Lyondell Chemical (LYO) 10-Q 2005 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, 2005

OR

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

For the transition period from            to            

Commission file number 1-10145

LYONDELL CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware	95-4160558
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1221 McKinney Street, Suite 700, Houston, Texas	77010
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange

Act).     Yes  x     No  ¨

Number of shares of common stock outstanding as of June 30, 2005: 246,701,428

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars, except per share data	2005			2004			2005			2004
Sales and other operating revenues:
Trade	$	4,009		$	1,137		$	8,043		$	2,230
Related parties		373			24			785			36
		4,382			1,161			8,828			2,266
Operating costs and expenses:
Cost of sales		3,879			1,084			7,663			2,113
Selling, general and administrative expenses		133			49			262			94
Research and development expenses		22			8			45			16
		4,034			1,141			7,970			2,223
Operating income		348			20			858			43
Interest expense		(165	)		(111	)		(334	)		(222	)
Interest income		10			3			21			5
Other expense, net		(14	)		(3	)		(37	)		(4	)
Income (loss) before equity investments and income taxes		179			(91	)		508			(178	)
Income from equity investments:
LYONDELL-CITGO Refining LP		19			63			86			119
Equistar Chemicals, LP		—			33			—			39
Other		(1	)		1			—			2
		18			97			86			160
Income (loss) before income taxes		197			6			594			(18	)
Provision for (benefit from) income taxes		71			3			214			(6	)
Net income (loss)	$	126		$	3		$	380		$	(12	)
Earnings (loss) per share:
Basic	$	0.51		$	0.02		$	1.55		$	(0.07	)
Diluted	$	0.48		$	0.02		$	1.46		$	(0.07	)

See Notes to the Consolidated Financial Statements.

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LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

Millions, except shares and par value data	June 30, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	713		$	804
Accounts receivable:
Trade, net		1,551			1,437
Related parties		113			132
Inventories		1,761			1,619
Prepaid expenses and other current assets		142			189
Deferred tax assets		237			276
Total current assets		4,517			4,457
Property, plant and equipment, net		6,875			7,215
Investments and long-term receivables:
Investment in PO joint ventures		791			838
Investment in and receivable from LYONDELL-CITGO Refining LP		188			192
Other investments and long-term receivables		163			160
Goodwill, net		2,181			2,175
Other assets, net		878			924
Total assets	$	15,593		$	15,961
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	1,183		$	1,083
Related parties		93			119
Current maturities of long-term debt		256			308
Accrued liabilities		673			785
Total current liabilities		2,205			2,295
Long-term debt		7,052			7,555
Other liabilities		1,779			1,780
Deferred income taxes		1,553			1,477
Commitments and contingencies
Minority interest		179			181
Stockholders’ equity:
Common stock, $1.00 par value, 420,000,000 shares authorized, 247,527,579 and 244,541,913 shares issued, respectively		248			245
Additional paid-in capital		3,056			3,000
Retained deficit		(331	)		(600	)
Accumulated other comprehensive income (loss)		(121	)		56
Treasury stock, at cost, 826,151 and 856,915 shares, respectively		(27	)		(28	)
Total stockholders’ equity		2,825			2,673
Total liabilities and stockholders’ equity	$	15,593		$	15,961

See Notes to the Consolidated Financial Statements.

2

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended June 30,
Millions of dollars	2005			2004
Cash flows from operating activities:
Net income (loss)	$	380		$	(12	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		363			127
Income from equity investments		(86	)		(160	)
Distributions of earnings from affiliates		86			120
Deferred income taxes		161			(8	)
Debt prepayment premiums and charges		21			—
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(150	)		(56	)
Inventories		(177	)		17
Accounts payable		128			50
Other, net		(75	)		—
Net cash provided by operating activities		651			78
Cash flows from investing activities:
Expenditures for property, plant and equipment		(120	)		(27	)
Distributions from affiliates in excess of earnings		51			48
Contributions and advances to affiliates		(51	)		(22	)
Other		3			—
Net cash used in investing activities		(117	)		(1	)
Cash flows from financing activities:
Repayment of long-term debt		(547	)		—
Dividends paid		(111	)		(63	)
Proceeds from stock option exercises		43			5
Other		(1	)		(1	)
Net cash used in financing activities		(616	)		(59	)
Effect of exchange rate changes on cash		(9	)		(1	)
(Decrease) increase in cash and cash equivalents		(91	)		17
Cash and cash equivalents at beginning of period		804			438
Cash and cash equivalents at end of period	$	713		$	455

See Notes to the Consolidated Financial Statements.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

1.	Basis of Preparation	5
2.	Description of the Company	5
3.	Acquisition of Millennium Chemicals Inc.	5
4.	Accounting Changes	6
5.	Investment in PO Joint Ventures	7
6.	Equity Interest in Equistar Chemicals, LP	7
7.	Equity Interest in LYONDELL-CITGO Refining LP	8
8.	Accounts Receivable	9
9.	Inventories	10
10.	Property, Plant and Equipment and Goodwill	10
11.	Long-Term Debt	12
12.	Pension and Other Postretirement Benefits	13
13.	Commitments and Contingencies	14
14.	Per Share Data	18
15.	Comprehensive Income	19
16.	Segment and Related Information	19
17.	Supplemental Guarantor Information	21

4

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company and its subsidiaries in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and notes thereto included in the Lyondell Chemical Company Annual Report on Form 10-K for the year ended December 31, 2004.

2. Description of the Company

Lyondell Chemical Company (“LCC”), together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), is a global chemical company that manufactures and markets a variety of basic chemicals and gasoline blending components. As a result of Lyondell’s acquisition of Millennium Chemicals Inc. (“Millennium”) and Lyondell’s resulting 100% ownership of Millennium and Equistar Chemicals, LP (“Equistar”), the operations of Millennium and Equistar are consolidated prospectively from December 1, 2004 (see Note 3). Prior to December 1, 2004, Lyondell accounted for its investment in Equistar using the equity method of accounting (see Note 6).

3. Acquisition of Millennium Chemicals Inc.

On November 30, 2004, Lyondell completed the acquisition of Millennium in a stock-for-stock business combination intended, among other things, to broaden the Company’s product base and to consolidate ownership of Equistar. In the acquisition, Lyondell issued 63.1 million shares of Lyondell common stock to Millennium’s shareholders, and Millennium became a wholly owned subsidiary of Lyondell. Millennium owns a 29.5% interest in Equistar which, upon completion of the acquisition, also became a wholly owned subsidiary of Lyondell.

The aggregate purchase price was $1,469 million, including the 63.1 million shares of Lyondell common stock valued at $1,438 million, payment of transaction costs of $20 million and the fair value of employee stock options of approximately $11 million.

The unaudited pro forma combined historical results of Lyondell, Millennium and Equistar for the three- and six-month periods ended June 30, 2004, giving effect to the acquisition assuming the transaction was consummated as of the beginning of 2004 are as follows:

Millions of dollars, except per share data	For the three months ended June 30, 2004			For the six months ended June 30, 2004
Sales and other operating revenues	$	3,540		$	6,885
Net loss		(6	)		(32	)
Basic and diluted loss per share		(0.02	)		(0.13	)

The unaudited pro forma data presented above are not necessarily indicative of the results of operations of Lyondell that would have occurred had such transaction actually been consummated as of the beginning of 2004, nor are they necessarily indicative of future results of operations.

5

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The purchase price of $1,469 million was allocated to the assets acquired and liabilities assumed based upon the estimated fair values of such assets and liabilities at the date of acquisition. The purchase price allocations used in the preparation of the December 31, 2004 and June 30, 2005 financial statements are preliminary due to the continuing analyses relating to the determination of the fair values of the assets acquired and liabilities assumed. Based upon additional information received to date, the fair values of the assets acquired and liabilities assumed were adjusted during the six-month period ended June 30, 2005. The adjustments and their effect on goodwill for the six month period, which were not material, are summarized in Note 10.

Any further changes to the fair values of net assets acquired would result in additional adjustment to the fair value of the assets acquired and liabilities assumed and corresponding adjustment to goodwill. Management does not expect the finalization of these matters to have a material effect on the allocation. No goodwill that would be deductible for income tax purposes was created by the acquisition.

4. Accounting Changes

In the first quarter 2003, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation using the prospective transition method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Accordingly, no compensation expense was recognized in connection with stock options granted prior to 2003. Pro forma compensation expense related to stock options was less than $1 million for each of the three month periods ended June 30, 2005 and 2004 and was $1 million and $2 million, respectively, for the six month periods ended June 30, 2005 and 2004.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004),Share-Based Payment. The primary focus of this Statement is accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as by the granting of stock options. Lyondell will be required to apply the provisions of SFAS No. 123 (revised 2004) in the first quarter 2006. Upon adoption, a provision of SFAS No. 123 (revised 2004) will require Lyondell to use a non-substantive vesting period approach for share-based payment transactions that vest when an employee becomes retirement eligible. The effect will be to accelerate expense recognition compared to the nominal vesting period approach that Lyondell currently uses. Assuming the non-substantive vesting period approach had been used, compensation expense related to share-based payments would have decreased $2 million and $1 million for the three-month periods ended June 30, 2005 and 2004, respectively, and increased $4 million in each of the six-month periods ended June 30, 2005 and 2004. Other provisions of SFAS No. 123 (revised 2004) may affect the computation and resulting fair value of Lyondell’s share-based payment transactions with employees. Lyondell is evaluating these impacts of adopting SFAS No. 123 (revised 2004) on its financial statements.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29,Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets, which is replaced with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange is defined to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Lyondell will be required to adopt SFAS No. 153 no later than the third quarter 2005 with prospective application. Lyondell does not expect application of SFAS No. 153 to have a material impact on its financial statements.

6

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations, which clarifies the termconditional asset retirement obligationas used in SFAS No. 143,Accounting for Conditional Asset Retirement Obligations, as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of Lyondell. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Lyondell is currently evaluating the impact of adopting this interpretation.

5. Investment in PO Joint Ventures

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

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

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

Millions of dollars	U.S. PO Joint Venture			European PO Joint Venture			Total PO Joint Ventures
Investment in PO joint ventures – January 1, 2004	$	570		$	296		$	866
Cash contributions		2			2			4
Depreciation and amortization		(16	)		(6	)		(22	)
Effect of exchange rate changes		—			(17	)		(17	)
Investment in PO joint ventures – June 30, 2004	$	556		$	275		$	831
Investment in PO joint ventures – January 1, 2005	$	541		$	297		$	838
Cash contributions		4			3			7
Depreciation and amortization		(16	)		(7	)		(23	)
Effect of exchange rate changes		—			(31	)		(31	)
Investment in PO joint ventures – June 30, 2005	$	529		$	262		$	791

6. Equity Interest in Equistar Chemicals, LP

As a result of Lyondell’s acquisition of Millennium and Lyondell’s resulting 100% ownership of Equistar, the operations of Equistar are consolidated prospectively from December 1, 2004 (see also Notes 2 and 3). Prior to December 1, 2004, Lyondell accounted for its 70.5% interest in Equistar using the equity method of accounting, because of Lyondell’s and Millennium’s joint control of certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership. As a partnership, Equistar is not subject to federal income taxes.

7

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information for Equistar follows for the relevant periods prior to December 1, 2004.

Millions of dollars	For the three months ended June 30, 2004			For the six months ended June 30, 2004
STATEMENT OF INCOME
Sales and other operating revenues	$	2,099		$	4,061
Cost of sales		1,951			3,808
Selling, general and administrative expenses		41			82
Research and development expenses		8			15
Gain on asset dispositions		—			(4	)
Operating income		99			160
Interest expense, net		(55	)		(110	)
Other expense, net		(1	)		(2	)
Net income	$	43		$	48

Lyondell’s income from its investment in Equistar prior to December 1, 2004 consisted of Lyondell’s share of Equistar’s income and accretion of Lyondell’s investment in Equistar up to its underlying equity in Equistar’s net assets.

7. Equity Interest in LYONDELL-CITGO Refining LP

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

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

Millions of dollars	June 30, 2005			December 31, 2004
Investment in LCR	$	(41	)	$	(37	)
Receivable from LCR		229			229
Investment in and receivable from LCR	$	188		$	192

8

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information for LCR follows:

Millions of dollars	June 30, 2005		December 31, 2004
BALANCE SHEETS
Total current assets	$	396	$	359
Property, plant and equipment, net		1,269		1,227
Other assets		88		61
Total assets	$	1,753	$	1,647
Current liabilities	$	640	$	588
Long-term debt		441		443
Loans payable to partners		264		264
Other liabilities		114		112
Partners’ capital		294		240
Total liabilities and partners’ capital	$	1,753	$	1,647

	For the three months ended June 30,						For the six months ended June 30,
	2005			2004			2005			2004
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,563		$	1,339		$	3,099		$	2,493
Cost of sales		1,515			1,213			2,921			2,250
Selling, general and administrative expenses		11			15			23			31
Operating income		37			111			155			212
Interest expense, net		(9	)		(8	)		(17	)		(18	)
Net income	$	28		$	103		$	138		$	194
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization	$	28		$	28		$	56		$	58
Expenditures for property, plant and equipment		49			14			83			29

Lyondell’s income from its investment in LCR consists of Lyondell’s share of LCR’s net income and accretion of Lyondell’s investment in LCR up to its underlying equity in LCR’s net assets. At June 30, 2005, Lyondell’s underlying equity in LCR’s net assets exceeded its investment in LCR by approximately $252 million. This difference will be recognized in income over the next 23 years.

8. Accounts Receivable

Lyondell has two four-year, accounts receivable sales facilities of $150 million and $450 million, relating to LCC and Equistar, respectively. Pursuant to these facilities, Lyondell sells, through two wholly owned bankruptcy remote subsidiaries, on an ongoing basis and without recourse, an interest in pools of domestic accounts receivable to financial institutions participating in the facilities. Lyondell is responsible for servicing the receivables. The outstanding amounts of receivables sold under the facilities were $75 million and $275 million as of June 30, 2005 and December 31, 2004, respectively.

9

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in June 2005 that otherwise would have been expected to be collected in July 2005. This included collections of $46 million in June 2005, related to Equistar receivables, from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).

9. Inventories

Inventories consisted of the following components:

Millions of dollars	June 30, 2005		December 31, 2004
Finished goods	$	1,092	$	1,014
Work-in-process		110		108
Raw materials		333		290
Materials and supplies		226		207
Total inventories	$	1,761	$	1,619

10. Property, Plant and Equipment and Goodwill

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

Millions of dollars	June 30, 2005			December 31, 2004
Land	$	189		$	190
Manufacturing facilities and equipment		9,036			9,224
Construction in progress		201			187
Total property, plant and equipment		9,426			9,601
Less accumulated depreciation		(2,551	)		(2,386	)
Property, plant and equipment, net	$	6,875		$	7,215

Depreciation and amortization is summarized as follows:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2005		2004		2005		2004
Property, plant and equipment	$	137	$	43	$	270	$	87
Investment in PO joint ventures		12		10		23		22
Turnaround costs		13		3		27		6
Software costs		9		3		19		5
Other		14		5		24		7
Total depreciation and amortization	$	185	$	64	$	363	$	127

The increases in depreciation and amortization in the three- and six-month periods ended June 30, 2005 primarily reflect the consolidation of Millennium and Equistar prospectively from December 1, 2004.

10

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the changes to Lyondell’s goodwill during the six months ended June 30, 2005 by reportable segment. Lyondell’s reportable segments include ethylene, co-products and derivatives (“EC&D”), propylene oxide and related products (“PO&RP”), and inorganic chemicals (see Note 16). The refining segment consists of Lyondell’s equity investment in LCR (see Note 7).

Millions of dollars	EC&D			PO&RP			Inorganic Chemicals		Total
Goodwill at January 1, 2005	$	270		$	1,080		$	825	$	2,175
Adjustments to preliminary purchase price allocation related to November 30, 2004 acquisition of Millennium		(3	)		—			18		15
Settlement of income tax issues related to 1998 acquisition of ARCO Chemical Company		—			(9	)		—		(9	)
Goodwill at June 30, 2005	$	267		$	1,071		$	843	$	2,181

11

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Long-Term Debt

Lyondell’s long-term debt includes credit facilities and debt obligations maintained by Lyondell’s wholly owned subsidiaries, Equistar and Millennium. LCC has not guaranteed the subsidiaries’ credit facilities or debt obligations, except for $300 million of Equistar debt, consisting of the 6.5% Notes due 2006 and the 7.55% Debentures due 2026.

Long-term debt consisted of the following:

Millions of dollars	June 30, 2005			December 31, 2004
Bank credit facilities:
LCC $475 million senior secured revolving credit facility	$	—		$	—
Equistar $250 million inventory-based revolving credit facility		—			—
Millennium $150 million revolving credit facility		—			—
LCC notes and debentures:
Senior Secured Notes, Series A due 2007, 9.625%		900			900
Senior Secured Notes, Series B due 2007, 9.875%		200			700
Senior Secured Notes due 2008, 9.5%		730			730
Senior Secured Notes due 2012, 11.125%		278			278
Senior Secured Notes due 2013, 10.5%		325			325
Senior Subordinated Notes due 2009, 10.875%		500			500
Debentures due 2005, 9.375%		100			100
Debentures due 2010, 10.25%		100			100
Debentures due 2020, 9.8%		225			225
Equistar notes and debentures:
Notes due 2006, 6.5%		150			150
Senior Notes due 2008, 10.125%		700			700
Notes due 2009, 8.75%		600			600
Senior Notes due 2011, 10.625%		700			700
Debentures due 2026, 7.55%		150			150
Millennium notes and debentures:
Senior Notes due 2006, 7.0%		476			500
Senior Debentures due 2026, 7.625%		250			250
Senior Notes due 2008, 9.25%		471			471
Convertible Senior Debentures due 2023, 4.0%		150			150
Other debt		29			32
Unamortized premium, net		274			302
Total		7,308			7,863
Less current maturities		(256	)		(308	)
Long-term debt	$	7,052		$	7,555

12

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the first six months of 2005, LCC repaid $500 million of the 9.875% Senior Secured Notes Series B, together with $17 million in prepayment premiums. In May 2005, Millennium obtained an amendment to its credit facility to allow for the unrestricted repurchase of indebtedness in the form of bonds, debentures, notes or similar instruments. During the first six months of 2005, Millennium purchased $24 million of the 7% Senior Notes due 2006 and less than $1 million of the 9.25% Senior Notes due 2008. In July 2005, LCC called the remaining $200 million of the 9.875% Senior Secured Notes Series B, at the call price of 102.469 percent of par. The debt is expected to be paid in late August 2005. Also in July 2005, Millennium purchased $27 million of the 7% Senior Notes and $1 million of the 9.25% Senior Notes.

Current maturities of long-term debt at June 30, 2005 included $100 million of LCC’s 9.375% Debentures due 2005, $150 million of Equistar’s 6.5% Notes due 2006 and other debt of $6 million. At December 31, 2004, current maturities included $200 million of LCC’s 9.875% Senior Secured Notes due 2007, which were called in December 2004, $100 million of LCC’s 9.375% Debentures due 2005 and other debt of $8 million.

Amortization of debt premiums, including adjustments to fair values included in accounting for the acquisition of Millennium, and debt issuance costs resulted in a net credit of $8 million and $17 million for the three- and six-month periods ended June 30, 2005, respectively, and a charge of $4 million and $8 million for the three- and six-month periods ended June 30, 2004, respectively, that were included in interest expense in the Consolidated Statements of Income.

12. Pension and Other Postretirement Benefits

Net periodic pension benefit costs included the following components:

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

	For the three months ended June 30, 2004						For the six months ended June 30, 2004
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Net periodic pension benefit cost:
Service cost	$	3		$	3		$	7		$	5
Interest cost		7			3			15			5
Recognized return on plan assets		(3	)		(3	)		(8	)		(5	)
Actuarial and investment loss amortization		4			1			9			2
Net periodic pension benefit cost	$	11		$	4		$	23		$	7

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net periodic other postretirement benefit costs, which were entirely incurred in the U.S., included the following components:

	For the three months ended June 30,				For the six months ended June 30,
Millions of dollars	2005		2004		2005		2004
Components of net periodic benefit cost:
Service cost	$	2	$	—	$	3	$	1
Interest cost		3		2		6		3
Net periodic benefit cost	$	5	$	2	$	9	$	4

The increases in pension and other postretirement benefit costs in the three- and six-month periods ended June 30, 2005 primarily reflect the consolidation of Millennium and Equistar prospectively from December 1, 2004.

13. Commitments and Contingencies

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

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

From time to time, Lyondell and PDVSA have had discussions covering both a restructuring of the CSA and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. If the CSA is modified or terminated or this source of crude oil is otherwise interrupted, due to production difficulties, political or economic events in Venezuela or other factors, LCR could experience significantly lower earnings and cash flows. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. If neither CITGO, PDVSA Oil nor their affiliates were a partner in LCR, PDVSA Oil would have an option to terminate the CSA. Depending on then-current market conditions, any breach or termination of the CSA, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. Alternative crude oil supplies with similar margins may not be available for purchase by LCR.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Leased Facility—As a result of its consolidation of Equistar, Lyondell has an ethylene facility in Lake Charles, Louisiana, which has been idled since the first quarter of 2001, pending sustained improvement in market conditions. The facility and land, which are included in property, plant and equipment at a net book value of $141 million, are leased from Occidental. In May 2003, Equistar and Occidental entered into a new one-year lease, which has renewal provisions for two additional one-year periods at either party’s option. Equistar exercised the second one-year renewal option in April 2005.

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

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

As of June 30, 2005, the probable liability associated with the river cannot be determined with certainty. A liability of $42 million has been recognized as of June 30, 2005, primarily representing Millennium’s interim allocation of 55% of the $73 million estimated cost of bank stabilization, recommended as the preferred remedy in 2000 by the KRSG. Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome.

In addition, Lyondell has recognized a liability of $38 million as of June 30, 2005, primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

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

Lyondell’s accrued environmental liability for future remediation costs at all current and former plant sites and Superfund sites totaled $147 million as of December 31, 2004 and $143 million as of June 30, 2005. The liabilities for individual sites range from $1 million to $80 million and are expected to be incurred over a number of years, and not to be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Clean Air Act—Under the Clean Air Act, the eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the EPA under a “one-hour” ozone standard. Emission reduction controls for nitrogen oxides (“NOx”) must be installed at LCR’s refinery and each of Lyondell’s ten facilities in the Houston/Galveston region prior to the November 2007 compliance deadline for the one-hour ozone standard.

In addition, in December 2004, the regulatory agency for the state of Texas, the Texas Commission on Environmental Quality (“TCEQ”) finalized controls over highly reactive, volatile organic compounds (“HRVOCs”). Lyondell and LCR are still assessing the impact of the HRVOC revisions. In addition, in April 2004, the EPA designated the eight-county Houston/Galveston region a moderate non-attainment area under an “eight-hour” ozone standard. As a result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010. Although the one-hour ozone standard expired in June 2005, the controls under that standard will not be relaxed under the EPA’s new eight-hour transition rules. As a result, Lyondell and LCR still will be required to meet the one-hour emission standards for NOx and HRVOCs. The timing and amount of the estimated expenditures are subject to regulatory and other uncertainties, as well as to obtaining the necessary permits and approvals. The ultimate cost of implementing any plan developed to comply with the final ozone standards cannot be estimated at this time.

The Clean Air Act also specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and required refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel fuel to produce 80% as ultra low sulfur diesel (“ULSD”) by June 2006 and 100% by the end of 2009, with less stringent standards for “off road” diesel fuel. These gasoline and diesel fuel standards will result in increased capital investment for LCR. In addition, these standards could result in higher operating costs for LCR. Lyondell’s business may also be impacted if these standards increase the cost for processing fuel components.

Lyondell currently estimates that environmentally related capital expenditures at its facilities, including Equistar and Millennium facilities, will be approximately $120 million for 2005 and $108 million for 2006, including estimated expenditures related to emission control standards for NOx and HRVOCs, as described above, and a wastewater management project. Capital spending to comply with environmental regulations at LCR’s facilities (on a 100% basis) is estimated to be approximately $96 million in 2005 and $129 million in 2006. The expected increase in environmental spending at LCR’s facilities reflects spending for low sulfur fuels regulations, as well as emission reductions.

The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl (“MTBE”), in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. In July 2005, the U.S. Congress passed the Energy Policy Act of 2005 and the President has announced that he will sign it on August 8, 2005. This Act does not ban the use of MTBE; however, it does eliminate the oxygenate standard for reformulated fuels, effective 270 days from the date of the Act. In addition, the Act contains a renewable fuel standard that mandates the use of ethanol in gasoline.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At the state level, a number of mid-West states that use ethanol as the oxygenate of choice have legislated MTBE bans. Bans in these states should not impact MTBE demand. However, Connecticut, California and New York banned MTBE, effective January 1, 2004, which started to negatively affect MTBE demand during late 2003. In addition, beginning in 2003 several major oil companies substantially reduced or discontinued the use of MTBE in gasoline produced for California markets, negatively affecting 2003 demand. Lyondell estimates that, in 2003, California, Connecticut and New York combined represented approximately one-fourth of U.S. MTBE industry demand.

At this time, Lyondell cannot predict the full impact that the U.S. federal legislation and state governmental initiatives and state bans will have on MTBE margins or volumes longer term. Lyondell’s North American MTBE sales represented approximately 6% of its total revenues for the six months ended June 30, 2005. Lyondell intends to continue marketing MTBE in the U.S., as well as outside of the U.S. However, should it become necessary or desirable to significantly reduce MTBE production, Lyondell has or will have the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene (also known as “di-isobutylene”) or ethyl tertiary butyl ether (“ETBE”). Lyondell is installing equipment at its Channelview, Texas facility that will provide Lyondell with the flexibility to produce di-isobutylene or MTBE at that facility, and this flexibility will be in place in 2006.The current estimated cost of converting this facility to di-isobutylene production is less than $20 million. In addition, Lyondell’s U.S.-based and European-based MTBE plants can produce ETBE and Lyondell has produced and sold ETBE in Europe to address Europe’s growing demand for biofuels. A key hurdle to ETBE viability in the U.S. was equal access to the U.S. federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE, which was addressed in tax legislation enacted in 2004. Lyondell is currently evaluating the tax legislation relative to ETBE, as well as the di-isobutylene alternative, which will be influenced by further regulatory and market developments. The profit contribution related to alternative gasoline blending components is likely to be lower than that historically realized on MTBE.

Litigation—On April 8, 2005, Lyondell filed a lawsuit against BASF Corporation (“BASF”) seeking declaratory judgment to resolve a commercial dispute regarding the interpretation of various provisions of a propylene oxide sales contract. On April 12, 2005, BASF filed a lawsuit against Lyondell asserting various claims relating to alleged breaches of the same propylene oxide sales contract and seeking damages in excess of $100 million. Management believes that it has valid defenses to all claims and is vigorously defending them. The parties have engaged in negotiations to resolve the claims without success to date. Management does not expect the resolution of the claims to result in any material adverse effect on financial condition, liquidity or results of operations of Lyondell.

Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging that Millennium and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. The plaintiffs in these legal proceedings include municipalities, counties, school districts, individuals and the State of Rhode Island, and seek recovery under a variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud, misrepresentation and nuisance. The majority of these legal proceedings assert unspecified monetary damages in excess of the statutory minimum and, in certain cases, contain general language requesting equitable relief from defendants such as abatement of lead-based paint in buildings. Legal proceedings relating to lead pigment or paint are in various procedural stages of pre-trial, post-trial and post-dismissal settings.

Millennium’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. Millennium has not accrued any liabilities for any lead-based paint and lead pigment litigation. Millennium has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. Millennium’s ability to collect under the indemnity coverage would depend upon the timing of any request for indemnity and the solvency of the various insurance carriers that are part of the coverage block at the time of such a request. As a result of insurance coverage litigation initiated by Millennium, an Ohio trial court issued a decision in 2002 effectively requiring certain insurance carriers to resume paying defense

17

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

costs in the lead-based paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio court’s decision. The insurance carriers may appeal the Ohio decision regarding defense costs, and they have in the past and may in the future attempt to deny indemnity coverage if there is ever a settlement or an adverse judgment in any lead-based paint or lead pigment case.

Indemnification—Lyondell, its subsidiaries and its joint ventures are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. For example, Lyondell entered into indemnification arrangements in connection with the transfer of assets and liabilities from Atlantic Richfield Company to Lyondell prior to Lyondell’s initial public offering, in connection with Lyondell’s acquisition of the outstanding shares of ARCO Chemical Company and in connection with the formation of LCR; Equistar and its owner companies (including Lyondell and Millennium) entered into indemnification arrangements in connection with the formation of Equistar; and Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc. Pursuant to these arrangements, Lyondell, its subsidiaries and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of June 30, 2005, Lyondell has not accrued any significant amounts for such indemnification obligations, other than amounts under tax sharing agreements that have been reflected in the provision for income taxes, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Lyondell. Lyondell cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

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

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

14. Per Share Data

Basic earnings (loss) per share for the periods presented is computed based upon the weighted average number of shares of common stock and Series B common stock outstanding during the periods. Diluted earnings (loss) per share also include the effect of outstanding stock options and warrants and restricted stock. Additionally, diluted earnings per share for the three and six months ended June 30, 2005 include the effect of the 4.0% Millennium Convertible Debentures that are convertible into Lyondell common stock. Computation of fully-diluted earnings per share for the three and six months ended June 30, 2005 reflected the assumed conversion of Millennium’s 4.0% Convertible Debentures, including the related reduction of net income by less than $1 million in each period. The reduction of net income reflected the net after-tax effect of related interest expense, including amortization of the adjustment of the Convertible Debentures to fair value in accounting for the acquisition of Millennium. Outstanding stock options, warrants and restricted stock had no effect on the calculation of diluted earnings (loss) per share for the six months ended June 30, 2004.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	For the three months ended June 30,				For the six months ended June 30,
	2005		2004		2005		2004
Weighted average shares, in millions:
Basic		245.9		177.1		245.2		176.8
Diluted		259.0		177.8		259.4		176.8
Earnings (loss) per share:
Basic	$	0.51	$	0.02	$	1.55	$	(0.07	)
Diluted		0.48		0.02		1.46		(0.07	)
Dividends declared per share of common stock	$	0.225	$	0.225	$	0.45	$	0.45

15. Comprehensive Income

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

	For the three months ended June 30,						For the six months ended June 30,
Millions of dollars	2005			2004			2005			2004
Net income (loss)	$	126		$	3		$	380		$	(12	)
Other comprehensive loss:
Foreign currency translation loss		(64	)		(6	)		(176	)		(42	)
Derivative instruments		—			—			(2	)		(2	)
Other		1			—			1			—
Total other comprehensive loss		(63	)		(6	)		(177	)		(44	)
Comprehensive income (loss)	$	63		$	(3	)	$	203		$	(56	)

16. Segment and Related Information

Lyondell has four reportable segments:

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

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

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

• Refining.

The inorganic chemicals segment resulted from the acquisition of Millennium on November 30, 2004. With the acquisition of Millennium, Equistar also became a consolidated subsidiary. Results of Equistar operations, in the EC&D segment, prior to December 2004 reflect Lyondell’s previous equity investment in Equistar (see Note 6).

The refining segment consists of Lyondell’s equity investment in LCR (see Note 7).

19

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Millions of dollars	EC&D		PO&RP			Inorganic Chemicals		Refining		Other			Total
For the three months ended June 30, 2005:
Sales and other operating revenues:
Customer	$	2,517	$	1,499		$	342	$	—	$	24		$	4,382
Intersegment		332		63			—		—		(395	)		—
		2,849		1,562			342		—		(371	)		4,382
Operating income (loss)		201		134			16		—		(3	)		348
Income (loss) from equity investments		—		(1	)		—		19		—			18
For the three months ended June 30, 2004:
Sales and other operating revenues	$	—	$	1,161		$	—	$	—	$	—		$	1,161
Operating income		—		20			—		—		—			20
Income from equity investments		33		1			—		63		—			97
For the six months ended June 30, 2005:
Sales and other operating revenues:
Customer	$	5,156	$	2,966		$	660	$	—	$	46		$	8,828
Intersegment		667		125			—		—		(792	)		—
		5,823		3,091			660		—		(746	)		8,828
Operating income (loss)		596		230			37		—		(5	)		858
Income from equity investments		—		—			—		86		—			86
For the six months ended June 30, 2004:
Sales and other operating revenues	$	—	$	2,266		$	—	$	—	$	—		$	2,266
Operating income		—		43			—		—		—			43
Income from equity investments		39		2			—		119		—			160

20

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Supplemental Guarantor Information

Lyondell Chemical Technology Inc. (“LCTI”), formerly known as ARCO Technology Inc., Lyondell Chemical Technology L.P. (“LCTLP”), formerly known as ARCO Chemical Technology L.P., and Lyondell Chemical Nederland, Ltd. (“LCNL”) are guarantors (collectively “Guarantors”), jointly and severally, of the following (see Note 11):

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

• Senior Secured Notes, Series B due 2007, 9.875%

• Senior Secured Notes due 2008, 9.5%

• Senior Secured Notes due 2012, 11.125%

• Senior Secured Notes due 2013, 10.5%, and

• Senior Subordinated Notes due 2009, 10.875%.

LCNL, a Delaware corporation, owns a Dutch subsidiary that operates chemical production facilities near Rotterdam, The Netherlands. LCTI is a Delaware corporation, which holds the investment in LCTLP. LCTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. The Guarantors are all 100% owned subsidiaries of Lyondell. The guarantees are joint and several and full and unconditional.

Equistar is the issuer (the “Subsidiary Issuer”) of 6.5% Notes due 2006 and 7.55% Debentures due 2026, which are guaranteed by LCC. As a result of Lyondell’s November 30, 2004 acquisition of Millennium, Equistar became a wholly owned subsidiary of Lyondell.

The following condensed consolidating financial information present supplemental information for the Guarantors and the Subsidiary Issuer as of June 30, 2005 and December 31, 2004 and for the three- month and six-month periods ended June 30, 2005 and 2004.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of June 30, 2005

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors			Eliminations			Consolidated
Total current assets	$	899	$	231	$	1,660	$	1,866		$	(139	)	$	4,517
Property, plant and equipment, net		765		784		3,107		2,219			—			6,875
Investments and long-term receivables		7,013		260		67		733			(6,931	)		1,142
Goodwill, net		713		349		—		1,119			—			2,181
Other assets		256		75		339		208			—			878
Total assets	$	9,646	$	1,699	$	5,173	$	6,145		$	(7,070	)	$	15,593
Current maturities of long-term debt	$	100	$	—	$	150	$	6		$	—		$	256
Other current liabilities		435		157		897		508			(48	)		1,949
Long-term debt		3,251		—		2,161		1,639			1			7,052
Other liabilities		629		43		407		700			—			1,779
Deferred income taxes		908		151		—		492			2			1,553
Intercompany liabilities (assets)		1,498		21		—		(1,061	)		(458	)		—
Minority interest		—		29		1		178			(29	)		179
Stockholders’ equity		2,825		1,298		1,557		3,683			(6,538	)		2,825
Total liabilities and stockholders’ equity	$	9,646	$	1,699	$	5,173	$	6,145		$	(7,070	)	$	15,593

BALANCE SHEET

As of December 31, 2004

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors			Eliminations			Consolidated
Total current assets	$	1,030	$	292	$	1,490	$	1,787		$	(142	)	$	4,457
Property, plant and equipment, net		778		898		3,167		2,372			—			7,215
Investments and long-term receivables		6,903		295		63		765			(6,836	)		1,190
Goodwill, net		722		349		—		1,104			—			2,175
Other assets		278		77		354		215			—			924
Total assets	$	9,711	$	1,911	$	5,074	$	6,243		$	(6,978	)	$	15,961
Current maturities of long-term debt	$	300	$	—	$	1	$	7		$	—		$	308
Other current liabilities		498		188		805		536			(40	)		1,987
Long-term debt		3,551		—		2,312		1,692			—			7,555
Other liabilities		634		50		394		702			—			1,780
Deferred income taxes		792		163		—		519			3			1,477
Intercompany liabilities (assets)		1,263		221		—		(1,473	)		(11	)		—
Minority interest		—		26		1		180			(26	)		181
Stockholders’ equity		2,673		1,263		1,561		4,080			(6,904	)		2,673
Total liabilities and stockholders’ equity	$	9,711	$	1,911	$	5,074	$	6,243		$	(6,978	)	$	15,961

22

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the Three Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors		Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	979		$	449	$	2,700		$	804		$	(550	)	$	4,382
Cost of sales		840			389		2,447			753			(550	)		3,879
Selling, general and administrative expenses		36			6		47			44			—			133
Research and development expenses		8			—		9			5			—			22
Operating income		95			54		197			2			—			348
Interest income (expense), net		(92	)		—		(54	)		(9	)		—			(155	)
Other income (expense), net		(31	)		6		(1	)		12			—			(14	)
Income (loss) from equity investments		215			45		—			(26	)		(216	)		18
Intercompany income (expense)		(33	)		18		—			15			—			—
Provision for (benefit from) income taxes		28			45		—			(2	)		—			71
Net income (loss)	$	126		$	78	$	142		$	(4	)	$	(216	)	$	126

STATEMENT OF INCOME

For the Three Months Ended June 30, 2004

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

23

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

STATEMENT OF INCOME

For the Six Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors		Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	1,902		$	906	$	5,561		$	1,541		$	(1,082	)	$	8,828
Cost of sales		1,671			787		4,864			1,422			(1,081	)		7,663
Selling, general and administrative expenses		68			13		94			87			—			262
Research and development expenses		17			—		17			11			—			45
Operating income		146			106		586			21			(1	)		858
Interest income (expense), net		(187	)		—		(108	)		(18	)		—			(313	)
Other income (expense), net		(59	)		8		(4	)		17			1			(37	)
Income from equity investments		656			86		—			2		��	(658	)		86
Intercompany income (expense)		(67	)		39		—			28			—			—
Provision for income taxes		109			87		—			18			—			214
Net income	$	380		$	152	$	474		$	32		$	(658	)	$	380

STATEMENT OF INCOME

For the Six Months Ended June 30, 2004

Millions of dollars	LCC			Guarantors			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	1,368		$	695		$	509		$	(306	)	$	2,266
Cost of sales		1,253			646			520			(306	)		2,113
Selling, general and administrative expenses		65			12			17			—			94
Research and development expenses		16			—			—			—			16
Operating income (loss)		34			37			(28	)		—			43
Interest income (expense), net		(220	)		—			3			—			(217	)
Other income (expense), net		(31	)		(3	)		29			1			(4	)
Income from equity investments		155			83			78			(156	)		160
Intercompany income (expense)		(40	)		13			27			—			—
(Benefit from) provision for income taxes		(90	)		46			38			—			(6	)
Net income (loss)	$	(12	)	$	84		$	71		$	(155	)	$	(12	)

24

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net income	$	380		$	152		$	474		$	32		$	(658	)	$	380
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		33			36			159			135			—			363
Income from equity investments		(656	)		(86	)		—			(2	)		658			(86	)
Distributions of earnings from affiliates		40			—			—			86			(40	)		86
Deferred income taxes		110			86			—			(35	)		—			161
Debt prepayment charges and premiums		21			—			—			—			—			21
Intercompany (receivables) payables, net		592			(193	)		—			(411	)		12			—
Net changes in working capital and other		(68	)		(5	)		(62	)		(127	)		(12	)		(274	)
Net cash provided by (used in) operating activities		452			(10	)		571			(322	)		(40	)		651
Expenditures for property, plant and equipment		(23	)		(3	)		(69	)		(25	)		—			(120	)
Distributions in excess of earnings from affiliates		—			—			—			51			—			51
Contributions and advances to affiliates		—			(3	)		—			(88	)		40			(51	)
Other		—			—			3			—			—			3
Net cash used in investing activities		(23	)		(6	)		(66	)		(62	)		40			(117	)
Repayment of long-term debt		(517	)		—			(1	)		(29	)		—			(547	)
Dividends paid		(111	)		—			—			—			—			(111	)
Proceeds from stock option exercises		43			—			—			—			—			43
Distributions to owners		—			—			(475	)		475			—			—
Other		(10	)		—			—			9			—			(1	)
Net cash provided by (used in) financing activities		(595	)		-—			(476	)		455			—			(616	)
Effect of exchange rate changes on cash		—			3			—			(12	)		—			(9	)
Increase (decrease) in cash and cash equivalents	$	(166	)	$	(13	)	$	29		$	59		$	—		$	(91	)

25

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2004

Millions of dollars	LCC			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net income (loss)	$	(12	)	$	84		$	71		$	(155	)	$	(12	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		35			35			57			—			127
(Income) from equity investments		(155	)		(83	)		(78	)		156			(160	)
Distributions of earnings of affiliates		38			—			120			(38	)		120
Deferred income taxes		(90	)		46			36			—			(8	)
Intercompany (receivables) payables, net		268			(56	)		(211	)		(1	)		—
Net changes in working capital and other		(3	)		8			6			—			11
Net cash provided by operating activities		81			34			1			(38	)		78
Expenditures for property, plant and equipment		(24	)		(1	)		(2	)		—			(27	)
Distributions from affiliates in excess of earnings		—			7			41			—			48
Contributions and advances to affiliates		—			(2	)		(58	)		38			(22	)
Net cash provided by (used in) investing activities		(24	)		4			(19	)		38			(1	)
Dividends paid		(63	)		—			—			—			(63	)
Proceeds from stock option exercises		5			—			—			—			5
Other		(1	)		—			—			—			(1	)
Net cash used in financing activities		(59	)		—			—			—			(59	)
Effect of exchange rate changes on cash		—			(1	)		—			—			(1	)
Increase (decrease) in cash and cash equivalents	$	(2	)	$	37		$	(18	)	$	—		$	17

26

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

This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements of Lyondell Chemical Company (“LCC”), together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), and the notes thereto.

In addition to comparisons of current operating results with the same period in the prior year, Lyondell has included, as additional disclosure, certain “trailing quarter” comparisons of second quarter 2005 operating results to first quarter 2005 operating results. Lyondell’s and its joint ventures’ businesses are highly cyclical, in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Lyondell and its joint ventures.

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

OVERVIEW

General—Lyondell is a global chemical company that manufactures and markets a variety of basic chemicals and gasoline blending components. As a result of its acquisition of Millennium Chemicals Inc. (“Millennium”) on November 30, 2004 and Lyondell’s resulting 100% ownership of Millennium and Equistar Chemicals, LP (“Equistar”), the operations of Millennium and Equistar are included in Lyondell’s consolidated financial statements prospectively from December 1, 2004. Prior to the acquisition of Millennium, Lyondell held an equity investment of 70.5% in Equistar, a joint venture with Millennium.

During 2004, the chemical industry experienced broad-based improvement as a strengthening global economy led to increases in demand and tighter chemical industry supply/demand balances. The industry also experienced improved market conditions in the second quarter and first six months of 2005 compared to the same periods in 2004, which led to generally higher profitability, despite significantly higher crude oil prices.

Lyondell’s operations primarily comprise the ethylene, co-products and derivatives (“EC&D”) segment, the propylene oxide and related products (“PO&RP”) segment, the inorganic chemicals segment and the refining segment, consisting of Lyondell’s equity investment in LYONDELL-CITGO Refining LP (“LCR”), a joint venture with CITGO Petroleum Corporation (“CITGO”).

In the EC&D segment, sales prices and margins decreased in the second quarter 2005, compared to the first quarter 2005, as the market adjusted to over production late in 2004 and in the first quarter 2005. Nonetheless, Lyondell’s average product margins for both the second quarter and first six months of 2005 were higher compared to the same periods in 2004.

In the PO&RP segment, Lyondell was able to implement sales price increases for propylene oxide (“PO”) and derivatives that more than offset the effect of higher average prices of propylene, a key PO raw material, resulting in higher product margins in the second quarter and first six months of 2005 compared to the same periods in 2004. In addition, higher gasoline prices and a tighter methyl tertiary butyl ether (“MTBE”) supply/demand balance in the second quarter and first six months of 2005 resulted in significantly higher margins for MTBE compared to the same periods in 2004.

In the second quarter 2005, LCR’s refining operations were negatively affected by a major planned maintenance turnaround and, to a lesser extent, equipment failures at the refinery and at a third party facility. The effect of the resulting decrease in second quarter 2005 crude processing rates was only partly offset by higher crude oil refining margins, resulting in lower profitability in the second quarter and first six months of 2005 compared to the same periods in 2004.

27

Operating results for the inorganic chemicals segment for the second quarter and first six months of 2005, compared to the same periods in 2004, reflected higher sales prices, which were partly offset by the effects of higher costs and lower sales volumes.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Lyondell’s EC&D segment. Ethylene and its co-products are produced from two major raw material groups:

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

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

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

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable period, as well as benchmark U.S. sales prices for ethylene and co-product propylene, which Lyondell produces and sells. Propylene is also a key raw material for Lyondell’s PO&RP business segment. The benchmark weighted average cost of ethylene production, which is reduced by co-product revenues, is based on CMAI’s estimated average ratio of crude oil-based liquid and NGL raw materials used in U.S. ethylene production and is subject to revision. See discussion of the EC&D segment’s operating results below for additional details.

	Average Benchmark Price
	For the three months ended June 30,		For the six months ended June 30,
	2005	2004	2005	2004
Crude oil – dollars per barrel	53.03	38.30	51.34	36.75
Natural gas – dollars per million BTUs	6.57	5.88	6.28	5.60
Weighted average cost of ethylene production – cents per pound	25.57	20.80	24.45	21.46
Ethylene – cents per pound	38.33	31.50	39.92	31.50
Propylene – cents per pound	36.17	30.75	39.83	29.08

Higher raw material and energy costs in the second quarter and first six months of 2005 compared to the same periods in 2004 reflected the effect of a significant escalation in crude oil prices and, to a lesser extent, natural gas prices.

RESULTS OF OPERATIONS

Lyondell’s wholly owned operations prior to the acquisition of Millennium comprised the PO&RP segment. As a result of the acquisition of Millennium on November 30, 2004, Lyondell’s operating results for the second quarter and first six months of 2005 include the operations of Equistar and Millennium as wholly owned subsidiaries. Prior to the acquisition of Millennium, Lyondell’s activities in the EC&D segment were conducted through its investment in Equistar, accounted for using the equity method. Lyondell’s activities in the refining business segment are conducted through its interest in LCR, which is accounted for using the equity method.

Revenues—Lyondell’s revenues were $4,382 million in the second quarter 2005 compared to $1,161 million in the second quarter 2004, while revenues of $8,828 million in the first six months of 2005 compared to $2,266 million in the first six months of 2004. Lyondell’s second quarter and first six months of 2005 revenues included $2,820 million and $5,737 million, respectively, of revenues of Equistar and Millennium. The remaining increases in revenues were primarily due to higher average product sales prices for products in the PO&RP segment in the second quarter and first six months of 2005 compared to the same periods in 2004.

28

Cost of Sales—Lyondell’s cost of sales of $3,879 million in the second quarter 2005 compared to $1,084 million in the second quarter 2004, and $7,663 million for the six-month period ended June 30, 2005 compared to $2,113 million for the six-month period ended June 30, 2004. Lyondell’s cost of sales for the second quarter and first six months of 2005 included $2,510 million and $4,917 million, respectively, of cost of sales of Equistar and Millennium businesses. The remaining increase in the cost of sales was primarily a result of higher average prices of raw materials and a $12 million charge related to cost of participation in an industry mutual insurance consortium.

SG&A Expenses—Selling, general and administrative (“SG&A”) expenses were $133 million in the second quarter 2005 compared to $49 million in the second quarter 2004, and $262 million for the six month period ended June 30, 2005 compared to $94 million for the six-month period ended June 30, 2004. Lyondell’s second quarter and first six months of 2005 SG&A expenses included $82 million and $164 million, respectively, of SG&A expenses of Equistar and Millennium.

Operating Income—Lyondell had operating income of $348 million in the second quarter 2005 compared to $20 million in the second quarter 2004, and operating income of $858 million in the first six months of 2005 compared to $43 million in the first six months of 2004. Lyondell’s second quarter and first six months of 2005 operating income included $212 million and $627 million, respectively, of operating income of Equistar and Millennium. The remaining increase was attributable to Lyondell’s PO&RP segment operating results, which are reviewed further in the segment discussion below.

Interest Expense—Interest expense was $165 million in the second quarter 2005 compared to $111 million in the second quarter 2004, and $334 million for the six months ended June 30, 2005 compared to $222 million for the six-months ended June 30, 2004. Lyondell’s second quarter and first six months of 2005 interest expense included $73 million and $143 million, respectively, of interest expense of Millennium and Equistar. This increase was partly offset by a reduction in interest expense for the second quarter and first six months of 2005 resulting from the prepayment of $800 million principal amount of LCC’s 9.875% Senior Secured Notes, Series B, including $300 million in the latter part of 2004, $200 million in January 2005 and $300 million in May 2005.

Other Expense, Net—Lyondell had other expense, net, of $14 million in the second quarter 2005 compared to $3 million in the second quarter 2004, and other expense, net of $37 million for the first six months of 2005 compared to $4 million for the first six months of 2004. The second quarter and first six months of 2005 included charges related to prepayments of LCC’s 9.875% Senior Secured Notes, Series B and write-offs of unamortized debt issuance costs of $9 million in the second quarter 2005 and $21 million in the first six months of 2005.

Income from Equity Investment in Equistar—Effective December 1, 2004, Equistar became a wholly owned subsidiary of Lyondell and was included in Lyondell’s consolidated operating results prospectively from that date. In the second quarter and first six months ended June 30, 2004, Lyondell’s 70.5% equity investment in Equistar resulted in income of $33 million and $39 million, respectively. Equistar’s operating results are reviewed further in the discussion of the EC&D segment below.

Income from Equity Investment in LCR—Lyondell’s income from its equity investment in LCR was $19 million in the second quarter 2005 compared to $63 million in the second quarter 2004, and $86 million in the first six months of 2005 compared to $119 million in the first six months of 2004. LCR’s operating results are reviewed in the discussion of the refining segment below.

Income Tax—The estimated annual effective tax rate for 2005 is 36% and was 35% in the first six months of 2004. The tax provision was $214 million in the first six months of 2005 and a benefit of $6 million in the first six months of 2004, reflecting the pretax loss in the 2004 period.

29

Net Income—Lyondell’s net income for the second quarter 2005 was $126 million compared to $3 million in the second quarter 2004 and $380 million for the six months ended June 30, 2005 compared to a net loss of $12 million in the corresponding period in 2004. The following table summarizes the major components contributing to the results of operations.

	For the three months ended June 30,						For the six months ended June 30,
	2005			2004			2005			2004
Millions of dollars
Operating income (loss) of:
EC&D segment	$	201		$	—		$	596		$	—
PO&RP segment		134			20			230			43
Inorganic chemicals		16			—			37			—
Other		(3	)		—			(5	)		—
Operating income		348			20			858			43
Income from equity investment in Equistar		—			33			—			39
Income from equity investment in LCR		19			63			86			119
Income from other equity investments		(1	)		1			—			2
Interest expense		(165	)		(111	)		(334	)		(222	)
Interest income		10			3			21			5
Other expense, net		(14	)		(3	)		(37	)		(4	)
Provision for (benefit from) income taxes		71			3			214			(6	)
Net income (loss)	$	126		$	3		$	380		$	(12	)

The second quarter and first six months of 2005 included the consolidated results of Millennium and Equistar, while the second quarter and first six months of 2004 included income from Lyondell’s 70.5% equity investment in Equistar. The improvements in the second quarter and first six months of 2005 compared to the second quarter 2004 and first six months of 2004 were primarily due to higher product margins in the EC&D and PO&RP segments in the second quarter and first six months of 2005, partly offset by lower operating results at LCR due to the second quarter 2005 planned maintenance and equipment failures. The operating results of the segments are reviewed in the Segment Analysis below.

Second Quarter 2005 versus First Quarter 2005

Second quarter 2005 net income of $126 million compares to $254 million in the first quarter 2005. The decrease primarily reflected lower operating results in the EC&D segment, due to lower product margins, and in the refining segment, due to the maintenance activity and operating issues discussed previously. These were partly offset by improved operating results in the PO&RP segment attributable to strong seasonal improvement in MTBE margins.

Segment Analysis

Lyondell has four reportable segments: EC&D, PO&RP, inorganic chemicals and refining. Lyondell’s refining operations are conducted through its interest in LCR.

The EC&D segment comprises the operations of Equistar and the acetyls business of Millennium, which became wholly owned subsidiaries of Lyondell with the November 30, 2004 acquisition of Millennium. The PO&RP segment represents the operations of the former intermediate chemicals and derivatives segment of Lyondell. The inorganic chemicals segment comprises Millennium’s TiO₂ and related products business.

30

Ethylene, Co-products and Derivatives Segment

Overview—In its EC&D segment, Lyondell manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene. Lyondell also manufactures and markets derivatives, primarily polyethylene, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear-low density polyethylene (“LLDPE”), ethylene glycol, ethylene oxide and its derivatives, and ethanol and vinyl acetate monomer (“VAM”). In the EC&D segment, Lyondell also manufactures fuels, such as methyl tertiary butyl ether (“MTBE”) and alkylate, as well as acetic acid, methanol and polypropylene.

Operations of the Millennium acetyls business are included in the EC&D segment prospectively from December 1, 2004. Revenues and operating income of the acetyls business for the second quarter 2005 were $149 million and $20 million, respectively, and $262 million and $38 million, respectively, for the first six months of 2005. In the second quarter and first six months of 2005, the acetyls business was able to increase sales prices to more than offset the effect of higher prices for ethylene raw materials and natural gas compared to the same periods in 2004 when the business was not a part of Lyondell. The aggregate sales volume for VAM and acetic acid in the first six months of 2005 was comparable to the first six months of 2004, but increased 22% in the second quarter 2005 compared to the second quarter 2004 as first quarter 2005 sales volumes were delayed into the second quarter 2005 due to unavailability of commercial marine vessels in the first quarter 2005.

The following is a review of Equistar’s operating results on a stand-alone basis comparing the second quarter and first six months of 2005 with the same periods in 2004. Consequently, it excludes the acetyls business and any effect of Lyondell’s accounting for its acquisition of Millennium and its resultant acquisition of Equistar. See Note 3 to the Consolidated Financial Statements for further discussion of Lyondell’s acquisition of Millennium.

Equistar’s sales prices and margins decreased in the second quarter 2005, compared to the first quarter 2005, as the market adjusted to over production late in 2004 and in the first quarter 2005. Nonetheless, average product margins for both the second quarter and first six months of 2005 were higher compared to the same periods in 2004. U.S. ethylene demand decreased an estimated 2.8% in the second quarter and grew 1.0% in the first six months of 2005 compared to the same periods in 2004.

The following table sets forth Equistar’s sales and other operating revenues, operating income and selected product sales volumes.

	For the three months ended June 30,				For the six months ended June 30,
	2005		2004		2005		2004
In millions
Sales and other operating revenues	$	2,700	$	2,099	$	5,561	$	4,061
Operating income		197		99		586		160
Volumes, in millions
Ethylene and derivatives (pounds)		2,635		2,759		5,365		5,479
Polyethylene volumes included above (pounds)		1,341		1,439		2,678		2,776
Co-products, non-aromatic (pounds)		1,862		1,961		3,896		3,876
Aromatics (gallons)		107		80		209		173

Revenues—Equistar’s revenues of $2,700 million in the second quarter 2005 increased 29% compared to revenues of $2,099 million in the second quarter 2004, while revenues of $5,561 million in the first six months of 2005 increased 37% compared to revenues of $4,061 million in the first six months of 2004. The increases in the 2005 periods reflected higher average sales prices, partially offset by lower sales volumes. Benchmark sales prices of ethylene averaged 22% higher, benzene averaged 27% higher, and propylene averaged 18% higher in the second quarter 2005 compared to the second quarter 2004, while in the first six months of 2005 benchmark sales prices of ethylene averaged 27% higher, benzene averaged 45% higher and propylene averaged 37% higher than in the first six months of 2004. Benchmark sales prices of HDPE averaged 21% higher in the second quarter 2005 and 29% higher in the first six months of 2005 compared to the same periods in 2004. Ethylene and derivative sales volumes were 4% lower in the second quarter 2005 compared to the second quarter 2004, and 2% lower in the first six months of 2005 compared to the first six months of 2004.

31

Operating Income—Equistar had operating income of $197 million in the second quarter 2005 compared to $99 million in the second quarter 2004, and operating income of $586 million in the first six months of 2005 compared to $160 million in the first six months of 2004. The improvements were primarily due to higher product margins as a result of higher average sales prices, which more than offset significant increases in the costs of raw materials in the second quarter and first six months of 2005 compared to the same periods in 2004. However, the improvement was less pronounced in the second quarter 2005 than in the first quarter 2005 as sales prices weakened while crude oil and natural gas prices continued to escalate.

Second Quarter 2005 versus First Quarter 2005

The operations of Millennium and Equistar are included in Lyondell’s consolidated operating results from December 1, 2004. Lyondell’s EC&D segment includes, from December 1, 2004, the businesses of Equistar and the acetyls business of Millennium. The following is a comparison of Lyondell’s EC&D segment for the second quarter 2005 compared to the first quarter 2005.

EC&D second quarter 2005 operating income of $201 million compares to operating income of $395 million in the first quarter 2005. The $194 million decrease in profitability was the result of lower product margins due to lower sales prices, primarily for propylene and polyethylene, and higher heavy liquids and NGL raw material costs attributable to higher crude oil and natural gas prices in the second quarter 2005 compared to the first quarter 2005. In the second quarter 2005, benchmark sales prices averaged 8% lower for ethylene, 17% lower for propylene and 8% lower for HDPE compared to the first quarter 2005. Benchmark crude oil prices averaged 7% higher in the second quarter 2005 than in the first quarter 2005, while benchmark natural gas prices averaged 10% higher. Ethylene and derivative sales volumes were 3% lower compared to the first quarter 2005. Acetyls second quarter 2005 operating results were relatively unchanged as higher costs were offset by higher sales prices and the effects of higher sales volumes.

Propylene Oxide and Related Products Segment

Overview—The PO&RP segment produces and markets PO; PO derivatives, such as propylene glycol (“PG”), propylene glycol ethers (“PGE”), and butanediol (“BDO”); toluene diisocyanate (“TDI”); styrene, or SM, and methyl tertiary butyl ether (“MTBE”), the principal derivative of tertiary butyl alcohol (“TBA”). SM and TBA are co-products of Lyondell’s two major PO production processes, referred to as PO/SM and PO/TBA.

As a result of improved supply/demand balances in the second quarter and first six months of 2005, sales price increases for PO and derivatives more than offset the effect of higher average prices of propylene, resulting in higher product margins compared to the second quarter and first six months of 2004. In the U.S., the benchmark cost of propylene, a key raw material, decreased during the second quarter 2005, but averaged 18% and 37% higher in the second quarter and first six months of 2005 than in the same periods of 2004. During the second quarter and first six months of 2005, MTBE sales prices and margins benefited from higher gasoline prices and a stronger MTBE market. Styrene margins in the second quarter and first six months of 2005 improved compared to the same periods in 2004, but were more than offset by a decrease in TDI margins, which reflected ongoing weak market conditions.

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The following table sets forth the PO&RP segment’s sales and other operating revenues, operating income, product sales volumes and average benchmark market prices for propylene.

	For the three months ended June 30,				For the six months ended June 30,
	2005		2004		2005		2004
Millions of dollars
Sales and other operating revenues	$	1,562	$	1,161	$	3,091	$	2,266
Operating income		134		20		230		43
Volumes, in millions
PO and derivatives (pounds)		731		766		1,615		1,651
Co-products:
SM (pounds)		1,045		830		2,027		1,761
MTBE and other TBA derivatives (gallons)		297		284		580		556
Average Benchmark Price
Propylene
United States – cents per pound		36.17		30.75		39.83		29.08
Europe – euros per metric ton		705		525		695		500

Revenues—Revenues of $1,562 million in the second quarter 2005 increased 35% compared to revenues of $1,161 million in the second quarter 2004, while revenues of $3,091 million in the first six months of 2005 increased 36% compared to revenues of $2,266 million in the first six months of 2004. The increases in revenues were primarily due to higher average sales prices, as well as higher sales volumes for styrene. Sales volumes for co-product styrene increased 26% and 15%, respectively, in the second quarter and first six months of 2005 compared to the corresponding periods in 2004, due to higher export sales and the timing of product offtake by customers under major styrene processing agreements. Sales volumes for PO and derivatives decreased 5% in the second quarter 2005 and 2% in the first six months of 2005, compared to the 2004 periods.

Operating Income—The PO&RP segment had operating income of $134 million in the second quarter 2005 compared to $20 million in the second quarter 2004 and operating income of $230 million in the first six months of 2005 compared to $43 million in the first six months of 2004. The increases were primarily due to higher product margins for PO and derivatives and for MTBE in the second quarter and first six months of 2005 compared to the same periods in 2004.

Second Quarter 2005 versus First Quarter 2005

The PO&RP segment had operating income of $134 million in the second quarter 2005 compared to $96 million in the first quarter 2005. The $38 million improvement was primarily due to seasonally higher MTBE margins in the second quarter 2005. PO and derivatives operating results were relatively unchanged. Product margins improved as the price of propylene decreased compared to the first quarter 2005, but were offset by the effect of a 17% decrease in sales volumes due primarily to seasonally lower deicer sales. TDI results deteriorated by approximately $20 million compared to the first quarter 2005, due to lower product margins and plant maintenance. Styrene operating results were relatively unchanged versus the first quarter 2005.

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Inorganic Chemicals Segment

Lyondell’s inorganic chemicals segment comprises the TiO₂ and related products business of Millennium, which became a wholly owned subsidiary of Lyondell on November 30, 2004. This segment’s operating results are included in Lyondell’s Consolidated Statement of Income prospectively from December 1, 2004. Revenues and operating income of this segment for the second quarter 2005 were $342 million and $16 million, respectively, and $660 million and $37 million, respectively, for the first six months of 2005. Compared to the second quarter and first six months of 2004, when the business was not a part of Lyondell, sales prices averaged 14% to 15% higher, resulting in higher product margins and increased profitability in the second quarter and first six months of 2005. Sales volumes were 18% and 16% lower in the second quarter and first six months of 2005, respectively. The sales volume decreases reflected Millennium’s efforts in the first six months of 2004 to reduce high inventory levels, which resulted in higher sales volumes in that period.

Refining Segment

Overview—Lyondell’s activities in the refining segment are conducted through its interest in LCR. The following discussion of LCR’s operating results is on a 100% basis. LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. PDVSA Petróleo, S.A. (“PDVSA Oil”) supplies heavy, high sulfur Venezuelan crude oil to LCR under a long-term crude supply agreement (“Crude Supply Agreement” or “CSA”). Under the CSA, LCR purchases 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of its rated crude oil refining capacity of 268,000 barrels per day. LCR generally purchases the balance of its crude oil requirements on the spot market. Profit margins on spot market crude oil tend to be more volatile than margins on CSA crude oil.

Total crude oil processing rates were 193,000 barrels per day in the second quarter 2005 compared to 266,000 barrels per day in the second quarter 2004 and 227,000 barrels per day in the first six months of 2005 compared to 265,000 barrels per day in the same period in 2004. The lower crude oil processing rates in the 2005 periods reflected a major planned maintenance turnaround and, to a lesser extent, equipment failures at the refinery and at a third party facility.

In the second quarter and first six months of 2005, LCR benefited from significantly higher spot crude oil margins compared to the second quarter and first six months of 2004. The higher spot crude oil margins reflected stronger diesel and gasoline markets in the first six months of 2005 compared to the same period in 2004. LCR also benefited from higher aromatics margins in the first six months of 2005 compared to the same period in 2004. The higher aromatics margins, primarily in the first quarter 2005, reflected significant increases in market prices late in 2004.

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The following table sets forth LCR’s sales and other operating revenues, net income, sales volumes for refined products and crude processing rates for the periods indicated.

	For the three months ended June 30,				For the six months ended June 30,
	2005		2004		2005		2004
Millions of dollars
Sales and other operating revenues	$	1,563	$	1,339	$	3,099	$	2,493
Net income		28		103		138		194
Thousands of barrels per day
Refined products sales volumes:
Gasoline		110		121		113		118
Diesel and heating oil		85		99		86		95
Jet fuel		8		14		14		15
Aromatics		10		9		9		9
Other refined products		70		87		80		88
Total refined products sales volumes		283		330		302		325
Crude processing rates:
Crude Supply Agreement		165		233		192		235
Other crude oil		28		33		35		30
Total crude processing rates		193		266		227		265

Revenues—Revenues of $1,563 million in the second quarter 2005 increased 17% compared to revenues of $1,339 million in the second quarter 2004, while revenues of $3,099 million in the first six months of 2005 increased 24% compared to revenues of $2,493 million in the first six months of 2004. The increases in revenue were due to higher average refined product sales prices, driven largely by the stronger diesel and gasoline markets and higher crude oil prices, partly offset by lower sales volumes, which decreased 14% and 7%, respectively, in the second quarter and first six months of 2005 compared to the corresponding periods in 2004. The lower sales volumes reflected the lower crude processing rates, which decreased 27% and 14%, respectively, in the second quarter and first six months of 2005, compared to the same periods in the prior year, as a result of the plant maintenance activity and equipment failures during the second quarter 2005.

Net Income—LCR had net income of $28 million in the second quarter 2005 compared to $103 million in the second quarter 2004, and $138 million in the first six months of 2005 compared to $194 million in the first six months of 2004. The decreases in net income were primarily due to the second quarter 2005 plant maintenance activity and equipment failures, which resulted in lower crude processing rates.

Second Quarter 2005 versus First Quarter 2005

LCR’s net income was $28 million in the second quarter 2005 compared to $110 million in the first quarter 2005. The decrease was primarily due to the second quarter 2005 plant maintenance activity and equipment failures, which resulted in lower crude processing rates. Second quarter 2005 total crude processing rates of 193,000 barrels per day compared to 262,000 barrels per day in the first quarter 2005. Higher spot crude oil margins were offset by lower aromatic margins in the second quarter 2005 compared to the first quarter 2005.

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FINANCIAL CONDITION

The following operating, investing and financing activities for the first six months of 2005 reflect consolidation of the operations of Millennium and Equistar, prospectively from December 1, 2004.

Operating Activities—Operating activities provided cash of $651 million in the first six months of 2005 compared to $78 million in the first six months of 2004. Cash flows provided by operating activities in the first six months of 2005 of $571 million and $77 million, respectively, were provided by the operations of Equistar and Millennium.

During the first six months of 2005, Lyondell’s operating cash flow benefited from significantly higher earnings compared to the first six months of 2004. This increase in cash flow was partly offset by a net increase in the main components of working capital – accounts receivable, inventory and accounts payable, which used cash of $199 million in the first six months of 2005 compared to a net decrease in the first six months of 2004, which provided cash of $11 million. Other changes in assets and liabilities reflected the annual payments of incentive compensation and property taxes, including amounts related to the operations of Equistar and Millennium.

The net increase in the main components of working capital of $199 million in the first six months of 2005 was due to higher accounts receivable and inventory balances partly offset by higher accounts payable balances. The increase in the accounts receivable balance primarily reflected a reduction of $200 million in the utilization of the Equistar accounts receivable sales facility. The increase in payables reflected the effect of higher raw material purchase prices. Inventories increased 9%, primarily due to higher EC&D inventories in anticipation of a third quarter 2005 planned maintenance turnaround and increases in TiO₂ inventories, which reflected lower than anticipated demand.

In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in June 2005 that otherwise would have been expected to be collected in July 2005. This included collections of $46 million in June 2005, related to Equistar receivables, from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).

Investing Activities—Investing activities used cash of $117 million in the first six months of 2005 and $1 million in the first six months of 2004. The increase was primarily due to higher cash contributions to LCR for capital and the effect of including Equistar’s and Millennium’s capital expenditures in the first six months of 2005.

The following table summarizes the capital expenditures of Lyondell and its principal joint ventures as well as their 2005 budgeted capital spending. Equistar’s and Millennium’s capital expenditures are included in Lyondell’s 2005 and 2004 capital expenditures prospectively from December 1, 2004 and are included in Lyondell’s 2005 capital budget.

	Annual Budget 2005		For the six months ended June 30,
Millions of dollars			2005		2004
Capital expenditures – 100% basis:
Lyondell	$	313	$	120	$	27
Equistar– through November 30, 2004		—		—		41
LCR		187		83		29
Capital expenditures – Lyondell proportionate share:
Lyondell – 100%	$	313	$	120	$	27
Equistar – 70.5% through November 30, 2004		—		—		29
LCR – 58.75%		110		49		17
Total capital expenditures		423		169		73
Contributions to European PO Joint Venture		5		3		2
Contributions to U.S. PO Joint Venture		14		4		2
Total capital expenditures and contributions to PO joint ventures	$	442	$	176	$	77

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In addition to the effect of including the 2005 Equistar budgeted capital expenditures of $167 million and the Millennium budgeted capital expenditures of $85 million, the 2005 Lyondell capital budget reflects increased spending on projects related to environmental and regulatory requirements, including air emission reductions and wastewater management, and to potential alternatives for MTBE. The LCR 2005 capital budget reflects spending for low sulfur fuels regulations, as well as emission reductions.

The following table summarizes Lyondell’s cash distributions from and cash contributions to joint venture affiliates:

	For the six months ended June 30,
Millions of dollars	2005		2004
Cash distributions from joint venture affiliates:
LCR	$	134	$	160
Other		3		8
Total distributions		137		168
Less: Earnings of affiliates		86		120
Total distributions from affiliates in excess of earnings	$	51	$	48
Cash contributions to joint venture affiliates:
LCR	$	44	$	18
European PO Joint Venture		3		2
U.S. PO Joint Venture		4		2
Total contributions to affiliates	$	51	$	22

Equistar distributed $475 million to its owners in the first six months of 2005, and made no distributions in the first six months of 2004.

Financing Activities—Financing activities used cash of $616 million in the first six months of 2005 and $59 million in the first six months of 2004.

In the first six months of 2005, LCC prepaid $500 million of the 9.875% Senior Secured Notes, Series B, and paid $17 million in prepayment premiums. Also, during the first six months of 2005, Millennium purchased $24 million of the 7% Senior Notes due 2006, and less than $1 million of the 9.25% Senior Notes due 2008. See “Millennium Debt” section of “Liquidity and Capital Resources” regarding the May 2005 Millennium credit facility amendment, which permitted the purchases. In July 2005, LCC called the remaining $200 million of the 9.875% Senior Secured Notes, Series B, at the call price of 102.469 percent of par. The debt is expected to be paid in late August 2005. Also in July 2005, Millennium purchased $27 million of the 7% Senior Notes and $1 million of the 9.25% Senior Notes. Lyondell and Millennium intend to continue to reduce indebtedness as market conditions permit.

Cash dividends of $0.225 per share of common stock were paid in each of the first two quarters of 2005 and 2004, totaling $111 million and $63 million, respectively. Through December 31, 2004, Lyondell had two series of common stock outstanding, common stock and Series B common stock. Lyondell paid a regular quarterly dividend of $0.225 per share of common stock in each of the first two quarters of 2004, and elected to pay the regular quarterly dividend on each share of outstanding Series B common stock in kind in the form of shares of Series B common stock. In December 2004, Lyondell elected to convert the 38.6 million outstanding shares of Series B common stock, owned by Occidental Chemical Holding Corporation, into common stock.

In the first six months of 2005, proceeds from the exercise of stock options totaled $43 million compared to $5 million in the first six months of 2004.

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Liquidity and Capital Resources—Lyondell’s balance sheet remains highly leveraged. As of June 30, 2005, total debt, including current maturities, and which included debt of Equistar and Millennium, was $7.3 billion, or approximately 71% of total capitalization. In addition, as of June 30, 2005 Lyondell’s LCR joint venture had approximately $526 million of debt to parties other than Lyondell (see “Joint Venture Debt” and “Equity investment in joint venture” below). Current maturities of long-term debt at June 30, 2005 included $100 million of LCC’s 9.375% Debentures due 2005, $150 million of Equistar’s 6.5% Notes due 2006 and other debt of $6 million.

LCC has not guaranteed Equistar’s, Millennium’s or LCR’s credit facilities or debt obligations, except for $300 million of Equistar debt, consisting of the 6.5% Notes due 2006 and the 7.55% Debentures due 2026. LCC’s credit facility generally limits investments by Lyondell in Equistar, Millennium and other specified investees unless certain conditions are satisfied. In addition, Millennium’s debt covenants may restrict its ability to make distributions to LCC. Equistar’s ability to make distributions to Lyondell and Millennium may be affected by an additional interest requirement in certain of Equistar’s indentures. The level of debt and the limitations imposed on LCC, Equistar and Millennium by their respective current or future debt agreements, including the restrictions on their ability to transfer cash among the entities as further discussed below, could have significant consequences on Lyondell’s business and future prospects.

Lyondell’s ability to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. However, Lyondell believes that conditions will be such that cash balances, cash generated from operating activities, cash distributions from the LCR joint venture, Lyondell’s ability to move cash among its wholly owned subsidiaries and funds from lines of credit will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, necessary capital expenditures, ongoing operations and dividends. In the first quarter 2005, Standard & Poors (“S&P”) upgraded LCC’s, Equistar’s and Millennium’s debt ratings from B+ to BB-, and gave each entity a positive outlook. According to S&P, the rating actions reflected favorable prospects over the intermediate term and the assumption that management will continue to prioritize debt reduction.

At June 30, 2005, Lyondell had cash on hand of $713 million, which included $375 million of cash held by Millennium that is not currently available for dividends to LCC and $68 million of cash held by Equistar. Lyondell’s total unused availability under various liquidity facilities of $1,183 million as of June 30, 2005 included the following:

• $399 million under LCC’s amended and restated $475 million senior secured revolving credit facility, which matures in December 2009. Availability under the revolving credit facility is reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $76 million as of June 30, 2005. There was no outstanding borrowing under the revolving credit facility at June 30, 2005.

• $50 million under LCC’s $150 million, four-year, accounts receivable sales facility. The agreement currently permits the sale of up to $125 million of total interest in domestic accounts receivable, which amount would decline by $25 million if LCC’s credit facility were fully drawn. The outstanding amount of receivables sold under the facility was $75 million as of June 30, 2005.

• $634 million under Equistar’s $250 million inventory-based revolving credit facility and its $450 million accounts receivable sales facility, after giving effect to the borrowing base net of a $50 million unused availability requirement, amounts sold under the accounts receivable sales facility, of which there were none at June 30, 2005, and $16 million of outstanding letters of credit under the revolving credit facility as of June 30, 2005. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $50 million, or $100 million if the Interest Coverage Ratio, as defined, is less than 2:1. There was no outstanding borrowing under the revolving credit facility at June 30, 2005.

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• $125 million under Millennium’s $150 million secured revolving credit facility, which matures in June 2006. Availability under the revolving credit facility is reduced to the extent of outstanding letters of credit provided under the facility, which totaled $25 million as of June 30, 2005. There was no outstanding borrowing under the revolving credit facility as of June 30, 2005. Millennium is in the process of refinancing its credit facility to extend the maturity and to add an Australian term loan to facilitate the repatriation during 2005 of approximately $225 million of non-U.S. earnings. The repatriated funds will primarily be used to reduce Millennium indebtedness. The refinancing is expected to close in the third quarter 2005.

LCC Debt—LCC’s credit facility and the indentures pertaining to LCC’s Senior Secured Notes and Senior Subordinated Notes contain restrictive covenants and the credit facility also requires LCC to maintain specified financial ratios, as defined. These restrictive covenants and financial ratios, as described in Item 7 of Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2004, have not changed in the six months ended June 30, 2005.

The breach of the covenants in LCC’s debt agreements could permit the lenders to declare any outstanding LCC debt payable and could permit the lenders under LCC’s credit facility to terminate future lending commitments. Furthermore, under certain circumstances, a default under the debt instruments of Equistar or Millennium would constitute a cross-default under LCC’s credit facility which, under certain circumstances, would then constitute a default under LCC’s indentures. LCC was in compliance with all such covenants and financial ratios as of June 30, 2005.

Equistar Debt—Equistar’s $250 million inventory-based revolving credit facility and the indentures governing its Senior Notes contain restrictive covenants. These restrictive covenants, as described in Item 7 of Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2004, have not changed in the six months ended June 30, 2005. The credit facility does not require Equistar to maintain specified financial ratios. The breach of the covenants could permit the lenders or noteholders to declare any outstanding Equistar debt payable and could permit the lenders under Equistar’s inventory-based revolving credit facility to terminate future lending commitments. In addition, some of Equistar’s indentures require additional interest payments to the noteholders if Equistar makes distributions to Lyondell and Millennium when Equistar does not meet a specified fixed charge coverage ratio. Equistar met this ratio and was in compliance with all covenants under these agreements as of June 30, 2005.

Millennium Debt—The covenants in Millennium’s credit facility, the indenture under which Millennium’s 7.00% and 7.625% Senior Debentures were issued and the indenture under which Millennium’s 9.25% Senior Notes were issued contain restrictive covenants and the credit facility requires Millennium to maintain specified financial ratios. Pursuant to these provisions, Millennium currently is prohibited from making restricted payments, including paying dividends. These restrictive covenants and financial ratios, as described in Item 7 of Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2004, have not changed in the six months ended June 30, 2005, except as a result of two amendments. On February 2, 2005, as a result of certain adjustments and charges related to the February 2005 restatement of Millennium’s financial statements, Millennium entered into an amendment and waiver to its credit facility, which amended the definition of EBITDA and waived any and all defaults or events of default that may have occurred on or prior to the amendment and waiver. In addition, Millennium obtained an amendment to its credit facility in May 2005 to allow for the unrestricted repurchase of indebtedness in the form of bonds, debentures, notes or similar instruments.

Millennium has outstanding $150 million aggregate principal amount of 4.00% Convertible Senior Debentures, which are due in 2023, unless earlier redeemed, converted or repurchased. The redemption, conversion and repurchase terms of the Debentures, as described in Item 7 of Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2004, have not changed in the six months ended June 30, 2005. As a result of Lyondell’s acquisition of Millennium, the Debentures are convertible into shares of Lyondell’s common stock or equivalent cash or a combination thereof. Based on a quarterly test related to the price of Lyondell common stock, the Debentures continued to be convertible at a conversion rate of 71.01 Lyondell shares per one thousand dollar principal amount of the Debentures. As of June 30, 2005, none of the Debentures had been converted into shares of Lyondell common stock.

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The breach of the covenants in Millennium’s debt agreements would permit the lenders to declare any outstanding Millennium debt payable and would permit the lenders under Millennium’s credit facility to terminate future lending commitments. Millennium was in compliance with all covenants and financial ratios under its debt agreements as of June 30, 2005.

Joint Venture Debt—At June 30, 2005, the outstanding debt of LCR to parties other than Lyondell was $526 million. That debt is not carried on Lyondell’s balance sheet because Lyondell has no obligation with respect to that debt. The ability of LCR to distribute cash to Lyondell may be affected by restrictive covenants in LCR’s credit facility.

Off-Balance Sheet Arrangements—Lyondell’s off-balance sheet arrangements are described in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2004. Lyondell’s off-balance sheet arrangements did not change materially in the six months ended June 30, 2005, except that the outstanding amount of receivables sold under both of the accounts receivable sales facilities decreased to $75 million as of June 30, 2005 from $275 million as of December 31, 2004. In April 2005, Lyondell obtained an amendment to LCC’s $150 million, four-year, accounts receivable sales facility to conform, in all material respects, the covenants under the facility to the covenants under LCC’s credit facility.

LCR Liquidity and Capital Resources—LCR maintains a credit facility, consisting of a $450 million senior secured term loan facility and a $100 million senior secured revolving credit facility, which matures in May 2007. The facility is secured by substantially all of the assets of LCR and contains covenants that require LCR to maintain specified financial ratios covering Debt-to-Total-Capitalization, EBITDA-to-Interest Expense and Secured Debt-to-EBITDA, all as defined. The revolving credit facility is reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $12 million at June 30, 2005. Under the revolving credit facility, $45 million was drawn at June, 30 2005 and repaid in July 2005. LCR was in compliance with all covenants and financial ratios under its debt facilities as of June 30, 2005.

CURRENT BUSINESS OUTLOOK

Thus far in the third quarter 2005, market conditions for PO are relatively unchanged and MTBE margins have increased compared to the second quarter 2005. Market conditions for TiO₂ are relatively unchanged from the second quarter, reflecting weaker than anticipated demand. Lyondell is reducing TiO₂ plant operating rates to reduce inventory levels, which will negatively impact earnings while benefiting cash flow. Refining results are expected to improve from the second quarter 2005 with the refinery now operating at normal rates and industry margins continuing to be quite strong. After reaching a low point in late June 2005, market conditions for the EC&D segment have strengthened; however, given the volatility of global markets, it is difficult to quantify the pace and magnitude of the improvement from the June 2005 low point.

Lyondell believes that industry and economic fundamentals remain strong, reflecting continued growth in the global economy, growing Chinese demand for chemicals and plastics, delays in adding new Middle East chemical plant capacity, and strong global demand for gasoline, diesel fuel and their components. These fundamentals, together with industry performance over the past several quarters, indicate continued strong performance over the coming years. Lyondell’s outlook continues to be very positive.

ANTICIPATED ACCOUNTING CHANGES

In the first quarter 2003, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation using the prospective transition method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Accordingly, no compensation expense was recognized in connection with stock options granted prior to 2003. Pro forma compensation expense related to stock options was less than $1 million for each of the three month periods ended June 30, 2005 and 2004 and was $1 million and $2 million, respectively, for the six month periods ended June 30, 2005 and 2004.

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In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004),Share-Based Payment. The primary focus of this Statement is accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as by the granting of stock options. Lyondell will be required to apply the provisions of SFAS No. 123 (revised 2004) in the first quarter 2006. Upon adoption, a provision of SFAS No. 123 (revised 2004) will require Lyondell to use a non-substantive vesting period approach for share-based payment transactions that vest when an employee becomes retirement eligible. The effect will be to accelerate expense recognition compared to the nominal vesting period approach that Lyondell currently uses. Assuming the non-substantive vesting period approach had been used, compensation expense related to share-based payments would have decreased $2 million and $1 million for the three-month periods ended June 30, 2005 and 2004, respectively, and increased $4 million in each of the six-month periods ended June 30, 2005 and 2004. Other provisions of SFAS No. 123 (revised 2004) may affect the computation and resulting fair value of Lyondell’s share-based payment transactions with employees. Lyondell is evaluating these impacts of adopting SFAS No. 123 (revised 2004) on its financial statements.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29,Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets, which is replaced with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange is defined to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Lyondell will be required to adopt SFAS No. 153 no later than the third quarter 2005 with prospective application. Lyondell does not expect application of SFAS No. 153 to have a material impact on its financial statements.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations, which clarifies the termconditional asset retirement obligation as used in SFAS No. 143,Accounting for Conditional Asset Retirement Obligations, as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of Lyondell. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Lyondell is currently evaluating the impact of adopting this interpretation.

Item 3. Disclosure of Market and Regulatory Risk

Lyondell’s exposure to market and regulatory risks is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2004. Lyondell’s exposure to market and regulatory risks has not changed materially in the six months ended June 30, 2005, except as noted below.

FOREIGN EXCHANGE RISK

Lyondell manufactures and markets its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. Costs in some countries are incurred, in part, in currencies other than the applicable functional currency. Lyondell utilizes forward, swap and option derivative contracts with terms normally lasting less than three months to protect against the adverse effect that exchange rate fluctuations may have on foreign currency denominated trade receivables and trade payables. These derivatives generally are not designated as hedges for accounting purposes. At June 30, 2005, the amount of foreign currency forward and swap contracts outstanding and, consequently, Lyondell’s related exposure to foreign exchange rate fluctuations under these derivative contracts was not material.

INTEREST RATE RISK

At June 30, 2005, LCR had variable rate debt of $526 million, excluding the note payable by LCR to Lyondell. Lyondell’s exposure to interest rate risk at LCR was not material. Sensitivity analysis was used for purposes of this analysis.

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Item 4. Controls and Procedures

Lyondell performed an evaluation, under the supervision and with the participation of its management, including the President and Chief Executive Officer (principal executive officer) and Senior Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of Lyondell’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2005. Based upon that evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that Lyondell’s disclosure controls and procedures are effective.

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

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FORWARD-LOOKING STATEMENTS

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

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

• the supply/demand balances for Lyondell’s, its subsidiaries’ and its joint ventures’ products, and the related effects of industry production capacities and operating rates,

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

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

• terrorist acts and international political unrest,

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

• legal, tax and environmental proceedings,

• the cyclical nature of the chemical and refining industries,

• competitive products and pricing pressures,

• risks of doing business outside the U.S., including foreign currency fluctuations,

• access to capital markets,

• technological developments, and

• Lyondell’s ability to implement its business strategies.

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

All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and in Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2004. These factors are not necessarily all of the important factors that could affect Lyondell, its subsidiaries or its joint ventures. Use caution and common sense when considering these forward-looking statements. Lyondell does not intend to update these statements unless securities laws require it to do so.

In addition, this Form 10-Q contains summaries of contracts and other documents. These summaries may not contain all of the information that is important to an investor, and reference is made to the actual contract or document for a more complete understanding of the contract or document involved.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments with respect to Lyondell’s legal proceedings previously reported in the Annual Report on Form 10-K for the year ended December 31, 2004 and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, except as described below:

Millennium—Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging that Millennium and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. A new trial date of September 19, 2005 has been set in theState of Rhode Island v. Lead Industries Association, Inc., et al. case. The court inCity of Chicago v. American Cyanamid Company, et al. entered summary judgment on behalf of all defendants, and notices of appeal had been filed. On May 25, 2005, the Illinois Supreme Court denied the City of Chicago’s petition for leave to appeal inCity of Chicago v. American Cyanamid Company, et al.

Legal proceedings were brought in Texas relating to lead pigment and lead-based paint. These cases have been held in abeyance pending the results of an appeal of the trial court’s decision granting summary judgment in favor of one lead pigment defendant inSpring Branch Independent School District v. NL Industries, Inc. During the period that these cases have been inactive, Millennium has not incurred defense costs. In 2004, the Texas Court of Appeals affirmed the trial court’s order granting the motion for summary judgment in favor of this defendant. On May 31, 2005, and on July 6, 2005, Millennium received plaintiffs’ notice of non-suit in theHarris County v. Lead Industries Association, et al.matter and in theLiberty Independent School District v. Lead Industries Association, et al. matter, respectively. The only one of these Texas cases that is still pending isBrownsville Independent School District v. Lead Industries Association, Inc. et al.

On July 15, 2005, the Wisconsin Supreme Court inSteven Thomas, et al. v. Lead Industries Association, Inc., et al. reversed the trial and appellate courts and ruled that the plaintiff could proceed against the defendants on a risk-contribution theory. The court affirmed the lower courts’ decisions dismissing the plaintiff’s claims of civil conspiracy and enterprise liability.

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

Lyondell held its annual meeting of stockholders on May 5, 2005. Please refer to Lyondell’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 for a description of the matters voted upon at the annual meeting and the votes cast.

Item 6. Exhibits

31.1	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Executive Officer
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certification of Principal Executive Officer
32.2	Section 1350 Certification of Principal Financial Officer

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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.

	Lyondell Chemical Company
Dated: August 5, 2005	/s/ Charles L. Hall
	Charles L. Hall
	Vice President
	and Controller
	(Duly Authorized and
	Principal Accounting Officer)