Westlake 10Q 2006 Q2 Quarterly report

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

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

For the Transition Period from to

Commission File No. 001-32260

Westlake Chemical Corporation

(Exact name of Registrant as specified in its charter)

Delaware

76-0346924

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

2801 Post Oak Boulevard, Suite 600

Houston, Texas 77056

(Address of principal executive offices, including zip code)

(713) 960-9111

(Registrant’s telephone number, including area code)

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 x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

The number of shares outstanding of the registrant’s sole class of common stock, as of August 1, 2006, was 65,167,559.

INDEX


Item		Page
PART I. FINANCIAL INFORMATION

	1) Financial Statements	3

	2) Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	3) Quantitative and Qualitative Disclosures about Market Risk	31

	4) Controls and Procedures	31

PART II. OTHER INFORMATION

	1) Legal Proceedings	32

	1A) Risk Factors	32

	4) Submission of Matters to a Vote of Security Holders	32

	6) Exhibits	32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30, 2006			December 31, 2005
	(in thousands of dollars, except par values and share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	275,615		$	237,895
Accounts receivable, net		323,009			302,779
Inventories, net		343,093			339,870
Prepaid expenses and other current assets		11,378			9,306
Deferred income taxes		13,040			13,013

Total current assets		966,135			902,863
Property, plant and equipment, net		900,791			863,232
Equity investment		25,710			20,042
Other assets, net		49,727			41,052

Total assets	$	1,942,363		$	1,827,189

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	186,394		$	199,777
Accrued liabilities		114,697			104,872
Current portion of long-term debt		—			1,200

Total current liabilities		301,091			305,849
Long-term debt		260,115			265,689
Deferred income taxes		231,972			221,088
Other liabilities		37,725			40,457

Total liabilities		830,903			833,083

Commitments and Contingencies (Notes 11 and 14)
Stockholders’ equity
Preferred stock, nonvoting, noncumulative, $0.01 par value, 50,000,000 shares authorized		—			—
Common stock, $0.01 par value, 150,000,000 shares authorized; 65,168,055 and 65,121,850 shares issued and outstanding in 2006 and 2005, respectively		652			651
Additional paid-in capital		425,095			424,537
Retained earnings		684,086			569,164
Minimum pension liability, net of tax		(1,976	)		(1,976	)
Unearned compensation on restricted stock		—			(971	)
Cumulative translation adjustment		3,603			2,701

Total stockholders’ equity		1,111,460			994,106

Total liabilities and stockholders’ equity	$	1,942,363		$	1,827,189

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net sales	$	669,267		$	580,659		$	1,288,046		$	1,199,275
Cost of sales		544,055			481,179			1,031,776			980,012

Gross profit		125,212			99,480			256,270			219,263
Selling, general and administrative expenses		18,359			16,717			38,538			34,792

Income from operations		106,853			82,763			217,732			184,471
Interest expense		(3,898	)		(5,879	)		(9,924	)		(12,033	)
Debt retirement cost		—			—			(25,853	)		(646	)
Other income (expense), net		3,055			(1,281	)		5,389			(566	)

Income before income taxes		106,010			75,603			187,344			171,226
Provision for income taxes		38,841			27,077			68,838			61,557

Net income	$	67,169		$	48,526		$	118,506		$	109,669

Earnings per common share Basic	$	1.03		$	0.75		$	1.82		$	1.69

Diluted	$	1.03		$	0.74		$	1.82		$	1.68

Weighted average shares outstanding:
Basic		65,104,100			64,995,129			65,098,181			64,966,790
Diluted		65,235,847			65,203,447			65,233,323			65,247,563

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2006			2005
	(in thousands of dollars)
Cash flows from operating activities
Net income	$	118,506		$	109,669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		40,896			41,544
Provisions for (recovery of) bad debts		634			(1,549	)
Amortization of debt issue costs		472			743
(Gain) loss from disposition of fixed assets		(13	)		1,153
Deferred tax expense		10,736			22,757
Equity in (income) loss of joint venture		(1,093	)		289
Write-off of debt issuance costs		3,623			646
Changes in operating assets and liabilities
Accounts receivable		(20,864	)		(20,332	)
Inventories		(3,223	)		11,622
Prepaid expenses and other current assets		(2,072	)		83
Accounts payable		712			(3,292	)
Accrued liabilities		9,825			(10,522	)
Other, net		(11,239	)		(9,113	)

Net cash provided by operating activities		146,900			143,698

Cash flows from investing activities
Additions to property, plant and equipment		(62,887	)		(44,092	)
Additions to equity investments		(4,574	)		—
Proceeds from disposition of assets		7			34
Settlements of derivative instruments		(27,445	)		—

Net cash used for investing activities		(94,899	)		(44,058	)

Cash flows from financing activities
Proceeds from the exercise of stock options		396			—
Dividends paid		(3,583	)		(2,763	)
Proceeds from borrowings		249,185			—
Repayment of borrowings		(256,000	)		(30,600	)
Capitalized debt costs		(4,279	)		—

Net cash used for financing activities		(14,281	)		(33,363	)

Net increase in cash and cash equivalents		37,720			66,277
Cash and cash equivalents at beginning of period		237,895			43,396

Cash and cash equivalents at end of period	$	275,615		$	109,673

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except per share data)

1. Basis of Financial Statements

The accompanying unaudited consolidated interim financial statements were prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnotes required for complete financial statements under generally accepted accounting principles in the United States have not been included pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the December 31, 2005 financial statements and notes thereto of Westlake Chemical Corporation (the Company) included in the annual report on Form 10-K for the fiscal year ended December 31, 2005, filed with the SEC on February 23, 2006. These financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the notes to the consolidated financial statements of the Company for the fiscal year ended December 31, 2005.

In the opinion of the Company’s management, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial position as of June 30, 2006, the results of operations for the three months and six months ended June 30, 2006 and 2005 and the changes in its cash position for the six months ended June 30, 2006 and 2005.

Results of operations and changes in cash position for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2006 or any other interim period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations, financial position and related disclosures.

2. Stock-Based Compensation

The Board of Directors of the Company has adopted, and the stockholders have approved, the Westlake Chemical Corporation 2004 Omnibus Incentive Plan (the “2004 Plan”). Under the 2004 Plan, all employees of the Company, as well as certain individuals who have agreed to become the Company’s employees, are eligible for awards. Shares of common stock may be issued as authorized in the 2004 Plan. At the discretion of the administrator of the 2004 Plan, employees and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, stock awards or cash awards (any of which may be a performance award). The total compensation expense related to the 2004 Plan was $515 and $944 for the three months and six months ended June 30, 2006, respectively. The realized excess tax benefit from exercised options during those same periods was $1 and $77, respectively.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plan in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and complied with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), for disclosure purposes. Under these provisions, no compensation expense was recognized for stock options because the exercise price for all options was equal to the market price at the grant date, and any compensation expense resulting from restricted stock was recognized ratably over the associated vesting term. The Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” as if the fair value method defined by SFAS 123 had been applied to its stock options.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated results of prior periods. Under this transition method, stock-based compensation expense for the first six months of fiscal

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

2006 includes compensation expense of all stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs on a straight-line basis over the requisite service period of the award for only those shares expected to vest. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies.

Upon adoption of SFAS 123R on January 1, 2006, amounts previously recorded in stockholders’ equity under APB 25 at December 31, 2005 related to unearned compensation for restricted stock awards have been reversed against paid-in capital and will be expensed over the vesting period in accordance with SFAS 123R. As a result of adopting SFAS 123R, the impact to the consolidated statement of operations for the three months ended June 30, 2006 on income before income taxes and net income was a decrease of $373 and $236, respectively, from the amount that would have been reported if the Company had continued to account for stock-based compensation under APB 25. The impact for the six months ended June 30, 2006 was a decrease in income before income taxes and net income of $642 and $406, respectively. The impact on both basic and diluted earnings per share for the three months and six months ended June 30, 2006 was less than $0.01 per share.

The pro forma table below reflects net income and basic and diluted earnings per share for the second quarter and first half of 2005, had the Company applied the fair value recognition provisions of SFAS 123:


	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income, as reported	$	48,526		$	109,669
Pro forma stock option compensation expense		(437	)		(873	)
Provision for income taxes on pro forma stock option expense		156			314

Pro forma net income	$	48,245		$	109,110

Basic and diluted earnings per share
As reported:
Basic	$	0.75		$	1.69
Diluted	$	0.74		$	1.68
Pro forma:
Basic	$	0.74		$	1.68
Diluted	$	0.74		$	1.67

Option activity and changes during the six months ended June 30, 2006 were as follows:


	Options		Weighted Average Exercise Price		Weighted Average Remaining Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	438,763		$	16.88
Granted	51,233			35.90
Exercised	(27,382	)		14.50
Cancelled	(7,214	)		14.50

Outstanding at June 30, 2006	455,400			19.20	8.4	$	5,141

Exercisable at June 30, 2006	44,940			14.50	8.1		688

The aggregate intrinsic value in the table represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2006. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised for the three months and six months ended June 30, 2006 was $2 and $513, respectively.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

As of June 30, 2006, $1,630 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.8 years.

The Company used the Black-Scholes option pricing model to value its options. The table below presents the weighted average value and assumptions used in developing each option’s fair value. Volatility was calculated using historical trends of the Company’s common stock price.


	2006 Options	2005 Options			2004 Options
Weighted average fair value	$15.21	$	12.81		$	6.52
Risk-free interest rate	4.8 %		4.3	%		4.0	%
Expected life in years	6-7		8			10
Expected volatility	33.9 %		36.5	%		28.1	%
Expected dividend yield	0.3 %		0.4	%		0.6	%

Non-vested restricted stock awards as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:


	Number of Shares	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2005	42,129	$	27.22
Granted	21,721		35.83
Forfeited	—		—

Non-vested at June 30, 2006	63,850		30.09

As of June 30, 2006 there was $1,396 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.5 years.

3. Accounts Receivable

Accounts receivable consist of the following:


	June 30, 2006			December 31, 2005
Accounts receivable — trade	$	320,065		$	301,091
Accounts receivable — affiliates		1,021			845
Allowance for doubtful accounts		(4,094	)		(3,460	)

		316,992			298,476
Accounts receivable — other		6,017			4,303

	$	323,009		$	302,779

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

4. Inventories

Inventories consist of the following:


	June 30, 2006			December 31, 2005
Finished product	$	188,433		$	186,241
Feedstock, additives and chemicals		135,432			133,949
Materials and supplies		27,313			27,790

		351,178			347,980
Allowance for inventory obsolescence		(8,085	)		(8,110	)

Net inventory	$	343,093		$	339,870

5. Property, Plant and Equipment

Depreciation expense on property, plant and equipment of $18,025 and $17,720 is included in cost of sales in the consolidated statement of operations for the three months ended June 30, 2006 and 2005, respectively, and $36,099 and $35,894 for the six months ended June 30, 2006 and 2005, respectively.

6. Equity Investment

The Company has purchased additional interests in Suzhou Huasu Plastics Co. Ltd., the Company’s joint venture in China. All governmental approvals were obtained and the transaction closed in the second quarter of 2006. The Company increased its ownership percentage from approximately 43% to approximately 58% at a cost of $6,441 ($1,867 was paid in the fourth quarter of 2005 and $4,574 was paid in the second quarter of 2006). The Company will continue to account for this investment using the equity method of accounting because the entity does not meet the definition of a variable interest entity under FIN 46R, “Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of ARB No. 51,” and because contractual arrangements allowing certain substantive participatory rights to minority shareholders prevent the Company from exercising a controlling financial interest over this entity.

7. Other Assets

Amortization expense on other assets of $2,582 and $3,096 is included in the consolidated statement of operations for the three months ended June 30, 2006 and 2005, respectively, and $5,269 and $6,393 for the six months ended June 30, 2006 and 2005, respectively.

8. Derivative Commodity Instruments

The Company uses derivative instruments to reduce price volatility risk on commodities, and the increases and decreases in the fair value of the derivative instruments are included in earnings. The Company had derivative gains of $12,285 for the six months ended June 30, 2006 compared to a net loss of $1,947 for the six months ended June 30, 2005. Derivative gains recorded in the second quarter of 2006 totaled $7,081 compared to derivative losses of $2,222 for the quarter ended June 30, 2005. Risk management asset balances of $3,040 and $-0- were included in “Accounts receivable, net” and risk management liability balances of $-0- and $31,891 were included in current liabilities in the Company’s balance sheets as of June 30, 2006 and December 31, 2005, respectively.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

9. Earnings per Share

There are no adjustments to “Net income” for the diluted earnings per share computations.

The following table reconciles the denominator for the basic and diluted earnings per share computations shown in the consolidated statements of operations:


	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
	(in thousands)		(in thousands)
Weighted average common shares—basic	65,104	64,995	65,098	64,967
Plus incremental shares from: Assumed conversion of options	117	208	120	237
Restricted stock	15	—	15	44

Weighted average common shares—diluted	65,236	65,203	65,233	65,248

10. Pension and Other Post Retirement Benefits

Components of Net Periodic Costs are as follows:


	Three Months Ended June 30,										Six Months Ended June 30,
	Pension Benefits						Other Benefits				Pension Benefits						Other Benefits
	2006			2005			2006		2005		2006			2005			2006		2005
Service cost	$	267		$	275		$	91	$	97	$	533		$	550		$	183	$	194
Interest cost		471			455			134		103		942			910			268		206
Expected return on plan assets		(550	)		(482	)		—		—		(1,100	)		(964	)		—		—
Amortization of transition obligation		—			—			28		28		—			—			57		56
Amortization of prior service cost		79			80			67		67		159			160			133		134
Amortization of net loss		100			69			77		62		200			138			154		124

Net periodic benefit cost	$	367		$	397		$	397	$	357	$	734		$	794		$	795	$	714

The Company contributed $2,498 and $0 to the Salaried and Wage pension plans during the quarters ended June 30, 2006 and 2005, respectively, and $2,498 and $6,074 to the Salaried and Wage pension plans for the six months ended June 30, 2006 and 2005, respectively. The Company is not scheduled to contribute any additional funds to the pension plans during the fiscal year ending December 31, 2006.

11. Commitments and Contingencies

Environmental Matters

The Company is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require it to remove or mitigate the effects of the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. Because several of the Company’s production sites have a history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on the Company in the future. As is typical for chemical businesses, soil and groundwater contamination has occurred in the past at some of the Company’s sites and might occur or be discovered at other sites in the future. The Company has typically conducted extensive soil and groundwater assessments either prior to acquisitions or in connection with subsequent permitting requirements. The Company’s investigations have not revealed any contamination caused by the Company’s operations that would likely require the Company to incur material long-term remediation efforts and associated liabilities.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Calvert City, Kentucky

Contract Litigation with Goodrich and PolyOne.In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation chemical manufacturing complex in Calvert City, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. In addition, the Company agreed to indemnify Goodrich for contamination attributable to the ownership, use or operation of the plant after the closing dates. The soil and groundwater at the manufacturing complex, which does not include the Company’s polyvinyl chloride facility in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation was spun off from Goodrich, and Geon assumed the responsibility to operate the site-wide remediation system and Goodrich’s indemnification obligations for any liabilities arising from preexisting contamination at the site. Subsequently, Geon’s name was changed to PolyOne. Part of the former Goodrich facility, which the Company did not acquire and on which it does not operate and that it believes is still owned by either Goodrich or PolyOne, is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. The investigation and remediation of contamination at the Company’s manufacturing complex is currently being coordinated by PolyOne.

Given the scope and extent of the underlying contamination at the Company’s manufacturing complex, the remediation will likely take a number of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $4,556 in 2005, and the Company expects this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has asserted that the Company’s actions after its acquisition of the complex have contributed to or otherwise exacerbated the contamination at the site. The Company denied those allegations. Goodrich has also asserted claims similar to those of PolyOne. In addition, Goodrich has asserted that the Company is responsible for a portion of the ongoing costs of treating contaminated groundwater being pumped from beneath the site. In May 2003, Goodrich began withholding payment of 45% of the monthly costs incurred by the Company to operate certain pollution control equipment owned by Goodrich at the site.

In October 2003, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky for breach of contract to recover unpaid invoices related to the Company’s operation of groundwater treatment equipment. Goodrich filed an answer and counterclaim in which it alleged that the Company was responsible for contamination at the facility. The Company denied those allegations and filed a motion to dismiss Goodrich’s counterclaim. By order dated April 9, 2004, the court dismissed part of Goodrich’s counterclaim while retaining the remainder. Goodrich also filed a third-party complaint against PolyOne. PolyOne in turn filed motions to dismiss, filed counterclaims against Goodrich and filed cross-claims against the Company in which it alleged breach of contract and that Goodrich and the Company had conspired to defraud PolyOne. On June 8, 2004, the Company filed a motion for summary judgment on its breach of contract claim against Goodrich. On June 16, 2004, the Company filed a motion to dismiss PolyOne’s cross-claims. By order dated March 9, 2005, the court granted the Company’s motion to dismiss PolyOne’s cross-claims. On March 29, 2005, the court granted the Company’s motion for summary judgment on the Company’s breach of contract claim against Goodrich. On April 12, 2005, Goodrich filed a motion for reconsideration of the order granting summary judgment. On July 5, 2005, Goodrich and the Company entered a Non-Waiver Agreement pursuant to which Goodrich paid the Company all past due amounts, including interest, in the amount of $3,132. This reimbursement is reflected in the consolidated statement of operations for the year ended December 31, 2005 resulting in a $2,606 reduction of selling, general and administrative expenses and $526 of interest income. Goodrich further agreed to make all future payments for services on a timely basis. Pursuant to the Non-Waiver Agreement, both parties retained all rights and legal arguments, including Goodrich’s right to pursue its motion for reconsideration. The granting of such motion could result in the Company being required to repay Goodrich for the amounts paid by Goodrich under the Non-Waiver Agreement. The case is continuing with respect to Goodrich’s counterclaims against the Company, and Goodrich’s third-party claims against PolyOne and PolyOne’s counterclaims against Goodrich. Extensive discovery is ongoing and the trial may occur in April 2007. A court-ordered mediation is scheduled for November 2006.

Administrative Proceedings and Related Litigation. In addition, there are several administrative proceedings in Kentucky involving Goodrich and PolyOne. On September 23, 2003, the Kentucky State Cabinet re-issued Goodrich’s Resource Conservation and Recovery Act, or RCRA, permit which requires Goodrich to remediate contamination at the Calvert City manufacturing complex. Goodrich was named as the sole permittee. Both Goodrich and PolyOne have challenged that determination. Goodrich filed an appeal (Goodrich I) of that permit on October 23, 2003, and PolyOne filed a separate challenge (PolyOne I) on November 13, 2003. In both proceedings, Goodrich and PolyOne are seeking to shift Goodrich’s cleanup responsibilities under Goodrich’s RCRA permit to other parties, including the Company. The Company

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

has either intervened directly or been named as a party in both of these proceedings. Mediation was conducted in these proceedings during 2004 but was unsuccessful. On September 27, 2004, the Kentucky State Cabinet sent PolyOne a determination requiring PolyOne to be added to the Goodrich RCRA permit due to PolyOne’s operation of the site remediation system. On October 22, 2004, PolyOne filed an appeal (PolyOne II). In this second proceeding, PolyOne is challenging the State’s determination that PolyOne is required to submit an application for a major modification of the Goodrich permit and assume the regulatory status of an operator under the permit. PolyOne makes a number of charges against the Company that, if proven, might cause the Kentucky State Cabinet to demand that the Company also be added to the Goodrich permit. Goodrich and PolyOne have alleged in Goodrich I and PolyOne I that Goodrich cannot be held responsible for contamination on property they do not own. Both Goodrich and PolyOne have also alleged that the Company is responsible for contamination at the manufacturing complex, which the Company has denied.

On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which had rejected a Goodrich proposal to perform a particular soil remediation procedure. The Company’s motion to intervene in PolyOne II and Goodrich II was subsequently granted.

On March 18, 2005, the Goodrich I and II and PolyOne I and II proceedings were consolidated and the hearing for the consolidated case was set for September 12, 2006. Subsequently, the Kentucky State Cabinet agreed to allow Goodrich to perform a test of the soil remediation procedure. Goodrich then withdrew its complaint and the Goodrich II proceeding was dismissed. By order dated January 19, 2006, the hearing for the consolidated administrative proceedings was rescheduled to April 3, 2007.

On March 22, 2005, after the court had dismissed PolyOne’s cross-claims against the Company, PolyOne filed a separate RCRA citizen suit against the Company in the United States District Court for the Western District of Kentucky, which covers the same issues raised in the Goodrich and PolyOne administrative proceedings. On May 23, 2005 the Company filed a motion to dismiss the PolyOne complaint, which PolyOne responded to on June 7, 2005. The Company filed its reply to PolyOne’s response on June 21, 2005, and the motion is pending.

In January 2004, the Kentucky State Cabinet notified the Company by letter that, due to its ownership of a closed landfill (known as Pond 4) at the manufacturing complex, the Company would be required to submit a post-closure permit application under RCRA. This could require the Company to bear the responsibility and cost of performing remediation work at Pond 4 and solid waste management units and areas of concern located on property adjacent to Pond 4 that is owned by the Company. The Company acquired Pond 4 from Goodrich in 1997 as part of the acquisition of other facilities. Under the 1997 contract, the Company has the right to reconvey title to Pond 4 back to Goodrich, which the Company has tendered. On March 21, 2005, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the tendered reconveyance and to indemnify the Company for its costs incurred in connection with Pond 4. On May 20, 2005, Goodrich filed a motion to dismiss portions of the Company’s complaint. On June 27, 2005, the Company filed a response in opposition to Goodrich’s motion to dismiss, and Goodrich filed its reply on July 18, 2005. In addition, on June 6, 2005, Goodrich filed a third-party complaint against PolyOne, seeking to hold PolyOne responsible for any of Goodrich’s Pond 4 liabilities to the Company. PolyOne moved to dismiss Goodrich’s third-party complaint on August 30, 2005. Goodrich responded to PolyOne’s motion on October 7, 2005, and PolyOne filed its reply on October 21, 2005. Finally, the Company filed a motion for partial summary judgment on Goodrich’s liability for the Company’s costs incurred in connection with Pond 4 on August 9, 2005. Goodrich responded to the Company’s motion on September 6, 2005, and the Company replied on September 27, 2005. The motion is now pending.

The Company has also filed an appeal with the Kentucky State Cabinet regarding its January 2004 letter. Goodrich and PolyOne have both filed motions to intervene in this appeal. On July 1, 2004, the Company notified the Kentucky State Cabinet that the Company would prefer to conduct a clean-closure equivalency determination, or CCED, of Pond 4 rather than pursue a post-closure care RCRA permit. The proposal to conduct the CCED was rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky State Cabinet directed the Company to file a post-closure permit application for Pond 4. On February 23, 2005, the Company filed a motion for stay of the order requiring the Company to file the permit application. On February 18, 2005, the Company also sent a letter to the Kentucky State Cabinet demanding that it enforce the Goodrich RCRA permit against Goodrich since the RCRA permit requires Goodrich to address Pond 4. On March 25, 2005, the Kentucky State Cabinet granted the Company an extension until September 26, 2005 to file the permit application. On August 19, 2005, the Kentucky Cabinet granted an additional extension until March 25, 2006 to file the permit application. On March 27, 2006, the Kentucky Cabinet granted another extension until September 20, 2006 to file the permit application.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Monetary Relief. None of the parties involved in the proceedings relating to the disputes with Goodrich and PolyOne and the Kentucky State Cabinet described above has formally quantified the amount of monetary relief that they are seeking from the Company, nor has the court or the Kentucky State Cabinet proposed or established an allocation of the costs of remediation among the various participants. Any monetary liabilities that the Company might incur with respect to the remediation of contamination at the manufacturing complex in Calvert City would likely be spread out over an extended period. While the Company has denied responsibility for any such remediation costs and is actively defending its position, the Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows.

Environmental Investigations. In March and June 2002, the EPA’s National Enforcement Investigations Center, or NEIC, conducted an environmental investigation of the Company’s manufacturing complex in Calvert City consisting of the ethylene dichloride (“EDC”)/vinyl chloride monomer (“VCM”), ethylene and chlor-alkali plants. In May 2003, the Company received a report prepared by the NEIC summarizing the results of that investigation. Among other things, the NEIC concluded that the requirements of several regulatory provisions had not been met. The Company analyzed the NEIC report and identified areas where it believed that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. The Company held a number of discussions with the EPA concerning its conclusions. In February 2004, representatives of the EPA orally informed the Company that the agency proposed to assess monetary penalties against it and to require it to implement certain injunctive relief to ensure compliance. In addition, the EPA’s representatives informed the Company that the EPA, the NEIC and the Kentucky State Cabinet would conduct an inspection of its polyvinyl chloride (“PVC”) facility in Calvert City, which is separate from the manufacturing complex and was not visited during the 2002 inspection. That additional inspection took place in late February 2004. The Company has not yet received a written report from the agencies regarding the actions that they propose to take in response to that visit. The EPA submitted to the Company an information request under Section 114 of the Clean Air Act and issued a Notice of Violation, both pertaining to the inspection of the EDC/VCM plant. The Notice of Violation does not propose any specific penalties. The EPA also issued to the Company information requests under Section 3007 of RCRA and Section 114 of the Clean Air Act regarding the PVC plant inspection. The Company and the EPA met in June 2004 and have continued to hold settlement discussions pursuant to which the EPA has indicated it will impose monetary penalties and will require plant modifications that will require capital expenditures. The Company expects that, based on the EPA’s past practices, the amount of any monetary penalties would be reduced by a percentage of the expenditures that the Company would agree to make for certain “supplemental environmental projects.” The Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows. However, the Company has recorded an accrual for a probable loss related to monetary penalties. Although the ultimate amount of liability is not ascertainable, the Company believes that any amounts exceeding the recorded accruals should not materially affect the Company’s financial condition. It is possible, however, that the ultimate resolution of this matter could result in a material adverse effect on the Company’s results of operations or cash flows for a particular reporting period.

Legal Matters

In October 2003, the Company filed suit against CITGO Petroleum Corporation in state court in Lake Charles, Louisiana, asserting that CITGO had failed to take sufficient hydrogen under two successive contracts pursuant to which the Company has supplied and the Company supplies to CITGO hydrogen that the Company generates as a co-product in its ethylene plants in Lake Charles. In December 2003, CITGO responded with an answer and a counterclaim against the Company, asserting that CITGO had overpaid the Company for hydrogen due to the Company’s allegedly faulty sales meter and that the Company is obligated to reimburse CITGO for the overpayments. In January 2004, the Company filed a motion to compel arbitration of CITGO’s counterclaim and to stay all court proceedings relating to the counterclaim. In May 2004, the parties filed a joint motion with the court to provide for CITGO’s counterclaim to be resolved by arbitration. The Company’s claim against CITGO is approximately $8,100 plus interest at the prime rate plus two percentage points and attorneys’ fees. CITGO’s claim against the Company is approximately $7,800 plus interest at the prime rate plus two percentage points and attorneys’ fees. The parties held a mediation conference in April 2004 at which they agreed to conduct further discovery with a view towards holding another mediation conference to attempt to settle their disputes. Subsequently,

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

the parties have held discussions regarding a settlement. The Company can offer no assurance that a settlement can be achieved, and if no settlement is achieved, the Company intends to vigorously pursue its claim against CITGO and its defense against CITGO’s counterclaim.

On March 30, 2006, Westlake Vinyls, Inc., a subsidiary of the Company, received notice that Royal Polymers Limited (“Royal”), a customer, had commenced a lawsuit against it in the Superior Court of Justice, Toronto, Ontario, Canada. Royal is seeking a declaration that the 2004 vinyl chloride monomer (VCM) supply agreement between Royal, as buyer, and Westlake Vinyls, Inc., as seller, is void and unenforceable as a result of the elimination of a published industry price factor which comprises one factor of a multi-factor pricing formula. Sales to Royal accounted for 16% of the net sales of the Company’s Vinyls segment and 7% of the Company’s consolidated net sales in 2005. Westlake Vinyls, Inc. continues to supply VCM to Royal and Royal continues to take VCM, although the parties are not in agreement as to the price of the VCM. In March 2006, Royal began short-paying invoices for VCM purchased, which shortfall aggregated a total of $6,973 as of June 30, 2006, making payments at prices lower than those the Company believes are called for under the agreement (the reduced payments were retroactive to January 1, 2006). The Company has deferred recognition of the amount withheld pending a resolution. On April 6, 2006, Westlake Vinyls, Inc. commenced a lawsuit against Royal in the same Ontario court seeking a declaration that the supply agreement is valid and binding, and an order requiring Royal to pay any shortfall amounts. A hearing at the court in Toronto on the parties’ claims against one another has been set for October 25, 2006. The Company plans to vigorously pursue all available legal remedies to preserve its rights under the agreement. If the agreement is found by the court to be void, the Company’s results of operations and cash flows could be materially adversely affected.

In addition to the matters described above, in both “Environmental Matters” and “Legal Matters,” the Company is involved in various routine legal proceedings incidental to the conduct of its business. The Company does not believe that any of these routine legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

12. Segment Information

The Company operates in two principal business segments: Olefins and Vinyls. These segments are strategic business units that offer a variety of different products. The Company manages each segment separately as each business requires different technology and marketing strategies.


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net sales to external customers
Olefins
Polyethylene	$	206,420		$	168,098		$	395,876		$	337,585
Ethylene, styrene and other		142,232			149,292			292,493			356,472

Total olefins		348,652			317,390			688,369			694,057
Vinyls
Fabricated finished goods		181,879			144,667			322,288			271,318
VCM, PVC and other		138,736			118,602			277,389			233,900

Total vinyls		320,615			263,269			599,677			505,218

	$	669,267		$	580,659		$	1,288,046		$	1,199,275

Intersegment sales Olefins	$	37,986		$	20,677		$	78,050		$	47,649
Vinyls		307			290			631			567

	$	38,293		$	20,967		$	78,681		$	48,216

Income (loss) from operations Olefins	$	62,029		$	32,004		$	121,594		$	94,416
Vinyls		44,251			50,980			98,662			92,632
Corporate and other		573			(221	)		(2,524	)		(2,577	)

	$	106,853		$	82,763		$	217,732		$	184,471

Depreciation and amortization Olefins	$	11,829		$	12,178		$	23,579		$	24,932
Vinyls		8,561			8,269			17,258			16,598
Corporate and other		31			14			59			14

	$	20,421		$	20,461		$	40,896		$	41,544

Other income (expense), net Olefins	$	(1	)	$	(2,227	)	$	(1	)	$	(1,928	)
Vinyls		38			435			85			465
Corporate and other		3,018			511			5,305			897

		3,055			(1,281	)		5,389			(566	)
Debt retirement cost		—			—			(25,853	)		(646	)

	$	3,055		$	(1,281	)	$	(20,464	)	$	(1,212	)

Capital expenditures Olefins	$	21,659		$	12,274		$	42,069		$	16,612
Vinyls		12,478			14,105			20,424			26,258
Corporate and other		201			377			394			1,222

	$	34,338		$	26,756		$	62,887		$	44,092

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

A reconciliation of total segment income from operations to consolidated income before taxes is as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Income from operations	$	106,853		$	82,763		$	217,732		$	184,471
Interest expense		(3,898	)		(5,879	)		(9,924	)		(12,033	)
Debt retirement cost		—			—			(25,853	)		(646	)
Other income (expense), net		3,055			(1,281	)		5,389			(566	)

Income before taxes	$	106,010		$	75,603		$	187,344		$	171,226


	June 30, 2006		December 31, 2005
Total Assets Olefins	$	1,013,113	$	961,742
Vinyls		598,814		573,709
Corporate and other		330,436		291,738

	$	1,942,363	$	1,827,189

13. Comprehensive Income Information


	Three Months Ended June 30,					Six Months Ended June 30,
	2006		2005			2006		2005
Net income	$	67,169	$	48,526		$	118,506	$	109,669
Other comprehensive income (loss):
Change in foreign currency translation		801		(255	)		902		(340	)

Comprehensive income	$	67,970	$	48,271		$	119,408	$	109,329

14. Long-Term Debt

Long-term indebtedness consists of the following:


	June 30, 2006		December 31, 2005
6 5/8% Senior notes due 2016	$	249,226	$	—
8 3/4% Senior notes due 2011		—		247,000
Term loan		—		9,000
Loan related to tax-exempt revenue bonds		10,889		10,889

Total debt		260,115		266,889
Less current portion		—		(1,200	)

Long-term debt	$	260,115	$	265,689

In the first quarter of 2006, the Company issued $250,000 aggregate principal amount of 6⁵/8% senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem all of the Company’s 8³/4% senior notes due 2011 and repay the Company’s term loan. The 6⁵/8 % senior notes were issued with an original issue discount of $815. As a result of the early redemption of the 8³/4% senior notes and the repayment of the term loan, the Company recognized $25,853 of debt retirement costs in the first quarter of 2006 consisting of a pre-payment premium on the 8³/4% senior notes of $22,230 and a write-off of $3,623 in previously capitalized debt issuance cost. The issuance of the 6⁵/8% senior notes resulted in the capitalization of $4,279 related to debt issuance cost.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

15. Guarantor Disclosures

The Company’s payment obligations under its 6⁵/8% senior notes are fully and unconditionally guaranteed by each of its current and future domestic restricted subsidiaries that guarantee other debt of the Company or of another guarantor of the 6⁵/8% senior notes in excess of $5,000 (the “Guarantor Subsidiaries”). Each Guarantor Subsidiary is 100% owned by the parent company. These guarantees are the joint and several obligations of the Guarantor Subsidiaries. The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of Westlake Chemical Corporation, the Guarantor Subsidiaries and the remaining subsidiaries that do not guarantee the notes (the “Non-Guarantor Subsidiaries”), together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.

Condensed Consolidating Financial Information as of June 30, 2006


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Balance Sheet
Current assets
Cash and cash equivalents	$	266,866		$	79		$	8,670		$	—		$	275,615
Accounts receivable, net		(47,198	)		309,832			(2,427	)		62,802			323,009
Inventories, net		—			334,519			8,574			—			343,093
Prepaid expenses and other current assets		10			10,825			543			—			11,378
Deferred income taxes		12,398			—			642			—			13,040

Total current assets		232,076			655,255			16,002			62,802			966,135
Property, plant and equipment, net		—			887,981			12,810			—			900,791
Equity investment		1,375,718			15,300			25,710			(1,391,018	)		25,710
Other assets, net		43,418			36,606			5,734			(36,031	)		49,727

Total assets	$	1,651,212		$	1,595,142		$	60,256		$	(1,364,247	)	$	1,942,363

Current liabilities
Accounts payable	$	21,659		$	163,274		$	1,461		$	—		$	186,394
Accrued liabilities		19,396			91,887			3,429			(15	)		114,697

Total current liabilities		41,055			255,161			4,890			(15	)		301,091
Long-term debt		249,226			(20,834	)		4,939			26,784			260,115
Deferred income taxes		230,099			—			1,873			—			231,972
Other liabilities		19,372			18,353			—			—			37,725
Stockholders’ equity		1,111,460			1,342,462			48,554			(1,391,016	)		1,111,460

Total liabilities and stockholders’ equity	$	1,651,212		$	1,595,142		$	60,256		$	(1,364,247	)	$	1,942,363

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Condensed Consolidating Financial Information as of December 31, 2005


	Westlake Chemical Corporation		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Balance Sheet
Current assets
Cash and cash equivalents	$	231,957	$	151	$	5,787		$	—		$	237,895
Accounts receivable, net		60,697		290,749		98			(48,765	)		302,779
Inventories, net		—		331,867		8,003			—			339,870
Prepaid expenses and other current assets		10		9,007		289			—			9,306
Deferred income taxes		12,398		—		615			—			13,013

Total current assets		305,062		631,774		14,792			(48,765	)		902,863
Property, plant and equipment, net		—		850,280		12,952			—			863,232
Equity investment		1,163,403		15,300		20,042			(1,178,703	)		20,042
Other assets, net		43,235		28,017		5,830			(36,030	)		41,052

Total assets	$	1,511,700	$	1,525,371	$	53,616		$	(1,263,498	)	$	1,827,189

Current liabilities
Accounts payable	$	18,705	$	181,093	$	(21	)	$	—		$	199,777
Accrued liabilities		4,509		99,042		1,266			55			104,872
Current portion of long-term debt		1,200		—		—			—			1,200

Total current liabilities		24,414		280,135		1,245			55			305,849
Long-term debt		254,800		90,597		5,142			(84,850	)		265,689
Deferred income taxes		219,802		—		1,286			—			221,088
Other liabilities		18,578		21,880		—			(1	)		40,457

Stockholders’ equity		994,106		1,132,759		45,943			(1,178,702	)		994,106

Total liabilities and stockholders’ equity	$	1,511,700	$	1,525,371	$	53,616		$	(1,263,498	)	$	1,827,189

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Condensed Consolidating Financial Information for the Three Months Ended June 30, 2006


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	657,602		$	13,773		$	(2,108	)	$	669,267
Cost of sales		—			534,135			12,028			(2,108	)		544,055

		—			123,467			1,745			—			125,212
Selling, general and administrative expenses		171			17,345			843			—			18,359

Income (loss) from operations		(171	)		106,122			902			—			106,853
Interest expense		293			(4,191	)		—			—			(3,898	)
Other income (expense), net		63,432			198			1,002			(61,577	)		3,055

Income (loss) before income taxes		63,554			102,129			1,904			(61,577	)		106,010
Provision for (benefit from) income taxes		(3,615	)		42,486			(30	)		—			38,841

Net income (loss)	$	67,169		$	59,643		$	1,934		$	(61,577	)	$	67,169

Condensed Consolidating Financial Information for the Three Months Ended June 30, 2005


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	572,944		$	10,899		$	(3,184	)	$	580,659
Cost of sales		—			475,429			8,934			(3,184	)		481,179

		—			97,515			1,965			—			99,480
Selling, general and administrative expenses		601			15,301			815			—			16,717

Income (loss) from operations		(601	)		82,214			1,150			—			82,763
Interest expense		(298	)		(5,581	)		—			—			(5,879	)
Other income (expense), net		49,292			(1,698	)		(122	)		(48,753	)		(1,281	)

Income (loss) before income taxes		48,393			74,935			1,028			(48,753	)		75,603
Provision for (benefit from) income taxes		(133	)		26,908			302			—			27,077

Net income (loss)	$	48,526		$	48,027		$	726		$	(48,753	)	$	48,526

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Condensed Consolidating Financial Information for the Six Months Ended June 30, 2006


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	1,269,820		$	23,923	$	(5,697	)	$	1,288,046
Cost of sales		—			1,016,125			21,348		(5,697	)		1,031,776

Gross profit		—			253,695			2,575		—			256,270
Selling, general and administrative expenses		709			36,129			1,700		—			38,538

Income (loss) from operations		(709	)		217,566			875		—			217,732
Interest expense		(1,456	)		(8,468	)		—		—			(9,924	)
Other income (expense), net		113,012			400			1,390		(135,266	)		(20,464	)

Income (loss) before income taxes		110,847			209,498			2,265		(135,266	)		187,344
Provision for (benefit from) income taxes		(7,659	)		75,932			565		—			68,838

Net income (loss)	$	118,506		$	133,566		$	1,700	$	(135,266	)	$	118,506

Condensed Consolidating Financial Information for the Six Months Ended June 30, 2005


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	1,186,958		$	18,811		$	(6,494	)	$	1,199,275
Cost of sales		—			970,412			16,094			(6,494	)		980,012

Gross profit		—			216,546			2,717			—			219,263
Selling, general and administrative expenses		1,225			32,023			1,544			—			34,792

Income (loss) from operations		(1,225	)		184,523			1,173			—			184,471
Interest expense		(1,309	)		(10,724	)		—			—			(12,033	)
Other income (expense), net		111,278			(1,150	)		(97	)		(111,243	)		(1,212	)

Income (loss) before income taxes		108,744			172,649			1,076			(111,243	)		171,226
Provision for (benefit from) income taxes		(925	)		62,129			353			—			61,557

Net income (loss)	$	109,669		$	110,520		$	723		$	(111,243	)	$	109,669

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Condensed Consolidating Financial Information for the Six Months Ended June 30, 2006


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Cash Flows
Net income (loss)	$	118,506		$	133,566		$	1,700		$	(135,266	)	$	118,506
Adjustments to reconcile net income (loss) to net cash providedby operating activities
Depreciation and amortization		472			39,272			1,624			—			41,368
Provision for bad debts		—			634			—			—			634
Gain from disposition of fixed assets		—			(13	)		—			—			(13	)
Deferred tax expense		(7,659	)		17,860			535			—			10,736
Equity in income of joint venture		—			—			(1,093	)		—			(1,093	)
Write-off of debt issuance costs		—			3,623			—			—			3,623
Net changes in working capital and other		(169,649	)		1,818			5,704			135,266			(26,861	)

Net cash provided by (used for) operating activities		(58,330	)		196,760			8,470			—			146,900
Additions to property, plant and equipment		—			(61,843	)		(1,044	)		—			(62,887	)
Additions to equity investment		—			—			(4,574	)		—			(4,574	)
Settlements of futures contracts		—			(27,445	)		—			—			(27,445	)
Other		—			7			—			—			7
Net cash used for investing activities		—			(89,281	)		(5,618	)		—			(94,899	)
Intercompany financing		107,520			(107,551	)		31			—			—
Proceeds from exercise of stock options		396			—			—			—			396
Dividends paid		(3,583	)		—			—			—			(3,583	)
Proceeds from borrowings		249,185			—			—			—			249,185
Repayments of borrowings		(256,000	)		—			—			—			(256,000	)
Capitalized debt costs		(4,279	)		—			—			—			(4,279	)

Net cash used for (provided by) financing activities		93,239			(107,551	)		31			—			(14,281	)
Net increase (decrease) in cash and cash equivalents		34,909			(72	)		2,883			—			37,720
Cash and cash equivalents at beginning of period		231,957			151			5,787			—			237,895

Cash and cash equivalents at end of period	$	266,866		$	79		$	8,670		$	—		$	275,615

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(UNAUDITED)

(dollars in thousands, except per share data)

Condensed Consolidating Financial Information for the Six Months Ended June 30, 2005


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Cash Flows
Net income (loss)	$	109,669		$	110,520		$	723		$	(111,243	)	$	109,669
Adjustments to reconcile net income (loss) to net cash providedby operating activities
Depreciation and amortization		743			40,276			1,268			—			42,287
Recovery of bad debts		—			(1,567	)		18			—			(1,549	)
Gain from disposition of fixed assets		—			1,152			1			—			1,153
Deferred tax expense		(925	)		23,699			(17	)		—			22,757
Equity in income of joint venture		—			—			289			—			289
Write off of debt issuance costs		646			—			—			—			646
Net changes in working capital and other		(146,672	)		3,204			671			111,243			(31,554	)

Net cash provided by (used for) operating activities		(36,539	)		177,284			2,953			—			143,698
Additions to property, plant and equipment		—			(43,148	)		(944	)		—			(44,092	)
Other		—			34			—			—			34

Net cash used for investing activities		—			(43,114	)		(944	)		—			(44,058	)
Intercompany financing		134,160			(134,012	)		(148	)		—			—
Dividends paid		(2,763	)		—			—			—			(2,763	)
Repayments of borrowings		(30,600	)		—			—			—			(30,600	)

Net cash used for (provided by) financing activities		100,797			(134,012	)		(148	)		—			(33,363	)
Net increase in cash		64,258			158			1,861			—			66,277
Cash balance at beginning of period		39,312			70			4,014			—			43,396

Cash balance at end of period	$	103,570		$	228		$	5,875		$	—		$	109,673

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

This discussion and analysis should be read in conjunction with information contained in the accompanying unaudited consolidated interim financial statements of Westlake Chemical Corporation and the notes thereto and the consolidated financial statements and notes thereto of Westlake Chemical Corporation included in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The following discussion contains forward-looking statements. Please read “Forward-Looking Statements” for a discussion of limitations inherent in such statements.

We are a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are Olefins and Vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.

RECENT DEVELOPMENTS

On April 18, 2006, we announced that we entered into a Memorandum of Understanding (“MOU”) to develop an ethane-based ethylene, polyethylene and other derivatives project in the Republic of Trinidad and Tobago. The Republic of Trinidad and Tobago has expressed an interest in becoming a minority equity partner in the project. As currently envisioned, the project would use 37,500 barrels per day of ethane to produce 570,000 metric tons (1.25 billion pounds) per year of ethylene, which would in turn be used to produce polyethylene and other derivative products. The project could be expanded in the future as more ethane becomes available. The capital cost is initially estimated to be approximately $1.5 billion. The size, scope, and cost of the project are subject to further definition as the parties undertake a detailed feasibility study pursuant to the MOU. It is expected that the project will be financed through a project financing arrangement. The preliminary project schedule contemplates that construction would start in late 2007 and that the project would start operations in late 2010.

We have purchased additional interests in Suzhou Huasu Plastics Co. Ltd., our joint venture in China. All governmental approvals were obtained and the transaction closed in the second quarter of 2006. We increased our ownership percentage from approximately 43% to approximately 58% at a cost of $6.4 million ($1.8 million was paid in the fourth quarter of 2005 and $4.6 million was paid in the second quarter of 2006). We will continue to account for this investment using the equity method of accounting because the entity does not meet the definition of a variable interest entity under FIN 46R, “Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of ARB No. 51,” and because contractual arrangements allowing certain substantive participatory rights to minority shareholders prevent us from exercising a controlling financial interest over this entity.

In the second quarter of 2006 we completed a major maintenance turnaround in Calvert City, and we currently expect to perform a major turnaround at one of the ethylene units at our Lake Charles, Louisiana olefins complex either in the fourth quarter of 2006 or the first quarter of 2007. The ethylene and VCM units at Calvert City were down 16 days while the chlor-alkali and PVC units were down for a shorter period. Sales continued during the turnaround from inventory on hand. The turnaround at Lake Charles is expected to last approximately 50 days. During a turnaround, production at the unit is suspended while work on the unit is performed; however, sales are expected to continue during the turnaround period.

RESULTS OF OPERATIONS

Selected Financial and Operating Data


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
	(in millions of dollars)
Net sales to external customers
Olefins
Polyethylene	$	206.4	$	168.1	$	395.9	$	337.6
Ethylene, styrene and other		142.3		149.3		292.5		356.5

Total olefins		348.7		317.4		688.4		694.1
Vinyls
Fabricated finished goods		181.9		144.7		322.3		271.3
VCM, PVC and other		138.7		118.6		277.3		233.9

Total vinyls		320.6		263.3		599.6		505.2

	$	669.3	$	580.7	$	1,288.0	$	1,199.3


Income (loss) from operations
Olefins	$	62.0		$	32.0		$	121.6		$	94.4
Vinyls		44.3			51.0			98.7			92.6
Corporate and other		0.6			(0.2	)		(2.6	)		(2.5	)

Total income from operations		106.9			82.8			217.7			184.5
Interest expense		(3.9	)		(5.9	)		(9.9	)		(12.0	)
Debt retirement cost		—			—			(25.9	)		(0.6	)
Other income (expense), net		3.1			(1.3	)		5.4			(0.6	)
Provision for income taxes		38.9			27.1			68.8			61.6

Net income	$	67.2		$	48.5		$	118.5		$	109.7

Earnings per share (diluted)	$	1.03		$	0.74		$	1.82		$	1.68


	Three Months Ended June 30,				Six Months Ended June 30,
	Average Sales Price		Volume		Average Sales Price		Volume
Key product sales price and volume percentage change from prior year
Olefins¹	+17.1	%	-3.4	%	+16.6	%	-6.6	%
Vinyls²	+11.4	%	+9.3	%	+14.1	%	+4.0	%
Company average	+14.4	%	+2.4	%	+15.3	%	-1.8	%

¹	Includes: Ethylene and co-products, polyethylene, and styrene

²	Includes: Ethylene co-products, caustic, VCM, PVC resin, PVC pipe, and other fabrication products


	Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
Average industry prices
Ethane (cents/lb)	22.8	17.6	21.0	17.6
Propane (cents/lb)	24.9	19.5	23.6	19.1
Ethylene (cents/lb) (1)	46.5	38.3	48.4	39.9
Polyethylene (cents/lb) (2)	73.0	62.0	75.5	65.0
Styrene (cents/lb) (3)	61.7	61.6	61.1	63.1
Caustic ($/short ton) (4)	393.3	382.5	408.7	363.8
Chlorine ($/short ton) (5)	332.5	350.0	332.5	340.0
VCM (cents/lb) (6)	42.2	37.5	43.1	38.0
PVC (cents/lb) (7)	60.0	54.2	61.4	54.0

Source: CMAI

(1)	Contract-Net Transaction (Pipeline)

(2)	Contract Low Density Polyethylene, GP-Film (Domestic Market, Contract, GP-Film)

(3)	Contract –Styrene (Contract Market)

(4)	Contract-Diaphragm caustic (Grade, Ave-incl Forecast)

(5)	Contract Chlorine (Contract Market Avg)

(6)	Contract Vinyl Chloride Monomer (Calculated Market Value)

(7)	Contract Polyvinyl Chloride-Pipe Grade (Contract Market)

Overview

We earned net income of $67.2 million, or $1.03 per diluted share, for the second quarter of 2006, an increase of 38.6% from the second quarter of 2005 net income of $48.5 million, or $0.74 per diluted share. Income from operations was $106.9 million on net sales of $669.3 million for the second quarter of 2006. This compares favorably with second-quarter 2005 income from operations of $82.8 million on net sales of $580.7 million. The improvement in income from operations was primarily the result of increased selling prices, which outpaced higher feedstock costs. The improvement in income from operations was partially offset by lower production volumes and higher maintenance expense due to a planned maintenance turnaround at our facilities in Calvert City, Kentucky. Sales increased $88.6 million, or 15.3%, over the second quarter of 2005. In addition, our income from operations margin increased to 16.0% in the second quarter of 2006 from 14.3% in the second quarter of 2005.

For the six months ended June 30, 2006, net income was $118.5 million, or $1.82 per diluted share, which included an after-tax charge of $16.3 million, or $0.25 per diluted share, related to debt retirement costs incurred in the first quarter of 2006. For the first six months of 2005 net income was $109.7 million and earnings per share was $1.68 per diluted share. Net sales increased $88.7 million, or 7.4%, to $1,288.0 million for the six months ended June 30, 2006 from the $1,199.3 million reported for the six months ended June 30, 2005. Income from operations was $217.7 million for the six months ended June 30, 2006 as compared to $184.5 million for the six months ended June 30, 2005. The year to date increases were primarily due to higher selling prices which outpaced higher feedstock and natural gas costs. Year to date net income for 2006 also benefited from lower interest expense resulting from lower interest rates due to the refinancing completed in the first quarter of 2006.

Second Quarter 2006 Compared with Second Quarter 2005

Net Sales. Net sales increased by $88.6 million to $669.3 million in the second quarter of 2006 from $580.7 million in the second quarter of 2005. This increase was primarily due to price increases for most of our major products and higher sales volumes for polyethylene, PVC resin and PVC pipe. These increases were partially offset by lower sales volumes for ethylene, styrene and VCM. Higher selling prices largely resulted from higher energy and raw material costs that were passed through to our customers. The decreased sales volume for styrene was primarily due to lower demand, while merchant ethylene sales volumes were lower primarily due to the increase in internal ethylene consumption at our Geismar facility. VCM sales volumes were down primarily due to the turnaround at Calvert City. PVC resin sales volumes increased primarily due to the supply of additional volumes from our Geismar facility. Polyethylene and PVC pipe volumes were up primarily due to increased demand.

Gross Margin. Gross margin percentage increased to 18.7% in the second quarter of 2006 from 17.1% in the second quarter of 2005. This increase was primarily due to price increases for most of our major products and higher sales volumes for polyethylene, PVC resin and PVC pipe. These increases were partially offset by higher raw material costs for ethane and propane and higher energy costs. In addition, production volumes were lower and maintenance expense was higher as a result of planned maintenance turnarounds at the Calvert City facilities. Our raw material cost in both segments normally tracks industry prices, which experienced an increase of 29.5% for ethane and 27.7% for propane as compared to the second quarter of 2005.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.6 million, or 9.8%, in the second quarter of 2006 as compared to the second quarter of 2005. The increase was primarily due to increased sales commissions and a higher provision for doubtful accounts.

Interest Expense. Interest expense in the second quarter of 2006 decreased by $2.0 million to $3.9 million from $5.9 million in the second quarter of 2005 primarily due to lower average interest rates and decreased borrowings. Average interest rates were lower due to the refinancing completed in the first quarter of 2006.

Other Income (Expense), Net. Other income increased by $4.4 million to $3.1 million in the second quarter of 2006 from an expense of $1.3 million in the second quarter of 2005 primarily due to higher interest income and increased equity in income from our joint venture in China.

Income Taxes. The effective income tax rate was 36.6% in the second quarter of 2006 as compared to 35.8% in the second quarter of 2005. The effective tax rates in 2006 and 2005 are higher than the statutory rate of 35.0% primarily due to state income taxes, partially offset by a tax benefit of approximately 1.0% related to the domestic manufacturing deduction.

Olefins Segment

Net Sales. Net sales increased by $31.3 million, or 9.9%, to $348.7 million in the second quarter of 2006 from $317.4 million in the second quarter of 2005. This increase was primarily due to price increases for all major products and increased sales volumes for polyethylene. These increases were partially offset by lower sales volumes for ethylene and styrene. Average selling prices for the Olefins segment increased by 17.1% in the second quarter of 2006 as compared to the second quarter of 2005. Higher selling prices were primarily the result of higher energy and raw material costs that were passed through to customers. Styrene sales volumes decreased slightly primarily due to lower demand and merchant ethylene sales volumes decreased as the internal requirements for ethylene at our Geismar facility increased.

Income from Operations. Income from operations increased by $30.0 million, or 93.8%, to $62.0 million in the second quarter of 2006 from $32.0 million in the second quarter of 2005. This increase was primarily due to price increases for all major products and increased sales volumes for polyethylene. These increases were partially offset by lower sales volumes for ethylene and styrene and higher raw material costs for ethane and propane.

Vinyls Segment

Net Sales. Net sales increased by $57.3 million, or 21.8%, to $320.6 million in the second quarter of 2006 from $263.3 million in the second quarter of 2005. This increase was primarily due to higher selling prices for most of our Vinyls products and higher sales volumes of PVC resin and PVC pipe. Average selling prices for the Vinyls segment increased by 11.4% in the second quarter of 2006 as compared to the second quarter of 2005. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane that were passed through to our customers. PVC resin sales volumes increased largely due to additional volumes from the Geismar facility. These increases were partially offset by lower sales volumes for VCM. See the discussion regarding the dispute with Royal in Note 11 to the consolidated financial statements.

Income from Operations. Income from operations decreased by $6.7 million, or 13.1%, to $44.3 million in the second quarter of 2006 from $51.0 million in the second quarter of 2005. This decrease was primarily due to planned maintenance turnarounds at our facilities in Calvert City, some of which were down for 16 days resulting in lower production volumes and higher maintenance expense. Higher selling prices for most of our Vinyls products and higher sales volumes for PVC resin and PVC pipe were more than offset by lower sales volumes and prices for VCM and increased raw material costs.

Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005

Net Sales. Net sales increased by $88.7 million to $1,288.0 million in the first six months of 2006 from $1,199.3 million in the first six months of 2005. This increase was primarily due to price increases for most of our major products and higher sales volumes for PVC resin and polyethylene. These increases were partially offset by lower sales volumes for ethylene, styrene and VCM. Higher selling prices largely resulted from higher energy and raw material costs that were passed through to our customers. The decreased sales volumes for styrene were primarily due to lower demand, while merchant ethylene sales volumes were lower primarily due to the increase in internal ethylene consumption at our Geismar facility. VCM volumes were down primarily due to the turnaround at Calvert City. PVC resin sales volumes increased primarily due to the supply of additional volumes from our Geismar facility, and polyethylene volumes were up primarily due to increased demand.

Gross Margin. Gross margin percentage increased to 19.9% in the first six months of 2006 from 18.3% in the first six months of 2005. This increase was primarily due to price increases for most of our major products and higher sales volumes for polyethylene and PVC resin. These increases were partially offset by lower sales volumes for ethylene and VCM, higher raw material costs of ethane and propane, lower production volumes and higher maintenance expense due to maintenance turnarounds, and higher energy costs. Our raw material cost in both segments normally tracks industry prices, which experienced an increase of 19.3% for ethane and 23.6% for propane as compared to the first half of 2005.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.7 million, or 10.8%, in the first six months of 2006 as compared to the first six months of 2005. The increase was primarily due to increased sales commissions, higher professional fees, and a higher provision for doubtful accounts.

Interest Expense. Interest expense in the first six months of 2006 decreased by $2.1 million to $9.9 million from $12.0 million in the first six months of 2005. Average interest rates were lower in the first six months of 2006 due to the issuance of $250.0 million aggregate principal amount of 6⁵/8% senior notes on January 13, 2006 and the redemption of the $247.0 million aggregate principal amount of 8³/4% senior notes in February 2006. Average debt balances were also lower in 2006.

Debt Retirement Cost. As a result of the redemption of $247.0 million aggregate principal amount of 8³/4% senior notes due July 15, 2011 and the repayment of $9.0 million of our term loan, we recognized $25.9 million in non-operating expense in the first quarter of 2006, consisting of a pre-payment premium on our 8³/4% senior notes of $22.2 million and a write-off of $3.7 million in previously capitalized debt issuance cost. We recognized $0.6 million in non-operating expense in the first quarter of 2005 resulting from a write-off in previously capitalized debt issuance cost in connection with the repayment of $30.0 million of our term loan.

Other Income (Expense), Net. Other income increased by $6.0 million to $5.4 million in the first six months of 2006 from an expense of $0.6 million in the first six months of 2005 primarily due to higher interest income and increased equity in income from our joint venture in China.

Income Taxes. The effective income tax rate was 36.7% in the first six months of 2006 as compared to 36.0% in the first six months of 2005. The effective tax rates in 2006 and 2005 are higher than the statutory rate of 35.0% primarily due to state income taxes, partially offset by a tax benefit of approximately 1.0% related to the domestic manufacturing deduction.

Olefins Segment

Net Sales. Net sales decreased by $5.7 million, or 0.8%, to $688.4 million in the first six months of 2006 from $694.1 million in the first six months of 2005. This decrease was primarily due to lower sales volumes for ethylene, which were partially offset by price increases throughout the Olefins segment. Average selling prices for the Olefins segment increased by 16.6% in the first half of 2006 as compared to the first half of 2005. Higher selling prices were primarily the result of higher energy and raw material costs that were passed through to customers. Merchant ethylene sales volumes decreased as the internal requirements for ethylene at our Geismar facility increased.

Income from Operations. Income from operations increased by $27.2 million, or 28.8%, to $121.6 million in the first six months of 2006 from $94.4 million in the first six months of 2005. This increase was primarily due to price increases throughout the Olefins segment which resulted in higher profit margins for polyethylene and ethylene, despite higher raw material costs for ethane and propane and higher energy costs.

Vinyls Segment

Net Sales. Net sales increased by $94.4 million, or 18.7%, to $599.6 million in the first six months of 2006 from $505.2 million in the first six months of 2005. This increase was primarily due to higher selling prices for caustic, PVC resin, and PVC pipe and higher sales volumes of PVC resin. Average selling prices for the Vinyls segment increased by 14.1% in the first half of 2006 as compared to the first half of 2005. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane that were passed through to our customers. PVC resin sales volumes increased largely due to additional volumes from the Geismar facility. These increases were partially offset by lower sales volumes for VCM. See the discussion regarding the dispute with Royal in Note 11 to the consolidated financial statements.

Income from Operations. Income from operations increased by $6.1 million, or 6.6%, to $98.7 million in the first six months of 2006 from $92.6 million in the first six months of 2005. This increase was primarily due to higher selling prices for most of our Vinyls products and higher sales volumes for PVC resin. These increases were partially offset by higher energy costs, higher raw material costs, and lower production volumes and higher maintenance expense related to the planned maintenance turnarounds at our Calvert City facilities.

CASH FLOW DISCUSSION FOR SIX MONTHS ENDED JUNE 30, 2006 AND 2005

Cash Flows

Operating Activities

Operating activities provided cash of $146.9 million in the first six months of 2006 compared to $143.7 million in the same period in 2005. The $3.2 million increase in cash flows from operating activities was primarily due to improvements in income from operations, as described previously, and favorable changes in working capital, which were partially offset by debt retirement costs incurred in the first half of 2006. Income from operations increased by $33.3 million in the first six months of 2006 as compared to the first six months of 2005. Debt retirement cost of $25.9 million was incurred in the first six months of 2006 as compared to $0.6 million incurred in the first six months of 2005, and turnaround costs of $10.4 were incurred in the first six months of 2006. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, used cash of $15.6 million in the first six months of 2006, compared to $22.4 million of cash used in the first six months of 2005, a decrease in cash use of $6.8 million. In the first six months of 2006, accounts receivable increased by $20.9 million largely due to higher sales while inventory increased by $3.2 million. Accounts payable and accrued liabilities, excluding accruals reflecting investing activities, increased by $10.5 million during the first six months of 2006 primarily due to higher feedstock and energy costs. The primary reasons for the $22.4 million use of cash in the first six months of 2005 related to working capital components was a $20.3 million increase in accounts receivable and a decrease of accounts payable and accrued liabilities of $13.8 million, partially offset by a $11.6 million decrease in inventories. The increase in accounts receivable in the first six months of 2005 was primarily due to higher selling prices and volumes.

Investing Activities

Net cash used for investing activities during the first six months of 2006 was $94.9 million as compared to $44.1 million in the first six months of 2005. Capital expenditures were $62.9 million in the first six months of 2006 as compared to $44.1 million in the first six months of 2005. The increase in capital expenditures was primarily due to a project designed to upgrade the feedstock flexibility in our ethylene plant and a project to expand our ethylene capacity. The remaining capital expenditures in the first half of 2006 primarily related to maintenance, safety and environmental projects. The capital expenditures in the first six months of 2005 primarily related to maintenance, safety and environmental projects. The additions to equity investments of $4.6 million in the first six months of 2006 relate to the additional equity interest purchased in Suzhou Huasu Plastics Co. Ltd., our joint venture in China, as discussed previously. In addition, the cash settlement of derivative instruments in the first half of 2006 related to derivative losses recognized in 2005.

Financing Activities

Net cash used by financing activities during the first six months of 2006 was $14.3 million as compared to $33.4 million in the first six months of 2005. During the first half of 2006, we received proceeds from new debt of $249.2 million, which was offset as we repaid debt of $256.0 million and paid dividends of $3.6 million. We also incurred $4.3 million in costs associated with the refinancing that were capitalized and that will be amortized over the term of the new debt. During the first half of 2005 we used $30.6 million to repay debt and $2.8 million to pay dividends.

Liquidity and Capital Resources

Liquidity and Financing Arrangements

Our principal sources of liquidity are from cash and cash equivalents, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing.

Cash

Cash balances were $275.6 million at June 30, 2006 compared to $237.9 million at December 31, 2005. We believe the June 30, 2006 cash levels are adequate to fund our short-term cash requirements.

Debt

Our present debt structure is used to fund our business operations, and our revolving credit facility is a source of liquidity. On January 6, 2006, we amended our senior secured revolving credit facility to, among other things, increase the commitment from $200.0 million to $300.0 million and generally reduce the interest payable. After the amendment, effective January 6, 2006, the revolving credit facility bore interest at either LIBOR plus 1.00% or prime rate minus 0.50%, and a 0.25% unused commitment fee, all of which are subject to quarterly grid pricing adjustments based on a fixed charge coverage ratio. The maturity of the facility was extended to January 6, 2011.

As of June 30, 2006, our long-term debt, including current maturities, totaled $260.1 million, consisting of $249.2 million principal amount of 6 ⁵/8% senior notes due 2016 and a $10.9 million loan from the proceeds of tax-exempt revenue bonds (supported by a $11.3 million letter of credit). Debt outstanding under the tax-exempt bonds bears interest at variable rates.

On January 13, 2006, we issued $250.0 million of 6⁵/8% aggregate principal amount of senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem our 8 ³/4% senior notes due 2011 and repay our term loan as follows:

•

On January 18, 2006, we repaid the entire $9.0 million outstanding under our term loan, plus accrued but unpaid interest.

•

On two redemption dates, February 8, 2006 and February 13, 2006, we redeemed the entire $247.0 million principal amount outstanding of our 8³/4% senior notes due 2011, and paid a make-whole premium of $22.2 million, plus accrued and unpaid interest.

As a result of the early redemption of the 8 ³/4% senior notes due 2011 and the repayment of the term loan, we recognized $25.9 million in non-operating expense in the first quarter of 2006 consisting of a pre-payment premium on the 8 ³/4 % senior notes of $22.2 million and a write-off of $3.7 million in previously capitalized debt issuance cost.

The 6⁵/8% senior notes are unsecured and were issued with an original issue discount of $0.8 million. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and the holders may require us to repurchase the notes upon a change of control. All domestic restricted subsidiaries that guarantee other debt of ours or of another guarantor of the senior notes in excess of $5 million are guarantors of the notes.

The agreements governing the 6 ⁵/8% senior notes and the revolving credit facility each contain customary covenants and events of default. Accordingly, these agreements impose significant operating and financial restrictions on us. These restrictions, among other things, provide limitations on incurrence of additional indebtedness, the payment of dividends, certain investments and acquisitions and sales of assets. These limitations are subject to a number of important qualifications and exceptions, including, without limitation, an exception for the payment of our regular quarterly dividend of up to $0.20 per share (currently $0.0275 per share). The 6 ⁵/8% senior notes indenture does not allow distributions, including dividends and certain other restricted payments unless, after giving pro forma effect to the distribution, our fixed charge coverage ratio is at least 2.0 and such payment, together with the aggregate amount of all other distributions after January 13, 2006, is less than the sum of 50% of our consolidated net income for the period from October 1, 2003 to the end of the most recent quarter for which financial statements have been filed, plus 100% of net cash proceeds received after October 1, 2003 as a contribution to our common equity capital or from the issuance or sale of certain securities, plus several other adjustments. The amount allowed under this restriction was $403.7 million at June 30, 2006. The revolving credit facility also restricts dividend payments unless, after giving effect to such payment, the availability under the line of credit equals or exceeds $60.0 million. None of the agreements require us to maintain specified financial ratios, except that the revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $60.0 million. In addition, the 6⁵/8% senior notes indenture and the revolving credit facility restrict our ability to create liens, to engage in certain affiliate transactions and to engage in sale-leaseback transactions.

Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our liquidity needs for the foreseeable future.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Certain of the statements contained in this report are forward-looking statements. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as:

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timing, size, scope, cost and other matters related to the project in the Republic of Trinidad and Tobago;

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anticipated future results of operations;

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industry outlook;

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production capacities;

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our ability to borrow additional funds under our credit facility;

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our ability to meet our liquidity needs;

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expected outcomes of legal and administrative proceedings and their expected effects on our financial position, results of operations and cash flows; and

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compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures and remedial actions.

We have based these statements on assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe were appropriate in the circumstances when the statements were made. These statements are subject to a number of assumptions, risks and uncertainties, including those described in “Risk Factors” in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the following:

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general economic and business conditions;

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timing, duration and impact of turnarounds;

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the cyclical nature of the chemical industry;

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the availability, cost and volatility of raw materials and energy;

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

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

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industry production capacity and operating rates;

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the supply/demand balance for our products;

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competitive products and pricing pressures;

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access to capital markets;

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terrorist acts;

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operating interruptions (including leaks, explosions, fires, natural disasters, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);

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changes in laws or regulations;

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technological developments;

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our ability to implement our business strategies; and

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creditworthiness of our customers.

Many of these factors are beyond our ability to control or predict. Any of the factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our 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. Every forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. Our strategies include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. We use derivative instruments in certain instances to reduce price volatility risk on feedstocks and products. Based on our open derivative positions at June 30, 2006, a hypothetical $1.00 increase in the price of a MMBTU of natural gas would have decreased our income before taxes by $2.1 million. Additional information concerning derivative commodity instruments appears in the consolidated financial information appearing elsewhere in this report.

Interest Rate Risk

We are exposed to interest rate risk with respect to fixed and variable rate debt. At June 30, 2006, we had variable rate debt of $10.9 million outstanding. All of the debt outstanding under our tax-exempt revenue bonds is at variable rates. We do not currently hedge our variable interest rate debt, but we may do so in the future. The average variable interest rate for our variable rate debt of $10.9 million as of June 30, 2006 was 4.08%. A hypothetical 100 basis point increase in the average interest rate on our variable rate debt would increase our annual interest expense by approximately $0.1 million. Also, at June 30, 2006, we had $249.2 million of fixed rate debt. We are subject to the risk of higher interest cost if and when this debt is refinanced. If interest rates are 1% higher at the time of refinancing, our annual interest expense would increase by approximately $2.5 million.

Item 4. Controls And Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. In the course of this evaluation, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, in all material respects, with respect to (i) the accumulation and communication to our management, including our Chief Executive Officer and our Chief Financial Officer, of information required to be disclosed by us in the reports that we submit under the Exchange Act, and (ii) the recording, processing, summarizing and reporting of such information, within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “2005 Form 10-K”), filed on February 23, 2006, contained a description of various legal proceedings in which we are involved, including environmental proceedings at our facilities in Calvert City, Kentucky. See Note 11 to Consolidated Financial Statements for an update of certain of those proceedings, which information is incorporated by reference herein.

Item 1A. Risk Factors

For a discussion of risk factors, please read Item 1A, “Risk Factors” in the 2005 Form 10-K.

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s 2006 annual meeting of stockholders was held on May 15, 2006. Two matters were voted upon by the Company’s stockholders at such meeting: (1) two members of the board of directors were re-elected and (2) the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006 was ratified. The following tabulation sets forth the number of votes cast for, against or withheld and the number of broker non-votes.


Election of Directors	Votes For	Votes Withheld
James Chao	61,469,289	2,577,031
Dr. Gilbert R. Whitaker, Jr.	63,759,890	286,430


Ratification of	Votes For	Votes Against	Votes to Abstain	Broker Non-Votes
PricewaterhouseCoopers LLP	64,031,626	14,254	440	0

Item 6. Exhibits


Exhibit No.		Exhibit

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

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

32.1		Section 1350 Certification (Principal Executive Officer and Principal Financial Officer).

SIGNATURES

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.


	WESTLAKE CHEMICAL CORPORATION

Date: August 4, 2006	By:	/s/ Albert Chao
		Albert Chao President and Chief Executive Officer (Principal Executive Officer)

Date: August 4, 2006	By:	/s/ John D. Gibbons
		John D. Gibbons Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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Westlake (WLK) 10-Q2006 Q2 Quarterly report

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