins and sales volumes as higher average sales prices more than offset the effect of higher crude oil prices on raw material costs compared to the second quarter 2005. The decrease in the first six months of 2006 was primarily due to the effect of lower product margins as higher raw material costs more than offset the effects of higher average sales prices and higher sales volumes compared to the same period in 2005.

Derivatives

Revenues—Revenues of $1,094 million in the second quarter 2006 were 31% higher compared to revenues of $838 million in the second quarter 2005, while revenues of $2,135 million in the first six months of 2006 were 18% higher compared to revenues of $1,809 million in the first six months of 2005. The increases in the second quarter and first six months of 2006 reflected the effects of higher average polyethylene sales prices and higher sales volumes. Sales volumes in the second quarter 2006 were 13% higher compared to the second quarter 2005, while in the first six months of 2006 sales volumes were 5% higher than in the first six months of 2005.

Operating Income—Operating income for derivatives was $27 million in the second quarter 2006 compared to $67 million in the second quarter 2005 and $94 million in the first six months of 2006 compared to $153 million in the first six months of 2005. The decreases were primarily the result of lower product margins in the second quarter and first six months of 2006 as higher raw materials costs were not offset by higher average sales prices. The lower product margins were partly offset by the favorable effects of higher sales volumes in the second quarter and first six months of 2006, respectively, compared to the same periods in 2005.

FINANCIAL CONDITION

Operating Activities—Operating activities provided cash of $427 million in the first six months of 2006 and $571 million in the first six months of 2005. The $144 million decrease primarily reflected lower net income of $90 million in the first six months of 2006 and a larger net increase in the main components of working capital – accounts receivable, inventory and accounts payable compared to the first six months of 2005.

In the first six months of 2006 and 2005, increases in the main components of working capital used cash of $84 million and $23 million, respectively. The larger net increase in the first six months of 2006 compared to the first six months of 2005 was primarily due to the effects of accounts receivable partly offset by the effects of accounts payable.

Receivables showed a $232 million increase in the first six months of 2006 compared to a $68 million increase in the first six months of 2005. The increase in the first six months of 2006 reflected higher June 2006 sales revenues compared to December 2005 and the $84 million effect related to discounts noted below. The increase in the first six months of 2005 primarily reflected the effect of a $200 million decrease in the outstanding amount of accounts receivable sold under the accounts receivable sales facility partly offset by lower June 2005 sales revenues compared to December 2004.

15

Prior to January 2006, discounts were offered to certain customers for early payment for product. As a result, some receivable amounts were collected in December 2005 that otherwise would have been expected to be collected in January 2006. This included collections of $84 million in December 2005 related to receivables from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation.

Accounts payable increased $204 million in the first six months of 2006 compared to $112 million in the first six months of 2005 due primarily to the timing of receipts and payments for heavy liquids raw materials.

Investing Activities—Investing activities used cash of $61 million and $66 million in the first six months of 2006 and 2005, respectively, primarily for capital expenditures. Equistar’s capital budget for 2006 is $232 million and includes spending for base plant support, plant efficiency projects and projects related to environmental and regulatory requirements, including air emission reductions and wastewater management.

Financing Activities—Cash used by financing activities was $449 million in the first six months of 2006 and $476 million in the first six months of 2005. During the first six months of 2006, Equistar repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006, and distributed $300 million to its owners. Equistar distributed $475 million to its owners in the first six months of 2005.

Liquidity and Capital Resources—At June 30, 2006, Equistar’s long-term debt totaled $2.2 billion, or approximately 56% of its total capitalization, and there were no current maturities. At June 30, 2006, Equistar had cash on hand of $132 million, and the total amount available under both the $400 million inventory-based revolving credit facility and the $600 million accounts receivable sales facility totaled approximately $734 million, after giving effect to the borrowing base net of a $50 million unused availability requirement, the $200 million outstanding amount of accounts receivable sold under the accounts receivable sales facility at June 30, 2006 and $16 million of outstanding letters of credit under the revolving credit facility as of June 30, 2006. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The revolving credit facility requires that the unused available amounts under that facility and the $600 million accounts receivable sales facility equal or exceed $50 million, or $100 million if the Interest Coverage Ratio, as defined, at the end of any period of four consecutive fiscal quarters is less than 2:1. There was no outstanding borrowing under the revolving credit facility at June 30, 2006.

Equistar’s ability to continue to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. However, Equistar believes that conditions will be such that cash balances, cash generated from operating activities and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, necessary capital expenditures and ongoing operations.

In July 2006, Moody’s Investors Service (“Moody’s”) placed the ratings of Equistar under review for possible downgrade and Standard & Poor’s Ratings Services revised the CreditWatch implications for Equistar from positive to negative following Lyondell’s announcement that Lyondell and CITGO Petroleum Corporation had discontinued the exploration of a sale of LYONDELL-CITGO Refining LP to a third-party. In June 2006, Moody’s had reinstated Equistar’s debt ratings at Ba3.

Equistar’s inventory-based revolving credit facility, accounts receivable sales facility and indentures contain restrictive covenants. These covenants are described in Notes 5 and 11 to Equistar’s Consolidated Financial Statements included in Equistar’s Annual Report on Form 10-K for the year ended December 31, 2005. The potential impact of a breach of these covenants is discussed in “Liquidity and Capital Resources” under Item 7 of Equistar’s Annual Report on Form 10-K for the year ended December 31, 2005. There have been no changes in the terms of the covenants in the six months ended June 30, 2006. Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when its Fixed Charge Coverage Ratio, as defined, is less than 1.75 to 1.

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, 2005. Equistar’s off-balance sheet arrangements did not change materially in the six months ended June 30, 2006.

16

CURRENT BUSINESS OUTLOOK

Equistar’s outlook for the balance of 2006 continues to be positive. The third quarter 2006 has started out positively despite the high cost of raw materials, which has been offset by strength in Equistar’s gasoline components and other co-products. The strong performance of the ethylene chain late in the second quarter 2006 has continued to improve into the third quarter.

ACCOUNTING AND REPORTING CHANGES

Effective January 1, 2006, Equistar adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment using the modified prospective method and, consequently, has not adjusted results of prior periods. Equistar previously accounted for these plans according to the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Equistar’s application of SFAS No. 123 (revised 2004) had no material effect on its consolidated financial statements.

Effective April 1, 2006, Equistar adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF Issue No. 04-13 requires that inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another be combined for purposes of applying Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. The effect was to reduce reported revenues and cost of sales for affected transactions. Equistar’s application of EITF Issue No. 04-13 had no material effect on its consolidated financial statements.

Item 3. Disclosure of Market Risk

Equistar’s exposure to market risk is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2005. Equistar’s exposure to market risk has not changed materially in the six months ended June 30, 2006.

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 Senior Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of Equistar’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2006. Based upon that evaluation, the Chief Executive Officer and the Senior Vice President and Chief Financial Officer 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.

17

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,

• the supply/demand balances for Equistar’s products, and the related effects of industry production capacities and operating rates,

• uncertainties associated with the U.S. and worldwide economies, including those due to political tensions in the Middle East and elsewhere,

• the cyclical nature of the chemical industry,

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

• legal and environmental proceedings,

• current and potential governmental regulatory actions in the U.S. and in other countries,

• terrorist acts and international political unrest,

• competitive products and pricing pressures,

• 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, elsewhere in this report and in Equistar’s Annual Report on Form 10-K for the year ended December 31, 2005. See “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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.

18

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments with respect to Equistar’s legal proceedings previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2005.

Item 1A. Risk Factors

There have been no material changes with respect to Equistar’s risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2005 and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, except that the following risk factor has been amended in its entirety as follows:

Legislative and other actions have reduced U.S. demand for MTBE and, therefore, Equistar has been exporting MTBE and may produce alternative gasoline blending components that may be less profitable than MTBE.

In the U.S., the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, used in gasoline sold as reformulated fuel 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 led to public concern about the use of MTBE and resulted in the U.S. federal Energy Policy Act of 2005 and U.S. state governmental initiatives to reduce the use of MTBE.

The federal Energy Policy Act of 2005, which was enacted in the U.S. in August 2005, did not phase-down or ban the use of MTBE. However, the Act eliminated the oxygen standard for reformulated fuels, effective May 6, 2006, and also contained a renewable fuel standard that mandated the use of ethanol in gasoline. As a result of the elimination of the oxygen standard for reformulated fuels, companies are no longer required to use MTBE or any other oxygenate for this purpose. Various U.S. states have banned or are considering banning the use of MTBE. For example, California, Connecticut and New York banned MTBE, effective January 2004, and New Jersey banned MTBE, effective January 2009. In addition, at this time, the majority of refiners and blenders have discontinued the use of MTBE in the U.S.

The combination of these actions is negatively affecting U.S. MTBE demand. Equistar’s North American MTBE business accounted for approximately $378 million of Equistar’s revenues in 2005. At this time, Equistar cannot predict the full impact that the U.S. federal legislation, state governmental initiatives and bans, and these commercial actions will have on MTBE margins or volumes longer term. Equistar intends to continue offering MTBE either in the U.S. or outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Should it become necessary or desirable to significantly reduce MTBE production as a result of state bans or the commercial decisions by refiners and blenders to discontinue use of MTBE, Equistar may 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 MTBE plant. Conversion and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to the non-ether alternative gasoline blending components may be lower than that historically realized on MTBE.

19

Item 6. Exhibits

3.2(a)	Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP effective as of June 30, 2006 (filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of June 30, 2006 and incorporated herein by reference)
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

20

SIGNATURE

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

	Equistar Chemicals, LP
Dated: August 9, 2006	/s/ Charles L. Hall
	Charles L. Hall
	Vice President and Controller
	(Duly Authorized and Principal Accounting Officer)

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

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

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

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

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

Date: August 9, 2006	/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, T. Kevin DeNicola, Senior Vice President and Chief Financial 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

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

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

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

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

Date: August 9, 2006	/s/ T. Kevin DeNicola
	T. Kevin DeNicola
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the “Periodic Report”), I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: August 9, 2006	/s/ Dan F. Smith
	Dan F. Smith
	Chief Executive Officer

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

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the “Periodic Report”), I, T. Kevin DeNicola, Senior Vice President and Chief Financial Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: August 9, 2006	/s/ T. Kevin DeNicola
	T. Kevin DeNicola
	Senior Vice President and Chief 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

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars, except per share data	2006			2005			2006			2005
Sales and other operating revenues
Trade	$	4,640		$	4,003		$	8,983		$	8,031
Related parties		432			373			846			785
		5,072			4,376			9,829			8,816
Operating costs and expenses
Cost of sales		4,586			3,879			8,757			7,663
Selling, general and administrative expenses		169			136			300			268
Research and development expenses		24			22			47			45
		4,779			4,037			9,104			7,976
Operating income		293			339			725			840
Interest expense		(132	)		(165	)		(273	)		(334	)
Interest income		7			10			20			21
Other income (expense), net		1			(5	)		75			(19	)
Income before equity investments and income taxes		169			179			547			508
Income (loss) from equity investments
LYONDELL-CITGO Refining LP		86			19			177			86
Other		3			(1	)		2			—
		89			18			179			86
Income before income taxes		258			197			726			594
Provision for income taxes		98			71			276			214
Net income	$	160		$	126		$	450		$	380
Earnings per share
Basic	$	0.65		$	0.51		$	1.82		$	1.55
Diluted	$	0.62		$	0.48		$	1.74		$	1.46

See Notes to the Consolidated Financial Statements.

1

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

Millions, except shares and par value data	June 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	320		$	593
Accounts receivable:
Trade, net		1,800			1,563
Related parties		171			114
Inventories		1,739			1,657
Prepaid expenses and other current assets		138			176
Deferred tax assets		257			198
Total current assets		4,425			4,301
Property, plant and equipment, net		6,487			6,530
Investments and long-term receivables:
Investment in PO joint ventures		785			776
Investment in and receivable from LYONDELL-CITGO Refining LP		289			186
Other		117			114
Goodwill, net		2,135			2,245
Other assets, net		790			828
Total assets	$	15,028		$	14,980
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	870		$	319
Accounts payable:
Trade		1,468			1,352
Related parties		139			101
Accrued liabilities		700			797
Total current liabilities		3,177			2,569
Long-term debt		4,966			5,974
Other liabilities		1,666			1,786
Deferred income taxes		1,584			1,463
Commitments and contingencies
Minority interests		167			180
Stockholders’ equity:
Common stock, $1.00 par value, 420,000,000 shares authorized, 248,649,990 and 247,876,385 shares issued, respectively		249			248
Additional paid-in capital		3,222			3,211
Retained earnings (deficit)		47			(292	)
Accumulated other comprehensive loss		(28	)		(136	)
Treasury stock, at cost, 793,736 and 826,151 shares, respectively		(22	)		(23	)
Total stockholders’ equity		3,468			3,008
Total liabilities and stockholders’ equity	$	15,028		$	14,980

See Notes to the Consolidated Financial Statements.

2

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended June 30,
Millions of dollars	2006			2005
Cash flows from operating activities
Net income	$	450		$	380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		362			363
Equity investments –
Amounts included in net income		(179	)		(86	)
Distributions of earnings		122			86
Deferred income taxes		102			161
Debt prepayment premiums and charges		—			21
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(234	)		(139	)
Inventories		(46	)		(177	)
Accounts payable		109			128
Other, net		(248	)		(91	)
Net cash provided by operating activities		438			646
Cash flows from investing activities
Expenditures for property, plant and equipment		(124	)		(112	)
Distributions from affiliates in excess of earnings		—			51
Contributions and advances to affiliates		(57	)		(51	)
Other		6			3
Net cash used in investing activities		(175	)		(109	)
Cash flows from financing activities
Repayment of long-term debt		(449	)		(547	)
Issuance of long-term debt		13			3
Dividends paid		(111	)		(111	)
Proceeds from stock option exercises		9			43
Other, net		(2	)		(7	)
Net cash used in financing activities		(540	)		(619	)
Effect of exchange rate changes on cash		4			(9	)
Decrease in cash and cash equivalents		(273	)		(91	)
Cash and cash equivalents at beginning of period		593			804
Cash and cash equivalents at end of period	$	320		$	713

See Notes to the Consolidated Financial Statements.

3

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

1.	Basis of Preparation	5
2.	Accounting and Reporting Changes	5
3.	Charges Related to Toluene Diisocyanate Plant	5
4.	Investment in PO Joint Ventures	6
5.	Equity Interest in LYONDELL-CITGO Refining LP	7
6.	Accounts Receivable	9
7.	Inventories	9
8.	Property, Plant and Equipment and Goodwill	10
9.	Accounts Payable	10
10.	Long-Term Debt	11
11.	Pension and Other Postretirement Benefits	13
12.	Commitments and Contingencies	13
13.	Per Share Data	18
14.	Share-Based Compensation	19
15.	Comprehensive Income	21
16.	Segment and Related Information	22
17.	Supplemental Guarantor Information	24

4

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Basis of Preparation

Lyondell Chemical Company (“LCC”), together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), is a global chemical company that manufactures and markets a variety of basic chemicals and gasoline blending components.

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company and its subsidiaries 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 audited consolidated financial statements and notes thereto included in the Lyondell Chemical Company Annual Report on Form 10-K for the year ended December 31, 2005. Certain previously reported amounts have been reclassified to conform to current period presentation.

2. Accounting and Reporting Changes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertain income tax positions. FIN No. 48 prescribes, among other things, a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position. The provisions of FIN No. 48 will apply to Lyondell beginning in 2007. Lyondell is evaluating the impact of FIN No. 48 on its consolidated financial statements.

Effective January 1, 2006, Lyondell adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment using the modified prospective method and, consequently, has not adjusted results of prior periods. Lyondell previously accounted for these plans according to the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which it adopted in the first quarter 2003, using the prospective transition method. Lyondell’s application of SFAS No. 123 (revised 2004) had no material effect on its consolidated financial statements.

Effective April 1, 2006, Lyondell adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF Issue No. 04-13 requires that inventory purchases and sales transactions with the same counterparty that are entered into in contemplation of one another be combined for purposes of applying Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. The effect was to reduce reported revenues and cost of sales for affected transactions. Lyondell’s application of EITF Issue No. 04-13 had no material effect on its consolidated financial statements.

3. Charges Related to Toluene Diisocyanate Plant

Lyondell ceased production of toluene diisocyanate (“TDI”) at the Lake Charles, Louisiana TDI plant and recognized a pretax charge of $195 million in the third quarter 2005 for the reduction of the carrying value of the TDI plant and related assets.

5

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Charges Related to Toluene Diisocyanate Plant – (Continued)

The following table summarizes estimates of additional charges related to the Lake Charles TDI facility that Lyondell has recognized or expects to recognize subsequent to September 30, 2005 as well as actual costs incurred through June 30, 2006.

Millions of dollars	Facility Costs			Employee Termination Benefits			Other Costs			Total
Estimates of charges to be recognized subsequent to September 30, 2005	$	22		$	14		$	8		$	44
Amounts settled during the three-month periods ended:
December 31, 2005		(6	)		—			(3	)		(9	)
March 31, 2006		(2	)		(12	)		—			(14	)
June 30, 2006		(3	)		(1	)		—			(4	)
Accrued liabilities as of June 30, 2006		(1	)		(1	)		—			(2	)
Estimate as of June 30, 2006 of remaining future charges	$	10		$	—		$	5		$	15

Facility costs include plant decommissioning and demolition activities; other costs include the costs of terminating contracts.

In addition, there are multiple commercial arrangements associated with the Lake Charles TDI facility for which the costs and timing of resolution cannot be determined at this time. The range of reasonably possible outcomes within which the present value of the costs of resolution of such commercial arrangements may fall is between $0 and $160 million; however, these costs are not expected to be in the upper portion of that range.

4. Investment in PO Joint Ventures

Lyondell, together with Bayer AG and Bayer Corporation (collectively “Bayer”), shares ownership in a U.S. propylene oxide (“PO”) manufacturing joint venture (the “U.S. PO Joint Venture”) and a separate joint venture for certain related PO technology. Bayer’s ownership interest represents ownership of 1.6 billion pounds of annual in-kind PO production of the U.S. PO Joint Venture. Lyondell takes in kind the remaining PO production and all co-product styrene monomer (“SM”) and tertiary butyl alcohol (“TBA”) production from the U.S. PO Joint Venture.

In addition, Lyondell and Bayer each have a 50% interest in a separate manufacturing joint venture (the “European PO Joint Venture”), which includes a world-scale PO/SM plant at Maasvlakte near Rotterdam, the Netherlands. Lyondell and Bayer each are entitled to 50% of the PO and SM production of the European PO Joint Venture.

6

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Investment in PO Joint Ventures – (Continued)

Changes in Lyondell’s investment in the U.S. and European PO joint ventures for the six-month periods ended June 30, 2005 and 2006 are summarized as follows:

Millions of dollars	U.S. PO Joint Venture			European PO Joint Venture			Total PO Joint Ventures
Investment in PO joint ventures – January 1, 2005	$	541		$	297		$	838
Cash contributions		4			3			7
Depreciation and amortization		(16	)		(7	)		(23	)
Effect of exchange rate changes		—			(31	)		(31	)
Investment in PO joint ventures – June 30, 2005	$	529		$	262		$	791
Investment in PO joint ventures – January 1, 2006	$	518		$	258		$	776
Cash contributions		12			3			15
Depreciation and amortization		(17	)		(6	)		(23	)
Effect of exchange rate changes		—			17			17
Investment in PO joint ventures – June 30, 2006	$	513		$	272		$	785

5. Equity Interest in LYONDELL-CITGO Refining LP

Lyondell’s refining operations are conducted through its investment in LYONDELL-CITGO Refining LP (“LCR”). Lyondell has a 58.75% interest in LCR, while CITGO Petroleum Corporation (“CITGO”) has a 41.25% interest. On July 20, 2006, Lyondell announced that Lyondell and CITGO had discontinued the previously announced exploration of a sale of LCR to a third party. The partners have been discussing the possibility of Lyondell acquiring CITGO’s interest in LCR. However, no agreement has been reached.

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.

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

Millions of dollars	June 30, 2006		December 31, 2005
Investment in LCR	$	7	$	(90	)
Receivable from LCR		229		229
Interest receivable		53		47
Investment in and receivable from LCR	$	289	$	186

7

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Equity Interest in LYONDELL-CITGO Refining LP – (Continued)

Summarized financial information for LCR is as follows:

Millions of dollars	June 30, 2006		December 31, 2005
BALANCE SHEETS
Total current assets	$	576	$	418
Property, plant and equipment, net		1,386		1,328
Other assets		95		86
Total assets	$	2,057	$	1,832
Current liabilities	$	1,422	$	805
Long-term debt		—		439
Loans payable to partners		264		264
Other liabilities		125		113
Partners’ capital		246		211
Total liabilities and partners’ capital	$	2,057	$	1,832

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars	2006			2005			2006			2005
STATEMENTS OF INCOME
Sales and other operating revenues	$	2,411		$	1,563		$	4,505		$	3,099
Cost of sales		2,232			1,515			4,147			2,921
Selling, general and administrative expenses		16			11			33			23
Operating income		163			37			325			155
Interest expense, net		(12	)		(9	)		(23	)		(17	)
Provision for income taxes		8			—			8			—
Net income	$	143		$	28		$	294		$	138
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	31		$	28		$	62		$	56
Expenditures for property, plant and equipment		49			49			109			83

The $8 million provision for income taxes in the table above represents Texas state income tax. As a partnership, LCR is not subject to federal income taxes. LCR’s selling, general and administrative expenses for the six months ended June 30, 2006 included an $8 million charge representing reimbursement to Lyondell of legal fees and expenses paid by Lyondell on behalf of LCR in connection with the settlement discussed below.

For the six months ended June 30, 2006, Lyondell’s income included $74 million in “Other income, net” representing the net payments received by Lyondell, including the reimbursement of legal fees and expenses from LCR referred to above, in settlement of all disputes among Lyondell, CITGO and Petróleos de Venezuela, S.A. (“PDVSA”) and their respective affiliates. See also the “Crude Supply Agreement” section of Note 12.

Lyondell’s income from its investment in LCR presented in the Consolidated Statements of Income consists of Lyondell’s share of LCR’s net income and accretion of Lyondell’s investment in LCR up to its underlying equity in LCR’s net assets. At June 30, 2006, Lyondell’s underlying equity in LCR’s net assets exceeded its investment in LCR by approximately $243 million. This difference is being recognized in income at an annual rate of $8 million.

8

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Accounts Receivable

Lyondell has four-year, accounts receivable sales facilities of $150 million and $600 million, relating to, respectively, LCC and Lyondell’s wholly-owned subsidiary, Equistar Chemicals, LP (“Equistar”). Pursuant to these facilities, which mature in November 2010, Lyondell sells, through two wholly-owned bankruptcy-remote subsidiaries, on an ongoing basis and without recourse, interests in pools of domestic accounts receivable to financial institutions participating in the facilities. Lyondell is responsible for servicing the receivables. The outstanding amounts of receivables sold under the facilities were $275 million as of June 30, 2006 and December 31, 2005.

7. Inventories

Inventories consisted of the following components:

Millions of dollars	June 30, 2006		December 31, 2005
Finished goods	$	991	$	985
Work-in-process		129		118
Raw materials		400		338
Materials and supplies		219		216
Total inventories	$	1,739	$	1,657

9

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Property, Plant and Equipment and Goodwill

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

Millions of dollars	June 30, 2006			December 31, 2005
Land	$	124		$	125
Manufacturing facilities and equipment		9,241			9,257
Construction in progress		255			215
Total property, plant and equipment		9,620			9,597
Less accumulated depreciation		(3,133	)		(3,067	)
Property, plant and equipment, net	$	6,487		$	6,530

Depreciation and amortization expense is summarized as follows:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2006		2005		2006		2005
Property, plant and equipment	$	134	$	137	$	268	$	270
Investment in PO joint ventures		12		12		23		23
Turnaround costs		16		13		32		27
Software costs		9		9		19		19
Other		10		14		20		24
Total depreciation and amortization	$	181	$	185	$	362	$	363

As a result of favorable tax settlements, Lyondell’s goodwill decreased from $2,245 million at December 31, 2005 to $2,135 million at June 30, 2006, $80 million of which related to the inorganic chemicals segment, $17 million to the ethylene, co-products and derivatives (“EC&D”) segment and $13 million to the PO and related products (“PO&RP”) segment.

9. Accounts Payable

Accounts payable at June 30, 2006 and December 31, 2005 included liabilities in the amounts of $11 million and $16 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.

10

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Long-Term Debt

Lyondell’s long-term debt includes credit facilities and debt obligations maintained by Lyondell’s wholly-owned subsidiaries, Equistar and Millennium Chemicals Inc. and its subsidiaries (“Millennium”), and by LCC. In some situations, such as references to financial ratios, the context may require that “LCC” refer to Lyondell Chemical Company and its consolidated subsidiaries other than Equistar and Millennium. LCC has not guaranteed the subsidiaries’ credit facilities or debt obligations, except for Equistar’s 7.55% Debentures due 2026 in the principal amount of $150 million.

Long-term debt consisted of the following:

Millions of dollars	June 30, 2006			December 31, 2005
Bank credit facilities:
LCC $475 million senior secured revolving credit facility	$	—		$	—
Equistar $400 million inventory-based revolving credit facility		—			—
Millennium $150 million senior secured revolving credit facilities		—			—
Millennium $100 million Australian senior secured term loan due 2010		96			99
Millennium €60 million U.K. asset-based revolving credit facility		12			—
LCC notes and debentures:
Senior Secured Notes, Series A due 2007, 9.625%		849			899
Senior Secured Notes due 2008, 9.5% ($3 million of discount)		427			426
Senior Secured Notes due 2012, 11.125% ($1 million of discount)		277			277
Senior Secured Notes due 2013, 10.5%		325			325
Debentures due 2010, 10.25%		100			100
Debentures due 2020, 9.8% ($1 million of discount)		224			224
Senior Subordinated Notes due 2009, 10.875%		500			500
Equistar notes and debentures:
Senior Notes due 2008, 10.125% ($20 million of premium)		720			725
Senior Notes due 2011, 10.625% ($30 million of premium)		730			733
Debentures due 2026, 7.55% ($15 million of discount)		135			135
Notes due 2006, 6.5%		—			150
Notes due 2009, 8.75% ($1 million of discount)		599			599
Millennium notes and debentures:
Senior Notes due 2006, 7%		9			161
Senior Notes due 2008, 9.25% ($28 million of premium)		401			500
Senior Debentures due 2026, 7.625% ($3 million of premium)		252			252
Convertible Senior Debentures due 2023, 4% ($14 million of premium)		164			166
Other debt		16			22
Total		5,836			6,293
Less current maturities		(870	)		(319	)
Long-term debt	$	4,966		$	5,974

11

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Long-Term Debt – (Continued)

In June 2006 LCC’s revolving credit facility, and thereby the indentures, were amended to, among other things, provide for additional subsidiary guarantees and other collateral and, in certain circumstances, to limit the pledge of equity interests and other securities. The amendment also excludes Millennium from certain events-of-default provisions.

In May 2006, Millennium obtained an amendment to its $150 million senior secured revolving credit facility and in July 2006 to the indenture governing the 4% Convertible Senior Debentures primarily to exclude Millennium Holdings, LLC and its subsidiaries (collectively, “Millennium Holdings”), a wholly-owned subsidiary, from events-of-default provisions that could be triggered in connection with judgments against Millennium Holdings. See “Litigation” section of Note 12.

In January 2006, a U.K. subsidiary of Millennium entered into a new €60 million, five-year, revolving credit facility, which, subject to permitted liens, is generally secured by the subsidiary’s inventory, accounts receivable and certain other assets. Availability under the U.K. facility, which was €51 million, or approximately $65 million, at June 30, 2006, gave effect to the borrowing base as determined using a formula applied to accounts receivable and inventory balances and was reduced to the extent of borrowing and outstanding letters of credit provided under the facility. At June 30, 2006, there were €9 million, or approximately $12 million, of outstanding borrowings and no outstanding letters of credit under the facility. The U.K. facility bears interest at LIBOR plus 1.25%.

During the six months ended June 30, 2006, Equistar repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006, and Millennium completed a cash tender offer for its 7% Senior Notes due 2006, purchasing $149 million principal amount of the notes and paying a premium of $2 million. In addition, Millennium purchased $85 million principal amount of the 9.25% Senior Notes due 2008, paying a premium of $5 million, and LCC purchased $50 million principal amount of the 9.625% Senior Secured Notes, Series A due 2007, paying a premium of $2 million.

As of June 30, 2006, based on a quarterly test related to the price of Lyondell common stock, Millennium’s 4% Convertible Senior Debentures were convertible into Lyondell common stock at a conversion rate of 73.3986 Lyondell shares per one thousand dollar principal amount of the Debentures. The principal amount of Debentures converted into shares of Lyondell common stock as of June 30, 2006 was not significant.

Current maturities of long-term debt at June 30, 2006 included $849 million of LCC’s 9.625% Debentures due 2007 and other debt of $21 million. At December 31, 2005, current maturities of long-term debt included $150 million of Equistar’s 6.5% Notes due 2006, $158 million of Millennium’s 7% Senior Notes due 2006 and other debt of $11 million.

Amortization of debt premiums, including adjustments to fair values included in accounting for the acquisition of Millennium, debt discounts and debt issuance costs resulted in a net credit of $5 million and $8 million for the three-month periods ended June 30, 2006 and 2005, respectively, and a net credit of $10 million and $17 million for the six-month periods ended June 30, 2006 and 2005, respectively, that were included in interest expense in the Consolidated Statements of Income.

LCC’s credit facility and Senior Secured Notes are secured by liens on: substantially all of Lyondell’s domestic personal property, but excluding personal property of Equistar and Millennium; mortgages on certain production facilities located in Pasadena and Channelview, Texas and Lake Charles, Louisiana and equity interests in domestic subsidiaries, including Millennium and certain subsidiaries holding the interests in Equistar and LCR, and certain non-U.S. subsidiaries.

12

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Pension and Other Postretirement Benefits

Net periodic pension benefit costs included the following components:

	For the three months ended June 30, 2006						For the six months ended June 30, 2006
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	13		$	6		$	25		$	10
Interest cost		22			6			43			12
Recognized return on plan assets		(21	)		(6	)		(41	)		(11	)
Amortization		5			1			11			2
Net periodic pension benefit cost	$	19		$	7		$	38		$	13

	For the three months ended June 30, 2005						For the six months ended June 30, 2005
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	12		$	5		$	23		$	9
Interest cost		22			5			43			11
Recognized return on plan assets		(20	)		(5	)		(39	)		(10	)
Amortization		5			1			10			2
Net periodic pension benefit cost	$	19		$	6		$	37		$	12

Net periodic other postretirement benefit costs, which are provided to U.S. employees, included the following components:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2006		2005		2006			2005
Service cost	$	1	$	2	$	2		$	3
Interest cost		3		3		6			6
Amortization		—		—		(1	)		—
Net periodic benefit cost	$	4	$	5	$	7		$	9

In addition to the anticipated 2006 pension contribution of $78 million disclosed in Note 18 to Lyondell’s Consolidated Financial Statements included in Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2005, Lyondell contributed $50 million during the first six months of 2006, and expects to contribute an additional $50 million in the third quarter 2006, to its pension plans.

12. Commitments and Contingencies

Crude Supply Agreement—PDVSA Petróleo, S.A. (“PDVSA Oil”) and LCR are parties to a Crude Supply Agreement (“CSA”). Under the CSA, generally, PDVSA Oil is required to sell and LCR is required to purchase 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of LCR’s refining capacity of 268,000 barrels per day of crude oil.

13

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies – (Continued)

From 1998 through 2002, PDVSA Oil, 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. More recently, LCR has been receiving crude oil under the CSA at or above contract volumes.

LCR has consistently contested the validity of the reductions in deliveries by PDVSA Oil and PDVSA under the CSA. In February 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations. PDVSA filed a subsequent lawsuit against LCR in October 2005 in the same court, related to that action, which alleged breach of the CSA. On April 6, 2006, the parties announced the settlement of these disputes and other disputes among the parties and their respective affiliates, and, on April 10, 2006, the lawsuits were dismissed.

On July 20, 2006, Lyondell announced that Lyondell and CITGO had discontinued the previously announced exploration of a sale of LCR to a third party. The partners have been discussing the possibility of Lyondell acquiring CITGO’s interest in LCR. However, no agreement has been reached. Subject to rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. If neither CITGO, PDVSA Oil nor their affiliates were a partner in LCR, PDVSA Oil would have an option to terminate the CSA. In addition, LCR’s credit facility would be repaid and terminated as part of any sale of LCR.

Leased Facility—Lyondell has an ethylene facility in Lake Charles, Louisiana, which 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 $107 million, are leased from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively (“Occidental”). In May 2006, Equistar and Occidental entered into a new three-year lease. If Lyondell were to determine that the facility will not be used to produce olefins in the future, the resulting impairment of the net book value of the facility could represent an after-tax charge of between $50 million and $70 million, depending upon the alternative uses that might be identified for the facility and other factors.

Asset Retirement Obligation—Lyondell believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Lyondell continually reviews the optimal future alternatives for its facilities. The amount and timing of costs, if any, that may be incurred as a result of such reviews are not known, and no decisions have been reached, but if a decision were reached, in accordance with local laws and customs, to retire one or more facilities in the foreseeable future, the asset retirement costs could range from $0 to $30 million, depending upon the scope of the required work and other factors. At June 30, 2006, the balance of the liability that had been recognized for all asset retirement obligations, including scheduled closure of certain landfills, was $29 million. In addition, any decision to retire a facility would result in other costs, including employment related costs.

Environmental Remediation—Lyondell’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $194 million as of June 30, 2006. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably 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.

14

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies – (Continued)

The following table summarizes the activity in Lyondell’s accrued environmental liability for the six-month periods ended June 30:

Millions of dollars	2006			2005
Balance at January 1	$	194		$	147
Additional accruals		6			—
Amounts paid		(6	)		(5	)
Adjustments to purchase price allocation		—			6
Other		—			(5	)
Balance at June 30	$	194		$	143

The liabilities for individual sites range from less than $1 million to $102 million. The $102 million liability relates to the Kalamazoo River Superfund Site.

A Millennium subsidiary has been identified as a Potential Responsible Party (“PRP”) with respect to the Kalamazoo River Superfund Site. The site involves cleanup of river sediments and floodplain soils contaminated with polychlorinated biphenyls, cleanup of former paper mill operations, and cleanup and closure of landfills associated with the former paper mill operations. In 2000, the Kalamazoo River Study Group (the “KRSG”), of which the Millennium subsidiary and other PRPs are members, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study, which evaluated a number of remedial options for the river. The estimated costs for these remedial options ranged from $0 to $2.5 billion.

At the end of 2001, the U.S. Environmental Protection Agency (“EPA”) took lead responsibility for the river portion of the site at the request of the State of Michigan. In 2004, the EPA initiated a confidential process to facilitate discussions among the agency, the Millennium subsidiary, other PRPs, the Michigan Departments of Environmental Quality and Natural Resources, and certain federal natural resource trustees about the need for additional investigation activities and different possible approaches for addressing the contamination in and along the Kalamazoo River. These discussions are continuing.

As of June 30, 2006, the probable future remediation spending associated with the river cannot be determined with certainty. Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome. However, in 2004, Lyondell recognized a liability representing Millennium’s interim allocation of 55% of the $73 million total of estimated cost of riverbank stabilization, recommended as the preferred remedy in 2000 by the KRSG study, and of certain other costs. During 2005 and 2006, this liability was increased to reflect new information obtained during the period about costs of regulatory oversight, modeling, and other associated river remediation costs. At June 30, 2006 and December 31, 2005, the balance of this liability, net of related spending, was $56 million and $57 million, respectively.

In addition, in 2004, Lyondell recognized a liability primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. The liability was increased in the six-month period ended June 30, 2006, by $2 million to reflect new information obtained during the period regarding the probable costs associated with the remediation activity. At each of June 30, 2006 and December 31, 2005, the balance of the liability, net of related spending, was $46 million. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

15

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies – (Continued)

Millennium’s ultimate liability for the Kalamazoo River Superfund Site will depend on many factors that have not yet been determined, including the ultimate remedy selected, the determination of natural resource damages, the number and financial viability of the other PRPs, and the determination of the final allocation among the PRPs.

Also, based on additional information obtained during the six-month period ended June 30, 2006, regarding Millennium remediation liabilities related to Millennium sites other than the Kalamazoo River Superfund Site, Lyondell increased the estimated remediation liabilities for those sites by $2 million. The balance of these liabilities at each of June 30, 2006 and December 31, 2005 was $65 million.

Lyondell currently estimates that environmentally related capital expenditures at its facilities, including Equistar and Millennium facilities, will be approximately $60 million for 2006 and $43 million for 2007, including estimated expenditures related to air emission reductions and wastewater management. Capital spending to comply with environmental regulations at LCR’s facilities (on a 100% basis) is estimated to be approximately $127 million in 2006 and $38 million in 2007.

MTBE—In the U.S., the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether (“MTBE”), used in gasoline sold as reformulated fuel 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 led to public concern about the use of MTBE and resulted in the U.S. federal Energy Policy Act of 2005 and U.S. state governmental initiatives to reduce the use of MTBE.

The federal Energy Policy Act of 2005, which was enacted in the U.S. in August 2005, did not phase-down or ban the use of MTBE. However, the Act eliminated the oxygen standard for reformulated fuels, effective May 6, 2006, and also contained a renewable fuel standard that mandated the use of ethanol in gasoline. As a result of the elimination of the oxygen standard for reformulated fuels, companies are no longer required to use MTBE or any other oxygenate for this purpose. Various U.S. states have banned or are considering banning the use of MTBE. For example, California, Connecticut and New York banned MTBE, effective January 2004, and New Jersey banned MTBE, effective January 2009. In addition, at this time, the majority of refiners and blenders have discontinued the use of MTBE in the U.S.

The combination of these actions is negatively affecting U.S. MTBE demand. Lyondell’s North American MTBE business accounted for approximately $1.4 billion of Lyondell’s revenues in 2005. At this time, Lyondell cannot predict the full impact that the U.S. federal legislation, state governmental initiatives and bans, and these commercial actions will have on MTBE margins or volumes longer term. Lyondell intends to continue marketing its U.S.-produced MTBE either in the U.S. or outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Lyondell also is installing equipment at its Channelview, Texas facility that will provide Lyondell with the flexibility to produce either iso-octene (an alternative gasoline blending component also known as “di-isobutylene” or “DIB”) or MTBE at that facility, and this flexibility should be in place in the fourth quarter of 2006. The estimated cost of converting this facility to DIB production is less than $25 million. In addition, Lyondell’s U.S.-based and European-based MTBE plants can produce ethyl tertiary butyl ether (“ETBE”) as an alternative to MTBE, and Lyondell has produced and sold ETBE in Europe to address Europe’s growing demand for biofuels. Product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to the non-ether alternative gasoline blending components may be lower than that historically realized on MTBE.

16

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies – (Continued)

Litigation—On April 8, 2005, Lyondell filed a lawsuit in Pennsylvania against BASF Corporation (“BASF”) seeking declaratory judgment to resolve a commercial dispute regarding the interpretation of various provisions of a propylene oxide sales contract. On April 12, 2005, BASF filed a lawsuit in New Jersey against Lyondell asserting various claims relating to alleged breaches of the same propylene oxide sales contract and seeking damages in excess of $100 million. In September 2005, BASF’s motion to dismiss Lyondell’s declaratory judgment action in Pennsylvania was granted, and Lyondell has decided not to appeal that ruling. The lawsuit that BASF filed in New Jersey is proceeding. The parties have been ordered to mediation by the court. Management believes that it has valid defenses to all claims and is vigorously defending them. Management does not expect the resolution of the claims to result in any material adverse effect on the financial position, liquidity or results of operations of Lyondell.

Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging personal injury, property damage, and remediation costs allegedly associated with the use of these products. The majority of these legal proceedings assert unspecified monetary damages in excess of the statutory minimum and, in certain cases, equitable relief such as abatement of lead-based paint in buildings. Legal proceedings relating to lead pigment or paint are in various trial stages and post-dismissal settings, some of which are on appeal.

One legal proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, the judge in that case declared a mistrial after the jury declared itself deadlocked. The sole issue before the jury was whether lead pigment in paint in and on Rhode Island buildings constituted a “public nuisance.” The re-trial of this case began on November 1, 2005. On February 22, 2006, a jury returned a verdict in favor of the State of Rhode Island finding that the cumulative presence of lead pigments in paints and coatings on buildings in the state constitutes a public nuisance; that a Millennium subsidiary, Millennium Holdings LLC, and other defendants either caused or substantially contributed to the creation of the public nuisance; and that those defendants, including the Millennium subsidiary, should be ordered to abate the public nuisance. On February 28, 2006, the judge held that the state could not proceed with its claim for punitive damages. As a result, the jury was discharged. There will be further proceedings by the judge to determine the scope of any abatement. Millennium is considering its options, including all appropriate appeals.

Millennium’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. Millennium has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. Millennium’s ability to collect under the indemnity coverage would depend upon, among other things, the resolution of certain potential coverage defenses that the insurers have asserted or are likely to assert and the solvency of the various insurance carriers that are part of the coverage block at the time of such a request.

While Lyondell believes that Millennium has valid defenses to all the lead-based paint and lead pigment proceedings and is vigorously defending them, litigation is inherently subject to many uncertainties. Any liability that Millennium may ultimately incur, net of any insurance or other recoveries, cannot be estimated at this time.

17

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies – (Continued)

Indemnification—Lyondell and its joint ventures are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. For example, Lyondell entered into indemnification arrangements in connection with the transfer of assets and liabilities from Atlantic Richfield Company to Lyondell prior to Lyondell’s initial public offering, in connection with Lyondell’s acquisition of the outstanding shares of ARCO Chemical Company and in connection with the formation of LCR; Equistar and its owner companies (including Lyondell and Millennium) entered into indemnification arrangements in connection with the formation of Equistar; and Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc. Pursuant to these arrangements, Lyondell and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of June 30, 2006, Lyondell has not accrued any significant amounts for such indemnification obligations, other than amounts under tax sharing agreements that have been reflected in the provision for income taxes, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Lyondell. Lyondell cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

Other—Lyondell and its joint ventures are, from time to time, defendants in lawsuits and other commercial disputes, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of any liability and resulting financial impact with respect to any such matters cannot be ascertained with any degree of certainty, management does not believe that any ultimate uninsured liability resulting from these matters in which it, its subsidiaries or its joint ventures currently are involved will, individually or in the aggregate, have a material adverse effect on the financial position, liquidity or results of operations of Lyondell.

General—In the opinion of management, the matters discussed in this note are 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 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.

13. Per Share Data

Basic earnings per share for the periods presented is computed based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share also include the effect of outstanding stock options, warrants and restricted stock. Additionally, diluted earnings per share for the three and six months ended June 30, 2006 and 2005 include the effect of the assumed conversion of Millennium’s 4% Convertible Senior Debentures into Lyondell common stock.

18

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Per Share Data – (Continued)

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

	For the three months ended June 30,					For the six months ended June 30,
In millions	2006		2005			2006		2005
Net income	$	160	$	126		$	450	$	380
After-tax interest expense on 4% Convertible Senior Debentures		—		(1	)		1		(1	)
Net income assuming conversion of 4% Convertible Senior Debentures	$	160	$	125		$	451	$	379
In millions of shares
Basic weighted average shares		247.4		245.9			247.1		245.2
Effect of dilutive securities:
4% Convertible Senior Debentures		11.0		10.5			10.9		10.5
Stock options, warrants and restricted stock		1.7		2.6			1.7		3.7
Dilutive potential shares		260.1		259.0			259.7		259.4
Earnings per share:
Basic	$	0.65	$	0.51		$	1.82	$	1.55
Diluted		0.62		0.48			1.74		1.46
Antidilutive stock options and warrants in millions		6.2		0.5			6.2		0.5
Dividends declared per share of common stock	$	0.225	$	0.225		$	0.45	$	0.45

14. Share-Based Compensation

Under Lyondell’s Amended and Restated 1999 Incentive Plan (the “Incentive Plan”), Lyondell has granted awards of performance units, restricted stock and stock options to certain employees. Restricted stock and stock option awards are also made to directors under other incentive plans. In addition, Lyondell issues phantom restricted stock, phantom stock options and performance units to certain other employees under other incentive plans. The Incentive Plan authorized total shares available for grant under the plan of 26 million shares of common stock. As of June 30, 2006, 12,036,136 shares remained available for grant with 6,002,005 shares available for future awards of restricted stock or performance units, to the extent settled in shares of common stock, and 1 million shares available for incentive stock option grants.

These awards resulted in compensation expense of $30 million and $18 million for the three months ended June 30, 2006 and 2005, respectively, and $23 million and $40 million for the six months ended June 30, 2006 and 2005, respectively. The after-tax amounts were $20 million and $12 million, respectively, for the three months ended June 30, 2006 and 2005 and $15 million and $26 million, respectively, for the six months ended June 30, 2006 and 2005. The compensation expense included vesting during the period and changes in valuation of previously vested awards.

19

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Share-Based Compensation – (Continued)

Performance Units—Under the performance unit arrangements, employees may earn a cash amount equal to the value at payout of a target number of shares of Lyondell common stock with that number of shares adjusted for shareholder return, unless Lyondell’s Board of Directors determines to pay the performance units under the Incentive Plan in shares of common stock. The actual payout compared to target is based on Lyondell’s three-year cumulative total shareholder return (common stock price growth plus dividends) relative to a chemical industry peer group. The payout can range from 0% to 200% of the target number of performance units. Performance units are accounted for as a liability award with compensation cost recognized ratably over the performance period.

The following table summarizes performance unit activity for the six months ended June 30, 2006 in thousands of units:

	Number of Units
Outstanding at beginning of year	3,288
Granted	906
Paid	(1,412	)
Forfeited	(22	)
Outstanding at June 30, 2006	2,760

At June 30, 2006, the value of the liability related to the outstanding units was $44 million. Cash payments of $68 million and $79 million were distributed to participants during the six months ended June 30, 2006 and 2005. Grants of 726,791 performance units were made during the six months ended June 30, 2005.

Stock Options—Stock options are granted with an exercise price of at least 100% of fair market value, have a contractual term of ten years and vest at a rate of one-third per year over three years, with accelerated vesting upon death, disability, retirement or change in control.

The following table summarizes stock option activity for the six months ended June 30, 2006 in thousands of shares:

Millions of dollars, except per share price	Shares		Price		Weighted - Average Remaining Term	Aggregate Intrinsic Value
Outstanding at beginning of year	8,336		$	15.66
Granted	665			24.52
Exercised	(686	)		13.31
Cancelled	(6	)		24.98
Outstanding at June 30, 2006	8,309			16.56	6 years	$	55
Exercisable at June 30, 2006	7,341			15.35	5 years	$	55

The total intrinsic value of options exercised during the six-month period ended June 30, 2006 was $8 million and the related tax benefit was $3 million.

20

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Share-Based Compensation – (Continued)

The fair value of each option award is estimated, based on several assumptions, on the date of grant using the Black-Scholes option valuation model. Upon adoption of SFAS No. 123 (revised), Lyondell modified its methods used to determine these assumptions based on the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. The fair value and the assumptions used for the 2006 grants are shown in the table below.

Fair value per share of options granted	$	6.23
Fair value assumptions:
Dividend yield		3.43	%
Expected volatility		39.8	%
Risk-free interest rate		4.53	%
Expected term, in years		6

Stock options are accounted for as equity instruments, and compensation cost is recognized using graded vesting over the three-year vesting period. As of June 30, 2006, the unrecognized compensation cost related to stock options was $3 million, which is expected to be recognized over a weighted-average period of 2 years.

Restricted Stock—Lyondell’s restricted stock arrangements under the Incentive Plan are divided equally into a restricted stock grant and an associated deferred cash payment. These restricted stock arrangements typically vest at a rate of one-third per year over three years, with accelerated vesting upon death, disability, retirement or change in control. The associated deferred cash award, paid when the shares of restricted stock vest, is equal to the fair market value of the restricted stock issued on the vesting date. Restricted stock is accounted for as an equity award, while the deferred cash component is accounted for as a liability award. Compensation expense, based on the market price of Lyondell stock at the date of the grant, is recognized using graded-vesting over the three-year vesting period. At June 30, 2006, 230,709 unvested shares of restricted stock were outstanding.

Phantom Awards—At June 30, 2006, the equivalent of 3,051,384 shares were outstanding under the phantom award arrangements. Phantom awards are accounted for as liability awards and compensation cost is recognized using graded-vesting over the three-year vesting period.

15. Comprehensive Income

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

	For the three months ended June 30,					For the six months ended June 30,
Millions of dollars	2006		2005			2006		2005
Net income	$	160	$	126		$	450	$	380
Other comprehensive income (loss):
Foreign currency translation income (loss)		58		(64	)		108		(176	)
Derivative instruments		—		—			—		(2	)
Other		—		1			—		1
Total other comprehensive income (loss)		58		(63	)		108		(177	)
Comprehensive income	$	218	$	63		$	558	$	203

21

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Segment and Related Information

Lyondell operates in four reportable segments:

• Ethylene, co-products and derivatives (“EC&D”), primarily manufacturing and marketing of ethylene; its co-products, including propylene, butadiene and aromatics; and derivatives, including ethylene oxide, ethylene glycol, polyethylene and vinyl acetate monomer;

• Propylene oxide and related products (“PO&RP”), including manufacturing and marketing of PO; co-products SM and TBA with its derivatives, MTBE and ETBE; PO derivatives, including propylene glycol, propylene glycol ethers and butanediol; and toluene diisocyanate;

• Inorganic chemicals, primarily manufacturing and marketing of titanium dioxide and related products; and

• Refining.

The refining segment consists of Lyondell’s equity investment in LCR (see Note 5).

22

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Segment and Related Information – (Continued)

Summarized financial information concerning reportable segments is shown in the following table for the periods presented:

Millions of dollars	EC&D		PO&RP			Inorganic Chemicals		Refining		Other			Total
For the three months ended June 30, 2006:
Sales and other operating revenues:
Customer	$	3,012	$	1,674		$	359	$	—	$	27		$	5,072
Intersegment		389		89			—		—		(478	)		—
		3,401		1,763			359		—		(451	)		5,072
Operating income (loss)		181		108			5		—		(1	)		293
Income (loss) from equity investments		—		3			—		86		—			89
For the three months ended June 30, 2005:
Sales and other operating revenues:
Customer	$	2,517	$	1,493		$	342	$	—	$	24		$	4,376
Intersegment		332		64			—		—		(396	)		—
		2,849		1,557			342		—		(372	)		4,376
Operating income (loss)		200		127			16		—		(4	)		339
Income (loss) from equity investments		—		(1	)		—		19		—			18
For the six months ended June 30, 2006:
Sales and other operating revenues:
Customer	$	5,818	$	3,257		$	701	$	—	$	53		$	9,829
Intersegment		735		150			—		—		(885	)		—
		6,553		3,407			701		—		(832	)		9,829
Operating income (loss)		480		225			25		—		(5	)		725
Income (loss) from equity investments		—		2			—		177		—			179
For the six months ended June 30, 2005:
Sales and other operating revenues:
Customer	$	5,156	$	2,954		$	660	$	—	$	46		$	8,816
Intersegment		667		126			—		—		(793	)		—
		5,823		3,080			660		—		(747	)		8,816
Operating income (loss)		592		216			37		—		(5	)		840
Income from equity investments		—		—			—		86		—			86

23

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Segment and Related Information – (Continued)

Sales and other operating revenues and operating income in the “Other” column above include elimination of intersegment transactions and a business that is not a reportable segment.

17. Supplemental Guarantor Information

Lyondell subsidiaries, which have investments in Lyondell’s chemical production facilities in the U.S., The Netherlands and France and in Delaware entities that hold and license technology to other Lyondell affiliates and to third parties, or make loans to other Lyondell affiliates or which own equity interests in the Equistar and LCR partnerships are guarantors (collectively “Guarantors”), jointly and severally, of the following LCC debt (see Note 10):

• Senior Secured Notes, Series A due 2007, 9.625%

• 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%.

The Guarantors are all 100% owned subsidiaries of Lyondell. The guarantees are joint and several and full and unconditional.

Equistar is the issuer of 7.55% Debentures due 2026, which are guaranteed by LCC.

The following condensed consolidating financial information present supplemental information as of June 30, 2006 and December 31, 2005 and for the three- month and six-month periods ended June 30, 2006 and 2005. In this note, LCC refers to the parent company, Lyondell Chemical Company.

24

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of June 30, 2006

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors		Eliminations			Consolidated
Inventories	$	262	$	—	$	713	$	768	$	(4	)	$	1,739
Accounts receivable – affiliates		2,842		1,702		223		586		(5,353	)		—
Other current assets		345		—		1,112		1,229		—			2,686
Property, plant and equipment, net		569		—		2,999		2,919		—			6,487
Investments and long-term receivables		6,069		3,865		63		1,325		(10,131	)		1,191
Long-term receivables – affiliates		628		1,562		—		361		(2,551	)		—
Goodwill, net		699		142		—		1,294		—			2,135
Other assets, net		205		21		314		250		—			790
Total assets	$	11,619	$	7,292	$	5,424	$	8,732	$	(18,039	)	$	15,028
Current maturities of long-term debt	$	849	$	—	$	—	$	21	$	—		$	870
Accounts payable – affiliates		2,431		1,995		75		852		(5,353	)		—
Other current liabilities		427		—		1,110		770		—			2,307
Long-term debt		1,853		—		2,160		953		—			4,966
Long-term payables – affiliates		1,250		535		—		766		(2,551	)		—
Other liabilities		461		4		411		790		—			1,666
Deferred income taxes		880		—		—		704		—			1,584
Minority interests		—		—		1		166		—			167
Stockholders’ equity		3,468		4,758		1,667		3,710		(10,135	)		3,468
Total liabilities and stockholders’ equity	$	11,619	$	7,292	$	5,424	$	8,732	$	(18,039	)	$	15,028

25

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of December 31, 2005

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors		Eliminations			Consolidated
Inventories	$	232	$	—	$	657	$	776	$	(8	)	$	1,657
Accounts receivable – affiliates		2,453		1,420		155		611		(4,639	)		—
Other current assets		405		—		1,037		1,202		—			2,644
Property, plant and equipment, net		574		—		3,063		2,893		—			6,530
Investments and long-term receivables		5,608		3,538		61		1,290		(9,421	)		1,076
Long-term receivables – affiliates		607		1,379		—		200		(2,186	)		—
Goodwill, net		713		142		—		1,390		—			2,245
Other assets, net		216		24		347		241		—			828
Total assets	$	10,808	$	6,503	$	5,320	$	8,603	$	(16,254	)	$	14,980
Current maturities of long-term debt	$	—	$	—	$	150	$	169	$	—		$	319
Accounts payable – affiliates		2,124		1,682		61		772		(4,639	)		—
Other current liabilities		555		—		949		746		—			2,250
Long-term debt		2,751		—		2,161		1,062		—			5,974
Long-term payables – affiliates		1,022		508		—		656		(2,186	)		—
Other liabilities		551		4		415		816		—			1,786
Deferred income taxes		797		—		—		666		—			1,463
Minority interests		—		—		1		179		—			180
Stockholders’ equity		3,008		4,309		1,583		3,537		(9,429	)		3,008
Total liabilities and stockholders’ equity	$	10,808	$	6,503	$	5,320	$	8,603	$	(16,254	)	$	14,980

26

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the Three Months Ended June 30, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	1,017		$	—		$	3,278		$	1,399		$	(622	)	$	5,072
Cost of sales		946			2			3,028			1,231			(621	)		4,586
Selling, general and administrative expenses		46			—			61			62			—			169
Research and development expenses		9			—			9			6			—			24
Operating income (loss)		16			(2	)		180			100			(1	)		293
Interest income (expense), net		(72	)		3			(52	)		(4	)		—			(125	)
Other income (expense), net		(2	)		2			—			1			—			1
Income from equity investments		183			249			—			42			(385	)		89
Intercompany income (expense)		(25	)		67			—			(42	)		—			—
(Provision for) benefit from income taxes		60			(120	)		—			(38	)		—			(98	)
Net income	$	160		$	199		$	128		$	59		$	(386	)	$	160

STATEMENT OF INCOME

For the Three Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	981		$	—		$	2,700		$	1,213		$	(518	)	$	4,376
Cost of sales		860			2			2,447			1,089			(519	)		3,879
Selling, general and administrative expenses		36			1			48			51			—			136
Research and development expenses		7			—			9			6			—			22
Operating income (loss)		78			(3	)		196			67			1			339
Interest income (expense), net		(92	)		2			(54	)		(11	)		—			(155	)
Other income (expense), net		(11	)		(13	)		—			19			—			(5	)
Income from equity investments		148			165			—			41			(336	)		18
Intercompany income (expense)		(34	)		70			—			(36	)		—			—
(Provision for) benefit from income taxes		37			(79	)		—			(29	)		—			(71	)
Net income	$	126		$	142		$	142		$	51		$	(335	)	$	126

27

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the Six Months Ended June 30, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	1,997		$	—		$	6,314		$	2,664		$	(1,146	)	$	9,829
Cost of sales		1,837			4			5,698			2,360			(1,142	)		8,757
Selling, general and administrative expenses		78			—			109			113			—			300
Research and development expenses		19			—			17			11			—			47
Operating income (loss)		63			(4	)		490			180			(4	)		725
Interest income (expense), net		(142	)		6			(105	)		(12	)		—			(253	)
Other income (expense), net		(5	)		76			(1	)		5			—			75
Income from equity investments		475			602			—			116			(1,014	)		179
Intercompany income (expense)		(54	)		130			—			(76	)		—			—
(Provision for) benefit from income taxes		113			(307	)		—			(82	)		—			(276	)
Net income	$	450		$	503		$	384		$	131		$	(1,018	)	$	450

STATEMENT OF INCOME

For the Six Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	1,903		$	—		$	5,561		$	2,373		$	(1,021	)	$	8,816
Cost of sales		1,706			4			4,864			2,109			(1,020	)		7,663
Selling, general and administrative expenses		68			1			98			101			—			268
Research and development expenses		16			—			17			12			—			45
Operating income (loss)		113			(5	)		582			151			(1	)		840
Interest income (expense), net		(187	)		3			(108	)		(21	)		—			(313	)
Other income (expense), net		(24	)		(22	)		—			27			—			(19	)
Income from equity investments		454			510			—			140			(1,018	)		86
Intercompany income (expense)		(68	)		149			—			(81	)		—			—
(Provision for) benefit from income taxes		92			(228	)		—			(78	)		—			(214	)
Net income	$	380		$	407		$	474		$	138		$	(1,019	)	$	380

28

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by operating activities	$	48		$	391		$	427		$	243		$	(671	)	$	438
Expenditures for property, plant and equipment		(18	)		—			(63	)		(43	)		—			(124	)
Distributions from affiliates in excess of earnings		1			—			—			—			(1	)		—
Contributions and advances to affiliates		(57	)		—			—			(3	)		3			(57	)
Loans to affiliates		—			(20	)		—			(139	)		159			—
Other		3			—			2			1			—			6
Net cash used in investing activities		(71	)		(20	)		(61	)		(184	)		161			(175	)
Repayment of long-term debt		(53	)		—			(150	)		(246	)		—			(449	)
Issuance of long-term debt		—			—			—			13			—			13
Proceeds from notes payable to affiliates		159			—			—			—			(159	)		—
Dividends paid		(111	)		(38	)		—			—			38			(111	)
Proceeds from stock option exercises		9			—			—			—			—			9
Distributions to owners		—			(333	)		(300	)		(1	)		634			—
Other		—			—			1			—			(3	)		(2	)
Net cash provided by (used in) financing activities		4			(371	)		(449	)		(234	)		510			(540	)
Effect of exchange rate changes on cash		—			—			—			4			—			4
Decrease in cash and cash equivalents		(19	)		—			(83	)		(171	)		—			(273	)
Cash and cash equivalents at beginning of period		63			—			215			315			—			593
Cash and cash equivalents at end of period	$	44		$	—		$	132		$	144		$	—		$	320

29

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by operating activities	$	293		$	421		$	571		$	249		$	(888	)	$	646
Expenditures for property, plant and equipment		(15	)		—			(69	)		(28	)		—			(112	)
Distributions from affiliates in excess of earnings		66			44			—			7			(66	)		51
Contributions and advances to affiliates		(51	)		—			—			(3	)		3			(51	)
Loans to affiliates		—			(7	)					(128	)		135			—
Other		—			—			3			—			—			3
Net cash provided by (used in) investing activities		—			37			(66	)		(152	)		72			(109	)
Repayment of long-term debt		(517	)		—			(1	)		(29	)		—			(547	)
Issuance of long-term debt		—			—			—			3			—			3
Proceeds from notes payable to affiliates		135			—			—			—			(135	)		—
Dividends paid		(111	)		(37	)		—			(3	)		40			(111	)
Proceeds from stock option exercises		43			—			—			—			—			43
Distributions to owners		—			(421	)		(475	)		(18	)		914			—
Other		(10	)		—			—			6			(3	)		(7	)
Net cash used in financing activities		(460	)		(458	)		(476	)		(41	)		816			(619	)
Effect of exchange rate changes on cash		—			—			—			(9	)		—			(9	)
Increase (decrease) in cash and cash equivalents		(167	)		—			29			47			—			(91	)
Cash and cash equivalents at beginning of period		383			—			39			382			—			804
Cash and cash equivalents at end of period	$	216		$	—		$	68		$	429		$	—		$	713

30