Filed Pursuant to Rule 424(b)(3)
Registration Number: 333-70048

PROSPECTUS

EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION

$700,000,000
OFFER TO ISSUE

REGISTERED
10 1/8% SENIOR NOTES DUE 2008

IN EXCHANGE FOR

ALL OUTSTANDING
10 1/8% SENIOR NOTES DUE 2008

THE NEW NOTES: THE EXCHANGE OFFER:

. will be freely tradeable; . expires at 5:00 p.m., New York
City time, on November 14, 2001,
. are substantially identical to unless extended; and
the outstanding notes;
. is not conditioned on any minimum
. will accrue interest at the same aggregate principal amount of
rate per annum as the outstanding outstanding notes being tendered.
notes payable semi-annually in
arrears on each March 1 and IN ADDITION, YOU SHOULD NOTE THAT:
September 1, beginning March 1,
2002; . all outstanding notes that are
validly tendered and not validly
. will be unsecured and will rank withdrawn will be exchanged for
equally with outstanding notes an equal principal amount of new
that are not exchanged and all notes that are registered under
other unsecured and the Securities Act of 1933;
unsubordinated indebtedness but
will effectively be junior to all . tenders of outstanding notes may
our secured indebtedness to the be withdrawn any time before the
extent of the value of the assets expiration of the exchange offer;
securing that indebtedness; and and

. will not be listed on any . the exchange of new notes for
securities exchange or on any outstanding notes in the exchange
automated dealer quotation offer should not be a taxable
system. event for U.S. federal income tax
purposes.

YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 11 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS OCTOBER 12, 2001.

----------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary........................................................ 1
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 20
Capitalization............................................................ 21
Our Owners................................................................ 22
Selected Historical Consolidated Financial and Operating Data............. 24
The Exchange Offer........................................................ 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 36
Disclosure of Market and Regulatory Risk.................................. 47
Industry Overview......................................................... 48
About Equistar Chemicals, LP.............................................. 52
Our Management............................................................ 64
Ownership................................................................. 68
Description of the Partnership Agreement.................................. 69
Description of the Parent Agreement....................................... 78
Related Party Transactions................................................ 81
Description of Other Indebtedness......................................... 87
Description of New Notes.................................................. 90
United States Federal Income Tax Consequences............................. 129
Book-Entry, Delivery and Form............................................. 136
Registration Rights Agreement............................................. 139
Plan of Distribution...................................................... 142
Legal Matters............................................................. 143
Experts................................................................... 143
Forward-looking Information............................................... 144
Where You Can Find More Information....................................... 145
Index to Consolidated Financial Statements................................ F-1

This prospectus is part of a registration statement we filed with the SEC.

.You should rely only on the information or representations provided in
this prospectus.

. We have not authorized any person to provide information in this
prospectus other than that provided in this prospectus.

.We have not authorized anyone to provide you with different information.

.We are not making an offer of these securities in any jurisdiction where
the offer is not permitted.

. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of this
document.

In this prospectus, except as the context otherwise requires:

. ""Equistar," "we," "us," "our" and "ours" refers to Equistar Chemicals,
LP, and its subsidiaries, including Equistar Funding;

. ""Equistar Funding" refers to Equistar Funding Corporation, a wholly
owned special purpose subsidiary of Equistar formed solely to act as co-
obligor for debt securities issued by Equistar;

. ""issuers'' refers to Equistar and Equistar Funding, who jointly issued
the outstanding 10 1/8% senior notes due 2008;

. ""notes'' refers to both the new notes and the outstanding notes; and

. ""pro forma" means the data included herein as pro forma information
present our financial information as if each of the following had
occurred as of June 30, 2001 for balance sheet purposes and as of July
1, 2000 for income statement purposes:

-- our credit facility was amended and restated (see "Description of
Other Indebtedness--Amended and Restated Credit Facility");

-- we borrowed $65 million in revolving loans and $300 million of the
term loan under our amended and restated credit facility and applied
the net proceeds thereof as described under "Use of Proceeds;" and

-- we completed the sale of our outstanding 10 1/8% senior notes due
2008 and applied the net proceeds thereof as described under "Use of
Proceeds."

. ""EBITDA'' means our earnings before interest, taxes, depreciation and
amortization.

PROSPECTUS SUMMARY

This summary highlights selected information from this prospectus to help you
understand the terms of this exchange offer and the new notes. It likely does
not contain all the information that is important to you or that you should
consider. To understand all of the terms of this exchange offer and the new
notes and to attain a more complete understanding of our business and financial
situation, we encourage you to carefully read this entire prospectus and the
information we have incorporated by reference herein.

ABOUT EQUISTAR

We are a major chemical producer with leading positions in all of our key
products. We are North America's second largest, and the world's third largest,
producer of ethylene, the world's most widely used petrochemical. We are also
the third largest producer of polyethylene in North America and in the world.
The chemicals we produce are fundamental to many diverse segments of the
economy, including consumer products, housing and automotive components and
other durable and nondurable goods. We operate 18 manufacturing facilities in
eight states. Our annual rated capacity for ethylene is 11.6 billion pounds and
for polyethylene is 5.7 billion pounds. We had total 2000 revenues of $7.5
billion and as of June 30, 2001 had total assets of $6.4 billion.

We currently operate in two segments, petrochemicals and polymers. Our
petrochemicals segment manufactures and markets the following products:

. Olefins: We produce ethylene, propylene and butadiene, which together
account for a majority of our petrochemicals business. Ethylene, our
most significant product, is the key building block for polyethylene and
most of our oxygenated products. Propylene is used to make polypropylene
and propylene oxide. The chemicals made from olefins are used to create
a variety of products, including food packaging, antifreeze, carpet
facing and backing, urethane foam seating and rubber for tires and
hoses.

. Oxygenated products: We produce ethylene oxide, ethylene glycol, ethanol
and methyl tertiary butyl ether. These chemicals are used to produce
paint, detergents, polyester fibers and film, antifreeze, gasoline
additives and other products.

. Aromatics: We produce benzene and toluene. Our aromatics products are
used to make plastics, rubber and nylon carpet fiber and as additives to
enhance octane value in gasoline.

. Specialty products: We manufacture a number of specialty chemicals that
are used as key inputs in inks, adhesives, polyester resins, rubber and
other products.

Our polymers segment manufactures and markets polyolefins and performance
polymers, including the following products:

. Polyethylene: We manufacture high density polyethylene, low density
polyethylene and linear low density polyethylene. Polyethylene is used
in packaging film, trash bags and lightweight high-strength plastic
bottles for milk, juices, shampoos and detergents.

. Polypropylene: We manufacture polypropylene, which is used in plastic
bottle caps and other closures, rigid packaging, automotive components
and carpet facing.

. Performance polymers: The majority of our performance polymers are sold
for use as compounds for wire and cable insulation, bulk molding, hot-
melt adhesives and carpet backing. Many of our performance polymers are
enhanced grades of polyethylene that have historically been sold at
higher margins than standard grade polyethylene.

Equistar is a joint venture limited partnership owned by Lyondell Chemical
Company, Millennium Chemicals Inc. and Occidental Petroleum Corporation. See
"Ownership." Lyondell owns 41% of Equistar and Millennium and Occidental each
own 29.5%. Under the terms of our partnership agreement, Lyondell manages our
business, although significant decisions regarding acquisitions, indebtedness
and other matters require the consent of representatives of each owner.

CURRENT INDUSTRY CONDITIONS

The olefins and polyolefins industry is cyclical. The cycle is characterized
by periods of tight supply and demand, leading to high operating rates and peak
margins, followed by periods of oversupply resulting from capacity additions,
leading to a decline in operating rates and margins. The industry is currently
in a down cycle as a result of significant new capacity additions, a decrease
in demand reflecting weak economic conditions and recent high raw material
costs associated with the spike in natural gas costs in early 2001. In response
to current industry conditions, U.S. ethylene producers are operating at less
than 85% of capacity and product selling prices and margins have declined.

Industry fundamentals point to an eventual cyclical recovery in the olefins
and polyolefins industry. No significant ethylene capacity additions in North
America have been announced other than the plants expected to come on-line
later this year. With improvement in the economy, operating rates should rise
to meet increased demand, permitting this announced capacity to be absorbed and
prices and margins to rise. Finally, raw material costs, while still higher
than historical levels, have decreased significantly in the last six months.

COMPETITIVE STRENGTHS

LEADING POSITIONS IN ALL OF OUR KEY PRODUCTS

We enjoy leading positions in our three key products: ethylene, propylene and
polyethylene. Our product portfolio consists of chemicals used in a wide
variety of commercial and industrial end markets, including packaging, paints,
coatings, adhesives, cosmetics, automotive components, plastic bottles and caps
and wire and cable insulation. The following table shows our leading positions
for our key products:

NORTH AMERICAN
CAPACITY
--------------
PRODUCT POSITION SHARE
------- -------- -----

Ethylene...................................................... #2 16%
Propylene..................................................... #2 11%
Polyethylene.................................................. #3 13%

LARGE, INTEGRATED MANUFACTURING FACILITIES

We operate 18 chemical manufacturing facilities and have an annual rated
capacity of approximately 11.6 billion pounds of ethylene and 5.7 billion
pounds of polyethylene. Our petrochemicals segment is highly integrated with
our polymers segment and with several manufacturing facilities of our owners,
to whom we sell a significant amount of our production. For example, for the
six months ended June 30, 2001, approximately 86% of our ethylene production,
based on sales dollars, was consumed by our polymers and oxygenated chemicals
businesses or sold to our owners and their affiliates at market-related prices.

railcar fleet enables us to efficiently transfer both raw materials and
finished products. We also have two plants located in close proximity to U.S.
Midwest customers, providing a freight cost advantage on sales to these
customers relative to U.S. Gulf Coast producers.

LOW COST POSITION

We continuously strive to lower overall costs through:

. Feedstock Flexibility--We operate olefins plants that have the
flexibility to consume a wide range of feedstocks, allowing us to better
maximize product margins during periods of volatile energy and raw
material prices compared to olefins plants that have limited feedstock
flexibility. The primary feedstocks used in the production of olefins
(petroleum liquids and natural gas liquids) represent approximately 75%
of total cash costs. Petroleum liquids have had a historical cost
advantage of approximately four cents per pound of ethylene over natural
gas liquids. We have the capability to realize this incremental margin
on approximately 63% of our ethylene capacity compared to less than 30%
for other North American ethylene capacity. In particular, because of
its feedstock flexibility, independent third-party surveys rank our
Channelview facility as one of the lowest cash production cost olefins
facilities in the United States.

. Production Optimization--We are able to optimize operating rates at our
manufacturing facilities to respond to changing industry conditions. We
seek to maximize operating rates at each of our facilities and may idle
less efficient manufacturing capacity and shift production to more
efficient facilities in order to maximize cash flow during weak industry
conditions.

. Low Overhead Costs--Since our formation, we have been able to eliminate
significant overhead costs by sharing services with Lyondell. Our
selling, general and administrative expenses declined 30% from
$259 million in 1999 to $182 million in 2000.

EXPERIENCED MANAGEMENT TEAM

We are managed by an experienced team of executive officers that benefit from
the collective best practices and experiences of our owners. Lyondell manages
the daily operation of our business, while significant decisions are subject to
the approval of representatives of each owner. Our senior management team, led
by Dan Smith, chief executive officer of Equistar and president and chief
executive officer of Lyondell, consists of five individuals with an average of
over 28 years of experience in the chemical industry. Our partnership
governance committee consists of nine individuals, three each from Lyondell,
Millennium and Occidental.

ABOUT EQUISTAR FUNDING

Equistar Funding Corporation is a wholly owned subsidiary of Equistar. It is
a Delaware corporation formed for the sole purpose of facilitating the
financing activities of Equistar. Other than financing activities as a co-
issuer of Equistar indebtedness, Equistar Funding has no material assets or
operations. Equistar Funding is a co-issuer with Equistar of the outstanding
notes and the new notes.

SUMMARY OF THE EXCHANGE OFFER

On August 24, 2001, we completed a private offering of the outstanding notes.

We entered into a registration rights agreement with the initial purchasers
in the private offering. We agreed to file a registration statement with the
Securities and Exchange Commission, or SEC, within 90 days after the date we
issued the outstanding notes, and use our best efforts to have it declared
effective within 210 days after the date we issued the outstanding notes. You
are entitled to new notes with substantially identical terms as your
outstanding notes in exchange for your outstanding notes.

You should read the discussion under the headings "--Summary of Terms of the
New Notes" beginning on page 8 and "Description of New Notes" beginning on page
90 for further information regarding the new notes.

We summarize the terms of the exchange offer below. You should read the
discussion under the heading "The Exchange Offer" beginning on page 26 for
further information regarding the exchange offer and resale of the new notes.

The Exchange Offer...... We are offering to issue to you new 10 1/8% senior
notes due 2008 in exchange for your outstanding 10
1/8% senior notes due 2008.

Expiration Date......... The exchange offer will expire at 5:00 p.m., New York
City time, on November 14, 2001, or at a later date
and time to which we extend it.

Conditions to the
Exchange Offer..........
We will not be required to accept outstanding notes
for exchange if the exchange offer would violate
applicable law or if any legal action has been
instituted or threatened that would impair our
ability to proceed with the exchange offer. The
exchange offer is not conditioned on any minimum
aggregate principal amount of outstanding notes being
tendered. Please read the section "The Exchange
Offer--Conditions to the Exchange Offer" beginning on
page 29 for more information regarding the conditions
to the exchange offer.

Procedures for
Tendering Outstanding
Notes................... If you wish to participate in the exchange offer, you
must complete, sign and date the letter of
transmittal and mail or deliver the letter of
transmittal, together with your outstanding notes, to
the exchange agent. If your outstanding notes are
held through The Depository Trust Company, or DTC,
you may effect delivery of the outstanding notes by
book-entry transfer.

In the alternative, if your outstanding notes are
held through DTC and you wish to participate in the
exchange offer, you may do so through the automated
tender offer program of DTC. If you tender under this
program, you will agree to be bound by the letter of
transmittal that we are providing with this
prospectus as though you had signed the letter of
transmittal.

By signing or agreeing to be bound by the letter of
transmittal, you will represent to us, among other
things, that:

. you are not our "affiliate," as defined in Rule
144 of the Securities Act of 1933 or a broker-
dealer tendering outstanding notes acquired
directly from us for your own account.

. if you are not a broker-dealer or are a broker-
dealer but will not receive new notes for your own
account, you are not engaged in and do not intend
to participate in a distribution of the new notes;

. you have no arrangement or understanding with any
person to participate in the distribution of the
new notes or the outstanding notes;

. any new notes you receive will be acquired in the
ordinary course of your business; and

. if you are a broker-dealer that will receive new
notes for your own account in exchange for
outstanding notes, those outstanding notes were
acquired as a result of market-making activities
or other trading activities, and you will deliver
a prospectus, as required by law, in connection
with any resale of those new notes.

Procedures for
Beneficial Owners.......
If you beneficially own outstanding notes registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to tender
your outstanding notes in the exchange offer, you
should promptly contact the registered holder and
instruct it to tender the outstanding notes on your
behalf.

If you wish to tender your outstanding notes on your
own behalf, you must either arrange to have your
outstanding notes registered in your name or obtain a
properly completed bond power from the registered
holder before completing and executing the letter of
transmittal and delivering you outstanding notes. The
transfer of registered ownership may take
considerable time.

Guaranteed Delivery If you wish to tender your outstanding notes and
Procedures.............. cannot comply, before the expiration date, with the
requirement to deliver the letter of transmittal and
notes or use the applicable procedures under the
automated tender offer program of The Depository
Trust Company, you must tender your outstanding notes
according to the guaranteed delivery procedures
described in "The Exchange Offer--Guaranteed Delivery
Procedures" on page 33.

U.S. Federal Income Tax
Considerations..........
The exchange of new notes for outstanding notes in
the exchange offer should not be a taxable event for
U.S. federal income tax purposes. Please read "United
States Federal Income Tax Consequences" beginning on
page 129.

Use of Proceeds......... We will not receive any cash proceeds from the
issuance of new notes.

Plan of Distribution.... All broker-dealers who receive new notes in the
exchange offer have a prospectus delivery obligation.

Based on SEC no-action letters, broker-dealers who
acquired the outstanding notes as a result of market-
making or other trading activities may use this
exchange offer prospectus, as supplemented or
amended, in connection with the resales of the new
notes.

Broker-dealers who acquired the outstanding notes
from us may not rely on SEC staff interpretations in
no-action letters. Broker-dealers who acquired the
outstanding notes from us must comply with the
registration and prospectus delivery requirements of
the Securities Act--including being named as selling
noteholders--in order to resell the outstanding notes
or the new notes.

THE EXCHANGE AGENT

We have appointed The Bank of New York as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:

For Delivery by Mail, Overnight Delivery or by Hand:

The Bank of New York
20 Broad Street
Lower Level
New York, NY 10004
Attn: Reorg. Department, Kin Lau

By Facsimile Transmission (for eligible institutions only):

(914) 773-5015
Attn: Kin Lau

To Confirm Receipt:

(914) 773-8445

SUMMARY OF TERMS OF THE NEW NOTES

The new notes will be freely tradeable and otherwise substantially identical
to the outstanding notes. The new notes will not have registration rights. The
new notes will evidence the same debt as the outstanding notes, and the
outstanding notes and the new notes will be governed by the same indenture.

Issuers................. The new notes will be joint and several obligations
of Equistar Chemicals, LP and Equistar Funding
Corporation. None of Lyondell, Millennium,
Occidental, or any of their subsidiaries or
affiliates, other than Equistar and Equistar Funding,
is obligated to pay the new notes.

Securities Offered...... $700 million of 10 1/8% senior notes due 2008.

Maturity Date........... September 1, 2008.

Interest Payment Dates.. March 1 and September 1 of each year, beginning March
1, 2002.

Optional Redemption..... We may redeem any of the new notes at any time at a
redemption price equal to 100% of the principal
amount of the notes, plus accrued interest and
liquidated damages and a "make whole" amount.

Change of Control....... Upon the occurrence of a change of control event, as
defined in "Description of New Notes," we will be
required to make an offer to purchase the new notes.
The purchase price will equal 101% of the principal
amount of the notes on the date of purchase plus
accrued interest and liquidated damages. See "Risk
Factors--Risks Relating to the New Notes and Our
Indebtedness--We may be unable to purchase the new
notes upon a change of control." Transfers of
interests in us among our owners, as further
described in "Description of New Notes," will not
constitute a change of control and accordingly, we
will not be required to make an offer to purchase the
new notes upon such a transfer.

Ranking................. The new notes will rank equally to our other
unsecured and unsubordinated indebtedness, but will
effectively be junior to all our secured indebtedness
to the extent of the value of the assets securing
that indebtedness. As of June 30, 2001, on a pro
forma basis, the notes would have ranked junior to
$365 million of secured indebtedness of the issuers.

Subsidiary Guarantees... Any subsidiary of Equistar that guarantees
indebtedness of Equistar or any of its subsidiaries
will, subject to specified exceptions, be required to
guarantee the new notes. The new notes will not
initially be guaranteed by any of our subsidiaries
and will therefore effectively rank junior to all
liabilities of our subsidiaries, including trade
payables. As of June 30, 2001, our subsidiaries,
other than Equistar Funding, had no material assets
or liabilities.

Certain Covenants....... The terms of the new notes limit our ability and the
ability of our subsidiaries to:

.incur additional indebtedness;

.create liens;

.engage in sale and lease-back transaction;

.purchase or redeem capital stock;

.make investments or certain other restricted
payments;

.sell assets;

.issue or sell stock of restricted subsidiaries;

.enter into transactions with equityholders or
affiliates; or

.effect a consolidation or merger.

These limitations will be subject to a number of
important qualifications and exceptions. Some of
these covenants will no longer apply if the notes are
rated "BBB-" or higher by Standard & Poor's and
"Baa3" or higher by Moody's.

Under our partnership agreement, we are required to
distribute all of our surplus cash in excess of our
estimated cash needs to our owners, and the indenture
does not limit our ability to make distributions to
our owners. However, we are required to pay
additional interest on the notes if we make a
distribution to our owners and cannot satisfy certain
financial tests. The additional interest will be
payable in kind in the form of additional notes.

Form of New Notes....... The new notes will be represented by one or more
permanent global securities deposited with The
Depository Trust Company. You will not receive
certificates for your new notes unless one of the
events described under the heading "Book-Entry,
Delivery and Form--Certificated Notes" on page 138
occurs. Instead, beneficial ownership interests in
the new notes will be shown on, and transfers of
beneficial ownership will be effected only through,
book-entry records maintained by The Depository Trust
Company.

Liquidated Damages...... If we fail to complete the exchange offer as required
by the registration rights agreement, we will be
obligated to pay liquidated damages to holders of the
outstanding notes.

RISK FACTORS

Please read "Risk Factors" beginning on page 11 and carefully consider the
risk factors before participating in the exchange offer.

PRINCIPAL EXECUTIVE OFFICES

Our principal executive offices are located at 1221 McKinney Street, Suite
700, Houston, Texas 77010 and our telephone number is (713) 652-7200.

SELECTED FINANCIAL AND OPERATING DATA

Please read "Selected Historical Consolidated Financial and Operating Data"
beginning on page 24 for our selected financial data for the years ended
December 31, 1998, 1999 and 2000 and as of and for the six months ended June
30, 2000 and 2001.

RISK FACTORS

You should carefully consider the risks below before deciding to participate
in the exchange offer.

RISKS RELATING TO THE EXCHANGE OFFER

IF YOU FAIL TO EXCHANGE YOUR OUTSTANDING NOTES, THE EXISTING TRANSFER
RESTRICTIONS WILL REMAIN IN EFFECT AND THE MARKET VALUE OF YOUR OUTSTANDING
NOTES MAY BE ADVERSELY AFFECTED BECAUSE OF A SMALLER FLOAT AND REDUCED
LIQUIDITY.

If you do not exchange your outstanding notes for new notes under the
exchange offer, then you will continue to be subject to the existing transfer
restrictions on the outstanding notes. In general, the outstanding notes may
not be offered or sold unless they are registered or exempt from registration
under the Securities Act of 1933 and applicable state securities laws. Except
as required by the registration rights agreement, we do not intend to register
resales of the outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the
principal amount of the notes outstanding. This may have an adverse effect
upon, and increase the volatility of, the market price of any outstanding notes
that you continue to hold due to a reduction in liquidity.

RISKS RELATING TO THE NEW NOTES AND OUR INDEBTEDNESS

The risks described in this "Risks Relating to the New Notes and Our
Indebtedness" that apply to the new notes also apply to any outstanding notes
not tendered for new notes in this exchange offer.

OUR PARTNERSHIP AGREEMENT REQUIRES THAT WE DISTRIBUTE SURPLUS CASH TO OUR
OWNERS, AND THE INDENTURE FOR THE NEW NOTES WILL NOT RESTRICT SUCH
DISTRIBUTIONS TO OUR OWNERS.

Under our partnership agreement, we are required to estimate the future cash
needs for our business and to distribute surplus cash to our owners. See
"Description of the Partnership Agreement." The indenture governing the new
notes and our amended and restated credit facility do not contain any
restrictions on our ability to make distributions to our owners in accordance
with our partnership agreement, although the indenture and the credit facility
require that we pay additional interest if distributions are made when our
fixed charge coverage ratio, as defined in the indenture, is less than 1.75 to
1. Distributions to our owners could materially adversely impact our financial
condition and our ability to service debt and satisfy our other cash
obligations in the future.

WE HAVE A SIGNIFICANT AMOUNT OF DEBT, WHICH COULD ADVERSELY AFFECT OUR ABILITY
TO OPERATE OUR BUSINESS.

We have a significant amount of indebtedness. On a pro forma basis, as of
June 30, 2001, we had (a) total indebtedness of approximately $2.4 billion and
(b) approximately $435 million available for borrowing under our amended and
restated credit facility, subject to customary conditions. In addition, subject
to the restrictions in our amended and restated credit facility and the
indenture for the new notes, we may incur significant additional indebtedness
from time to time.

The following chart is unaudited and is presented on a pro forma basis:

AS OF
JUNE 30,
2001
------------
(DOLLARS
IN MILLIONS)

Total indebtedness.............................................. $2,403
Partners' capital............................................... 3,430

FOR THE
FOR THE SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------

Ratio of EBITDA excluding unusual charges to inter-
est expenses...................................... 3.1x 1.6x
Ratio of debt to EBITDA excluding unusual charges.. 3.7 N/A

The level of our indebtedness could have important consequences, including:

. limiting cash flow available for general corporate purposes, including
capital expenditures and acquisitions, because a substantial portion of
our cash flow from operations must be dedicated to servicing our debt;

. limiting our ability to obtain additional debt financing on satisfactory
terms in the future for working capital, capital expenditures, research
and development efforts, acquisitions and other general corporate
obligations;

. limiting our flexibility in planning for, or reacting to, competitive
and other changes in our industry and economic conditions generally;

. exposing us to risks inherent in interest rate fluctuations because some
of our borrowings are at variable rates of interest, which could result
in higher interest expense in the event of increases in interest rates;
and

. increasing our vulnerability to general economic downturns and adverse
competitive and industry conditions, which could place us at a
competitive disadvantage compared to our competitors that are less
leveraged.

WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS,
INCLUDING THE NEW NOTES, AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.

Our ability to make payments on and to refinance our indebtedness, including
the new notes, will depend on our ability to generate cash in the future. Our
ability to fund working capital and planned capital expenditures will also
depend on our ability to generate cash in the future. We cannot assure you
that:

. our business will generate sufficient cash flow from operations;

. future borrowings will be available under our current or future
revolving credit facilities in an amount sufficient to enable us to pay
our indebtedness on or before maturity; or

. we will be able to refinance any of our indebtedness on commercially
reasonable terms, if at all.

Factors beyond our control will affect our ability to make these payments and
refinancings. These factors include those discussed elsewhere in these risk
factors and those listed in the "Forward-Looking Information" section of this
prospectus.

If, in the future, we cannot generate sufficient cash from our operations to
meet our debt service obligations, we may need to reduce or delay capital
expenditures or curtail research and development efforts. In addition, we may
need to refinance our debt, obtain additional financing or sell assets, which
we may not be able to do on commercially reasonably terms, if at all. We cannot
assure you that our business will generate sufficient cash flow, or that we
will be able to obtain funding, sufficient to satisfy our debt service
obligations.

RESTRICTIVE COVENANTS IN OUR INDENTURE AND AMENDED AND RESTATED CREDIT
FACILITY MAY ADVERSELY AFFECT US AND, IF WE ARE NOT ABLE TO COMPLY WITH THESE
COVENANTS, WE MAY NOT HAVE SUFFICIENT ASSETS TO REPAY THE NEW NOTES.

The indenture governing the new notes contains various covenants that limit
our ability to engage in specified types of transactions. In addition, our
amended and restated credit facility contains other and more restrictive
covenants and also requires us to maintain specified financial ratios and
satisfy other financial condition tests. See "Description of Other
Indebtedness--Amended and Restated Credit Facility." Our ability to satisfy the
covenants, financial ratios and tests of our debt instruments can be affected
by events beyond our control. Our ability to comply with the financial ratios
required by the credit facility will be dependent on improvement in our results
of operations in 2002. We cannot assure you that we will meet those

requirements. A breach of any of these covenants could result in a default
under our amended and restated credit facility, and/or the new notes. Upon the
occurrence of an event of default under our amended and restated credit
facility, the lenders thereunder could elect to declare all amounts outstanding
under our amended and restated credit facility to be immediately due and
payable and terminate all commitments to extend further credit. If we were
unable to repay those amounts, the lenders under the amended and restated
credit facility could proceed against the collateral granted to them to secure
that indebtedness. We have pledged substantially all of our personal property,
including inventory and accounts receivable, as well as a portion of our real
property, as security under our amended and restated credit facility. If the
lenders under our amended and restated credit facility accelerate the repayment
of borrowings, we cannot assure you that we will have sufficient assets to
repay our amended and restated credit facility and our other indebtedness,
including the new notes.

THE NEW NOTES WILL BE EFFECTIVELY JUNIOR TO SOME OF OUR DEBT AND OTHER
LIABILITIES.

The new notes will be effectively junior to all secured indebtedness.

The new notes will be effectively junior to all indebtedness under our $800
million secured amended and restated credit facility. As of June 30, 2001, on a
pro forma basis, we would have had $365 million borrowed under our amended and
restated credit facility and $435 million available for borrowing. In addition,
subject to specified limitations, the indenture governing the outstanding notes
and the new notes permits us to incur additional secured indebtedness and both
the outstanding and the new notes are effectively junior to any additional
secured indebtedness we may incur.

The new notes will be structurally junior to indebtedness of our
subsidiaries.

You will not have any claim as a creditor against any of our subsidiaries
that do not guarantee the new notes, and indebtedness and other liabilities,
including trade payables, of those subsidiaries will effectively be senior to
your claims against those subsidiaries. Initially, no subsidiaries will
guarantee the new notes. As of June 30, 2001 our subsidiaries, excluding
Equistar Funding, would have had no material assets or liabilities. In
addition, the indenture, subject to certain limitations, permits these
subsidiaries to incur additional indebtedness and does not contain any
limitation on the amount of other liabilities, such as trade payables, that may
be incurred by these subsidiaries.

We may incur additional indebtedness ranking equal to the new notes.

If we incur any additional debt that ranks equally with the new notes,
including trade payables, the holders of that debt will be entitled to share
ratably with you in any proceeds distributed in connection with any insolvency,
liquidation, reorganization, dissolution or other winding-up of us. This may
have the effect of reducing the amount of proceeds paid to you.

WE MAY BE UNABLE TO REPURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL.

Upon the occurrence of specified change of control events, as described in
"Description of New Notes," you may require us to repurchase all of your new
notes at 101% of their principal amount, plus accrued interest. The amended and
restated credit facility provides that certain change of control events will be
a default that will permit the lenders thereunder to accelerate the maturity of
all borrowings thereunder and terminate commitments to lend thereunder and will
also restrict our ability to repurchase the new notes upon a change of control.
Any of our future debt agreements may contain similar provisions. Accordingly,
we will not be able to satisfy our obligations to purchase your new notes
unless we are able to refinance or obtain waivers under the amended and
restated credit facility and other indebtedness with similar provisions. In
addition, even if we were able to refinance that indebtedness, the refinancing
may not be on terms favorable to us. We cannot assure you that we will have the
financial resources to repurchase your new notes, particularly if that change
of control event triggers a similar repurchase requirement for, or results in
the acceleration of, other indebtedness.

NONE OF THE PARTNERS OF EQUISTAR OR THEIR AFFILIATES WILL HAVE ANY LIABILITY
FOR PAYMENTS OF PRINCIPAL OR INTEREST ON THE NEW NOTES.

Our ability to make payments on the new notes is solely dependent upon
Equistar's ability to generate sufficient cash from operations. If we fail to
fulfill our obligations under the new notes or the indenture, you will not have
the right to recover against any of Equistar's partners, whether as a general
partner or limited partner or otherwise, or against their respective parents or
other affiliates.

THERE IS A RISK THAT THE NEW NOTES ARE, OR WILL BECOME, SUBJECT TO THE FEDERAL
INCOME TAX CONTINGENT PAYMENT RULES.

The new notes have contingent payment rights, including the right to receive
Additional Dividend Notes as described under "Description of New Notes--Certain
Covenants--Additional Interest Upon Payment of Certain Permitted Dividends",
that could cause the federal income tax contingent payment rules to apply. If
those rules applied, holders generally would not be entitled to treat any gain
on the sale of the new notes as capital gain and probably would be required to
accrue interest income with respect to the new notes at a rate in excess of the
stated interest rate. However, the contingent payment rules do not apply to a
debt instrument as to which, at the time of issuance, the likelihood that any
contingent payments will be made is remote or as to which the timing and amount
of every combination of contingent payments that could possibly be made on the
debt instrument is known and it is significantly more likely than not that the
only payments that will be made are the scheduled payments of principal and
stated interest. We believe that the new notes, which should, for this purpose,
constitute a continuation of the outstanding notes, will qualify for these
exceptions. It is possible, however, that the Internal Revenue Service and the
relevant court would disagree. In addition, in the event a contingent payment
became payable on the outstanding notes or the new notes, they would, solely
for purposes of determining the amount and timing of future interest or
original issue discount income for federal income tax purposes, be treated as
reissued at that time and would become subject to the contingent payment rules
as of that date unless an exception to those rules, such as the exception for
remote contingencies described above, was satisfied at that time. See "United
States Federal Income Tax Consequences."

THE PORTFOLIO INTEREST EXEMPTION FROM UNITED STATES WITHHOLDING TAX ON
PAYMENTS TO CERTAIN NON-UNITED STATES PERSONS MAY NOT APPLY TO SOME CONTINGENT
INTEREST INCOME WITH RESPECT TO THE NEW NOTES.

There is a risk that non-United States holders of new notes will not be
eligible for the portfolio interest exemption from United States withholding
tax on certain payments on the new notes. The exemption does not apply to
contingent interest or original issue discount on the new notes that is
determined by reference to distributions we make on our equity interests. As a
result, the portion of any interest or original issue discount on the new notes
attributable to a non-United States holder's right to receive Additional
Dividend Notes upon our payment of certain permitted dividends may not be
eligible for the exemption. This could include the portion of any accruals of
original issue discount under the contingent payment rules (if those rules were
to apply) attributable to the right to receive Additional Dividend Notes. Since
we believe that only the stated interest payments on the new notes currently
are required to be accrued for federal income tax purposes, we do not currently
intend to treat payments on the notes as ineligible for the exemption. See
"United States Federal Income Tax Consequences."

THERE IS NO TRADING MARKET FOR THE NEW NOTES AND THERE MAY NEVER BE ONE, AND
ANY MARKET THAT DOES COME INTO EXISTENCE MAY HAVE LIMITED LIQUIDITY AND BE
HIGHLY VOLATILE.

Currently there is no trading market for the new notes. We do not currently
intend to apply for listing of the new notes on any securities exchange or
stock market. Although the initial purchasers of the outstanding notes have
informed us that they currently intend to make a market in the new notes, they
are not obligated to do so. Any such market making may be discontinued at any
time without notice. The liquidity of any market for the new notes will depend
on the number of holders of those new notes, the interest of securities dealers
in making a market in those securities and other factors. Accordingly, we
cannot assure you as to the development or liquidity of any market for the new
notes. Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the new notes. We cannot assure you that the market, if
any, for the new notes will be free from similar disruptions. Any such
disruptions may adversely affect the new note holders.

RISKS RELATING TO OUR BUSINESS

THE CYCLICALITY OF THE PETROCHEMICAL AND POLYMER INDUSTRIES MAY CAUSE
SIGNIFICANT FLUCTUATION IN OUR INCOME AND CASH FLOW.

Our historical operating results reflect the cyclical and volatile nature of
the supply-demand balance in the petrochemical and polymer industries. These
industries historically experience alternating periods of inadequate capacity
and tight supply, causing prices and profit margins to increase, followed by
periods when substantial capacity is added, resulting in oversupply, declining
capacity utilization rates and declining prices and profit margins. In
particular, the markets for ethylene and polyethylene are highly cyclical,
resulting in volatile profits and cash flow over the business cycle.

Currently, there is overcapacity in the petrochemical and polymer industries.
Moreover, a number of our competitors in various segments of the petrochemical
and polymer industries either have added or are expected to add capacity. For
example, North American ethylene capacity is expected to increase by 5% in the
latter half of 2001 as compared with existing installed capacity. Excess
industry capacity, especially at times when demand is weak as is currently the
case, has in the past and may in the future cause us and other industry
participants to lower our production rates and reduce our margins, income and
cash flow. As a result of excess industry capacity and weak demand for
products, as well as rising energy and raw material prices, our EBITDA has
declined significantly and may continue to do so. Our assessment is that
operating results, including EBITDA, for the third quarter of 2001 will be
lower than in the first quarter of 2001. Weak industry conditions are expected
to continue during at least the remainder of 2001.

RISING COSTS OF RAW MATERIALS AND ENERGY MAY RESULT IN INCREASED OPERATING
EXPENSES AND REDUCED RESULTS OF OPERATIONS.

We purchase large amounts of raw materials and energy for our business. The
cost of these raw materials and energy, in the aggregate, represents a
substantial portion of our operating expenses. The prices of raw materials and
energy generally follow price trends of, and vary with market conditions for,
crude oil and natural gas, which may be highly volatile and cyclical. Our raw
material costs began increasing during 1999 due to higher oil and gas prices.
These increases continued through 1999 and prices remained at high levels
during 2000. Surging natural gas costs late in 2000 and in the first half of
2001 increased both the costs of natural gas liquids-based raw materials,
primarily ethane, as well as the cost of utilities. In the first quarter of
2001, our results of operations were significantly affected by the rising cost
of natural gas. Spot natural gas prices spiked at nearly $10 per million BTUs
in January of 2001, compared to a spot price range of $1.50 to $2.50 per
million BTUs in the period from 1991 to 1999. Since the January 2001 peak,
natural gas prices have decreased. Nonetheless, second quarter 2001 average
natural gas prices were 36% higher than natural gas prices in the second
quarter 2000 and natural gas prices for the first half of 2001 were almost
double those of the first half of 2000. Our operating expenses have increased
and will likely continue to increase if these costs continue to rise or do not
return to historical levels.

In addition, rising natural gas prices adversely affect the ability of
domestic producers to compete internationally since U.S. producers are
disproportionately reliant on natural gas as a feedstock and energy source. In
addition to the impact that this had on our exports, reduced competitiveness of
U.S. producers also increases the availability of petrochemicals in North
America, as U.S. production that would otherwise have been sold overseas is
instead offered for sale domestically.

EXTERNAL FACTORS BEYOND OUR CONTROL CAN CAUSE FLUCTUATIONS IN DEMAND FOR OUR
PRODUCTS AND IN OUR PRICES AND MARGINS, WHICH MAY NEGATIVELY AFFECT INCOME AND
CASH FLOW.

External factors can also cause significant fluctuations in demand for our
products and volatility in the price of raw materials and other operating
costs. Examples of external factors include:

.general economic conditions;

.competitor actions;

.international events and circumstances; and

.governmental regulation in the United States and abroad.

Demand for our products is influenced by general economic conditions. For
example, during 2000 and in the first half of 2001, uncertainty regarding the
domestic economy, as well as unusually high prices for natural gas reduced
market demand for our products, which adversely affected our results of
operations. Although natural gas prices have declined, this reduction in market
demand continued in the second quarter 2001. For example, demand for ethylene
in the United States declined by 1% in 2000 compared to 1999 and by 13% in the
first half of 2001 compared to the first half of 2000. In addition, a number of
our products are highly dependent on durable goods markets, such as housing and
automotive, that are themselves particularly cyclical. If the U.S. economy does
not improve, demand for our products and our income and cash flow would be
adversely affected.

We may idle a facility for an extended period of time because of high raw
material prices, an oversupply of a particular product and/or a lack of demand
for that particular product makes production uneconomical. For example, during
the first quarter of 2001, the significant increase in the cost of natural gas
liquids caused some producers, including us, to idle plants that primarily use
natural gas liquids as raw materials. These temporary outages sometimes last
for several quarters and cause us to incur costs, including the expenses of the
outages and the restart of these facilities. It is possible that factors like
increases in raw material costs or lower demand in the future will cause us to
further reduce operating rates or idle other facilities.

WE SELL COMMODITY PRODUCTS IN HIGHLY COMPETITIVE MARKETS AND FACE SIGNIFICANT
PRICE PRESSURE.

We sell our products in highly competitive markets. Due to the commodity
nature of our products, competition in these markets is based primarily on
price and to a lesser extent on product performance, product quality, product
deliverability and customer service. As a result, we are generally not able to
protect our market position by product differentiation and may not be able to
pass on cost increases to our customers. Accordingly, increases in raw material
and other costs may not necessarily correlate with changes in product prices,
either in the direction of the price change or in magnitude. In addition, some
of our competitors may be able to drive down product prices because they have
costs that are lower than ours. Moreover, some of our competitors may have
greater financial, technological and other resources than ours, and may be
better able to withstand changes in market conditions. Our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can. The occurrence of any of these events could
adversely affect our financial condition and results of operations.

A SIGNIFICANT PORTION OF OUR PRODUCTS ARE SOLD TO OUR OWNERS AND IF THEY ARE
UNABLE OR OTHERWISE CEASE TO CONTINUE TO PURCHASE OUR PRODUCTS, OUR REVENUES,
MARGINS AND CASH FLOWS COULD BE ADVERSELY AFFECTED.

Our owners and their respective affiliates accounted for over 23% of our
revenues in 2000, of which sales to Lyondell and its affiliates totaled $1
billion, or 13% of revenues. We expect to continue to derive a significant
portion of our business from our owners. If they are unable or otherwise cease
to purchase our products, our revenues, margins and cash flows could be
adversely affected.

OPERATING PROBLEMS IN OUR BUSINESS MAY ADVERSELY AFFECT OUR INCOME AND CASH
FLOW.

The occurrence of material operating problems at our facilities, including
the events described below, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or on
our operations as a whole, during and after the period of such operational
difficulties. Our income and cash flow is dependent on the continued operation
of our various production facilities and the ability to complete construction
projects on schedule. Our operations are subject to the usual hazards
associated with chemical manufacturing and the related storage and
transportation of raw materials, products and wastes, the occurrence of which
could affect our productivity and/or profitability, including:

. pipeline leaks and ruptures;

. fires;

. mechanical failure;

. labor difficulties;

. remediation complications;

. discharges or releases of toxic or hazardous substances or gases and
other environmental risks;

. explosions;

. storage tank leaks;

. unscheduled downtime;

. transportation interruptions;

. chemical spills; and

. inclement weather and natural disasters.

Some of these hazards may cause personal injury and loss of life, severe damage
to or destruction of property and equipment and environmental damage, and may
result in suspension of operations and the imposition of civil or criminal
penalties. Furthermore, we are also subject to present and future claims with
respect to workplace exposure, workers' compensation and other matters. We are
not fully insured against all potential operating hazards.

WE ARE EXPOSED TO COSTS ARISING FROM ENVIRONMENTAL COMPLIANCE, CLEANUP AND
ADVERSE LITIGATION, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION, OPERATING RESULTS OR CASH FLOW.

Our business involves the handling, manufacture or use of substances and
compounds that may be considered toxic or hazardous within the meaning of
environmental laws. As a result, we are subject to stringent environmental,
health and safety laws and regulations addressing air emissions, water
discharges, the generation, handling and disposal of waste and other aspects of
our operations. Some of these laws and regulations require our production
facilities to operate under permits that are subject to renewal or
modifications. Typically, these laws provide for substantial fines and
potential criminal sanctions for violations. Violations of these laws can also
result in permit revocation and/or facility shutdown. Several of these laws,
including the Superfund law, also impose extensive requirements relating to
investigation and cleanup of contamination, and we may be required to bear some
or all of these costs regardless of fault, legality of the original disposal or
ownership of the disposal site.

We also incur and expect to continue to incur capital and operating costs to
comply with environmental, health and safety laws and regulations. In
particular, we will be required to incur significant capital expenditures and
be subject to higher operating costs as a result of proposed air pollution
standards. Six of our plants are located in the eight-county Houston/Galveston
region, which has been designated a severe non-attainment area for ozone by the
Environmental Protection Agency, or EPA. As a result, the Texas Natural
Resource Conservation Commission, or TNRCC, has submitted a plan to the EPA to
reach and demonstrate compliance with the ozone standard by November 2007.
Compliance with this plan by us would result in increased capital investment
well in advance of the 2007 deadline, which could be between $150 million and
$300 million, as well as higher annual operating costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental Matters" for further discussion of the ozone standards. In
addition, because we are permitted to treat, store or dispose of hazardous
waste and maintain underground storage tanks under the Resource Conservation
and Recovery Act, or RCRA, we are also required to meet certain financial
responsibility requirements.

We cannot predict with certainty the extent of our future liabilities and
costs under environmental, health and safety laws and regulations and we cannot
assure you that they will not be material. In addition, we may face liability
for alleged personal injury or property damage due to exposure to chemicals or
other hazardous substances at our facilities or chemicals that we otherwise
manufacture, handle or own. Although these claims have not historically had a
material impact on our operations, a significant increase in the number or
success of these claims could materially adversely affect our business,
financial condition, operating results or cash flow. Personal injury claims
alleging exposure to asbestos at our facilities have been filed against us; to
date Millennium Petrochemicals Inc., Lyondell and specified subsidiaries of
Occidental have accepted responsibility for the defense, and costs, of these
claims. When our indemnitors are no longer obligated to indemnify us for these
types of claims, these claims could materially adversely affect our business,
financial condition, operating results or cash flow. See "Related Party
Transactions--Asset Contributions by Lyondell and Affiliates of Millennium and
Occidental."

RISKS RELATING TO OUR OWNERSHIP AND RELATIONSHIP WITH OUR OWNERS

WE CANNOT PREDICT HOW A CHANGE IN CONTROL OF ONE OR MORE OF LYONDELL,
MILLENNIUM OR OCCIDENTAL, OR AN EXIT OF ANY OF THEM, COULD AFFECT OUR
OPERATIONS OR BUSINESS.

Any one or more of Lyondell, Millennium or Occidental may transfer control of
their interests in Equistar or engage in mergers or other business combination
transactions with a third party or with one or more of the other owners that
could result in a change in control of any one of Lyondell, Millennium,
Occidental or Equistar. Because of the unanimous approval requirements in
Equistar's partnership governance structure, any transfer of an interest in
Equistar or change of control of any one of Equistar's owners would affect the
governance of Equistar. We cannot predict how a change of owners would affect
our operations or business. Certain changes of control could require us to
repurchase the notes and/or could be a default under our amended and restated
credit facility, permitting the lenders thereunder to terminate their
commitments and accelerate amounts outstanding under the facility. See
"Description of New Notes" and "Description of Other Indebtedness."

Unless waived by each of our owners, our partnership agreement provides that
a direct or indirect transfer of an interest in Equistar generally may occur
only if the other owners are first offered the opportunity to purchase the
interest and, if the transferee is a third party, the transferee has an
"investment grade" debt rating. However, if interests are transferred in
connection with a merger or sale of a majority of the other assets of Lyondell,
Millennium or specified subsidiaries of Occidental, the other owners do not
have a right of first option and the investment grade requirement is not
applicable.

The types of transactions described above could involve third parties and/or
one or more of Lyondell, Millennium or Occidental. Our owners have discussed,
and from time to time may continue to discuss, whether in connection with their
ordinary course dialogue regarding Equistar's business or otherwise,
transactions which

if consummated could result in a transfer or modification, either directly or
indirectly, of their ownership interest in Equistar. For example, in January
2000, Millennium advised us that it was considering the divestiture of its
29.5% interest in Equistar. In September 2000, Millennium publicly announced
that it had terminated the announced active marketing of its interest in
Equistar. We cannot be certain that Equistar's owners will not sell, transfer
or otherwise modify their ownership interest in Equistar, whether in
transactions involving third parties and/or one or more of the other owners.

LYONDELL, MILLENNIUM AND OCCIDENTAL CONTROL ALL IMPORTANT DECISIONS AFFECTING
OUR GOVERNANCE AND OUR OPERATIONS AND THEIR INTERESTS MAY DIFFER FROM OUR AND
YOUR INTERESTS.

Circumstances may occur in which the interests of our owners could be in
conflict with your interests as a noteholder. In particular, our owners may
have an interest in pursuing transactions that, in their judgment, enhance the
value of their investment in us even though such transactions may involve risks
to you as noteholders. Further conflicts of interest may arise between you and
our owners when we are faced with decisions that could have different
implications for you and our owners, including financial budgets, potential
competition, the issuance or disposition of securities, the payment of
distributions by us, regulatory and legal positions and other matters. Because
our owners control us, these conflicts could be resolved in a manner adverse to
the noteholders.

In addition, conflicts of interest may arise between us and one or more of
our owners when we are faced with decisions that could have different
implications for us and our owners. Although our partnership agreement requires
that any transaction or dealing between us and an owner or one of its
affiliates be approved on our behalf by the disinterested owners, this does not
address all conflicts of interest that may arise. For example, our owners are
permitted, in certain circumstances, to compete with us. Because our owners
control us, conflicts of interest arising because of competition between us and
an owner could be resolved in a manner adverse to us. All of our executive
officers are also executive officers of Lyondell. Pursuant to our partnership
agreement, our chief executive officer is designated by Lyondell. It is
possible that there will be situations where our owners' interests are in
conflict with our interests, and our owners, acting through our partnership
governance committee or through our executive officers, could resolve these
conflicts in a manner adverse to Equistar.

WE RELY ON LYONDELL TO PROVIDE IMPORTANT ADMINISTRATIVE AND MANAGEMENT
SERVICES TO US.

We are party to a shared services arrangement with Lyondell pursuant to which
Lyondell provides us with many services that are essential to the
administration and management of our business, including information
technology, human resources, materials management, raw material supply,
customer supply chain, health, safety and environmental, engineering, research
and development, facility services, legal, accounting, treasury, internal audit
and tax. See "Related Party Transactions--Services and Shared-Site Arrangements
with Lyondell and Affiliates of Millennium and Occidental." Accordingly, we
depend to a significant degree on Lyondell for the administration of our
business. If Lyondell did not fulfill its obligations under the shared services
arrangement, it would disrupt our business and could have a material adverse
effect on our business and results of operations.

THE AGREEMENTS THAT WE HAVE WITH OUR OWNERS AND THEIR AFFILIATES, WHILE
APPROVED BY THE DISINTERESTED OWNERS, MAY NOT BE ON THE SAME TERMS AS IF WE HAD
ENTERED INTO A CONTRACT WITH A THIRD PARTY.

We have entered into various agreements with our owners and their respective
affiliates that are material to the conduct of our business, and we expect to
enter into additional agreements with them in the future. For example, we have
entered into various product supply agreements with each of our owners and
their affiliates pursuant to which we sell a substantial amount of our
products. Moreover, we are party to a shared services arrangement with Lyondell
pursuant to which Lyondell provides us with many important administrative
services. Our partnership agreement requires that agreements between us and an
owner must first be approved on our behalf by the disinterested owners.
Although we believe this process helps ensure that these arrangements are
entered into on an arm's length basis, we cannot assure you that each of these
agreements is on the same terms as if we had entered into a contract with a
third party.

IMPORTANT DECISIONS REQUIRE THE APPROVAL OF ALL OUR OWNERS, AND A FAILURE TO
AGREE COULD RESULT IN DEADLOCK.

Under the terms of the partnership agreement, our partnership governance
committee manages and controls our business, property and affairs, including
the determination and implementation of our strategic direction. Our
partnership governance committee consists of nine members, called
representatives, three appointed by each owner. Under the partnership
agreement, many important decisions, including decisions relating to changes in
our scope of business, our strategic plan, certain capital expenditures and
business combinations, among other specified matters, require the unanimous
agreement of at least two representatives of each of our owners. It is possible
that, as to unanimous consent items, our partnership governance committee may
not reach agreement regarding matters that are very important to us and could
be deadlocked. The partnership agreement does not include procedures for
resolving deadlocks, unless the deadlock relates to approval of our updated
strategic plan. If deadlocks cannot be resolved, inaction may result, which
could, among other things, result in us losing business opportunities.

USE OF PROCEEDS

The exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
private offering of the outstanding notes. We will not receive any cash
proceeds from the issuance of the new notes. In consideration for issuing the
new notes, we will receive in exchange a like principal amount of outstanding
notes. The outstanding notes surrendered in exchange for the new notes will be
retired and canceled, and cannot be re-issued. Accordingly, issuance of the new
notes will not result in any change in our capitalization.

We used the net proceeds from the sale of the outstanding notes of
approximately $685 million, together with $300 million of borrowings under our
credit facility, which was amended and restated August 24, 2001, to pay fees
and interest expense related to the credit facility and to refinance:

. approximately $820 million of our outstanding revolving credit
borrowings under our credit facility that were scheduled to mature in
November 2002; and

. approximately $90 million of our medium-term notes that matured on
August 30, 2001.

The remaining net proceeds will be used for general partnership purposes.

CAPITALIZATION

The following table describes our capitalization as of June 30, 2001 on a
historical basis and on a pro forma basis.

You should read this table in conjunction with "Selected Historical
Consolidated Financial and Operating Data," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
financial statements and the related notes and other financial and operating
data included elsewhere in this prospectus.

JUNE 30, 2001
----------------
ACTUAL PRO FORMA
------ ---------
(UNAUDITED)
(IN MILLIONS)

Cash and cash equivalents.................................. $ 57 $ 57
====== ======
Long-term debt, including current maturities:
Credit facility
Revolving loans (a).................................... $ 820 $ 65
Term loans............................................. -- 300
Medium-term notes (due 2001-2005)........................ 121 31
9.125% notes due 2002.................................... 100 100
8.50% notes due 2004..................................... 300 300
6.50% notes due 2006..................................... 150 150
8.75% notes due 2009..................................... 598 598
7.55% debentures due 2026................................ 150 150
10.125% senior notes due 2008............................ -- 700
Other.................................................... 9 9
------ ------
Total debt............................................. 2,248 2,403
Partners' capital.......................................... 3,430 3,430
------ ------
Total capitalization....................................... $5,678 $5,833
====== ======

--------
(a) Total committed revolver capacity was $1.25 billion on an actual basis and
is $500 million on a pro forma basis. See "Description of Other
Indebtedness--Amended and Restated Credit Facility" for a description of
our amended and restated credit facility.

OUR OWNERS

Equistar is a joint venture limited partnership owned by Lyondell Chemical
Company, Millennium Chemicals Inc. and Occidental Petroleum Corporation. See
"Ownership." Lyondell's aggregate interest in Equistar is 41%, and each of
Millennium's and Occidental's aggregate interest is 29.5%. Under the terms of
our partnership agreement, Lyondell manages our business, although significant
decisions regarding acquisitions, indebtedness and other matters require the
consent of representatives of each owner. For further information about our
governance, see "Description of the Partnership Agreement." Although Equistar
has general partners, the notes are non-recourse to the general partners, which
are all special purpose subsidiaries that have no other assets or operations.
The following is a description of each of our owners.

LYONDELL

Lyondell is a global chemical company with leading market positions in all of
its major products. Lyondell had revenues of approximately $4 billion and
EBITDA, including the proportionate share of its joint ventures, of
approximately $636 million for the year ended December 31, 2000, and
approximately $6.7 billion of assets at June 30, 2001. Lyondell is vertically
integrated into its key raw materials through its equity ownership in Equistar,
LYONDELL-CITGO Refining LP and Lyondell Methanol Company, L.P. Lyondell
operates in the following businesses:

. Intermediate Chemicals and Derivatives. Lyondell is the world's largest
producer of propylene oxide, commonly referred to as PO, and a leading
worldwide producer and marketer of PO derivatives. Lyondell is the
world's third largest supplier of toluene diisocyanate. Lyondell is also
a major producer and marketer of styrene monomer and tertiary butyl
alcohol, co-products of Lyondell's proprietary PO technology.

. Petrochemicals and Polymers. Lyondell operates in these businesses
through its ownership interest in Equistar.

. Refining. Lyondell owns 58.75% of LYONDELL-CITGO Refining LP, which owns
one of the largest crude oil refineries in the United States, located in
Houston, Texas. The refinery is a full conversion refinery with heavy
crude oil processing capability of approximately 268,000 barrels per day
of 17 degree API gravity crude oil.

. Methanol. Lyondell owns 75% of Lyondell Methanol Company, L.P., the
third largest producer of methanol in the United States.

MILLENNIUM

Millennium is a major international chemical company, with leading market
positions in a broad range of commodity, industrial, performance and specialty
chemicals. Millennium manufactures products in 14 plants on four continents.
Millennium had revenues of approximately $1.8 billion and EBITDA of
approximately $326 million for the year ended December 31, 2000, and
approximately $3.1 billion of assets at June 30, 2001. In addition to its
interest in Equistar, Millennium operates in three principal business segments:

. Titanium Dioxide and Related Products. Millennium is the second largest
producer of titanium dioxide, or TiO2, in the world, with manufacturing
facilities in the United States, the United Kingdom, France, Australia
and Brazil. Millennium is also the largest merchant seller of titanium
tetrachloride in North America and Europe and a major producer of silica
gel.

. Acetyls. Millennium is the second largest producer of acetic acid and
vinyl acetate monomer in North America.

. Fragrance and Flavor Chemicals. Millennium is the world's second largest
producer of terpene fragrance chemicals.

OCCIDENTAL

Occidental explores for, develops, produces and markets crude oil and natural
gas. Occidental also manufactures and markets basic chemicals, including
chlorine, caustic soda and ethylene dichloride, vinyls, including polyvinyl
chloride resins and vinyl chloride monomer, through its 76% interest in Oxy
Vinyls, LP, and specialty chemicals. Occidental conducts its operations through
various oil and gas and chemical subsidiaries and affiliates. Occidental also
has an interest in petrochemicals through its 29.5% ownership interest in
Equistar.

Occidental had net sales of approximately $13.6 billion for the year ended
December 31, 2000 and approximately $19.4 billion of assets as of that date.
Occidental's principal business consists of two industry segments:

. Oil and Gas Operations. Occidental conducts oil and gas operations in
the United States, Colombia, Ecuador, Oman, Pakistan, Qatar, Russia and
Yemen. At December 31, 2000, Occidental had total reserves of 1,803
million barrels of oil and 2,210 billion cubic feet of natural gas.

. Chemical Operations. Occidental conducts its chemical operations through
Occidental Chemical Corporation and its various subsidiaries and
affiliates, including Equistar. Occidental is a chemical manufacturer,
with interests in basic chemicals, vinyls, petrochemicals and specialty
chemicals.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents selected historical consolidated financial and
operating data. The historical consolidated financial data has been derived
from our audited consolidated financial statements for the years ended December
31, 1998, 1999 and 2000 and from our unaudited consolidated financial
statements for the six months ended June 30, 2000 and 2001.

The selected historical consolidated financial data presented below is
condensed and may not contain all of the information that you should consider.
You should read this selected financial data in conjunction with our
consolidated financial statements, including the related notes, and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section included elsewhere in this prospectus.

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1998(A) 1999 2000 2000 2001
---------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN MILLIONS)

INCOME STATEMENT DATA:
Sales and other operating
revenues.................... $ 4,524 $ 5,594 $ 7,495 $ 3,757 $ 3,373
Cost of sales................ 3,928 5,002 6,908 3,332 3,245
Selling, general and adminis-
trative expenses............ 229 259 182 93 91
Unusual charges (b).......... 14 96 -- -- 22
Operating income (loss)...... 282 162 334 297 (22)
Interest expense............. (156) (182) (185) (91) (91)
Other income, net (c)........ -- 46 -- -- 6
Net income (loss)............ 143 32 153 208 (107)
OTHER OPERATING DATA:
EBITDA excluding unusual
charges (d)................. $ 564 $ 604 $ 644 $ 449 $ 165
Depreciation and amortiza-
tion........................ 268 300 310 152 159
Capital expenditures......... 200 157 131 48 53
Ratio of earnings to fixed
charges (e)................. 1.7x 1.1x 1.7x 2.9x --
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents.... $ 66 $ 108 $ 18 $ 70 $ 57
Total assets................. 6,665 6,736 6,582 6,719 6,391
Total debt................... 2,220 2,261 2,248 2,239 2,248
Total partners' capital...... 3,885 3,662 3,540 3,644 3,430
SALES VOLUMES (IN MILLIONS):
Selected petrochemical prod-
ucts:
Olefins (pounds)........... 16,716 18,574 18,490 9,508 8,313
Aromatics (gallons)........ 271 367 397 211 188
Polymer products (pounds).... 6,488 6,388 6,281 3,141 2,837

--------
(a) The financial and operating data for 1998 includes the operating results of
the business contributed to us by Occidental prospectively from May 15,
1998, the date of contribution. The business contributed to us by
Occidental was accounted for using the purchase method of accounting.
(b) For the year ended December 31, 1998 unusual charges were $14 million, for
the year ended December 31, 1999 unusual charges were $96 million and for
the year ended December 31, 2000 unusual charges were $0. For the six
months ended June 30, 2000 unusual charges were $0 and for the six months
ended June 30, 2001 unusual charges were $22 million. Unusual charges in
2001 were the result of the shutdown of our Port Arthur, Texas polyethylene
facility in February 2001, including decommissioning and environmental
remediation expenses in connection with the shutdown. Unusual charges in
1999 were the result of decisions to shut down polymer reactors at two
Equistar sites and to consolidate certain

administrative functions between Lyondell and Equistar. During the year
ending December 31, 1998, unusual charges were the result of the mergers and
integration of the businesses contributed by Lyondell, Millennium, and
Occidental.
(c) Other income, net in 1999 and the six months ended June 30, 2001, primarily
consists of gains on asset sales, including the sale of our concentrates
and compounds business in April 1999.
(d) EBITDA excluding unusual charges is calculated as operating income
excluding unusual charges, plus other income, net and depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles, it is included herein to provide additional
information with respect to our ability to meet our future debt service,
capital expenditure and working capital requirements. EBITDA is not
necessarily a measure of our ability to fund our cash needs. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. In addition,
it should be noted that companies calculate EBITDA differently and
therefore EBITDA as presented for us may not be comparable to EBITDA
reported by other companies.
(e) The ratio of earnings to fixed charges is computed by dividing earnings
available for fixed charges by fixed charges. Earnings available for fixed
charges consist of earnings before income taxes plus fixed charges, less
capitalized interest. Fixed charges consist of interest, whether expensed
or capitalized, and the portion of operating lease rental expense that
represents the interest factor. For the six months ended June 30, 2001,
earnings were insufficient to cover fixed charges by $107 million.

THE EXCHANGE OFFER

We are offering to issue new 10 1/8% senior notes due 2008 in exchange for a
like principal amount of our outstanding 10 1/8% senior notes due 2008. We may
extend, delay or terminate the exchange offer. Holders of outstanding notes
will need to complete the exchange offer documentation related to the exchange.

PURPOSE AND EFFECT OF THE EXCHANGE OFFER

We entered into a registration rights agreement with the initial purchasers
of the outstanding notes in which we agreed to file a registration statement
relating to an offer to exchange the outstanding notes for new notes within 90
days after the closing of the offering and to use our best efforts to have it
declared effective within 210 days after issuing the outstanding notes. We are
offering the new notes under this prospectus to satisfy those obligations under
the registration rights agreement.

If the exchange offer is not permitted by applicable law or SEC policy or in
general if any holder of the outstanding notes notifies us before the 20th
business day following the consummation of the exchange offer that:

. it is prohibited by law or SEC policy from participating in the exchange
offer;

. it cannot resell the new notes to the public without delivering a
prospectus and this prospectus is not appropriate or available for those
resales by it; or

. it is a broker-dealer that holds notes acquired directly from us or any
of our affiliates,

we will file with the SEC a shelf registration statement to cover resales of
outstanding notes. See "Registration Rights Agreement--Shelf Registration
Statement."

If we fail to comply with deadlines for completion of the exchange offer, we
will be required to pay liquidated damages to holders of the outstanding notes.
Please read the section captioned "Registration Rights Agreement" for more
details regarding the registration rights agreement.

To receive transferable new notes in exchange for your outstanding notes in
the exchange offer, you, as holder of that outstanding note, will be required
to make the following representations:

. you are not an "affiliate," as defined in Rule 144 of the Securities
Act, of Equistar or a broker-dealer tendering outstanding notes acquired
directly from us for your own account;

. if you are not a broker-dealer or are a broker-dealer but will not
receive new notes for your own account in exchange for outstanding
notes, you are not engaged in and do not intend to participate in a
distribution of the new notes;

. you have no arrangement or understanding with any person to participate
in a distribution of the outstanding notes or the new notes within the
meaning of the Securities Act;

. you are acquiring the new notes in the ordinary course of your business;
and

. if you are a broker-dealer that will receive new notes for your own
account in exchange for outstanding notes, you represent that the
outstanding notes to be exchanged for new notes were acquired by you as
a result of market-making activities or other trading activities and you
acknowledge that you will deliver a prospectus meeting the requirements
of the Securities Act in connection with the resale of any new notes. It
is understood that you are not admitting that you are an "underwriter"
within the meaning of the Securities Act by acknowledging that you will
deliver, and by delivery of, a prospectus.

RESALE OF NEW NOTES

Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offer
may be offered for resale, resold and otherwise transferred by you, the holder
of that new note, without compliance with the registration and prospectus
delivery provisions of the Securities Act if:

. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act,

. the new note is acquired in the ordinary course of your business and

. you do not intend to participate in the distribution of new notes.

However, the SEC has not considered the legality of our exchange offer in the
context of a "no action letter," and there can be no assurance that the staff
of the SEC would make a similar determination with respect to our exchange
offer as in other circumstances.

If you tender outstanding notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes, you:

. cannot rely on these interpretations by the SEC staff and

. must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.

Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 or Item 508, as applicable, of
Regulation S-K under the Securities Act. This prospectus may be used for an
offer to resell, resale or other retransfer of new notes only as specifically
described in this prospectus. Failure to comply with the registration and
prospectus delivery requirements by a holder subject to these requirements
could result in that holder incurring liability for which it is not idemnified
by us. Only broker-dealers that acquired the outstanding notes as a result of
market-making activities or other trading activities may participate in the
exchange offer. Please read the section captioned "Plan of Distribution" for
more details regarding the transfer of new notes.

TERMS OF THE EXCHANGE OFFER

Upon the terms and subject to the conditions described in this prospectus and
in the letter of transmittal, we will accept for exchange any outstanding notes
properly tendered and not withdrawn before the expiration date. We will issue
$1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding notes surrendered under the exchange offer. Outstanding
notes may be tendered only in integral multiples of $1,000. The exchange offer
is not conditioned upon any minimum aggregate principal amount of outstanding
notes being tendered for exchange.

As of the date of this prospectus, $700 million aggregate principal amount of
10 1/8% senior notes due 2008 are outstanding. This prospectus and the letter
of transmittal included with this prospectus are being sent to all registered
holders of outstanding notes. There will be no fixed record date for
determining registered holders of outstanding notes entitled to participate in
the exchange offer.

We intend to conduct the exchange offer according to the provisions of the
registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934 and the rules and regulations of
the SEC. Outstanding notes that are not tendered for exchange in the exchange
offer will remain outstanding and continue to accrue interest and will be
entitled to the rights and benefits the holders have under the indenture
relating to the notes.

We will be deemed to have accepted for exchange properly tendered outstanding
notes when we have given oral or written notice of the acceptance to the
exchange agent and complied with the applicable provisions of the registration
rights agreement. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the new notes.

Holders tendering outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the exchange offer. It is
important for holders to read the section labeled "--Fees and Expenses" for
more details regarding fees and expenses incurred in the exchange offer.

We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.

EXPIRATION DATE

The exchange offer will expire at 5:00 p.m., New York City time, on November
14, 2001 unless, in our sole discretion, we extend the exchange offer.

EXTENSIONS, DELAY IN ACCEPTANCE, TERMINATION OR AMENDMENT

We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. During any
extensions, all outstanding notes previously tendered will remain subject to
the exchange offer, and we may accept them for exchange.

To extend the exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.

If any of the conditions described below under "--Conditions to the Exchange
Offer" have not been satisfied, we reserve the right, in our sole discretion:

. to delay accepting for exchange any outstanding notes,

. to extend the exchange offer or

. to terminate the exchange offer

by giving oral or written notice of a delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.

Any delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice to the registered holders
of the outstanding notes. If we amend an exchange offer in a manner we
determine to constitute a material change, we will promptly disclose the
amendment by means of a prospectus supplement. The supplement will be
distributed to the registered holders of the outstanding notes. Depending upon
the significance of the amendment and the manner of disclosure to the
registered holders, we will extend the exchange offer if the exchange offer
would otherwise expire during that period.

Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we will have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
release to the Dow Jones News Service.

CONDITIONS TO THE EXCHANGE OFFER

Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of outstanding
notes, would violate applicable law or any applicable interpretation of the
staff of the SEC:

. we will not be required to accept for exchange, or exchange any new
notes for, any outstanding notes and

. we may terminate the exchange offer as provided in this prospectus
before accepting any outstanding notes for exchange.

In addition, we will not be obligated to accept for exchange the outstanding
notes of any holder that has not made the following:

. the representations described under "--Purpose and Effect of the
Exchange Offer," "--Procedures for Tendering" and "Plan of Distribution"
and

. other representations as may be reasonably necessary under applicable
SEC rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act.

We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions to the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, nonacceptance or termination to the holders of the outstanding notes
as promptly as practicable. These conditions are for our sole benefit, and we
may assert them or waive them in whole or in part at any time or at various
times in our sole discretion. If we fail at any time to exercise any of these
rights, this failure will not mean that we have waived our rights. Each right
will be deemed an ongoing right that we may assert at any time or at various
times. In addition, we will not accept for exchange any outstanding notes
tendered and will not issue new notes in exchange for any outstanding notes, if
at that time any stop order has been threatened or is in effect with respect to
the registration statement of which this prospectus constitutes a part or the
qualification of the indenture relating to the notes under the Trust Indenture
Act of 1939.

PROCEDURES FOR TENDERING

HOW TO TENDER GENERALLY

Only a holder of outstanding notes may tender their outstanding notes in the
exchange offer. To tender in the exchange offer, you must either comply with
the procedures for manual tender or comply with the automated tender offer
program procedures of DTC described below under "--Tendering Through DTC's
Automated Tender Offer Program."

To complete a manual tender, you must

. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,

. have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires,

. mail or deliver the letter of transmittal or a facsimile of the letter
of transmittal to the exchange agent before the expiration date, and

. deliver and the exchange agent must receive, before the expiration date:

- the outstanding notes along with the letter of transmittal, or

- a timely confirmation of book-entry transfer of the outstanding
notes into the exchange agent's account at DTC according to the
procedure for book-entry transfer described below under "--Book-
Entry Transfer."

If you wish to tender your outstanding notes and cannot comply with the
requirement to deliver the letter of transmittal and your outstanding notes or
use the automated tender offer program of DTC before the expiration date, you
must tender your outstanding notes according to the guaranteed delivery
procedures described below.

To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Prospectus Summary--The Exchange Agent" before
the expiration date. The tender by a holder that is not withdrawn before the
expiration date will constitute an agreement between the holder and us
according to the terms and subject to the conditions described in this
prospectus and in the letter of transmittal.

THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND
RISK. RATHER THAN MAIL THESE ITEMS, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND
THE LETTER OF TRANSMITTAL OR OUTSTANDING NOTES TO US. YOU MAY REQUEST YOUR
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR OTHER NOMINEES TO EFFECT
THE ABOVE TRANSACTIONS ON YOUR BEHALF.

BOOK-ENTRY TRANSFER

The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus. Any financial institution participating in
DTC's system may make book-entry delivery of outstanding notes by causing DTC
to transfer the outstanding notes into the exchange agent's account at DTC
according to DTC's procedures for transfer. Holders of outstanding notes who
are unable to deliver confirmation of the book-entry tender of their
outstanding notes into the exchange agent's account at DTC or all other
documents required by the letter of transmittal to the exchange agent on or
before the expiration date must tender their outstanding notes according to the
guaranteed delivery procedures described below.

TENDERING THROUGH DTC'S AUTOMATED TENDER OFFER PROGRAM

The exchange agent and DTC have confirmed that any financial institution that
is a participant in DTC's system may use DTC's automated tender offer program
to tender its outstanding notes. Participants in the program may, instead of
physically completing and signing the letter of transmittal and delivering it
to the exchange agent, transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the outstanding notes
to the exchange agent according to its procedures for transfer. DTC will then
send an agent's message to the exchange agent.

The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that:

. DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of book-entry confirmation,

. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery and

. the agreement may be enforced against the participant.

HOW TO TENDER IF YOU ARE A BENEFICIAL OWNER

If you beneficially own outstanding notes that are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and you wish
to tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own behalf, you must, before completing and executing the letter
of transmittal and delivering your outstanding notes, either:

. make appropriate arrangements to register ownership of the outstanding
notes in your name or

. obtain a properly completed bond power from the registered holder of
outstanding notes.

The transfer of registered ownership may take considerable time and may not
be completed before the expiration date.

SIGNATURES AND SIGNATURE GUARANTEES

Except as described below, you must have signatures on a letter of
transmittal or a notice of withdrawal described below guaranteed by:

. a member firm of a registered national securities exchange,

. a member of the National Association of Securities Dealers, Inc.,

. a commercial bank or trust company having an office or correspondent in
the United States or

. an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934.

The above must be a member of one of the recognized signature guarantee
programs identified in the letter of transmittal. No signature guarantee is
required if the outstanding notes are tendered:

. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal and the new notes are being issued directly to the
registered holder of the outstanding notes tendered in the exchange for
those new notes or

. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in
the United States, or an eligible guarantor institution.

WHEN ENDORSEMENTS OR BOND POWERS ARE NEEDED

If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes, the outstanding notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed
by the registered holder as the registered holder's name appears on the
outstanding notes and a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an eligible guarantor institution must guarantee the signature
on the bond power.

If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. They should also
submit evidence of their authority to deliver the letter of transmittal
satisfactory to us unless we waive this requirement.

DETERMINATIONS UNDER THE EXCHANGE OFFER

We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes
and withdrawal of tendered outstanding notes. Our determination will be final
and binding. We reserve the absolute right to reject any outstanding notes not
properly tendered or any outstanding notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within the time we
shall determine. Neither we, the exchange agent nor any other person will be
under any duty to give notification of defects or irregularities with respect
to tenders of outstanding notes, and none of the aforementioned will incur
liability for failure to give notification. Tenders of outstanding notes will
not be deemed made until any defects or irregularities have been cured or
waived. Any outstanding notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.

WHEN WE WILL ISSUE NEW NOTES

In all cases, we will issue new notes for outstanding notes that we have
accepted for exchange under the exchange offer only after the exchange agent
timely receives:

. outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC and

. a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.

RETURN OF OUTSTANDING NOTES NOT ACCEPTED OR EXCHANGED

If we do not accept any tendered outstanding notes for exchange for any
reason described in the terms and conditions of the exchange offer or if
outstanding notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or nonexchanged outstanding notes will be
returned without expense to their tendering holder. In the case of outstanding
notes tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described below, the nonexchanged outstanding notes
will be credited to an account maintained with DTC. These actions will occur as
promptly as practicable after the expiration or termination of the exchange
offer.

YOUR REPRESENTATIONS TO US

By signing or agreeing to be bound by the letter of transmittal, you will
represent that, among other things:

. you are not our "affiliate," as defined in Rule 144 of the Securities
Act or a broker-dealer tendering outstanding notes acquired directly
from Equistar for your own account;

. you have no arrangement or understanding with any person to participate
in a distribution of the outstanding notes or the new notes within the
meaning of the Securities Act;

. you are acquiring the new notes in the ordinary course of your business;
and

GUARANTEED DELIVERY PROCEDURES

If you wish to tender your outstanding notes but your outstanding notes are
not immediately available or you cannot deliver your outstanding notes, the
letter of transmittal or any other required documents to the exchange agent or
comply with the applicable procedures under DTC's automated tender offer
program before the expiration date, you may tender if:

. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution,

. before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust
company having an office or correspondent in the United States, or
eligible guarantor institution either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail
or hand delivery or a properly transmitted agent's message and notice of
guaranteed delivery:

-- stating your name and address, the registered number(s) of your
outstanding notes and the principal amount of outstanding notes
tendered,

-- stating that the tender is being made and

-- guaranteeing that, within three business days after the expiration
date, the letter of transmittal or facsimile thereof, together with
the outstanding notes or a book-entry confirmation and any other
documents required by the letter of transmittal will be deposited by
the eligible guarantor institution with the exchange agent; and

. the exchange agent receives the properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered outstanding
notes in proper form for transfer or a book-entry confirmation, and all
other documents required by the letter of transmittal, within three
business days after the expiration date.

Upon request to the exchange agent, the exchange agent will send you a notice
of guaranteed delivery if you wish to tender your outstanding notes using the
guaranteed delivery procedures described above.

WITHDRAWAL OF TENDERS

Except as otherwise provided in this prospectus, you may withdraw your tender
at any time before 5:00 p.m., New York City time, on the expiration date unless
previously accepted for exchange. For a withdrawal to be effective:

. the exchange agent must receive a written notice of withdrawal at one of
the addresses listed above under "Prospectus Summary--The Exchange
Agent" or

. the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system.

Any notice of withdrawal must:

. specify the name of the person who tendered the outstanding notes to be
withdrawn (the "Depositor"),

. identify the outstanding notes to be withdrawn, including the
registration number or numbers and the principal amount of the
outstanding notes,

. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those outstanding notes or
be accompanied by documents of transfer sufficient to permit the trustee
for the outstanding notes to register the transfer into the name of the
Depositor withdrawing the tender and

. specify the name in which the outstanding notes are to be registered, if
different from that of the Depositor.

If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding
notes and otherwise comply with the procedures of DTC.

We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any outstanding notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.

Any outstanding notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. Holders may retender properly withdrawn outstanding notes by
following one of the procedures described under "--Procedures for Tendering"
above at any time on or before the expiration date.

FEES AND EXPENSES

We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.

We have not retained any dealer-manager in connection with the exchange offer
and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letters of
transmittal and related documents to the beneficial owners of the outstanding
notes and in handling or forwarding tenders for exchange.

We will pay the cash expenses to be incurred in connection with the exchange
offer, including:

. SEC registration fees,

. fees and expenses of the exchange agent and trustee,

. accounting and legal fees and printing costs and

. related fees and expenses.

TRANSFER TAXES

We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:

. certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered,

. tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal or

. a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.

If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.

CONSEQUENCES OF FAILURE TO EXCHANGE

If you do not exchange your outstanding notes for new notes in the exchange
offer your notes will remain subject to the existing restrictions on transfer.
In general, you may not offer or sell the outstanding notes unless they are
registered under the Securities Act or the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the outstanding notes under the Securities Act. Based on
interpretations of the SEC staff, you may offer for resale, resell or otherwise
transfer new notes issued in the exchange offer without compliance with the
registration and prospectus delivery provisions of the Securities Act, if:

. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act,

. you acquired the new notes in the ordinary course of your business and

. you have no arrangement or understanding with respect to the
distribution of the new notes to be acquired in the exchange offer.

If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes,

. you cannot rely on the applicable interpretations of the SEC and

. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.

ACCOUNTING TREATMENT

We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize expenses of the exchange
offer over the term of the new notes under accounting principles generally
accepted in the United States of America.

OTHER

Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult their financial and tax
advisors in making your own decision on what action to take.

WE MAY, IN THE FUTURE, SEEK TO ACQUIRE UNTENDERED OUTSTANDING NOTES IN OPEN
MARKET OR PRIVATELY NEGOTIATED TRANSACTIONS, THROUGH SUBSEQUENT EXCHANGE OFFERS
OR OTHERWISE. WE HAVE NO PRESENT PLANS TO ACQUIRE ANY OUTSTANDING NOTES THAT
ARE NOT TENDERED IN THE EXCHANGE OFFER OR TO FILE A REGISTRATION STATEMENT TO
PERMIT RESALES OF ANY UNTENDERED OUTSTANDING NOTES.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with information contained in
the consolidated financial statements and the notes thereto included in this
prospectus.

OVERVIEW

We derive our revenues, earnings and cash flow from the sale of petrochemical
and polymer products to customers, predominantly in North America. Generally,
the market for petrochemical and polymer products in North America has grown at
rates approximating general economic growth rates. Many of the markets for our
products, particularly ethylene and propylene, and many grades of polyethylene
and polypropylene, are cyclical and sensitive to changes in the balance between
supply and demand, the price of raw materials and the level of general economic
activity. Historically, these markets have experienced alternating periods of
tight supply, rising prices and profit margins, followed by periods of capacity
additions resulting in over capacity and declining prices and margins.

The three-year period from 1998 to 2000 was marked by considerable volatility
in the industry. The fourth quarter of 1998 marked a trough in the commodity
petrochemical cycle due to a combination of new capacity, high inventory levels
and the Asian financial crisis. In 1999, ethylene and derivatives prices
rebounded from year end 1998 lows as domestic ethylene demand grew by more than
6.5%, while the industry experienced both planned and unplanned outages. As a
result, benchmark ethylene prices increased every quarter from the end of 1998,
and reached a peak in mid-2000. Raw material costs also began increasing during
1999 due to higher oil and gas prices. These increases continued through 1999
into 2000 and remained at high levels during 2000. From the end of 1998 to the
end of 2000, the weighted-average cost of raw materials for the industry rose
150%. Surging natural gas costs late in 2000 increased both the costs of
natural gas liquids-based raw materials (primarily ethane) as well as the cost
of utilities. As a result, some United States-based producers, including us,
idled plants that use natural gas liquids-based raw materials. Also during
2000, significant industry ethylene capacity was added. During the latter half
of 2000, demand began to weaken due to slower United States economic growth. As
a result of these factors, benchmark ethylene prices declined in the fourth
quarter 2000.

Demand for products in our petrochemicals and polymers segments during the
first half of 2001 was affected by continuing weakness in the U.S. economy, a
trend that started in the second half of 2000. The U.S. economy grew at an
estimated annual rate of 1% in the first half of 2001 compared to 5% in the
first half of 2000. Crude oil prices, which affect the cost of crude-oil based
raw materials, began to decrease in the first quarter 2001 and continued in a
downward trend in the second quarter 2001 to levels comparable to the prior
year periods. Natural gas costs, which affect the cost of natural gas liquids,
another major source of raw materials for Equistar, as well as energy costs,
began to decrease in the second quarter 2001 from the high levels reached in
the first quarter 2001.

Natural gas prices spiked in January 2001 at nearly $10 per million BTUs,
compared to a price range of $1.50 to $2.50 per million BTUs in the period from
1991 to 1999. Since the January 2001 spike, natural gas prices have decreased.
Second quarter 2001 average natural gas prices decreased 33% from first quarter
2001 levels. Nonetheless, second quarter 2001 average natural gas prices were
36% higher than natural gas prices in the second quarter 2000 and average
natural gas prices for the first half of 2001 were almost double those of the
first half of 2000. The high natural gas prices had a significant impact in
reducing the competitive position of North American exports to other regions of
the world. With the recent decreases in natural gas prices, the competitive
position of North American exports has improved, but, as of the end of the
second quarter, had not returned to its historical position. These high natural
gas prices had a significant impact on our costs in the first six months of
2001.

The significant increase in natural gas liquids costs, lower exports and
lower domestic demand led some producers, including us, to idle plants that
primarily use natural gas liquids as raw materials. In the second quarter 2001,
we reduced the state of readiness of our previously idled Lake Charles,
Louisiana plant, which represents 7% of our ethylene capacity. Industry
analysts estimate that U.S. producers were operating at less than 85% of
capacity for the first half of 2001 compared to slightly over 95% in the first
half of 2000.

In addition, the ethylene industry is affected by significant capacity
additions. The industry added annual ethylene capacity of 13.4 billion pounds
globally in 2000 and is scheduled to add a record 14.1 billion pounds in 2001,
or nearly 6% in each year. New domestic capacity scheduled for the latter half
of 2001 will add 5% to existing domestic ethylene capacity during a period of
weak demand growth. The combination of weak demand and excess capacity has put
pressure on industry prices and margins in 2001.

SEGMENT DATA

The following tables reflect selected actual sales volume data, including
intersegment sales volumes, and summarized financial information for our
business segments. The addition of the business contributed to us by Occidental
is reflected prospectively from May 15, 1998.

FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- --------------------
1998 1999 2000 2000 2001
------- ------- ------- --------- ---------
(UNAUDITED)
(MILLIONS OF DOLLARS)

SALES AND OTHER OPERATING
REVENUES:
Petrochemicals segment....... $ 3,474 $ 4,759 $ 7,031 $ 3,486 $ 3,164
Polymers segment............. 2,208 2,159 2,351 1,211 1,058
Intersegment eliminations.... (1,158) (1,324) (1,887) (940) (849)
------- ------- ------- --------- ---------
Total.................... $ 4,524 $ 5,594 $ 7,495 $ 3,757 $ 3,373
======= ======= ======= ========= =========
COST OF SALES:
Petrochemicals segment....... $ 3,143 $ 4,298 $ 6,330 $ 3,043 $ 2,961
Polymers segment............. 1,943 2,028 2,465 1,229 1,133
Intersegment eliminations.... (1,158) (1,324) (1,887) (940) (849)
------- ------- ------- --------- ---------
Total.................... $ 3,928 $ 5,002 $ 6,908 $ 3,332 $ 3,245
======= ======= ======= ========= =========
OTHER OPERATING EXPENSES:
Petrochemicals segment....... $ 12 $ 14 $ 7 $ 4 $ 7
Polymers segment............. 88 80 71 36 37
Unallocated.................. 200 240 175 88 84
Unusual charges.............. 14 96 -- -- 22
------- ------- ------- --------- ---------
Total.................... $ 314 $ 430 $ 253 $ 128 $ 150
======= ======= ======= ========= =========
OPERATING INCOME (LOSS):
Petrochemicals segment....... $ 319 $ 447 $ 694 $ 439 $ 196
Polymers segment............. 177 51 (185) (54) (112)
Unallocated.................. (200) (240) (175) (88) (84)
Unusual charges.............. (14) (96) -- -- (22)
------- ------- ------- --------- ---------
Total.................... $ 282 $ 162 $ 334 $ 297 $ (22)
======= ======= ======= ========= =========
SALES VOLUMES (IN MILLIONS):
Selected petrochemicals prod-
ucts:
Olefins (pounds)........... 16,716 18,574 18,490 9,508 8,313
Aromatics (gallons)........ 271 367 397 211 188
Polymers products (pounds)... 6,488 6,388 6,281 3,141 2,837

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001

NET INCOME

Our net loss of $30 million in the second quarter 2001 compares to net income
of $152 million in the second quarter 2000. The decrease of $182 million
primarily reflected lower volumes due to reduced demand and lower margins in
our petrochemicals segment due to lower prices for ethylene and co-product
propylene. Polymers segment results did not change significantly.

Our net loss of $107 million for the first six months of 2001 compares to net
income of $208 million for the first six months of 2000. The $315 million
decrease reflects lower volumes and margins in both the petrochemicals and
polymers segments. The lower volumes reflect weaker demand in 2001. The lower
margins were due to the significant effect of higher natural gas costs in the
first quarter 2001 on the cost of natural gas liquids-based raw materials and
energy costs as well as lower co-product propylene prices and lower polymers
prices. The first quarter 2001 also included $22 million of costs associated
with the shutdown of the Port Arthur, Texas polyethylene facility.

PETROCHEMICALS SEGMENT

Revenues--Revenues of $1.5 billion in the second quarter 2001 decreased 17%
compared to second quarter 2000 revenues of $1.8 billion due to lower sales
volumes and prices. Sales volumes decreased about 12% due to lower demand,
reflecting the weakness of the U.S. economy. The decrease in sales prices also
reflects the lower demand and excess industry capacity. Benchmark quoted
ethylene prices averaged 28.4 cents per pound in the second quarter 2001, a 10%
decrease compared to the second quarter 2000. Average benchmark propylene
prices decreased 30% compared to the second quarter 2000.

Revenues of $3.2 billion for the first six months of 2001 decreased 9%
compared to the first six months of 2000 as lower 2001 sales volumes were
partially offset by higher average prices in 2001. Sales volumes decreased
about 13% due to weaker business conditions in 2001. Average sales prices in
2001 were slightly higher primarily due to increases in the first quarter 2001
in response to high natural gas costs. Prices declined in the second quarter
2001.

Cost of Sales--Cost of sales of $1.4 billion in the second quarter 2001
decreased 7% compared to $1.5 billion in the second quarter 2000. The decrease
was primarily due to 12% lower volumes and was partly offset by a significant
decrease in co-product propylene prices, resulting in a lower co-product credit
to cost of sales.

Cost of sales of $3.0 billion in the first six months of 2001 decreased 3%
compared to the first six months of 2000. The effect of the 13% decrease in
sales volumes was substantially offset by the significant first quarter 2001
increase in natural gas liquids-based raw material costs and energy costs due
to the spike in natural gas costs as well as the decrease in co-product prices.

Operating Income--Operating income of $81 million in the second quarter 2001
decreased from $267 million in the second quarter 2000 due to lower sales
volumes as well as lower prices and margins, primarily for co-product
propylene.

Operating income of $196 million for the first six months of 2001 decreased
from $439 million in the first six months of 2000 due to higher natural gas
liquids-based raw material costs and higher energy costs, primarily in the
first quarter 2001, as well as lower sales volumes and lower co-product
propylene prices.

POLYMERS SEGMENT

Revenues--Revenues of $516 million in the second quarter 2001 decreased 13%
compared to $595 million in the second quarter 2000 reflecting an 8% decrease
in average sales prices and a 5% decrease in volumes. The decrease in sales
prices reflected weaker 2001 business conditions and pressure from decreasing
raw material costs. The decline in volumes was tempered by the effect on second
quarter 2000 volumes of a turnaround at the Morris, Illinois facility during
that period.

Revenues of $1.1 billion for the first six months of 2001 decreased almost
13% compared to $1.2 billion in the first six months of 2000 due to a 10%
decrease in sales volumes and a 3% decrease in average sales prices compared to
the first six months of 2000. The decrease in sales volumes reflects the effect
of weaker demand in the first six months of 2001. The sales price decreases
reflect weaker 2001 business conditions and pressure from decreasing raw
material costs.

Cost of Sales--Cost of sales of $520 million in the second quarter 2001
decreased 13% compared to $599 million for the second quarter 2000. The
decrease in 2001 reflected lower raw material costs, primarily ethylene and
propylene, as well as the 5% decrease in volumes.

Cost of sales of $1.1 billion in the first six months of 2001 decreased 8%
compared to $1.2 billion for the first six months of 2000, due to a 10%
decrease in sales volumes in 2001. The decrease in raw material costs in the
first six months of 2001 was not as significant as in the second quarter
comparison due to the first quarter 2001 effect of high natural gas costs on
both raw material and energy costs.

Operating Income--The polymers segment had an operating loss of $23 million
in both the second quarter 2001 and the second quarter 2000. Although sales
prices decreased in the second quarter 2001, raw material costs also decreased,
offsetting the lower prices and the 5% lower sales volumes.

For the first six months of 2001, the operating loss was $112 million
compared to an operating loss of $54 million in the comparable 2000 period. The
increased operating loss was primarily due to the effect of lower polymers
prices on margins as well as the effect of lower sales volumes and the first
quarter 2001 effect of high natural gas costs.

UNALLOCATED ITEMS

The following discusses expenses that were not allocated to the
petrochemicals or polymers segments.

Unusual Charges--We discontinued production at our higher-cost Port Arthur,
Texas polyethylene facility on February 28, 2001 and shut down the facility.
Closed production units included a 240 million pounds per year high density
polyethylene reactor and a low density polyethylene reactor with annual
capacity of 160 million pounds. These units and a 300 million pounds per year
high density polyethylene reactor mothballed in the fourth quarter of 1999 have
been shut down permanently. The asset values of these production units were
previously adjusted as part of a $96 million restructuring charge recognized in
1999. During the first quarter 2001, we recorded a $22 million charge, which
included environmental remediation liabilities of $7 million, other exit costs
of $3 million and severance and pension benefits of $7 million for
approximately 125 people employed at the Port Arthur facility. The remaining
balance primarily related to the write down of certain inventories.

SECOND QUARTER 2001 VERSUS FIRST QUARTER 2001

Our net loss of $30 million in the second quarter 2001 compares to a net loss
of $77 million in the first quarter 2001. Excluding $22 million of Port Arthur
shutdown costs in the first quarter 2001, our net loss decreased $25 million.
This was primarily due to a $66 million decrease in the operating loss of the
polymers segment, offset in part by a $34 million decrease in the operating
profit of the petrochemicals segment.

The petrochemicals segment reported operating income of $81 million in the
second quarter 2001 compared to $115 million in the first quarter 2001. Second
quarter 2001 olefins sales volumes declined 4% from the first quarter 2001 as
the domestic economy continued to weaken. Ethylene and co-product price
decreases were only partly offset by decreases in energy and raw material
costs, resulting in lower margins. Average benchmark ethylene prices were 28.4
cents per pound in the second quarter 2001, a 12% decrease from the first
quarter 2001 average price of 32.1 cents. Pricing for co-products such as
propylene, butadiene and benzene fell even more significantly.

The polymers segment had an operating loss of $23 million in the second
quarter 2001 compared to an operating loss of $89 million in the first quarter
2001. The improvement was the result of polymers prices decreasing less than
energy costs and the cost of ethylene, a major raw material. Polymer price
increases from the first quarter 2001 were still being phased in during April
2001, while ethylene prices began to decline in March 2001. During April and
early May of 2001, margins in the polymer business increased. In late May and
June of 2001, polymer prices began to fall as new polymer capacity impacted the
market. Second quarter 2001 sales volumes for polymers decreased 3% from the
first quarter 2001 due to the weak domestic economy.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

NET INCOME

Our 2000 net income of $153 million increased $71 million from net income,
excluding unusual items, of $82 million in 1999. The increase reflected the
benefits of higher petrochemicals segment margins and lower selling, general
and administrative expenses partly offset by lower polymers segment margins and
lower sales volumes in both segments. The unusual items in 1999 included
restructuring and other unusual charges of $96 million and gains on asset sales
of $46 million. Petrochemicals margins improved in 2000 as average sales prices
increased more than raw material costs. However, polymers sales price increases
in 2000 lagged behind raw material cost increases, leading to reduced margins.
Lower 2000 volumes in both segments primarily reflected a slow down in demand
in the latter half of 2000.

Our net income, excluding unusual items, of $82 million in 1999 decreased $75
million from net income, excluding unusual items, of $157 million in 1998. The
decrease was attributable to lower polymers margins, higher general and
administrative expenses, and higher interest expense in 1999 compared with
1998. These were only partly offset by higher petrochemicals sales volumes.
Unusual items in 1998 included $14 million of restructuring charges.

PETROCHEMICALS SEGMENT

Revenues--Revenues of $7.0 billion in 2000 increased 48% from $4.8 billion in
1999. The increase was primarily due to higher average sales prices, as sales
volumes were relatively flat compared to 1999. Sales prices rose rapidly in
1999, and remained at higher levels throughout 2000, resulting in higher
average prices for 2000. For example, average benchmark ethylene prices were
37% higher in 2000 than in 1999. Volumes were flat due to a slow down in demand
in the latter half of 2000, reflecting slower growth in the U.S. economy. As a
result of the slower demand and the adverse effects of the rapid fourth quarter
increase in natural gas costs, we idled some capacity in 2000 that uses natural
gas liquids-based raw materials.

Revenues of $4.8 billion in 1999 increased 37% from $3.5 billion in 1998. The
increase was due to both higher average sales prices and higher sales volumes
during 1999. As a result of rapidly rising prices

throughout 1999, which reflected stronger demand as well as increases in the
underlying cost of raw materials, average sales prices for 1999 were about 20%
higher than average sales prices for 1998. Sales volumes increased about 13%
during 1999, reflecting a full year of the business contributed to us by
Occidental and stronger demand.

Cost of Sales--Cost of sales of $6.3 billion in 2000 increased 47% compared
to cost of sales of $4.3 billion in 1999. The increase was primarily due to
increases in raw material costs, which were affected by higher average crude
oil and natural gas costs in 2000. Industry data indicates that the average
cost of crude oil increased 60%, while the average cost of natural gas
increased 70% in 2000 compared to 1999. The fourth quarter 2000 average cost of
natural gas was 130% higher than the full year 1999 average, reflecting the
rapid increase late in that year.

Cost of sales of $4.3 billion in 1999 increased 36% compared to cost of sales
of $3.1 billion in 1998. This increase was partly due to higher production
levels in 1999, reflecting twelve months of operations of the business
contributed to us by Occidental. The balance of the increase was due to higher
raw material costs and, to a lesser extent, higher maintenance costs associated
with a 1999 Channelview olefins plant outage. One of our two Channelview
olefins units, with an annual ethylene capacity of 1.9 billion pounds, was shut
down from early April 1999 to mid-May 1999 to repair a compressor.

Operating Income--Operating income of $694 million in 2000 increased 55%
compared to $447 million in 1999. Gross margin as a percent of sales was flat
at 10%, as sales price increases, on average, kept pace with raw material cost
increases. Generally, we were able to increase sales prices more than the
increase in raw material costs per unit.

Operating income of $447 million in 1999 increased 40% compared to $319
million in 1998, while gross margin as a percent of sales was flat at 10%.
Gross margin percentages were flat as sales prices increases, on average, kept
pace with increases in raw material costs. The benefit from increased sales
volumes was only partly offset by the effects of the production unit outage in
1999. The 1999 increase in sales volumes was primarily due to inclusion of a
full year of operations of the business contributed to us by Occidental, which
was added in mid-May 1998.

POLYMERS SEGMENT

Revenues--Revenues of $2.4 billion in 2000 increased 9% compared to revenues
of $2.2 billion in 1999 due to higher sales prices partly offset by lower sales
volumes. Average sales prices were 9% higher, primarily in response to higher
raw material costs for ethylene and propylene. Sales volumes declined 2% due to
a combination of a planned maintenance turnaround at the Morris, Illinois plant
in the second quarter 2000 and a slow down in demand in the latter half of
2000, reflecting slower growth in the U.S. economy.

Revenues of $2.2 billion in 1999 decreased slightly from 1998 revenues
primarily due to lower sales volumes. Sales volumes decreased due to the shut
down of less efficient high density polyethylene and other polymer product
capacity, plant maintenance and the sale of the concentrates and compounds
business in 1999. Industry sales prices, which began decreasing during the
fourth quarter 1997, continued in a downward trend throughout 1998, but then
increased during 1999 as raw material costs increased. As a result, average
sales prices were comparable from 1998 to 1999.

Cost of Sales--Cost of sales of $2.5 billion in 2000 increased 22% compared
to $2.0 billion in 1999. Higher 2000 average prices for ethylene and propylene,
the primary raw materials for polymers, were partly offset by lower sales
volumes. Average 2000 benchmark prices for ethylene were higher by 37% and
prices for propylene were higher by 70% than in 1999.

Cost of sales was $2.0 billion in 1999 and $1.9 billion in 1998. Higher 1999
average prices for ethylene and propylene were substantially offset by lower
sales volumes.

Operating Income--The operating loss of $185 million in 2000 decreased from
operating income of $51 million in 1999. The decrease was primarily due to
substantially lower margins for 2000 compared to 1999 as raw material cost
increases outpaced sales price increases. Gross margin as a percent of sales
was negative in 2000 compared to 6% in 1999.

Operating income of $51 million in 1999 decreased 71% compared to $177
million in 1998. The decrease was primarily due to substantially lower margins
for 1999 compared to 1998 as raw material cost increases outpaced sales price
increases. Gross margin as a percent of sales decreased to 6% in 1999 from 12%
in 1998.

UNALLOCATED ITEMS

The following discusses expenses that were not allocated to the
petrochemicals or the polymers segments.

Other Operating Expenses--This caption includes general and administrative
expenses and amortization of goodwill and other intangibles. Unallocated
expenses were $175 million in 2000, $240 million in 1999, and $200 million in
1998. The increase from 1998 to 1999 was primarily due to higher compensation
and employee benefit expenses and costs associated with Year 2000 preventive
measures. The decrease from 1999 to 2000 reflects the reduction in compensation
and employee benefit expenses and Year 2000 costs, as well as savings realized
from the consolidation of certain administrative functions under the shared
services arrangement we have with Lyondell.

Restructuring and Other Unusual Charges--Restructuring and other unusual
charges were $96 million in 1999 and $14 million in 1998. During 1999, we
recorded a charge of $96 million associated with a decision to shut down
certain polymer reactors and severance costs related to these shutdowns and
consolidation of certain administrative functions between Lyondell and
Equistar. The decision to shut down the polymer reactors was based on their
high production costs, market conditions in the polyethylene industry and the
flexibility to utilize more efficient reactors to meet customer requirements.
Approximately $72 million of the total charge was an adjustment of the asset
carrying values of the reactors. The remaining $24 million represented
severance and other employee-related costs for approximately 500 employee
positions that were eliminated. The eliminated positions, primarily
administrative functions, resulted from opportunities to consolidate such
services among Lyondell and Equistar and, to a lesser extent, positions
associated with the shut down polymer reactors. We made severance payments of
$19 million in 2000. As of December 31, 2000, substantially all of the employee
terminations had been completed and the remaining liability was eliminated. We
incurred and recorded $14 million of restructuring charges related to the
addition of the business contributed to us by Occidental in 1998.

Interest Expense, Net and Other Income--Net interest expense was $181 million
in 2000, $176 million in 1999 and $139 million in 1998. Interest expense
increased from 1998 to 1999 due to higher levels of debt as a result of the
addition of the business contributed to us by Occidental in mid-May 1998.
Interest expense also increased from 1998 to 1999 and from 1999 to 2000 due to
the February 1999 refinancing of $900 million of bank debt with senior
unsecured notes, which carry a higher fixed rate of interest. Other income of
$46 million in 1999 primarily consisted of net gains on asset sales, including
the sale of the concentrates and compounds business in April 1999.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash flows from operations and
borrowings under our amended and restated credit facility. Our principal uses
of cash are capital expenditures, distributions and debt service.

DEBT SERVICE

As of June 30, 2001, on a pro forma basis, we had approximately $2.4 billion
of indebtedness outstanding. Our significant debt service obligations could,
under certain circumstances, have material consequences to note

holders. Our principal debt obligations include the outstanding notes, our
amended and restated credit facility, the other notes described below and will
include the new notes following their issuance.

Amended and Restated Credit Facility--Our credit facility includes a $500
million revolving credit facility and a $300 million term loan. Up to $150
million of the revolving credit facility is available to permit the issuance of
letters of credit. The revolving credit facility terminates in August 2006. The
term loan matures in August 2007 and requires amortization of 1% of the
principal amount during each of the first five years. Under certain
circumstances, we will be required to prepay the term loan out of the proceeds
of asset sales, debt and equity issuances and casualty events.

We are required to pay a facility fee on the entire revolving credit facility
at a rate of .5% to .75% per year, depending on our ratio of debt to EBITDA, as
defined in the amended and restated credit facility. Borrowings under the
revolving credit facility generally bear interest based on a margin over, at
our option, a base rate or the LIBO rate. The applicable margin varies between
1% and 1.75%, in the case of LIBOR loans, and 0% and .75%, in the case of base
rate loans, based upon our ratio of debt to EBITDA. The term loan generally
bears interest at a rate equal to LIBOR plus 3% or the base rate plus 2%, at
our option. Our obligations under the credit facility are secured by
substantially all of our personal property, including receivables and
inventory, and a portion of our real property. The credit facility contains
customary covenants and events of default. See "Description of Other
Indebtedness--Amended and Restated Credit Facility."

Notes--The outstanding notes and the new notes offered by this prospectus in
exchange for the outstanding notes will mature in 2008. Interest on the notes
is payable semiannually in cash. The notes contain customary covenants and
events of default, including covenants that limit our ability to incur debt and
make certain investments.

In addition to the notes, we also have $100 million of 9.125% notes due 2002,
$300 million of 8.50% notes due 2004, $150 million of 6.50% notes due 2006,
$598 million of 8.75% notes due 2009 and $150 million of 7.55% debentures due
2026. Interest on each series of notes is payable semiannually in cash. These
notes all contain limitations on our ability to grant liens or enter into
sale/leasebacks with respect to some of our manufacturing facilities.

Railcar Financings--In addition to our debt obligations, we also have entered
into several master leases to lease railcars that are accounted for as
operating leases. The leases have five renewable one-year terms and mature
after the fifth year, and require annual lease payments of approximately $75
million per year. We can purchase the cars when the facilities mature or, if we
do not, then we must pay the lessor to the extent that the sales proceeds are
less than their guaranteed residual value set out in the agreements, which was
approximately $235 million at June 30, 2001.

CAPITAL EXPENDITURES

We spent approximately $131 million on capital expenditures in 2000 and spent
approximately $53 million on capital expenditures in the first six months of
2001, and anticipate that we will spend approximately $50 million in the last
six months of 2001. We have reduced our 2001 capital expenditures as a cost-
saving measure as a result of the poor current business environment.

DISTRIBUTIONS

Under our partnership agreement, we are required to estimate the future cash
needs for our business and to distribute surplus cash to our owners. See
"Description of the Partnership Agreement-- Distribution of Available Net
Operating Cash to Our Owners." Currently, we do not anticipate making any
distributions to our owners for the remainder of 2001. We will be required to
pay additional interest on the notes and our amended and restated credit
facility if we pay distributions to our owners when our fixed charge coverage
ratio, as defined in the indenture, is less than 1.75 to 1.

SOURCES OF FUNDS

Management believes that business conditions will be such that cash balances,
cash flow from operations and borrowings under the amended and restated credit
facility and proceeds from the offering of the outstanding notes will be
adequate to meet anticipated future cash requirements, including scheduled debt
repayments, necessary capital expenditures and ongoing operations.

HISTORICAL FINANCIAL CONDITION

OPERATING ACTIVITIES

Operating activities provided cash of $95 million in the first six months of
2001 compared to $259 million in the comparable 2000 period. The $164 million
decrease in the first six months of 2001 primarily reflected $315 million of
lower income from operations, partly offset by a reduction in 2001 working
capital. The reduction in working capital in the first six months of 2001 was
primarily due to lower receivables, reflecting lower sales prices and improved
collection efficiency. The decrease in receivables was offset by a decrease in
payables, due to lower raw material costs, and an increase in inventories. The
inventory component of working capital increased $34 million primarily due to
increased levels of raw materials. Raw material inventories had been minimized
at year end due to the high cost of raw materials.

Operating activities provided cash of $339 million in 2000 compared to $344
million in 1999. The benefit from higher 2000 net income was offset by an
increase in working capital, primarily due to a significant reduction in
accrued liabilities in 2000 compared to an increase in 1999. The decrease in
accrued liabilities in 2000 reflected the timing of severance and other
compensation-related payments, as well as a change in the timing of interest
payments due to the February 1999 refinancing. Despite improved receivables
collection efficiency and higher inventory turnover, receivables and inventory
balances were higher in 2000 due to the effects of higher product prices and
raw material costs.

INVESTING ACTIVITIES

Our capital expenditures were $53 million in the first six months of 2001 and
$48 million in the first six months of 2000. In addition, we purchased the low-
and medium-voltage power cable materials business of AT Plastics, Inc. for $7
million during the second quarter 2001. Our capital spending for 2001 is
currently projected at approximately $103 million and includes spending for
cost reduction and yield improvement projects. The planned 2001 capital
expenditures have been reduced by approximately 40% from amounts originally
budgeted due to the poor current business environment.

Our capital expenditures were $131 million in 2000 and $157 million in 1999.
Capital expenditures in 2000 primarily included low-cost, incremental capacity
expansions and cost-reduction projects. The most significant capital
expenditures in 1999 related to the 480 million pound high density polyethylene
resin expansion project at our Matagorda, Texas facility, which started
operating in the fourth quarter 1999.

FINANCING ACTIVITIES

There were no distributions to our owners in the first six months of 2001 and
we do not currently anticipate making any distributions to our owners for the
remainder of 2001. We secured an amendment to our credit facility in March
2001, making certain financial ratio requirements less restrictive.

Net cash used in financing activities was $302 million in 2000, including
$280 million of distributions to owners and $42 million of scheduled debt
repayment. We also had net borrowings of $20 million under our existing credit
facility during 2000.

CURRENT BUSINESS OUTLOOK

Management expects continued poor operating results in the second half of
2001 due to continued weak conditions in global chemical markets. Pricing and
margin pressures are expected to continue for the remainder of the year in our
petrochemicals and polymers businesses. Our assessment is that our operating
results for the third quarter of 2001 will be lower than in the first quarter
of 2001.

ENVIRONMENTAL MATTERS

Various environmental laws and regulations impose substantial requirements
upon our operations. Our policy is to be in compliance with such laws and
regulations, which include, among others, the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as amended, RCRA and the
Clean Air Act Amendments of 1990. We do not specifically track all recurring
costs associated with managing hazardous substances and pollution in ongoing
operations. Such costs are included in cost of sales. We also make capital
expenditures to comply with environmental regulations. Such capital
expenditures totaled approximately $6 million, $3 million and $5 million for
2000, 1999 and 1998, respectively. All such expenditures were funded by cash
generated from operations.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
November 2007. Ozone is a product of the reaction between volatile organic
compounds and nitrogen oxides ("NOx") in the presence of sunlight, and is a
principal component of smog. The proposed plans for meeting the ozone standard
focus on significant reductions in NOx emissions. NOx emission reduction
controls must be installed at each of our six plants located in the
Houston/Galveston region during the next several years, well in advance of the
2007 deadline. Compliance with the plan will result in increased capital
investment, which could be between $150 million and $300 million before the
2007 deadline, as well as higher annual operating costs for us. The timing and
amount of these expenditures are subject to regulatory and other uncertainties,
as well as obtaining the necessary permits and approvals. We have been actively
involved with a number of organizations to help solve the ozone problem in the
most cost-effective manner and, in January 2001, we and an organization
composed of industry participants filed a lawsuit against the TNRCC to
encourage adoption of an alternative plan to achieve the same air quality
improvement with less negative economic impact on the region. In June 2001, the
parties entered into a consent order with respect to the lawsuit. Pursuant to
the consent order, the TNRCC agreed to review, by June 2002, the scientific
data for ozone formation in the Houston/Galveston region. If the TNRCC
scientific review supports the industry group proposal, the TNRCC has agreed to
revise the NOx emission reduction requirements set forth in its original plan.
Such revision of the NOx emission reduction requirements would reduce our
estimated capital investments required to comply with the plans for meeting the
ozone standard.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as methyl tertiary butyl ether, or MTBE, in gasoline sold
in areas not meeting specified air quality standards. However, while studies by
federal and state agencies and other organizations have shown that MTBE is safe
for use in gasoline, is not carcinogenic and is effective in reducing
automotive emissions, 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 that MTBE
may, in certain limited circumstances, affect the taste and odor of drinking
water supplies, and thereby lead to possible public concerns.

was denied by both the Clinton Administration and the Bush Administration. At
the federal level, a blue ribbon panel appointed by the EPA issued its report
on July 27, 1999. That report recommended, among other things, reducing the use
of MTBE in gasoline. During 2000, the EPA announced its intent to seek
legislative changes from Congress to give the EPA authority to ban MTBE over a
three-year period. Such action would only be granted through amendments to the
Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing
rulemaking authority contained in the Toxic Substance Control Act. It would
take at least three years for such a rule to issue. In January 2001, however,
senior policy analysts at the U.S. Department of Energy presented a study
stating that banning MTBE would create significant economic risk. The study did
not identify any benefits from banning MTBE. Additionally, in early 2001, after
a thorough evaluation of MTBE conducted in connection with proposed amendments
to the 1998 European Council directive on gasoline and diesel fuel
specifications, the European Union concluded that the use of MTBE in gasoline
does not present a health risk to the community or a risk to the environment,
and decided not to restrict the use of MTBE in the European Union. The EPA
initiatives mentioned above or other governmental actions could result in a
significant reduction in our MTBE sales. We have developed technologies to
convert our process to produce alternate gasoline blending components should it
be necessary to reduce MTBE production in the future.

Additionally, the Clean Air Act specified certain emissions standards for
vehicles beginning in the 1994 model year and required the EPA to study whether
further emissions reductions from vehicles were necessary starting no earlier
than the 2004 model year. In 1998, the EPA concluded that more stringent
vehicle emission standards were needed and that additional controls on gasoline
and diesel were necessary to meet these emission standards. New standards for
gasoline were finalized in 1999 and will require 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 to produce ultra
low sulfur diesel by June 2006, with some allowance for a conditional phase-in
period that could extend final compliance until 2009. Our olefins fuel business
may be impacted if these rules increase the cost for processing fuel
components.

ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. The statement will be effective for our calendar year 2002. Under SFAS
No. 142, amortization of goodwill to earnings will be discontinued. However,
goodwill will be reviewed for impairment at least annually and whenever events
indicate an impairment may have occurred. A benchmark assessment of potential
impairment also must be completed within six months of adopting SFAS No. 142.
As of June 30, 2001, we carried $1.1 billion of goodwill on our balance sheet,
which is amortized at an annual rate of $33 million. We are currently
evaluating the effect that implementation of SFAS No. 142 will have on our
financial statements.

DISCLOSURE OF MARKET AND REGULATORY RISK

COMMODITY PRICE RISK

A substantial portion of our products and raw materials are commodities whose
prices fluctuate as market supply and demand fundamentals change. Accordingly,
product margins and the level of our profitability tend to fluctuate with
changes in the business cycle. We try to protect against such instability
through various business strategies. These include increasing the olefins
plants' raw material flexibility, entering into multi-year processing and sales
agreements, and moving downstream into olefins derivatives products whose
pricing is more stable. However, these strategies do not fully protect us and
our results are affected by negative changes in commodity prices.

We enter into over-the-counter "derivatives," or price swap contracts, for
crude oil to help manage our exposure to commodity price risk with respect to
crude oil-related raw material purchases. These hedging arrangements have the
effect of locking in, at predetermined prices or ranges of prices and for a
specified period of time, the prices that we will pay for the volumes to which
the hedge relates. As a result, while these hedging arrangements are structured
to reduce our exposure to increases in price associated with the hedged
commodity, they also limit the benefit we might otherwise receive from any
price decreases associated with the hedged commodity. During the second quarter
2001, we entered into put options covering 1.9 million barrels of crude oil.
The put options were not treated as hedges for financial reporting purposes,
but are intended to reduce our crude oil-based raw material costs.

As of June 30, 2001, the outstanding price swap contracts, which mature from
July 2001 through March 2002, covered 7.2 million barrels of crude oil, and are
intended to cover from approximately 25% to 30% of our estimated crude oil-
related raw material exposures. Based on quoted market prices, we recorded a
liability of $2 million at June 30, 2001 for those contracts. Assuming a
hypothetical 25% decrease in crude oil prices from those in effect at June 30,
2001, the loss in earnings for the price swap contracts would be approximately
$45 million. As of June 30, 2001, the outstanding put option contracts, which
mature from August 2001 through December 2001, covered 1.7 million barrels of
crude oil. Assuming the same hypothetical 25% decrease in crude oil prices, our
loss in earnings for the put option contracts would be approximately
$10 million. Sensitivity analysis was used for purposes of the above analyses.
The quantitative information about market risk is necessarily limited because
it does not take into account the effects of the underlying operating
transactions. We do not engage in any derivatives trading activities.

INTEREST RATE RISK

We are exposed to interest rate risk with respect to our variable-rate credit
facility. At June 30, 2001, on a pro forma basis, the outstanding balance under
the credit facility was $365 million. Assuming a hypothetical 1% increase in
interest rates, the increase in annual interest expense on the variable-rate
debt would be approximately $3.7 million. Sensitivity analysis was used for
this purpose.

REGULATORY RISK

See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Environmental Matters."

INDUSTRY OVERVIEW

OVERVIEW

Olefins are the building blocks of the petrochemical industry and include
primarily ethylene and propylene. Ethylene and propylene, as well as their
polymer derivatives, polyethylene and polypropylene, are used in the
manufacture of a wide range of consumer non-durable plastics and films, as well
as consumer durables and industrial products. Historical demand for these
products has generally tracked economic growth. Other key drivers of demand are
rising living standards in developing nations and the continued substitution of
plastics and synthetics for other materials. North America, Asia and Western
Europe are the largest consumers of olefins and their derivative products,
accounting for 86% of world demand in 2000. The economic health of these
regions is therefore a major determinant of the condition of the olefins
industry. Other factors affecting demand include the price of plastics compared
to the prices of substitute products such as metal, glass and paper, and
infrastructure development within developing countries, which increases demand
for both durable and non-durable olefins applications.

The global olefins and polyolefins industry is cyclical. The cycle is
characterized by periods of tight supply and demand, leading to high operating
rates and peak margins, followed by a decline in operating rates primarily
resulting from significant capacity additions. The result is trough conditions
with cash margins for higher cost producers at or below breakeven. The industry
is currently in a down cycle. Due to the significant size of new olefins
plants, capacity additions come in large increments and typically require
several years of demand growth to be absorbed. Designing and constructing a new
world scale olefins facility takes approximately four years. Other than the
plants expected to come on-line later this year, no significant ethylene
capacity additions in North America have been announced. Operating rates and
margins are currently depressed due to significant capacity additions in 2000
and 2001 and weak demand growth. Operating rates should increase over time as
economic growth improves, permitting this announced capacity to be absorbed and
prices and margins to rise.

PETROCHEMICALS

ETHYLENE

In terms of volume, ethylene is the most widely consumed petrochemical in the
world. It is a basic raw material for a broad array of chemical products
including: (i) polyethylene (in high density polyethylene (HDPE), low density
polyethylene (LDPE) and linear low density polyethylene (LLDPE) forms), which
is used in trash bags, packaging film, toys, housewares and milk containers;
(ii) ethylene dichloride, which is further processed into polyvinyl chloride
(PVC), a chemical that is widely used in residential and commercial
construction; (iii) ethylbenzene, an intermediate chemical used in the
production of polystyrene which is then used in packaging and containers; and
(iv) ethylene oxide, which is used in the production of ethylene glycol, which
is further processed into antifreeze and polyesters. Ethylene can be produced
from ethane, propane, butane, naphtha or gas oil. The two most common
feedstocks are ethane (because of its high yield) and naphtha (because of its
availability, transportability and ability to generate co-products).

The chart below highlights North American ethylene consumption. Polyethylene
is the largest use of ethylene, accounting for over 50% of ethylene
consumption. See "--Polymers."

[Chart]

Margins in the world ethylene market reached a peak in 1995, with operating
rates increasing in response to both strong demand and limited capacity
additions. This period was characterized by both rising prices and reduced
feedstock costs, resulting in strong profitability for producers. The 1997-1998
period was characterized by significant capacity additions and reduced
incremental demand as a result of the Asian crisis, resulting in reduced
operating rates and margins. As a result of strong world economic growth in
1999-2000, demand growth for ethylene was strong. Global demand in 2000 reached
200 billion pounds, an increase of 4.4% compared to 1999 demand of 192 billion
pounds, although North American demand decreased by 1% over the same period.
The compound annual global growth rate for ethylene volume over the past five
years was 5.3%.

North America is the largest consumer of ethylene. An estimated 66 billion
pounds of ethylene, representing approximately 33% of world demand, was
consumed by the North American market in 2000. The compound annual growth rate
in North America over the past five years was 3.1%. The United States is by far
the largest market for ethylene in North America, accounting for about 84% of
total North American demand. Operating rates of ethylene producers in North
America and the United States began declining in 2000 and into 2001 due to the
impact of a 9% increase in capacity, aggravated by the sharp slowdown in the
economy and increased raw material costs, which made North American producers
less competitive. Other than plants expected to come on-line later this year,
no significant capacity additions in North America have been announced. Limited
capacity will be added from debottlenecking, including 1 billion pounds in
2003. Once economic growth improves, allowing capacity additions to be
absorbed, operating rates should increase.

As a result of a number of transactions, most recently the merger of The Dow
Chemical Company and Union Carbide Corporation, the industry has been
concentrated into fewer, larger and stronger competitors. The aggregate
capacity share of the five largest North American producers increased from 40%
in 1991 to nearly 65% in 2001. Larger producers are generally better able to
optimize production during weak industry conditions. The five largest North
American ethylene producers are Dow Chemical, Equistar, Exxon Mobil
Corporation, Chevron Phillips Chemical Company LP and NOVA Chemical Company.

PROPYLENE

Propylene is the second most widely consumed petrochemical. The largest uses
for propylene are: (i) polypropylene, used in carpeting, food packaging,
upholstery, automotive components and plastic bottle caps; (ii) acrylonitrile,
used in clothing and high impact plastics; (iii) oxo-alcohols, used in
industrial solvents and intermediate chemicals; and (iv) propylene oxide, which
is further processed into polyurethane foams. Approximately 70% of propylene is
produced as a co-product of ethylene manufacturing and 28% is produced as a by-
product of petroleum refining. The remaining 2% is obtained through the
dehydrogenation of propane.

The chart below highlights North American propylene consumption.

[Chart]

Over the past five years, the growth in propylene demand has outpaced growth
in ethylene demand. Worldwide demand for propylene reached 137 billion pounds
in 2000, an increase of 5.3% over 1999. Over the last five years, propylene
demand has grown at a 6.6% compound annual rate. Production and consumption of
propylene is concentrated in North America, Western Europe and Japan, which
collectively represent 75% of worldwide consumption. However, as with ethylene,
the demand in the developing regions of the world is expected to outpace that
of the more mature industrial regions. In North America, propylene demand
continued to grow, reaching 35 billion pounds in 2000, an increase of nearly 6%
compared to 1999. The five-year compound annual growth rate in North American
demand for propylene was 4.9%.

During the next five years, an estimated 34.5 billion pounds of propylene
capacity is projected to come on stream worldwide, of which 4.5 billion pounds
will be in the United States. While some of this new capacity will be connected
to refinery operations, a majority will be as a co-product of additions to
ethylene manufacturing capacity. A greater portion of the planned worldwide
capacity additions will take place in higher demand areas such as the Middle
East and Asia, while mature markets such as North America and Western Europe
will experience more moderate capacity growth.

As with ethylene, as a result of a number of transactions, the industry has
been concentrated into fewer, larger and stronger competitors. Larger producers
are generally better able to optimize production during weak industry
conditions. The five largest North American producers of propylene are
ExxonMobil, Equistar, Shell Chemical Company, Dow Chemical and Chevron
Phillips.

POLYMERS

Our principal polymers product is polyethylene. There are three basic
polyethylenes: (i) low density polyethylene (LDPE); (ii) high density
polyethylene (HDPE); and (iii) linear low density polyethylene (LLDPE). LDPE,
the softest of the polyethylenes and the least crystalline, is used in
applications requiring clarity, inertness and processing ease. HDPE has a high
degree of crystallinity and a non-polar structure, resulting in good electrical
insulation properties. The most commonly used application for HDPE is blow
molding for the manufacture of milk bottles, liquid detergent bottles,
industrial drums, oil bottles and gas tanks. LLDPE demonstrates greater tensile
impact and tear properties, as well as better temperature characteristics than
LDPE. LLDPE's major end use is in film applications such as shrink and stretch
wrap, trash can liners and injection molding applications, including housewares
and lids. Injection molding and film applications are also common with molding
applications including pails, totes and crates. Film applications consist of
grocery and merchandise bags.

Of the three polyethylenes, LLDPE has demonstrated the strongest global
growth with a 12.7% compound annual growth rate since 1995. HDPE and LDPE
demand is also growing with an increase of 6.8% compound annual growth rate for
HDPE and 1.2% compound annual growth rate for LDPE since 1995.

The U.S. polyethylene market has displayed the same trend as the global
market, with demand growing at a 3.6% compound annual growth rate over the last
five years. HDPE grew 3.8% over the past five years, while there has been no
growth in the LDPE market as LLDPE continues to make gains at the expense of
LDPE.

The charts below highlight North American polyethylene consumption by end
use. The broad array of uses for polyethylene as well as other ethylene
derivatives is an important reason for ethylene's sustained historical and
continued growth.

[Chart]

As with olefins, as a result of a number of transactions, the industry has
been concentrated into fewer, larger and stronger competitors. Larger producers
are generally better able to optimize production during weak industry
conditions. The five largest North American producers of polyethylene are Dow
Chemical, ExxonMobil, Equistar, Chevron Phillips and NOVA Chemicals.

ABOUT EQUISTAR CHEMICALS, LP

BUSINESS OVERVIEW

COMPETITIVE STRENGTHS

LEADING POSITIONS IN ALL OF OUR KEY PRODUCTS

NORTH AMERICAN
CAPACITY
--------------
PRODUCT POSITION SHARE
------- -------- -----

LARGE, INTEGRATED MANUFACTURING FACILITIES

The significant size, integration and geographic locations of our operations
allow system-wide optimization while providing our customers with reliable and
efficient product supply. We operate a 1,430 mile petrochemical pipeline system
on the U.S. Gulf Coast; we have over 16 million barrels of storage capacity;
and we own or lease approximately 9,700 railcars. The combination of our
pipeline system, storage capacity and railcar fleet enables us to efficiently
transfer both raw materials and finished products. We also have two plants
located in close proximity to U.S. Midwest customers, providing a freight cost
advantage on sales to these customers relative to U.S. Gulf Coast producers.

LOW COST POSITION

We continuously strive to lower overall costs through:

EXPERIENCED MANAGEMENT TEAM

PETROCHEMICALS SEGMENT

OVERVIEW

Petrochemicals are fundamental to many segments of the economy, including the
production of consumer products, housing and automotive components and other
durable and nondurable goods. We produce a variety of petrochemicals, including
olefins, oxygenated products, aromatics and specialty products, at twelve
facilities located in six states. Olefins include ethylene, propylene and
butadiene. Oxygenated products include ethylene oxide (EO), ethylene glycol
(EG), ethanol and MTBE. Aromatics produced are benzene and toluene. Our
petrochemical products are used to manufacture polymers and intermediate
chemicals, which are used in a variety of consumer and industrial products,
including trash bags, food containers, plastic bottles, dry cleaning bags, lids
for coffee cans, foamed sheets, fibers for carpets, rugs and upholstery and
insulation for telephone and computer wire.

Our combined rated ethylene capacity at January 1, 2001 was approximately
11.6 billion pounds per year or approximately 16% of total North American
production capacity. Based on published rated production capacities, we are
currently the second largest producer of ethylene in North America. North
American ethylene rated capacity at January 1, 2001 was approximately 72
billion pounds per year.

Our Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants
use petroleum liquids, including naphtha, condensates and gas oils
(collectively Petroleum Liquids), to produce ethylene. Assuming the co-products
are recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquids, including ethane, propane and butane (collectively, NGLs). For
example, using Petroleum Liquids has historically generated approximately four
cents additional margin per pound of ethylene produced compared to using
ethane. The use of Petroleum Liquids results in the production of a significant
amount of co-products such as propylene, butadiene, benzene and toluene, and
specialty products, such as dicyclopentadiene (DCPD), isoprene, resin oil and
piperylenes. Based upon independent third-party surveys, management believes
that our Channelview facility is one of the lowest cash production cost olefins
facilities in the United States. Our Morris, Illinois; Clinton, Iowa; Lake
Charles, Louisiana; and LaPorte, Texas plants are designed to primarily consume
NGLs to produce ethylene and some co-products such as propylene. A
comprehensive pipeline system connects the Gulf Coast plants with major olefins
customers. Raw materials are sourced both internationally and domestically and
are shipped via vessel and pipeline.

We produce EO and its primary derivative, EG, at our facilities located in
Pasadena, Texas and through a 50/50 joint venture with DuPont de Nemours and
Company in Beaumont, Texas. Our Pasadena facility also produces other
derivatives of EO, principally ethers and ethanolamines. EG is used in
antifreeze, polyester fibers, resins and films. EO and its derivatives are used
in many consumer and industrial end uses, such as detergents and surfactants,
brake fluids and polyurethane seating and bedding foams.

We produce synthetic ethanol at our Tuscola, Illinois plant by a direct
hydration process that combines water and ethylene. We also own and operate
facilities in Newark, New Jersey and Anaheim, California for denaturing ethanol
by the addition of certain chemicals. In addition, we produce small volumes of
diethyl ether, a by-product of ethanol production, at our Tuscola facility.
These ethanol products are ingredients in various consumer and industrial
products as described more fully in the table below.

The following table outlines our primary petrochemical products, annual
processing capacity as of January 1, 2001, the primary uses for such products
and where we produce them. Unless otherwise specified, annual processing
capacity was calculated by estimating the number of days in a typical year that
a production unit of a plant is expected to operate, after allowing for
downtime for regular maintenance, and multiplying that number by an amount
equal to the unit's optimal daily output based on the design raw material mix.
Because the processing capacity of a production unit is an estimated amount,
actual production volumes may be more or less than the capacities set forth
below.

PRODUCT ANNUAL CAPACITY PRIMARY USES WHERE PRODUCED
---------------------------------------------------------------------------------

OLEFINS:
---------------------------------------------------------------------------------
Ethylene 11.6 billion Ethylene is used as a Channelview, Texas
pounds raw material to Corpus Christi,
manufacture Texas
polyethylene, EO, Chocolate Bayou,
ethanol, ethylene Texas
dichloride and LaPorte, Texas
ethylbenzene. Lake Charles,
Louisiana
Morris, Illinois
Clinton, Iowa
---------------------------------------------------------------------------------
Propylene 5.0 billion Propylene is used to Channelview, Texas
pounds (a) produce polypropylene, Corpus Christi,
acrylonitrile and Texas
propylene oxide. Chocolate Bayou,
Texas
LaPorte, Texas
Lake Charles,
Louisiana
Morris, Illinois
Clinton, Iowa
---------------------------------------------------------------------------------
Butadiene 1.2 billion Butadiene is used to Channelview, Texas
pounds manufacture styrene- Corpus Christi,
butadiene rubber and Texas
polybutadiene rubber. Chocolate Bayou,
Butadiene is also used Texas
in the production of
paints, adhesives, nylon
clothing, carpets and
engineered plastics.

---------------------------------------------------------------------------------
OXYGENATED PRODUCTS:
---------------------------------------------------------------------------------
Ethylene Oxide 1.1 billion EO is used to produce Pasadena, Texas
(EO) pounds ethylene surfactants, industrial
oxide cleaners, cosmetics,
equivalents; emulsifiers, paint, heat
400 million transfer fluids and
pounds as pure ethylene glycol.
ethylene oxide
---------------------------------------------------------------------------------
Ethylene Glycol 1 billion EG is used to produce Beaumont, Texas
(EG) pounds polyester fibers and Pasadena, Texas
film, polyethylene
terephthalate (PET)
resin, heat transfer
fluids and automobile
antifreeze.
---------------------------------------------------------------------------------
Ethylene Oxide 225 million EO derivatives are used Pasadena, Texas
Derivatives pounds to produce paint and
coatings, polishes,
solvents and chemical
intermediates.
---------------------------------------------------------------------------------
MTBE 284 million MTBE is a gasoline Channelview, Texas
gallons component for reducing Chocolate Bayou,
(18,500 emissions in Texas
barrels/day)(b) reformulated gasolines
and enhancing octane
value.
---------------------------------------------------------------------------------
Ethanol 50 million Ethanol is used in the Tuscola, Illinois
gallons production of solvents
as well as household,
medicinal and personal
care products.

PRODUCT ANNUAL CAPACITY PRIMARY USES WHERE PRODUCED
------------------------------------------------------------------------------------------------------------------------------------
AROMATICS:
------------------------------------------------------------------------------------------------------------------------------------
Benzene 310 million Benzene is used Channelview, Texas
gallons to produce Corpus Christi, Texas
styrene, phenol Chocolate Bayou, Texas
and cyclohexane.
These products
are used in the
production of
nylon, plastics,
rubber and
polystyrene.
Polystyrene is
used in
insulation,
packaging and
drink cups.
------------------------------------------------------------------------------------------------------------------------------------
Toluene 66 million Toluene is used Channelview, Texas
gallons as an octane Chocolate Bayou, Texas
enhancer in
gasoline, as a
chemical
feedstock for
benzene
production, and
a core
ingredient in
TDI, a compound
used in urethane
production.
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY PRODUCTS:
------------------------------------------------------------------------------------------------------------------------------------
Dicyclopentadiene 130 million DCPD is a Channelview, Texas
(DCPD) pounds component of Chocolate Bayou, Texas
inks, adhesives
and polyester
resins for
molded parts
such as tub and
shower stalls
and boat hulls.
------------------------------------------------------------------------------------------------------------------------------------
Isoprene 145 million Isoprene is a Channelview, Texas
pounds component of Chocolate Bayou, Texas
premium tires,
adhesive
sealants and
other rubber
products.
------------------------------------------------------------------------------------------------------------------------------------
Resin Oil 150 million Resin oil is Channelview, Texas
pounds used in the Chocolate Bayou, Texas
production of
hot-melt-
adhesives, inks,
sealants, paints
and varnishes.
------------------------------------------------------------------------------------------------------------------------------------
Piperylenes 100 million Piperylenes are Channelview, Texas
pounds used in the
production of
adhesives, inks
and sealants.
------------------------------------------------------------------------------------------------------------------------------------
Alkylate 337 million Alkylate is a Channelview, Texas
gallons (c) premium gasoline
blending
component used
by refiners to
meet Clean Air
Act standards
for reformulated
gasoline.
------------------------------------------------------------------------------------------------------------------------------------
Diethyl Ether 5 million Diethyl ether is Tuscola, Illinois
gallons used in
laboratory
reagents,
gasoline and
diesel engine
starting fluid,
liniments,
analgesics and
smokeless
gunpowder.

--------
(a) Does not include refinery-grade material or production from the product
flexibility unit at our Channelview facility, which can convert ethylene
and other light petrochemicals into propylene. This facility has a current
annual processing capacity of one billion pounds per year of propylene.
(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LYONDELL-CITGO Refining LP.
(c) Includes up to 172 million gallons/year of capacity operated for the
benefit of LYONDELL-CITGO Refining LP.

RAW MATERIALS

The raw materials cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with
the flexibility to consume a wide range of raw materials generally are able to
maintain higher profitability during periods of changing energy and
petrochemicals prices than olefins plants that are restricted in their raw
material processing capability, assuming that co-products are recovered and
sold. The primary raw materials used in the production of olefins are Petroleum
Liquids and NGLs. Petroleum Liquids are generally delivered by ship or barge.
NGLs are delivered to our facilities primarily via pipeline. Petroleum Liquids
have had a historical cost advantage over NGLs such as ethane and propane,
assuming the co-products were recovered and sold. For example, using Petroleum
Liquids has historically generated approximately four cents additional margin
per pound of ethylene produced compared to using ethane. We have the capability
to realize this margin advantage at our Channelview, Corpus Christi and
Chocolate Bayou, Texas facilities.

Our Channelview facility is particularly flexible because it can process 100%
Petroleum Liquids or up to 80% NGLs. Our Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs. Our Chocolate Bayou facility processes
100% Petroleum Liquids. Our LaPorte facility can process natural gasoline and
NGLs, including heavier ones such as butane. Our three other olefins facilities
currently process only NGLs.

The majority of our Petroleum Liquids requirements are purchased via
contractual arrangements from a variety of third-party domestic and foreign
sources. We also purchase Petroleum Liquids on the spot market from third-party
domestic and foreign sources. A majority of our NGLs requirements are purchased
via contractual arrangements from a variety of third party sources. We also
purchase NGLs on the spot market from third party sources. We obtain a portion
of our Petroleum Liquids requirements from LYONDELL-CITGO Refining LP at
market-related prices.

In addition, we purchase large amounts of natural gas to be used as energy
for consumption in our business via contractual arrangements with a variety of
third-party sources, typically with a term of 12 to 18 months.

MARKETING AND SALES

Ethylene produced by our Clinton, LaPorte and Morris facilities is generally
consumed as a raw material by our polymers operations at those sites, except
for the ethylene produced at LaPorte and sold to Millennium. Ethylene and
propylene produced at our Channelview, Chocolate Bayou, Corpus Christi and Lake
Charles olefins plants are generally distributed by pipeline or via exchange
agreements to our Gulf Coast polymer and EO and EG facilities as well as to our
affiliates and third parties. For the six months ended June 30, 2001,
approximately 86% of our ethylene production, based on sales dollars, was
consumed by our polymers or oxygenated chemicals businesses or sold to our
owners and their affiliates at market-related prices.

With respect to sales to third parties, we sell a majority of our olefins
products to customers with whom Lyondell and Occidental have had long-standing
relationships. Sales to third parties generally are made under written
agreements that typically provide for monthly negotiation of price; customer
purchases of a specified minimum quantity; and three- to six-year terms with
automatic one- or two-year term extension provisions. Some contracts may be
terminated early if deliveries have been suspended for several months. No
single unrelated third party customer accounted for more than 10% of total
segment revenues in 2000.

EO and EG are sold under three to five year contracts to third-party
customers, with pricing negotiated on a quarterly basis to reflect market
conditions. Glycol ethers are sold primarily into the solvent and distributor
markets under one-year contracts at market prices, as are ethanolamines and
brake fluids. Ethanol and ethers are sold to third-party customers under one-
year contracts at market prices.

We license MTBE technology under a license from an affiliate of Lyondell and
sell a significant portion of MTBE produced at one of our two Channelview units
to Lyondell at market-related prices. The production from the second unit is
consumed by LYONDELL-CITGO Refining LP for gasoline blending. MTBE produced at
Chocolate Bayou is sold at market-related prices to Lyondell for resale.

We sell most of our aromatics production under contracts that have initial
terms ranging from two to three years and that typically contain automatic one-
year term extension provisions. These contracts generally provide for monthly
or quarterly price adjustments based upon current market prices. We market
aromatics produced by LYONDELL-CITGO Refining LP, with the exception of
benzene, for LYONDELL-CITGO Refining LP under contracts with similar terms to
our own. Benzene produced by LYONDELL-CITGO Refining LP is sold directly to us
at market-related prices.

Most of the ethylene and propylene production of our Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which we own and some of
which we lease, extends from Corpus Christi to Mont Belvieu to Port Arthur,
Texas as well as around the Lake Charles, Louisiana area. In addition, exchange
agreements with other olefins producers allow access to customers who are not
directly connected to our pipeline system. Some ethylene is shipped by railcar
from Clinton, Iowa to Morris, Illinois. Some propylene is shipped by ocean-
going vessel. Ethylene oxide is shipped by railcar, and its derivatives are
shipped by railcar, truck, isotank or ocean-going vessel. Butadiene, aromatics
and other petrochemicals are distributed by pipeline, railcar, truck, barge or
ocean-going vessel.

COMPETITION

The basis for competition in our petrochemicals products is price, product
quality, product deliverability and customer service. We compete with other
large producers of petrochemicals, including BP p.l.c., Chevron Phillips, Dow
Chemical, ExxonMobil, Huntsman Chemical Company, NOVA Chemicals and Shell
Chemical.

POLYMERS SEGMENT

OVERVIEW

Through facilities located at ten plant sites in five states, our polymers
segment manufactures a wide variety of polyolefins, including polyethylene,
polypropylene and various performance polymers. Polyolefins are used in a
variety of consumer and industrial products, including packaging film, trash
bags, plastic bottles and caps and compounds for wire and cable insulation.

We are the third largest producer of polyethylene in North America and are a
leading domestic producer of polyolefins powders, compounds, wire and cable
insulating resins and polymers for adhesives. The combined rated capacity of
our polyethylene units as of January 1, 2001 was approximately 5.7 billion
pounds per year or approximately 13% of total industry capacity in North
America. Our polypropylene capacity, 680 million pounds per year as of January
1, 2001, represents approximately 4% of total North American polypropylene
capacity.

We currently manufacture polyethylene using a variety of technologies at five
facilities in Texas and at our Morris, Illinois and Clinton, Iowa facilities.
The Morris and Clinton facilities are located in the U.S. Midwest and enjoy a
freight cost advantage over Gulf Coast producers in delivering products to
customers in the U.S. Midwest and on the East Coast of the United States.

We produce performance polymer products, which include enhanced grades of
polyethylene and polypropylene, at several of our polymers facilities. We
believe that, over a business cycle, average selling prices and profit margins
for performance polymers tend to be higher than average selling prices and
profit margins for higher-volume commodity polyethylenes. We also produce wire
and cable insulating resins and compounds at LaPorte, Texas and Morris,
Illinois; and wire and cable insulating compounds at Fairport Harbor, Ohio;
Peachtree City, Georgia and Tuscola, Illinois. Wire and cable insulating resins
and compounds are used to insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications. Our Morris, Illinois
and Pasadena, Texas facilities manufacture polypropylene using propylene
produced as a co-product of our ethylene production as well as propylene
purchased from third parties. Polypropylene is sold for various applications in
the automotive, housewares and appliance industries.

The following table outlines our polymers and performance polymers products,
including brand names, annual processing capacity at January 1, 2001, the
primary uses for such products and where we produce them. The table excludes
capacity of our Port Arthur, Texas facility, which was permanently shut down
February 28, 2001. Unless otherwise specified, annual processing capacity was
calculated by estimating the number of days in a typical year that a production
unit of a plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.

PRODUCT ANNUAL CAPACITY PRIMARY USES WHERE PRODUCED
------------------------------------------------------------------------------------------------------------

POLYETHYLENE:
------------------------------------------------------------------------------------------------------------
High density polyethyl- 3.1 billion pounds (a) HDPE is used to manufacture Chocolate Bayou,
ene grocery,merchandise and trash bags; Texas
(HDPE) foodcontainers for items from frozen LaPorte, Texas
Alathon(R) desserts to margarine; plastic Matagorda, Texas
Petrothene(R) capsand closures; liners for boxes Victoria, Texas
of cereal and crackers; plastic Clinton, Iowa
drink cups and toys; dairy crates;
bread trays and pails for items from
paint to fresh fruits and
vegetables; safety equipment such as
hard hats; house wrap for
insulation; bottles for
household/industrial chemicals and
motor oil; milk/water/juice bottles;
and large (rotomolded) tanks for
storing liquids like agricultural
and lawn care chemicals.
------------------------------------------------------------------------------------------------------------
Low density polyethylene 1.5 billion pounds (a) LDPE is used to manufacture food LaPorte, Texas
(LDPE) packaging films; plastic bottles for Pasadena, Texas
Petrothene(R) packaging food and personal care Morris, Illinois
items; dry cleaning bags; ice bags; Clinton, Iowa
pallet shrink wrap; heavy-duty bags
for mulch and potting soil; boil-in-
bag bags; coatings on flexible
packaging products; and coatings on
paper board such as milk cartons.
Specialized forms of LDPE are Ethyl
Methyl Acrylate, which provides
adhesion in a variety of
applications, and Ethylene Vinyl
Acetate, which is used in foamed
sheets, bag-in-box bags, vacuum
cleaner hoses, medical tubing, clear
sheet protectors and flexible
binders.
------------------------------------------------------------------------------------------------------------
Linear low density 1.1 billion pounds LLDPE is used to manufacture garbage LaPorte, Texas
polyethylene and lawn- leaf bags; housewares; Morris, Illinois
(LLDPE) lids for coffee cans and margarine
Petrothene(R) tubs; and large (rotomolded) toys
like outdoor gym sets.
------------------------------------------------------------------------------------------------------------
POLYPROPYLENE:
------------------------------------------------------------------------------------------------------------
Polypropylene 680 million pounds Polypropylene is used to manufacture Pasadena, Texas
KromaLon(R) fibers for carpets, rugs and Morris, Illinois
upholstery; housewares; automotive
battery cases; automotive fascia,
running boards and bumpers; grid-
type flooring for sports facilities;
fishing tackle boxes; and bottle
caps and closures.

PRODUCT ANNUAL CAPACITY PRIMARY USES WHERE PRODUCED
---------------------------------------------------------------------------------------

PERFORMANCE POLYMERS:
---------------------------------------------------------------------------------------
Wire and Ca- (b) Wire and cable insulating resins and LaPorte, Texas
ble compounds are used to insulate Tuscola, Illinois
Insulating copper and fiber optic wiring in Fairport Harbor,
Resins power, telecommunication, computer Ohio
and Com- and automobile applications. Peachtree City,
pounds Georgia
Petrothene(R)
Aquathene(R)
---------------------------------------------------------------------------------------
Polymeric (b) Polymeric powders are component Tuscola, Illinois
Powders products in structural and bulk
Microthene(R) molding compounds, parting agents
and filters for appliance,
automotive and plastics processing
industries.
---------------------------------------------------------------------------------------
Polymers for (b) Polymers are components in hot-melt- LaPorte, Texas
Adhesives, adhesive formulations for case,
Sealants and carton and beverage package sealing,
Coatings glue sticks, automotive sealants,
Petrothene(R) carpet backing and adhesive labels.
Ultrathene(R)
---------------------------------------------------------------------------------------
Reactive (b) Reactive polyolefins are Clinton, Iowa
Polyolefins functionalized polymers used to bond
Plexar(R) non-polar and polar substrates in
barrier food packaging, wire and
cable insulation and jacketing,
automotive gas tanks and metal
coating applications.
---------------------------------------------------------------------------------------
Liquid (b) Liquid polyolefins are a diesel fuel LaPorte, Texas
Polyolefins additive to inhibit freezing.
Vynathene(R)

--------
(a) Excludes capacity of our Port Arthur, Texas facility, which was permanently
shut down February 28, 2001.
(b) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.

RAW MATERIALS

The primary raw materials for our polymers segment are ethylene and
propylene. With the exception of our Chocolate Bayou polyethylene plant, our
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from our petrochemical facilities via our olefins
pipeline system or from on-site production. Most of the raw materials consumed
by our polymers segment are produced internally by our petrochemicals segment.
Our polyethylene plants at Chocolate Bayou, LaPorte and Pasadena, Texas are
pipeline-connected to third parties and can receive ethylene via exchanges or
purchases. Our polypropylene facility at Morris, Illinois also receives
propylene from third parties.

MARKETING AND SALES

Our polymers products are primarily sold to an extensive base of established
customers. Approximately 50% of these customers have term contracts, typically
having a duration of one to three years. The remainder is generally sold
without contractual term commitments. In either case, in most of the continuous
supply relationships, prices are subject to change upon mutual agreement
between us and the customer. No single unrelated third party customer accounted
for more than 10% of total segment revenues in 2000.

Polymers are primarily distributed via railcar. We own or lease, pursuant to
long-term lease arrangements, approximately 8,000 railcars for use in our
polymers business. We sell our polymers products in the United States and
Canada primarily through our own sales organization. We generally engage sales
agents to market our products in the rest of the world.

COMPETITION

The basis for competition in our polymers products is price, product
performance, product quality, product deliverability and customer service. We
compete with other large producers of polymers, including Atofina, BP, Chevron
Phillips, Dow Chemical, Eastman Chemical Company, ExxonMobil, Formosa Plastics,
Huntsman Chemical, NOVA Chemicals, Solvay Polymers and Westlake Polymers.

PROPERTIES WE OWN OR LEASE

Our principal manufacturing facilities and principal products are listed
below. All of these facilities are wholly owned by us unless otherwise noted.

LOCATION PRINCIPAL PRODUCTS
-------- ------------------

Beaumont, Texas (a)*...... EG
Channelview, Texas (b)*... Ethylene, Propylene, Butadiene, Benzene, Toluene,
DCPD, Isoprene, Resin Oil, Piperylenes, Alkylate and
MTBE
Corpus Christi, Texas*.... Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, Texas HDPE
(c)......................
Chocolate Bayou, Texas Ethylene, Propylene, Butadiene, Benzene, Toluene,
(c)(d)*.................. DCPD, Isoprene, Resin Oil and MTBE
LaPorte, Texas (e)........ Ethylene, Propylene, LDPE, LLDPE, HDPE, Liquid
Polyolefins, Wire and Cable Insulating Resins and
Polymers for Adhesives, Sealants and Coatings
Matagorda, Texas*......... HDPE
Pasadena, Texas (f)*...... EO, EG and Other EO Derivatives
Pasadena, Texas (f)*...... Polypropylene and LDPE
Victoria, Texas (d)*...... HDPE
Peachtree City, Georgia... Wire and Cable Insulating Compounds
Lake Charles, Louisiana Ethylene, and Propylene
(g)*.....................
Morris, Illinois*......... Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois......... Ethanol, Diethyl Ether, Wire and Cable Insulating
Compounds and Polymeric Powders
Clinton, Iowa............. Ethylene, Propylene, LDPE, HDPE and Reactive
Polyolefins
Fairport Harbor, Ohio Wire and Cable Insulating Compounds
(h)*.....................
Anaheim, California....... Denatured Alcohol
Newark, New Jersey........ Denatured Alcohol

--------
* Facilities which received the OSHA Star Certification, which is the highest
safety designation issued by the U.S. Department of Labor.
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by DuPont.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol Company, L.P. owns a methanol plant located within the Channelview
facility on property Lyondell Methanol Company, L.P. leases from Equistar.
A third party owns and operates a facility on land leased from Equistar
that is used to purify hydrogen from Lyondell Methanol Company, L.P.'s
methanol plant. Equistar also operates a styrene maleic anhydride unit and
a polybutadiene unit which are owned by a third party and are located on
property leased from Equistar within the Channelview facility.
(c) Millennium and Occidental each contributed a facility located in Chocolate
Bayou. These facilities are not on contiguous property.
(d) The land is leased and the facility is owned. The lease for the land
expires in August 2021.
(e) All of the HDPE capacity and a portion of the LDPE capacity at the LaPorte
facility has been idled since the first quarter of 2000.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar
operates them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The Lake Charles facility has been idled since first quarter 2001. The
facilities and land are leased from an affiliate of Occidental under a
lease which expires in May 2003.
(h) The facilities and land are leased.

We also own a storage facility, a brine pond and a tract of vacant land in
Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGLs,
ethylene, propylene and other hydrocarbons is provided in salt domes at the
Mont Belvieu facility. There are an additional 3 million barrels of ethylene
and propylene storage we operate on leased property in Markham, Texas.

We use an extensive olefins pipeline system, some of which we own and some of
which we lease, extending from Corpus Christi to Mont Belvieu to Port Arthur
and around the Lake Charles area. We own other pipelines in connection with our
Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus Christi and LaPorte
facilities. We own and lease several pipelines connecting the Channelview
facility, the refinery owned by LYONDELL-CITGO Refining and the Mont Belvieu
storage facility. These pipelines are used to transport feedstocks, butylenes,
hydrogen, butane, MTBE and unfinished gasolines. We also own a barge docking
facility near the Channelview facility capable of berthing eight barges and
related terminal equipment for loading and unloading raw materials and
products. We own or lease pursuant to long-term lease arrangements
approximately 9,700 railcars for use in our business.

We sub-lease our executive offices and corporate headquarters from Lyondell
in downtown Houston. In addition, we own facilities which house the Morris and
Cincinnati research operations. We also lease sales facilities and lease
storage facilities, primarily in the Gulf Coast area, from various third
parties for the handling of products.

RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

We maintain a significant research and development facility in Cincinnati,
Ohio. We have additional research facilities in Morris, Illinois; Matagorda,
Texas; and Chocolate Bayou, Texas. Our research and development expenditures
for 2000 were $38 million, for 1999 were $42 million and for 1998 were $40
million.

We use numerous technologies in our operations, many of which are licensed
from third parties. We jointly own with Maruzen Petrochemical Co., Ltd. a bi-
modal process for the production of HDPE. We use this bi-modal process at our
Matagorda, Texas facility. We hold significant licenses, including the Unipol
process for the production of LLDPE, and certain other licenses for the
production of EO, EG, polyethylene and polypropylene. We are not dependent on
the retention of any particular license, and we believe that the loss of any
individual license would not have a material adverse effect on our operations.

Our Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Consistent with our business strategy, we are conducting a research project to
investigate alternative olefins feedstocks for use at our Channelview,
Chocolate Bayou and Corpus Christi facilities. These alternative olefins
feedstocks could significantly lower costs and provide an additional
competitive advantage at these facilities.

Recent polymers industry announcements relate to the development of single-
site catalysts. Successful development and commercialization of these catalysts
are expected to result in enhanced polymer properties and higher margin
products. We are conducting research and developing several non-metallocene
single-site catalysts (STARTM catalysts) for use in the production of
polyolefins resins. We have several patents and patent applications pending in
connection with research and development efforts in this area. We do not
believe that the loss of any individual patent or trade secret would have a
material adverse effect on our petrochemicals or polymers businesses.

In August 2000, we and ABB Lummus Global formed a joint venture, Novolen
Technology Holdings C.V., to acquire the Novolen(R) technology business from
Targor GmbH, a subsidiary of BASF AG. The joint venture, owned 80% by ABB
Lummus Global and 20% by us, licenses the Novolen(R) technology and supports
new catalyst and process development through joint research and development
programs. Novolen(R) is a technology used to make polypropylene.

We acquired rights to numerous trademarks from Lyondell and Millennium
Petrochemicals in connection with our formation, including ALATHON(R),
KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and Microthene(R). Our
right to use these trademarks is perpetual as long as we actively use the
trademarks. We are not dependent upon any particular trademark, and we believe
the loss of any individual trademark would not have a material adverse effect
on our operations.

ENVIRONMENTAL MATTERS

For a discussion of environmental matters that relate to our business, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters."

LITIGATION

In April 1997, the Illinois Attorney General's Office filed a complaint in
Grundy County, Illinois Circuit Court seeking monetary sanctions for releases
into the environment at Millennium Chemicals Inc.'s Morris, Illinois plant in
alleged violation of state regulations. The Morris, Illinois plant was
contributed to Equistar on December 1, 1997 in connection with the formation of
Equistar. We now believe that a civil penalty in excess of $100,000 could
result, without giving effect to contribution of indemnification obligations of
others. We do not believe that the ultimate result of this complaint will have
a material adverse effect on the business or financial condition of Equistar.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
November 2007. On January 19, 2001, Equistar and LYONDELL-CITGO Refining LP,
individually, and Lyondell, individually and as part of the BCCA Appeal Group
(a group of industry participants), filed a lawsuit against the TNRCC in State
District Court in Travis County, Texas to encourage the adoption of the
plaintiffs' alternative plan to achieve the same air quality improvements as
the TNRCC plan, with less negative economic impact on the region. In June 2001,
the parties entered into a consent order with respect to the lawsuit. Pursuant
to the consent order, the TNRCC agreed to review, by June 2002, the scientific
data for ozone formation in the Houston/Galveston region. If the TNRCC
scientific review supports the industry group proposal, the TNRCC has agreed to
revise the NOx emission reduction requirements set forth in its original plan.

In addition, we are, from time to time, a defendant in lawsuits, some of
which are not covered by insurance. Many of these suits make no specific claim
for relief. Although final determination of legal liability and the resulting
financial impact with respect to any such litigation cannot be ascertained with
any degree of certainty, we do not believe that any ultimate uninsured
liability resulting from the legal proceedings in which we currently are
involved (directly or indirectly) will individually, or in the aggregate, have
a material adverse effect on our business or financial condition. However, the
adverse resolution in any reporting period of one or more of these suits could
have a material impact on our results of operations for that period without
giving effect to contribution or indemnification obligations of co-defendants
or others, or to the effect of any insurance coverage that may be available to
offset the effects of any such awards.

From time to time we receive notices from federal, state or local
governmental entities of alleged violations of environmental laws and
regulations pertaining to, among other things, the disposal, emission and
storage of chemical and petroleum substances, including hazardous wastes.
Although we have not been the subject of significant penalties to date, such
alleged violations may become the subject of enforcement actions or other legal
proceedings and may (individually or in the aggregate) involve monetary
sanctions of $100,000 or more (exclusive of interest and costs).

Lyondell, Millennium and specified subsidiaries of Occidental have each
agreed to provide certain indemnifications to us with respect to the
petrochemicals and polymers businesses contributed by our owners. In addition,
we have agreed to assume third party claims that are related to certain pre-
closing contingent liabilities. See Note 14 of Notes to Consolidated Financial
Statements for more information regarding these indemnification obligations.

EMPLOYEE RELATIONS

As of June 30, 2001, we employed approximately 3,600 full-time employees. We
also use the services of independent contractors in the routine conduct of our
business. Approximately 185 hourly workers are covered by collective bargaining
agreements. We believe that our relations with our employees are good.

OUR MANAGEMENT

PARTNERSHIP GOVERNANCE COMMITTEE

A partnership governance committee manages and controls our business,
property and affairs, including the determination and implementation of our
strategic direction. The general partners exercise their authority to manage
and control us only through our partnership governance committee, subject to
delegation to the executive officers discussed below. Our partnership
governance committee consists of nine members, called representatives, three
appointed by each general partner. All decisions of our partnership governance
committee that do not require at least two of the three representatives of each
of Lyondell, Millennium and Occidental may be made by Lyondell's
representatives alone. See "Description of the Partnership Agreement."

The members of our partnership governance committee as of the date of this
prospectus are:

. Dr. Ray R. Irani, Chairman and Chief Executive Officer of Occidental and
co-chairman of the partnership governance committee;

. William M. Landuyt, Chairman and Chief Executive Officer of Millennium
and co-chairman of the partnership governance committee;

. Dan F. Smith, President and Chief Executive Officer of Lyondell and
Chief Executive Officer of Equistar and co-chairman of the partnership
governance committee;

. Robert T. Blakely, Executive Vice President and Chief Financial Officer
of Lyondell;

. Stephen I. Chazen, Executive Vice President--Corporate Development and
Chief Financial Officer of Occidental;

. Kevin DeNicola, Vice President, Corporate Development of Lyondell;

. J. Roger Hirl, President and Chief Executive Officer of Occidental
Chemical Corporation;

. Robert E. Lee, Executive Vice President, Growth and Development of
Millennium; and

. John E. Lushefski, Senior Vice President and Chief Financial Officer of
Millennium.

EXECUTIVE OFFICERS

Our partnership governance committee has delegated responsibility for day-to-
day operations to our executive officers. The executive officers consist of a
Chief Executive Officer, a President and Chief Operating Officer and others as
determined from time to time by our partnership governance committee. The
approval of at least two representatives of each of Lyondell, Millennium and
Occidental is required to appoint or discharge executive officers, other than
the Chief Executive Officer, based upon the recommendation of the Chief
Executive Officer.

The Chief Executive Officer holds office for a five-year term, assuming he
does not resign or die and is not removed, and need not be our employee. The
Chief Executive Officer may be removed at any time by action of our partnership
governance committee. Lyondell has the right to designate our Chief Executive
Officer, provided the person designated is reasonably acceptable to Millennium
and Occidental.

The following table sets forth the names and ages of our executive officers
as of June 30, 2001.

NAME AGE POSITION
---- --- --------

Dan F. Smith............ 55 Chief Executive Officer
Eugene R. Allspach...... 54 President and Chief Operating Officer
James W. Bayer.......... 45 Senior Vice President, Manufacturing
Brian A. Gittings....... 54 Senior Vice President, Petrochemicals
W. Norman Phillips, Jr.. 46 Senior Vice President, Polymers
Russell T. Crockett..... 37 Vice President, Responsible Care(R) and Engineering
J. R. Fontenot.......... 48 Vice President, Research and Development
Jeffrey L. Hemmer....... 43 Vice President, Supply Chain
John A. Hollinshead..... 51 Vice President, Human Resources
Gerald A. O'Brien....... 49 Vice President, General Counsel and Secretary
Jose L. Rodriguez....... 43 Vice President, Supply and Optimization
Robert E. Tolbert....... 58 Vice President and Chief Information Officer
Joseph M. Putz.......... 60 Acting Controller

Mr. Smith has been our Chief Executive Officer since December 1997. Mr. Smith
has been a Director of Lyondell since 1988. He has been President of Lyondell
since August 1994 and Chief Executive Officer of Lyondell since December 1996.
He has been a member of the LYONDELL-CITGO Refining partnership governance
committee since July 1993. Mr. Smith was Chief Operating Officer of Lyondell
from May 1993 to December 1996. Before that time, Mr. Smith held various senior
executive positions with Lyondell and Atlantic Richfield Company, including
Executive Vice President and Chief Financial Officer of Lyondell, Vice
President, Corporate Planning of Atlantic Ritchfield Company and Senior Vice
President in the areas of management, manufacturing, control and administration
for Lyondell and the Lyondell Division of Atlantic Ritchfield Company.

Mr. Allspach has been our President and Chief Operating Officer since
December 1997. Mr. Allspach served as Group Vice President, Manufacturing and
Technology for Millennium Petrochemicals from 1993 to 1997. Before 1993, Mr.
Allspach held various senior executive positions with Millennium, including
Group Vice President, Manufacturing and Manufacturing Services and Vice
President, Specialty Polymers and Business Development. Mr. Allspach has served
as Executive Vice President of Lyondell since December 2, 1999.

Mr. Bayer has been Senior Vice President, Manufacturing for Lyondell and
Equistar since October 2000. Before that, Mr. Bayer was the Vice President of
Health, Safety & Environment and Engineering. From December 1997 to July 1999,
he was Director, Gulf Coast Manufacturing for ARCO Chemical Company. Before
December 1997, Mr. Bayer served as Channelview Plant Manager for ARCO Chemical.

Mr. Gittings has been our Senior Vice President, Petrochemicals since August
1998 and was our Vice President, Oxygenated Chemicals from May 1998 to August
1998. Before that, he was Vice President and General Manager, Isocyanates for
Occidental Chemicals, where he had previously served as Vice President and
General Manager, Ethylene Oxide and Derivatives. Mr. Gittings also has served
as Senior Vice President of Lyondell since October 2000.

Mr. Phillips has been our Senior Vice President, Polymers since August 1998.
He was previously our Vice President, Petrochemicals from December 1997 to
August 1998. Mr. Phillips also has served as Senior Vice President of Lyondell
since October 2000. He previously served as Vice President, Polymers of
Lyondell from January 1997 to December 1997, and as Vice President of Lyondell
with responsibilities in the areas of marketing and operations from 1993 to
January 1997.

Mr. Crockett was named Vice President, Responsible Care(R) and Engineering
for Equistar and Lyondell in October 2000. Before then, he was our Channelview
Hydrocarbons Plant Manager. Mr. Crockett originally joined Lyondell in 1996 as
a Treasury Consultant and, in January 1997, became the Business Manager of
Aromatics for Lyondell.

Mr. Fontenot has been our Vice President, Research and Development since
September 1998. Mr. Fontenot has also served as Vice President, Research and
Development for Lyondell since October 2000. Mr. Fontenot previously served as
our Vice President, Engineering from December 1997 to September 1998, as Vice
President, Technology of Lyondell from January 1997 to December 1997 and as
Director of Technology of Lyondell from 1995 to January 1997. Before 1995, Mr.
Fontenot held various positions in operations, evaluation and technology for
Lyondell.

Mr. Hemmer has been Vice President, Supply Chain of Lyondell and Equistar
since February 2001. Before then, he served as our Vice President, Customer
Supply Chain since May 1999 and for Lyondell since October 2000. Previously he
was our Vice President, Information Systems and Business Process Improvement
from December 1997 to May 1999. Before our formation, Mr. Hemmer had been
Director, Engineering and Licensing for Millennium Petrochemicals from October
1996 to December 1997. Before October 1996, he was manager of polyethylene
process and engineering technology for Exxon Chemical.

Mr. Hollinshead has been Vice President, Human Resources for Lyondell and
Equistar since July 1998. Before his appointment he was our Director, Human
Resources, Manufacturing and Engineering from 1997. Mr. Hollinshead served as
Manager, Human Resources with Lyondell from 1985 to 1997.

Mr. O'Brien has been our Vice President, General Counsel and Secretary since
December 1997. Mr. O'Brien previously served as Associate General Counsel of
Lyondell, where his responsibilities included joint responsibility for the
management of the legal department and responsibility for a variety of legal
department functions, including mergers and acquisitions, general corporate,
finance and securities. Mr. O'Brien has served as Vice President and Deputy
General Counsel of Lyondell since December 2, 1999.

Mr. Rodriguez is Vice President, Supply and Optimization for Lyondell and
Equistar and serves on the LYONDELL-CITGO Refining partnership governance
committee. Before being named to his current position in March 2000, Mr.
Rodriguez served as Vice President, Planning, Evaluations and Supply for
LYONDELL-CITGO Refining since 1998. He joined LYONDELL-CITGO Refining in 1993
as Manager of Planning, Evaluations and Manufacturing Coordination. He was
promoted to Director of Planning, Evaluations and Supply in 1996.

Mr. Tolbert was appointed Vice President and Chief Information Officer of
Lyondell and Equistar in May 1999. He was named Vice President, Information
Services for Lyondell in July 1998. He served as General Auditor for Atlantic
Ritchfield Company from 1991 to 1995, when he was named Vice President,
Information Services for ARCO Chemical.

Mr. Putz was appointed Acting Controller of Lyondell and Equistar in March
2001. He served as a consultant to Lyondell and Equistar from January 2000
until March 2001, working on a variety of mergers, acquisitions and other
finance projects. From July 1998 through December 1999, Mr. Putz was a Senior
Vice President of Lyondell, with responsibility for special projects. He served
as Senior Vice President, Finance and Administration for Equistar from December
1997 through July 1998. Before that, Mr. Putz was Vice President, Finance and
Administration for Lyondell. Before joining Lyondell in 1987, Mr. Putz served
in a variety of financial positions with Atlantic Richfield Company.

COMPENSATION

Our Annual Report on Form 10-K for 2000 presents information on executive
compensation and our incentive plans that were in effect on December 31, 2000.
These plans remain in effect.

In addition, we recently adopted the 2001 Incentive Plan and made the first
grants of incentive awards under this plan to our executive officers. We
believe the 2001 grants of incentive awards are comparable in value to grants
of incentive awards in prior years. The awards were made in three forms:

. Annual cash awards, which reward management for economic value added and
financial and operational performance based on other measures selected
by the compensation committee of our partnership governance committee.

. Equistar options, which give participants the right to receive a cash
payment equal to the increase in the value of a predetermined number of
units whose value is determined by the composite market values of
Lyondell, Millennium and Occidental common stock, weighted in
proportions set by the compensation committee of our partnership
governance committee. The awards have a strike price equal to the
composite market value of our owner companies, vest in annual one-third
increments and generally have a term of ten years.

. Equistar performance shares, which allow participants to receive a cash
payment equal to the value of a predetermined number of units whose
value is determined by the composite market values of Lyondell,
Millennium and Occidental common stock, weighted in proportions set by
the compensation committee of our partnership governance committee. The
cash payment actually made to participants will depend on the composite
total shareholder return for our owners over a three-year period.

We believe this incentive plan will allow the compensation committee of our
partnership governance committee to make awards that provide appropriate
performance and retention incentives to our management.

OWNERSHIP

EQUISTAR

Equistar is a limited partnership wholly owned by Lyondell Petrochemical L.P.
Inc. ("Lyondell LP"), Millennium Petrochemicals LP LLC ("Millennium LP"),
Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2"), as the limited partners, and
Lyondell Petrochemical G.P. Inc. ("Lyondell GP"), Millennium Petrochemicals GP
LLC ("Millennium GP") and Occidental Petrochem Partner GP, Inc. ("Occidental
GP"), as the general partners. The following information is given with respect
to the partners' interests in Equistar as of the date of this prospectus.

NATURE OF PERCENTAGE
BENEFICIAL PARTNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP INTEREST
------------------------------------ --------------- -----------

Lyondell LP......................................... Limited Partner 40.180%
300 Delaware Ave.
Wilmington, DE 19801
Millennium LP....................................... Limited Partner 28.910%
230 Half Mile Road
Red Banks, NJ 00770
Occidental LP1...................................... Limited Partner 6.623%
10889 Wilshire Blvd.
Los Angeles, CA 90024
Occidental LP2...................................... Limited Partner 22.876%
10889 Wilshire Blvd.
Los Angeles, CA 90024
Lyondell GP......................................... General Partner 0.820%
1221 McKinney Street
Houston, TX 77010
Millennium GP....................................... General Partner 0.590%
230 Half Mile Road
Red Banks, NJ 00770
Occidental GP....................................... General Partner 0.001%
10889 Wilshire Blvd.
Los Angeles, CA 90024

Lyondell owns 100% of the outstanding capital stock of each of Lyondell LP
and Lyondell GP. Lyondell has pledged its interests in each of the Equistar
partners owned by it under its bank credit facility. Millennium indirectly owns
100% of the outstanding equity interests of each of Millennium LP and
Millennium GP. Millennium has pledged its interest in each of the Equistar
partners owned by it under its bank credit facility. Occidental indirectly owns
100% of the outstanding capital stock of each of Occidental LP1, Occidental LP2
and Occidental GP.

EQUISTAR FUNDING

All of the outstanding capital stock of Equistar Funding is owned directly by
Equistar.

DESCRIPTION OF THE PARTNERSHIP AGREEMENT

Our partnership agreement governs, among other things, our ownership, cash
distributions, capital contributions and management. The following is a summary
of the material provisions of the partnership agreement. This summary is
qualified in its entirety by reference to the full and complete text of the
partnership agreement, which is available upon written request as provided
under "Where You Can Find More Information."

BACKGROUND

Lyondell GP, Lyondell LP, Millennium GP and Millennium LP entered into the
partnership agreement as of October 10, 1997. PDG Chemical Inc., Occidental LP1
and Occidental LP2 became parties to the partnership agreement as of May 15,
1998. PDG Chemical Inc. withdrew from Equistar as of June 30, 1998, and
Occidental GP became a general partner on the same date. We will continue in
existence until our dissolution as provided in the partnership agreement. Our
three general partners are Lyondell GP, Millennium GP and Occidental GP.
Lyondell GP is a direct wholly owned subsidiary of Lyondell. Millennium GP is
an indirect wholly owned subsidiary of Millennium. Occidental GP is an indirect
wholly owned subsidiary of Occidental.

Our general partners are special purpose entities which do not hold any
significant assets other than partnership interests. Each general partner holds
less than a 1% interest in us.

GOVERNANCE OF EQUISTAR

A partnership governance committee manages and controls our business,
property and affairs, including the determination and implementation of our
strategic direction. The general partners exercise their authority to manage
and control us only through the partnership governance committee. The
partnership governance committee consists of nine members, called
representatives, three of whom are representatives of Lyondell GP, three of
whom are representatives of Millennium GP and three of whom are representatives
of Occidental GP.

In general, the approval of two or more representatives acting for Lyondell
GP will be necessary and sufficient for the partnership governance committee to
take any action. This means, in effect, that Lyondell GP's representatives have
the ability to control the partnership governance committee and, as a result,
Equistar, except where the approval of the representatives of Millennium GP and
Occidental GP is specifically required. See "--Actions Requiring Unanimous
Voting." Even though ordinary actions by the partnership governance committee
may be approved by two representatives of Lyondell GP, the partnership
governance committee may not take any action at a meeting with respect to any
matter that was not reflected on an agenda that was properly delivered to all
of the representatives in advance, unless at least one of each of Millennium
GP's and Occidental GP's representatives is present. The participation rights
of any general partner's representatives may be curtailed to the extent that
the general partner or its affiliates cause a default under the partnership
agreement.

Our executive officers consist of a Chief Executive Officer, a President and
Chief Operating Officer and others as determined from time to time by the
partnership governance committee. See "Our Management." Except for the Chief
Executive Officer, the approval of at least two representatives of each of
Lyondell GP, Millennium GP and Occidental GP is required to appoint or
discharge executive officers, based upon the recommendation of the Chief
Executive Officer. However, any of Lyondell GP, Millennium GP or Occidental GP
may, by action of two or more of its representatives, remove from office any of
our executive officers, including the Chief Executive Officer, who takes, or
causes us to take, any action described above under "--Actions Requiring
Unanimous Voting" without the required approval of two or more representatives
of each of Lyondell GP, Millennium GP and Occidental GP.

Our Chief Executive Officer holds office for a five-year term, assuming he
does not resign or die and is not removed. Upon the expiration of his term or
earlier vacancy, Lyondell GP will designate the Chief Executive Officer,
provided that the person so designated shall be reasonably acceptable to
Millennium GP and Occidental GP. The Chief Executive Officer is not required to
be our employee. The Chief Executive Officer may be removed at any time by
action of the partnership governance committee, meaning that the approval of
only two representatives of Lyondell GP is required to effect a removal.

Our Chief Executive Officer has general authority and discretion, comparable
to that of a chief executive officer of a publicly held Delaware corporation of
similar size, to direct and control our business and affairs, including,
without limitation, its day-to-day operations in a manner consistent with the
annual budget and the most recently approved strategic plan. The Chief
Executive Officer takes steps to implement all orders and resolutions of the
partnership governance committee. The Chief Executive Officer also establishes
salaries or other compensation for the other executive officers of Equistar
consistent with plans approved by the partnership governance committee.

ACTIONS REQUIRING UNANIMOUS VOTING

Unless approved by two or more representatives of each of Lyondell GP,
Millennium GP and Occidental GP, the partnership governance committee may not
take any actions that would permit or cause us, any of our subsidiaries, or any
person acting in the name of or on behalf of any of them, directly or
indirectly, whether in a single transaction or a series of related
transactions, to:

. engage, participate or invest in any business outside the scope of our
business as described in the partnership agreement;

. approve any strategic plan, as well as any amendments or updates to the
strategic plan, including the annual update described under "--Strategic
Plans and Preparation of an Annual Budget" below;

. authorize any disposition of assets having a fair market value exceeding
$30 million in any one transaction or a series of related transactions
not contemplated in an approved strategic plan;

. authorize any acquisition of assets or any capital expenditure exceeding
$30 million that is not contemplated in an approved strategic plan;

. require capital contributions to us within any fiscal year if the total
of contributions required from the partners within that year would
exceed $100 million, or if the total of contributions required from the
partners within that year and the immediately preceding four years would
exceed $300 million, other than contributions:

-- contemplated by the asset contribution agreements for each of
Lyondell, Millennium and Occidental,

-- contemplated by an approved strategic plan or

-- required to achieve or maintain compliance with health, safety and
environmental laws;

. authorize the incurrence of debt for borrowed money, unless:

-- the debt is to refinance all or a portion of our credit facilities
as contemplated below,

-- after giving effect to the incurrence of the debt and any related
transactions, we would be expected to have an "investment grade"
debt rating by Moody's and S&P, or

-- the debt is incurred to refinance the public or bank debt assumed or
incurred by us as contemplated by documents relating to our
formation and the contribution of the Occidental contributed
business or to refinance any such refinancing debt;

and in the case of each of the three exceptions above, the agreement
relating to the debt does not provide that the transfer by a partner of
its partnership interests, or a change of control with respect to any
partner or any of its affiliates, would either:

-- constitute a default under the debt instruments,

-- otherwise accelerate the maturity of the debt or

-- give the lender or holder any "put rights" or similar rights with
respect to the debt instrument;

. make borrowings under one or more of our bank credit facilities,
uncommitted lines of credit or any credit facility or debt instruments
that refinances all or any portion of our credit facility or facilities,
at any time, if, as a result of any such borrowing, the aggregate
principal amount of all borrowings outstanding at that time would exceed
$1.75 billion;

. enter into interest rate protection or other hedging agreements, other
than hydrocarbon hedging agreements in the ordinary course of business;

. enter into any capitalized lease or off-balance sheet financing
arrangements involving payments, individually or in the aggregate, by us
in excess of $30 million in any fiscal year;

. cause us or any of our subsidiaries to issue, sell, redeem or acquire
any partnership interests in us or other equity securities, or any
rights to acquire, or any securities convertible into or exchangeable
for, partnership interests or other equity securities;

. make cash distributions from us in excess of Available Net Operating
Cash, as defined below under "--Distribution of Available Net Operating
Cash to Our Owners," or to make non-cash distributions, except as
provided in the partnership agreement in respect of a dissolution or
liquidation;

. appoint or discharge executive officers, other than the Chief Executive
Officer, based on the recommendation of the Chief Executive Officer;

. approve material compensation and benefit plans and policies, material
employee policies and material collective bargaining agreements for our
employees;

. initiate or settle any litigation or governmental proceedings if the
effect of the litigation or proceedings would be material to our
financial condition;

. change our independent accountants;

. change our method of accounting as adopted in the partnership agreement
or make tax elections under the Internal Revenue Code of 1986, as
amended, determined to be appropriate by the partnership governance
committee;

. create or change the authority of any auxiliary committee;

. merge, consolidate or convert us or any of our subsidiaries with or into
any other entity, other than a wholly owned subsidiary of us;

. engage in certain bankruptcy and reorganization actions specified in the
partnership agreement;

. exercise any of the powers or rights described below under "--
Transactions with Affiliates" with respect to a business conflict
involving either;

-- LYONDELL-CITGO Refining LP, its successors or assigns,

-- Lyondell Methanol Company, L.P., its successors or assigns or

-- any other affiliate of either Lyondell GP, Millennium GP or
Occidental GP, if the affiliate's actions with respect to the
conflict circumstance are not controlled by Lyondell, Millennium or
Occidental, other than a business conflict involving the exercise of
any rights and remedies with respect to a default under any
agreement that is the subject of the conflict;

. repay any of the Millennium America reference debt before December 1,
2004, other than through refinancing, or refinance any Millennium
America reference debt before December 1, 2004, if any of the principal
of the debt refinancing the Millennium America reference debt would be
due and payable after December 1, 2004; provided, however, that if the
Millennium America reference debt continues to be the reference for
determination of the amount of the obligation of Millennium

America or its successors pursuant to one or more specified indemnities
after December 1, 2004, then the term of the debt shall not exceed 365
days; or

. repay any of the Occidental reference debt before June 14, 2005, other
than through refinancing, or refinance any Occidental reference debt
before June 14, 2005, if any of the principal of the debt refinancing
Occidental reference debt would be due and payable after June 14, 2005;
provided, however, that if the Occidental reference debt continues to be
guaranteed by an affiliate of Occidental or its successors or the
reference for determination of the amount of the obligation of
Occidental Chemical to contribute to Equistar pursuant to a specified
indemnity agreement after June 14, 2005, then the term of the debt shall
not exceed 365 days.

Although unanimous approval by all nine members of the partnership
governance committee is never required, the requirements described above are
referred to as "unanimous voting requirements" because two representatives of
each of the general partners must agree on any action taken in respect of the
enumerated matters.

TRANSACTIONS WITH AFFILIATES

Except as described above under "--Actions Requiring Unanimous Voting," if a
business conflict caused by any transaction or dealing between us, or any of
our subsidiaries, and one or more of our general partners, or any of their
affiliates, occurs, the other general partners will have sole and exclusive
power, at our expense, to both:

. control all decisions, elections, notifications, actions, exercises or
non-exercises and waivers of all rights, privileges and remedies
provided to, or possessed by, us with respect to the conflict; and

. retain and direct legal counsel and to control, assert, enforce, defend,
litigate, mediate, arbitrate, settle, compromise or waive any and all
claims, disputes and actions if any potential, threatened or asserted
claim, dispute or action about a conflict occurs.

Any action by the partnership governance committee with respect to such a
conflict, except as described above under "--Actions Requiring Unanimous
Voting," will require the approval of at least two representatives of each of
the uninvolved general partners, and the representatives of the interested
general partner will have no votes.

STRATEGIC PLANS AND PREPARATION OF AN ANNUAL BUDGET

We are managed under a five-year strategic business plan which is updated
annually under the direction of the Chief Executive Officer and presented for
approval by the partnership governance committee no later than 90 days before
the start of the first fiscal year covered by the updated plan. The strategic
plan must be approved each year by at least two representatives of each of
Lyondell GP, Millennium GP and Occidental GP. The strategic plan establishes
our strategic direction, including:

. plans relating to capital maintenance and enhancement;

. geographic expansion, acquisitions and dispositions;

. new product lines;

. technology;

. long-term supply and customer arrangements;

. internal and external financing;

. environmental and legal compliance; and

. plans, programs and policies relating to compensation and industrial
relations.

In addition, our executive officers prepare an annual budget for each fiscal
year. Each annual budget includes an operating budget and capital expenditure
budget. Each annual budget must be consistent with the information for its
fiscal year included in the most recently approved strategic plan. Unless
otherwise provided in the most recently approved strategic plan, each annual
budget utilizes a format and provides a level of detail consistent with our
previous annual budget.

If for any fiscal year the partnership governance committee fails to approve
an updated strategic plan, for that year and each subsequent year before the
approval of an updated strategic plan, our executive officers will prepare and
promptly furnish to the partnership governance committee an annual budget
consistent with the projections and other information for that year included in
the strategic plan most recently approved. The Chief Executive Officer, acting
in good faith, shall be entitled to modify any annual budget:

. to satisfy current contractual and compliance obligations; and/or

. to account for other changes in circumstances resulting from the passage
of time or the occurrence of events beyond our control.

The Chief Executive Officer is not authorized to cause us to proceed with
capital expenditures to accomplish capital enhancement projects except to the
extent that the expenditures would enable us to continue or complete any
capital project reflected in the last strategic plan that was approved by the
partnership governance committee.

After a strategic plan and an annual budget have been approved by the
partnership governance committee, or an annual budget has been developed as
described above in cases where an updated strategic plan has not yet been
approved, the Chief Executive Officer is authorized, without further action by
the partnership governance committee, to cause us to make expenditures
consistent with the updated strategic plan and annual budget, provided that all
internal control policies and procedures, including those regarding the
required authority for expenditures, shall have been followed.

PARTNERSHIP GOVERNANCE COMMITTEE DEADLOCK OVER THE STRATEGIC PLAN

If the partnership governance committee has not agreed upon and approved an
updated strategic plan by 12 months after the beginning of the first fiscal
year that would have been covered by the plan, then our general partners are
required to submit to a non-binding dispute resolution process. The general
partners are required to continue the dispute resolution process until either:

. agreement is reached by the general partners, acting through their
representatives, on an updated strategic plan; or

. at least 24 months have elapsed since the beginning of the first fiscal
year that was to be covered by the first updated strategic plan for
which agreement was not reached and one general partner determines and
notifies the other general partners in writing that no agreement
resolving the dispute is likely to be reached.

Following receipt of notice described above, any general partner may elect to
dissolve Equistar.

DISTRIBUTION OF AVAILABLE NET OPERATING CASH TO OUR OWNERS

Our partnership agreement provides that we must distribute to our partners,
as soon as practicable following the end of each month, all Available Net
Operating Cash, as defined below.

"Available Net Operating Cash" is defined in our partnership agreement, at
the relevant time of determination, as:

. all cash and cash equivalents on hand as of the most recent month's end,
plus the excess, if any, of our targeted level of indebtedness over our
actual indebtedness as of that month's end; less

. our Projected Cash Requirements, if any, as of that month's end, as
determined by our executive officers.

Our targeted level of indebtedness is shown in the most recently updated
strategic plan. Our actual indebtedness is determined according to generally
accepted accounting principles and represents all short term and long term
debt.

"Projected Cash Requirements" means, for the 12-month period following any
month's end, the excess, if any, of the sum of our:

. forecast capital expenditures;

. forecast cash payments for taxes, debt service, including principal and
interest payment requirements and other non-cash credits to income; and

. forecast cash reserves for future operations or other requirements;

over the sum of:

. forecast net income;

. forecast plus depreciation, amortization, other non-cash charges to
income, interest expense and tax expenses, in each case to the extent
deducted in determining net income;

. forecast decreases in working capital or minus forecast increases in
working capital;

. forecast cash proceeds of disposition of assets, net of expenses; and

. an amount equal to the forecast net proceeds of debt financings and
capital contributions.

Our Projected Cash Requirements are calculated, subject to changes in certain
circumstances, consistently with the most recently updated strategic plan.

Distributions to the partners of cash or property arising from our
liquidation would be made according to the capital account balances of the
partners.

Unless otherwise agreed by the general partners not involved with a business
conflict as described under "--Transactions with Affiliates" above, any amount
otherwise distributable to a partner as described above will be applied by us
to satisfy obligations to us resulting from a partner's or its affiliate's
failure to:

. pay any interest or principal when due on any indebtedness for borrowed
money to us;

. make any indemnification payment required by its asset contribution
agreement that has been finally determined to be due; or

. make any capital contribution required by the partnership agreement,
other than as required by the applicable asset contribution agreement.

INDEMNIFICATION OF OUR OWNERS

We have agreed, to the fullest extent permitted by applicable law, to
indemnify, defend and hold harmless each partner, its affiliates and its
respective officers, directors and employees. This indemnification is from,
against and in respect of any liability which the indemnified person may
sustain, incur or assume as a result of, or relative to, any third-party claim
arising out of or in connection with our business, property or affairs. This
indemnification does not apply to the extent that it is finally determined that
the third-party claim arose out of or was related to actions or omissions of
the indemnified partner, its affiliates or any of their respective officers,
directors or employees acting in those capacities constituting a breach of our
partnership agreement or any related agreement. This indemnification obligation
is not intended to, nor will it, affect or take precedence over the indemnity
provisions contained in any related agreement. See "Related Party
Transactions--Asset Contributions by Lyondell and Affiliates of Millennium and
Occidental."

TRANSFERS AND PLEDGES OF A PARTNER'S INTEREST IN US

Without the consent of the general partners, no partner may transfer less
than all of its interest in us, nor can any partner transfer its interest other
than for cash. If one of our limited partners and its affiliated general
partner desire to transfer, via a cash sale, all of their units, they must give
written notice to us and the other partners and the non-selling partners shall
have the option, exercisable by delivering written acceptance notice of the
exercise to the selling partners within 45 days after receiving notice of the
sale, to elect to purchase all of the partnership interests of the selling
partners on the terms described in the initial notice. If all of the other non-
selling partners deliver notice of acceptance, then all of the partnership
interests shall be transferred in proportion to the partners' current
percentage interest unless otherwise agreed. If less than all of the non-
selling partners deliver notice of acceptance, the partner who delivers notice
of acceptance will have the option of purchasing all of the partnership
interests up for sale. The notice of acceptance will set a date for closing the
purchase which is not less than 30 nor more than 90 days after delivery of the
notice of acceptance, subject to extension. The purchase price for the selling
partners' partnership interests will be paid in cash.

If the non-selling partners do not elect to purchase the selling partners'
partnership interests within 45 days after the receipt of initial notice of
sale, the selling partners will have a further 180 days during which they may
consummate the sale of their units to a third-party purchaser. The sale to a
third-party purchaser must be at a purchase price and on other terms that are
no more favorable to the purchaser than the terms offered to the non-selling
partners. If the sale is not completed within the 180-day period, the initial
notice will be deemed to have expired, and a new notice and offer shall be
required before the selling partners may make any transfer of their partnership
interests.

Before the selling partners may consummate a transfer of their partnership
interests to a third party under the partnership agreement, the selling
partners must demonstrate that the person willing to serve as the proposed
purchaser's guarantor must have outstanding indebtedness that is rated
investment grade by Moody's and S&P's. If the proposed guarantor has no rated
indebtedness outstanding, it shall provide an opinion from a nationally
recognized investment banking firm that it could be reasonably expected to
obtain suitable ratings. In addition, a partner may transfer its partnership
interests only if, together with satisfying all other requirements:

. the transferee executes an appropriate agreement to be bound by the
partnership agreement;

. the transferor and/or the transferee bears all reasonable costs incurred
by us in connection with the transfer; and

. the guarantor of the transferee delivers an agreement to the ultimate
parent entity of the non-selling partners and to us substantially in the
form of the parent agreement.

A partner will not in any transaction or series of actions, directly or
indirectly, pledge all or any part of its partnership interest. However, a
partner may at any time assign its right to receive distributions from us so
long as the assignment does not purport to assign any:

. right of the partner to participate in or manage our affairs;

. right of the partner to receive any information or accounting of our
affairs;

. right of the partner to inspect our books or records; or

. any other right of a partner under the partnership agreement or the
Delaware Revised Uniform Limited Partnership Act.

In addition, except for any restrictions imposed by the parent agreement
described under "Description of the Parent Agreement," nothing in our
partnership agreement will prevent the transfer or pledge by the owner of any
capital stock, equity ownership interests or other security of the partner or
any affiliate of a partner.

BUSINESS OPPORTUNITIES WHICH MUST BE OFFERED TO US

Except as described below, each partner's affiliates are free to engage in or
possess an interest in any other business of any type and to avail themselves
of any business opportunity available to it without having to offer us or any
partner the opportunity to participate in that business. If a partner's
affiliate desires to initiate or pursue an opportunity to undertake, engage in,
acquire or invest in a "related business," as defined in the partnership
agreement, that partner or its affiliate will offer Equistar the business
opportunity. A related business is any business related to:

. the manufacturing, marketing and distribution of the types of olefins,
polyolefins, ethyl alcohol, ethyl ether and ethylene oxide, ethylene
glycol and derivatives of ethylene oxide and ethylene glycol that are
specific in the partnership agreement;

. the purchasing, processing and disposing of raw materials in connection
with the manufacturing, marketing and distributing of the chemicals
identified in the previous bullet point; and

. any research and development in connection with the previous two bullet
points.

When a proposing partner offers a business opportunity to us, we will elect
to do one of the following within a reasonably prompt period:

. acquire or undertake the business opportunity for our benefit as a
whole, at our cost, expense and benefit; or

. permit the proposing partner to acquire or undertake the business
opportunity for its own benefit and account without any duty to us or
the other partners.

If the business opportunity is in direct competition with our then-existing
business and we do not elect to acquire or undertake the business opportunity
for our own benefit, then the proposing partner and we shall, if either so
elects, seek to negotiate and implement an arrangement whereby we would either:

. acquire or undertake the competing opportunity at the sole cost, expense
and benefit of the proposing partner under a mutually acceptable
arrangement. Under such arrangements, the competing opportunity will be
treated as a separate business within Equistar; or

. enter into a management agreement with the proposing partner to manage
the competing opportunity on behalf of the proposing partner on terms
and conditions mutually acceptable to the proposing partner and us.

If we and the proposing partner do not reach agreement as to an arrangement,
the proposing partner may acquire or undertake the competing opportunity for
its own benefit and account without any duty to us or the other partners.

In addition, if the business opportunity constitutes less than 25% of an
acquisition of or investment in assets, activities, operations or businesses
that is not otherwise a related business, then a proposing partner may acquire
or invest in a business opportunity without first offering it to us. The 25%
figure is based on annual revenues for the most recently completed fiscal year.
After completion of the above acquisition or investment, the proposing partner
must offer the business opportunity to us under the terms described above. If
we elect to pursue the business opportunity, it will be acquired by us at its
fair market value as of the date of the acquisition.

If we are presented with an opportunity to acquire or undertake a business
opportunity that we determine not to acquire or undertake, and the
representatives of one or two general partner or partners, but not the other
general partner or partners, desire that we acquire or undertake the business
opportunity, then we will permit the first general partner or partners and its
or their affiliates to acquire or undertake such business opportunity, and the
business opportunity shall be treated in the same manner as if the general
partner and its affiliates were a proposing partner with respect to the
business opportunity.

LIMITATION ON FIDUCIARY DUTY OF PARTNERS

Under our partnership agreement, the liability of our partners and their
affiliates to us or another partner for any act or omission by a partner in its
capacity as such that is imposed by law is waived and eliminated to the extent
permitted by law, except in the case of observing the unanimous voting
requirements described under "--Actions Requiring Unanimous Voting."

AMENDMENT OF PARTNERSHIP AGREEMENT

All waivers, modifications, amendments or alterations of our partnership
agreement require the written approval of all of our partners.

DESCRIPTION OF THE PARENT AGREEMENT

Lyondell, Millennium, Occidental, Occidental Chemical Corporation, Oxy CH
Corporation, Occidental Chemical Holding Corporation and Equistar are parties
to an amended and restated parent agreement. The following is a summary of the
material provisions of the parent agreement, as modified by an assignment and
assumption agreement and the first amendment thereto, which is available upon
written request as provided under "Where You Can Find More Information."

GUARANTEE OF OBLIGATIONS UNDER THE PARTNERSHIP AGREEMENT AND RELATED PARTY
AGREEMENTS

Pursuant to the parent agreement, each of Lyondell, Millennium and Occidental
Chemical Holding (the "Guarantor Parents") has guaranteed, undertaken and
promised to cause the due and punctual payment and the full and prompt
performance of all of the amounts to be paid and all of the terms and
provisions under various agreements, including, without limitation, the
partnership agreement and the asset contribution agreements, to be performed or
observed by or on the part of certain of their respective subsidiaries,
including subsidiaries that are our partners, and any other direct or indirect
subsidiary of any of the Guarantor Parents that are parties to these
agreements. We collectively refer to these subsidiaries as the "Affiliated
Obligors" and we refer to the entities that are our limited partners and
general partners as the "Partner Subs." Insofar as the provisions described in
this subsection apply to agreements other than the partnership agreement and
the parent agreement, the term "Affiliated Obligors" will not include Equistar
or any partner of Equistar in its capacity as a partner. The parent agreement
provides expressly that the parent guarantees inure solely to the benefit of
the beneficiaries specified in the parent agreement, which consist of Equistar,
Lyondell, Millennium, Occidental and the Affiliated Obligors. The parent
agreement also states that nothing in the agreement confers upon any other
person any rights, benefits or remedies by reason of the parent agreement.
Accordingly, the holders of the notes may not enforce any provision, or seek
relief by reason, of the parent agreement.

CONFLICT CIRCUMSTANCE

Our partnership agreement includes definitions of "Conflict Circumstance,"
"Conflicted General Partner" and "Nonconflicted General Partner" and provides
that the Nonconflicted General Partners have some exclusive rights to control
us with respect to any Conflict Circumstance, generally involving a transaction
between Equistar and an affiliate of one of our partners. The guarantee
provisions described above do not apply to the parents of the general partners
that direct us in connection with these Conflict Circumstances, so that the
parents of a Nonconflicted General Partner are not effectively guaranteeing our
performance of contracts with other parents. However, a parent of a
Nonconflicted General Partner may have liability for our failure to perform in
circumstances where that failure was caused by an act or failure to act of its
Partner Sub. Without limiting the rights of the Partner Subs under the
partnership agreement, and without prejudice to any rights, remedies or
defenses we may have in any other agreement or Conflict Circumstance, each
Guarantor Parent has agreed to cause each of its Partner Subs to both:

. cause us to pay, perform and observe all of the terms and provisions of
other agreements to be paid, performed or observed by or on the part of
Equistar under the agreements, according to their terms to the extent
that the Partner Sub is a Nonconflicted General Partner and is thereby
entitled to cause the payment, performance and observance of the terms
and provisions; and

. except to the extent inconsistent with its obligations above, abide by
its obligations as a Nonconflicted General Partner with respect to any
Conflict Circumstance arising in connection with any other agreement
according to the terms of the partnership agreement that apply.

Nothing in the provisions described in this subsection shall require a
Guarantor Parent to make or cause a Partner Sub to either:

. cure or mitigate our inability to make any payment or to perform or
observe any terms and provisions under any other agreements;

. cause us to require from the Partner Subs any cash contributions in
respect of any payment, performance or observance involving a Conflict
Circumstance; or

. make any contribution to us that the Partner Sub is not otherwise
required to make under terms of the partnership agreement concerning
required capital contributions.

See "Description of the Partnership Agreement--Transactions with Affiliates."

RESTRICTIONS ON TRANSFER OF PARTNER SUB STOCK

Without the consent of each of Lyondell, Millennium, Oxy CH and Occidental
Chemical (the "Ownership Parents"), no Ownership Parent may transfer less than
all of its interests in its Partner Subs (the "Partner Sub Stock") except in
compliance with the following provisions.

Each Ownership Parent may transfer all, but not less than all, of its Partner
Sub Stock, without the consent of the other Ownership Parents, if the transfer
is in connection with either:

. a merger, consolidation, conversion or share exchange of the Ownership
Parent; or

. a sale or other disposition of:

-- the Partner Sub Stock, plus

-- other assets representing at least 50% of the book value of the
Ownership Parent's assets (or in the case of each of Oxy CH and
Occidental Chemical, 50% of the book value of Oxy CH's assets)
excluding the Partner Sub Stock, as reflected on its most recent
audited consolidated or combined financial statements.

In addition, any transfer of Partner Sub Stock by any Ownership Parent
described above is only permitted if the acquiring, succeeding or surviving
entity, if any, both:

. succeeds to and is substituted for the transferring Ownership Parent
with the same effect as if it had been named in the parent agreement;
and

. executes an instrument agreeing to be bound by the obligations of the
transferring Ownership Parent under the parent agreement, with the same
effect as if it had been named in the instrument.

The transferring Ownership Parent may be released from its guarantee
obligations under the parent agreement after the successor parent agrees to be
bound by the Ownership Parent's obligations.

Unless a transfer is permitted under the provisions described above, any
Ownership Parent desiring to transfer all of its Partner Sub Stock to any
person, including another Ownership Parent or any affiliate of an Ownership
Parent, may only transfer its Partner Sub Stock for cash consideration and will
give written right of first option to Equistar and each of the other Ownership
Parents. Each offeree parent will have the option to elect to purchase all of
its proportional share, in the case of both the limited partner and general
partner, of all of the Partner Sub Stock of the selling parent, on the terms
described in the right of first offer. If one of the offeree parents, but not
the other, elects to so purchase, the selling parent shall give written notice
thereof to the offeree parent electing to purchase, and that parent shall have
the option to purchase all of the Parent Sub Stock held by the selling parent,
including the Partner Sub Stock it has not previously elected to purchase. Any
election by an offeree parent not to purchase all of the Partner Sub Stock
shall be deemed a rescission of the parent's original notice of acceptance of
the Partner Sub Stock of that selling parent. If one or both of the offeree
parents do not elect to purchase all of the selling parent's Partner Sub Stock
within 45 days after the

receipt of the initial notice or within 15 days after the receipt of the notice
to an offeree parent electing to purchase, if applicable, the selling parent
will have a further 180 days during which it may, subject to the provisions of
the following paragraph, consummate the sale of its Partner Sub Stock to a
third-party purchaser at a purchase price and on other terms that are no more
favorable to the purchaser than the initial terms offered to the offeree
parents. If the sale is not completed within the further 180-day period, the
right of first offer will be deemed to have expired and a new right of first
offer shall be required before the selling parent may make any transfer of its
Partner Sub Stock.

Before the selling parent may consummate a transfer of its Partner Sub Stock
to a third party under the provisions described in the preceding paragraph, the
selling parent shall demonstrate to the other Ownership Parents that the
proposed purchaser, or the person willing to serve as its guarantor as
contemplated by the terms of the parent agreement, has outstanding indebtedness
that is rated investment grade by either Moody's or S&P. If such proposed
purchaser or the other person has no rated indebtedness outstanding, that
person shall provide an opinion from Moody's, S&P or from a nationally
recognized investment banking firm that it could be reasonably expected to
obtain a suitable rating. Moreover, an Ownership Parent may transfer its
Partner Sub Stock, under the previous paragraph, only if all of the following
occur:

. the transfer is accomplished in a nonpublic offering in compliance with,
and exempt from, the registration and qualification requirements of all
federal and state securities laws and regulations;

. the transfer does not cause a default under any material contract which
has been approved unanimously by the partnership governance committee
and to which Equistar is a party or by which Equistar or any of its
properties is bound;

. the transferee executes an appropriate agreement to be bound by the
parent agreement;

. the transferor and/or transferee bears all reasonable costs incurred by
Equistar in connection with the transfer;

. the transferee, or the guarantor of the obligations of the transferee,
delivers an agreement to each of the other Ownership Parents and
Equistar substantially in the form of the parent agreement; and

. the proposed transferor is not in default in the timely performance of
any of its material obligations to Equistar.

In no event may any Ownership Parent transfer the Partner Sub Stock of any of
the subsidiaries that hold the direct interests in Equistar to any person
unless the Ownership Parent simultaneously transfers the Partner Sub Stock of
each of the subsidiaries that hold the direct interests in Equistar to that
person or a wholly owned affiliate of that person or a common parent.

COMPETING BUSINESS BY OWNERS OF EQUISTAR OR THEIR AFFILIATES

If any of Lyondell, Millennium, Occidental Chemical, Oxy CH or Occidental
Chemical Holding or any of their affiliates desires to initiate or pursue any
opportunity to undertake, engage in, acquire or invest in a business
opportunity of the type described under "Description of the Partnership
Agreement--Business Opportunities Which Must be Offered to Us," it shall agree
to offer that business opportunity to Equistar under the terms and conditions
in the partnership agreement as if it were the "proposing partner," as
described in such section. Equistar will have the rights and obligations
arising from the offer of the business opportunity granted by the partnership
agreement. See "Description of the Partnership Agreement--Business
Opportunities Which Must be Offered to Us."

RELATED PARTY TRANSACTIONS

The following summary describes the transactions among Equistar and its
owners and their affiliates. We believe that all of the transactions described
below were obtained on terms substantially no more or less favorable than those
that would have been agreed upon by third parties on an arm's length basis,
although we have not received fairness opinions.

ASSET CONTRIBUTIONS BY LYONDELL AND AFFILIATES OF MILLENNIUM AND OCCIDENTAL

Both Lyondell and Millennium Petrochemicals entered into separate asset
contribution agreements on December 1, 1997, providing for the contribution of
the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries
of Occidental (the "Occidental Subsidiaries") entered into an asset
contribution agreement with Equistar on May 15, 1998, with respect to the
transfer of the Occidental contributed business, a portion of which transfer
was accomplished through a merger of an Occidental Subsidiary with and into
Equistar. Among other things, the asset contribution agreements required
representations and warranties by the contributor regarding the transferred
assets and indemnification of Equistar by the contributor. These agreements
also provide for the assumption by Equistar of, among other things:

. third-party claims that are related to pre-closing contingent
liabilities that are asserted before December 1, 2004 as to Lyondell and
Millennium Petrochemicals, or before May 15, 2005 as to the Occidental
Subsidiaries, to the extent the aggregate amount does not exceed, in the
case of each of Lyondell, Millennium and the Occidental Subsidiaries, $7
million;

. third-party claims related to pre-closing contingent liabilities that
are asserted for the first time after December 1, 2004 as to Lyondell
and Millennium Petrochemicals, or after May 15, 2005 as to the
Occidental Subsidiaries;

. obligations for $745 million of Lyondell indebtedness, of which $431
million remains outstanding as of August 31, 2001;

. a $750 million intercompany obligation of Millennium Petrochemicals to
an indirect subsidiary of Millennium, which has been repaid;

. the lease intended for security relating to the Corpus Christi facility
contributed by Occidental, which has been repaid;

. liabilities for products sold after December 1, 1997 as to Lyondell and
Millennium Petrochemicals, or after May 15, 1998 as to the Occidental
Subsidiaries, regardless of when manufactured;

. certain post-retirement benefits related to the applicable contributed
business or to certain Lyondell employees who became employees of
Equistar;

. in the case of the Millennium Petrochemicals asset contribution
agreement, future maintenance and maintenance turnaround costs related
to the Millennium contributed business; and

. in the case of each of the Millennium Petrochemicals and the Occidental
Subsidiaries asset contribution agreements, obligations under railcar
leases under which Equistar is the lessee.

Lyondell, Millennium Petrochemicals and Occidental Chemical entered into
Master Intellectual Property Agreements and other related agreements with
respect to intellectual property with Equistar. These agreements provide for
all of the following:

. the transfer of intellectual property of Lyondell, Millennium
Petrochemicals and Occidental Chemical related to the businesses each
contributed to Equistar;

. grant of irrevocable, non-exclusive, royalty-free licenses to Equistar
(without the right to sublicense) with respect to intellectual property
retained by Lyondell, Millennium Petrochemicals or Occidental Chemical
that is related to Equistar's business; and

. grant of irrevocable, non-exclusive, royalty-free licenses (without the
right to sublicense) from Equistar to Lyondell, Millennium
Petrochemicals and Occidental Chemical with respect to intellectual
property each contributed to Equistar.

Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each
entered into various other conveyance documents with Equistar to effect their
asset contributions as provided for in their respective contribution
agreements.

TRANSACTIONS WITH LYONDELL METHANOL COMPANY, L.P.

Equistar provides operating and other services for Lyondell Methanol under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by Equistar of the real property on
which its methanol plant is located. Under the terms of those agreements,
Lyondell Methanol pays Equistar a management fee of $6 million per year and
will reimburse certain expenses of Equistar at cost. The natural gas for
Lyondell Methanol's plant is purchased under Equistar master agreements with
various third party suppliers, which master agreements are administered by
Lyondell personnel. These sales of natural gas to Lyondell Methanol were $85
million in 2000. All of the foregoing arrangements with Lyondell Methanol are
expected to continue on terms similar to those described above. Lyondell
Methanol sells all of its product to Equistar, which amounted to $165 million
in 2000.

TRANSACTIONS WITH LYONDELL-CITGO REFINING LP

In connection with the formation of Equistar, Lyondell's rights and
obligations under the terms of its product sales and raw material purchase
agreements with LYONDELL-CITGO Refining were assigned to Equistar. Accordingly,
refinery products, including propane, butane, naphthas, heating oils and gas
oils, are sold by LYONDELL-CITGO Refining to Equistar as raw materials, and
some olefins by-products are sold by Equistar to LYONDELL-CITGO Refining for
processing into gasoline. Net payments from LYONDELL-CITGO Refining to Equistar
in connection with these product sales and raw material purchase agreements
were $161 million for 2000.

Equistar and LYONDELL-CITGO Refining are also parties to:

. tolling arrangements under which some of LYONDELL-CITGO Refining's co-
products are transferred to Equistar and processed by Equistar, with the
resulting product being returned to LYONDELL-CITGO Refining,

. terminaling and storage obligations and

. an agreement, which is currently being extended from month to month, to
perform some marketing services for LYONDELL-CITGO Refining. Equistar
and LYONDELL-CITGO Refining are currently evaluating renewal of this
agreement. Aggregate payments under these various services agreements of
$15 million were made by Equistar to LYONDELL-CITGO Refining with
respect to 2000.

All of the agreements between LYONDELL-CITGO Refining and Equistar are on
terms generally representative of prevailing market prices.

SERVICES AND SHARED-SITE ARRANGEMENTS WITH LYONDELL AND AFFILIATES OF
MILLENNIUM AND OCCIDENTAL

During 1998 and 1999, Lyondell provided certain administrative services to
Equistar, including certain legal, risk management and treasury services, tax
services and employee benefit plan administration, and Equistar provided
services to Lyondell in the areas of health, safety and environmental, human
resources, information technology and legal. Effective January 1, 2000,
Lyondell and Equistar implemented a revised shared services arrangement that
provides for all shared services to be provided by Lyondell to Equistar and
expanded the prior arrangement to cover a broader range of shared services,
including information technology, human resources, materials management and raw
material supply, customer supply chain, health, safety and environmental,
engineering and research and development, facility services, legal, accounting,
treasury, internal audit and tax. During the year ended December 31, 2000,
Lyondell charged Equistar $133 million for these shared services. There were no
billings from Equistar to Lyondell for the year ended December 31, 2000 because
Equistar did not provide services under the shared services arrangement to
Lyondell during this period.

Equistar and Millennium Petrochemicals entered into a variety of operating,
manufacturing and technical service agreements in 1997 related to the business
of Equistar and the vinyl acetate monomer, acetic acid, synthesis gas and
methanol businesses retained by Millennium Petrochemicals. A number of these
agreements have since been modified and/or terminated. Agreements currently in
effect include the provision by Equistar to Millennium Petrochemicals of
utilities, fuel streams, and office space. These agreements also include the
provision by Millennium Petrochemicals to Equistar of operational services,
including barge dock access and related services as well as utilities. As a
consequence of services provided by Equistar to Millennium Petrochemicals and
by Millennium Petrochemicals to Equistar, net payments were made by Millennium
Petrochemicals to Equistar of $2 million in 2000. In the case of product sales,
prices are generally market-related. In the case of services and utilities,
prices are usually based on cost recovery or an allocation of costs according
to anticipated relative usage. Equistar also purchases vinyl acetate monomer
and glacial acetic acid from Millennium Petrochemicals. During the year ended
December 31, 2000, Equistar purchased $16 million of vinyl acetate monomer and
glacial acetic acid from Millennium Petrochemicals. Millennium Petrochemicals
purchases ethylene and hydrogen from Equistar. Except for modifications
resulting from Millennium Petrochemicals' recent sale of its synthesis gas and
a portion of its methanol businesses, these service and product sales
agreements are expected to continue on terms similar to those described above.

Equistar and Occidental Chemical have entered into a toll processing
agreement dated effective as of May 15, 1998, whereby Equistar has retained the
services of Occidental Chemical's facilities in Ashtabula, Ohio, for the
processing of Glycol Ether(TM) into Glycol Ether(TM) Borate Ester material for
brake or clutch fluid. Under the terms of the agreement, Equistar procures from
Occidental Chemical its total requirements of Glycol Ether(TM) Borate Ester.
The agreement requires Occidental Chemical to process Glycol Ether(TM) into
Glycol Ether(TM) Borate Ester exclusively for Equistar. During 2000, Equistar
paid Occidental Chemical $586,000 under the agreement. The initial term of the
agreement ends on December 31, 2001; however, the agreement will continue from
year to year unless terminated by either party upon 12 months' written notice.
Equistar has provided notice that it intends to terminate the agreement
effective as of December 31, 2001.

OCCIDENTAL ETHYLENE SALES AGREEMENT

Equistar and Occidental Chemical entered into an ethylene sales agreement
dated effective May 15, 1998. Under the terms of this agreement, Occidental
Chemical and its affiliates have agreed to purchase an amount of ethylene from
Equistar equal to 100% of the ethylene raw material requirements of Occidental
Chemical's U.S. plants. The ethylene raw material is exclusively for internal
use in production at these plants less any quantities up to 250 million pounds
tolled according to the provisions of the agreement. Upon three years' notice
from either party to the other, the ethylene sales agreement may be "phased
down" over a period not less than five years. No phase down may commence before
January 1, 2009. The ethylene sales agreement provides for sales of ethylene at
market-related prices. During 2000, Equistar received aggregate payments from
Occidental Chemical and its affiliates of $558 million under the ethylene sales
agreement.

ETHYLENE SALES AGREEMENT WITH MILLENNIUM PETROCHEMICALS

Equistar sells ethylene to Millennium Petrochemicals at market-related prices
under an agreement entered into in connection with the formation of Equistar.
Under this agreement with Millennium Petrochemicals, Millennium Petrochemicals
is required to purchase 100% of its ethylene requirements for its La Porte,
Texas facility. The initial term of the contract expired December 1, 2000. The
contract automatically renews annually. Either party may terminate on one
year's notice. Neither party has provided notice of termination of the
agreement. The pricing terms under this agreement between Equistar and
Millennium Petrochemicals are similar to the pricing terms under the ethylene
sales agreement between Equistar and Occidental Chemical. Millennium
Petrochemicals paid $90 million to Equistar for ethylene during 2000.

PRODUCT SALES AGREEMENTS WITH LYONDELL

Lyondell has purchased benzene, ethylene, propylene and other products at
market-related prices from Equistar since Lyondell's acquisition of ARCO
Chemical Company in July 1998. Currently, Equistar sells ethylene, propylene
and benzene to Lyondell at market-related prices pursuant to agreements dated
effective as of October 1998, August 1999 and January 1999, respectively. Under
the agreements, Lyondell is required to purchase 100% of its benzene, ethylene
and propylene requirements for its Channelview and Bayport, Texas facilities,
with the exception of quantities of one product that Lyondell is obligated to
purchase under a supply agreement with an unrelated third party entered into
prior to 1999 and expiring in 2015. The initial term of each of those
agreements between Equistar and Lyondell expires on December 13, 2013, in the
case of the ethylene sales agreement and December 31, 2014, in the case of the
propylene and benzene sales agreements. After the initial term, each of the
agreements automatically renews for successive one-year periods and either
party may terminate any of the agreements on notice of one year. The pricing
terms under the agreements between Equistar and Lyondell are similar to the
pricing terms under the ethylene sales agreement between Equistar and
Occidental Chemical. In addition, a wholly owned subsidiary of Lyondell
licenses MTBE technology to Equistar. Lyondell also purchases a significant
portion of the MTBE produced by Equistar at one of its two Channelview units at
market-related prices. Product sales to Lyondell in 2000 were $572 million.

PRODUCT TRANSACTIONS WITH OXY VINYLS, LP

Occidental Chemical owns 76% of Oxy Vinyls, LP, a joint venture partnership
it formed with The Geon Company, now known as PolyOne Corporation, as co-owner.
Equistar sells ethylene to Oxy Vinyls for Oxy Vinyls' LaPorte, Texas facility
at market-related prices pursuant to an agreement which expires on December 31,
2003. The agreement automatically renews for successive one-year periods until
terminated by either party on 24 months' notice at the end of 2003 or any
subsequent year. Equistar made ethylene sales to Oxy Vinyls totaling $67
million in 2000.

AGREEMENT REGARDING SERVICES OF OUR CHIEF EXECUTIVE OFFICER

Dan F. Smith serves as the Chief Executive Officer of both Lyondell and
Equistar and is a director of Lyondell. Mr. Smith receives no compensation from
Equistar. Under an agreement between Equistar and Lyondell, Equistar paid
approximately $1 million as compensation to Lyondell for the services rendered
by Mr. Smith as part of the shared services provided by Lyondell during 2000.

INDEMNITY AGREEMENT WITH OCCIDENTAL CHEMICAL

Equistar and Occidental Chemical have entered into an indemnity agreement
pursuant to which Occidental Chemical may be required to contribute to Equistar
an amount equal to up to the lesser of approximately $420 million or the
principal amount of the notes due 2009 then outstanding, together with
interest. Occidental Chemical is only required to pay this amount to Equistar
if the holders of the notes due 2009 have not been able to obtain payment after
the holders of the notes due 2009 have pursued and exhausted all their remedies
to compel payment by Equistar and Equistar Funding, including the liquidation
of assets. The indemnity expressly

does not create any right in the holders of the notes due 2009 or any person
other than Occidental Chemical, Equistar and the partners of Equistar. The
indemnity may be amended or terminated at any time by the agreement of the
partners in Equistar without the consent of the holders of the notes due 2009.

In addition, at any time after June 14, 2005, Occidental Chemical may,
without the consent of the other partners in Equistar, elect to terminate the
indemnity if all of the following conditions exist:

. Equistar's ratio of total indebtedness to total capitalization is, as of
the most recently completed fiscal quarter, lower than the same ratio as
of December 31, 1998;

. Equistar's ratio of earnings before interest, taxes, depreciation and
amortization to net interest for the most recent 12-month period is at
least 105% of the same ratio for the 12-month period ending December 31,
1998;

. Equistar is not then in default in the payment of principal of, or
interest on, any indebtedness for borrowed money in excess of $15
million; and

. Equistar is not then in default in respect of any covenants, other than
those relating to payment of principal and/or interest, relating to any
indebtedness for borrowed money, if the effect of a default shall be to
accelerate, or to permit the holder or obligee of such indebtedness, or
any trustee on behalf of a holder or obligee, to accelerate, with or
without the giving of notice or lapse of time or both, the indebtedness
in an aggregate amount in excess of $50 million.

Finally, without the consent of the other partners in Equistar, if Occidental
GP, Occidental LP1 and Occidental LP2 sell all of their respective interests in
Equistar or if Occidental Chemical Holding Corporation sells all of its
interests in Occidental GP, Occidental LP1 and Occidental LP2, in each case to
an unaffiliated third party at any time, Occidental Chemical may elect to
terminate its indemnity, if, at the time of the sale or termination, Equistar
has an investment grade credit rating or the fair market value of our assets is
at least 140% of the gross amount of its liabilities.

Occidental Chemical may assign its rights or obligations under the indemnity
to Occidental at any time without the consent of Equistar. Following such an
assignment, Occidental Chemical may terminate the indemnity at any time if
Equistar ceases to be an affiliate of Occidental.

INDEMNITY AGREEMENT WITH MILLENNIUM AMERICA

Equistar and Millennium America entered into an indemnity agreement pursuant
to which Millennium America may be required to contribute to Equistar an amount
equal to up to the lesser of $750 million or the sum of the principal amount
outstanding under the term loan portion of our credit facility (not to exceed
$275 million) and of the 10 1/8% senior notes due 2008 then outstanding (not to
exceed $475 million), in any case together with interest. Millennium America is
only required to pay this amount to Equistar if the lenders under our amended
and restated credit facility and the holders of the notes have not been able to
obtain payment after pursuing and exhausting all their remedies to compel
payment by Equistar and Equistar Funding, including the liquidation of assets.
The indemnity expressly does not create any right in the lenders or holders of
the notes or any person other than Millennium America, Equistar and the
partners in Equistar. The indemnity may be amended or terminated at any time by
the agreement of the partners in Equistar without the consent of the lenders
under the amended and restated credit facility or the holders of the notes.

In addition, at any time after December 1, 2004, Millennium America may,
without the consent of the other partners in Equistar, elect to terminate the
indemnity in whole or in part if all of the following conditions exist:

. Equistar's ratio of total indebtedness to total capitalization is, as of
the most recently completed fiscal quarter, lower than the same ratio as
of December 31, 1998;

. Equistar is not then in default in the payment of principal of, or
interest on, any indebtedness for borrowed money in excess of $15
million; and

Finally, without the consent of the other partners in Equistar, if Millennium
GP and Millennium LP sell all of their respective interests in Equistar or if
Millennium Petrochemicals Inc. sells all of its interests in Millennium GP and
Millennium LP, in each case to an unaffiliated third party at any time,
Millennium America may elect to terminate its indemnity, if, at the time of the
sale or termination, Equistar has an investment grade credit rating or the fair
market value of Equistar's assets is at least 140% of the gross amount of its
liabilities.

DEBT INSTRUMENTS OF LYONDELL ASSUMED BY EQUISTAR

Upon its formation, Equistar assumed $745 million of Lyondell indebtedness,
of which $521 million remained outstanding as of June 30, 2001. Lyondell was
not released as an obligor at the time of the assumption and, until November
2000, Lyondell remained as a co-obligor on the indebtedness, although as
between Equistar and Lyondell, Equistar was primarily liable. In November 2000,
Lyondell was added as a guarantor on $400 million of the indebtedness and
subsequently the consent of the holders of the indebtedness was obtained to the
release of Lyondell as a primary obligor (but not as a guarantor) on such $400
million of indebtedness. Lyondell remains a primary obligor on the remaining
$121 million of indebtedness, $90 million of which matured on August 30, 2001.
See "Description of Other Indebtedness."

DESCRIPTION OF OTHER INDEBTEDNESS

The following is a summary of our other material indebtedness. It may not
contain all of the information about this indebtedness that is important to
you. You should therefore read the debt instruments, copies of which are
available as described under "Where You Can Find More Information." This
summary is qualified in its entirety by reference to those debt instruments.

AMENDED AND RESTATED CREDIT FACILITY

In connection with issuance of the outstanding notes, we amended and restated
our $1.25 billion revolving credit facility dated as of November 25, 1997, as
previously amended and restated. We entered into an amended and restated
facility that provides for a total of $800 million in available borrowings with
a group of lenders led by J.P. Morgan Securities Inc. and Banc of America
Securities LLC as joint lead arrangers and joint book runners, The Chase
Manhattan Bank as collateral and administrative agent, Bank of America, N.A. as
servicing agent and administrative agent, and Credit Suisse First Boston and
Citicorp USA, Inc. as co-syndication agents.

The amended and restated credit facility consists of:

. a senior secured revolving credit facility ("Revolving Credit Facility")
in the aggregate principal amount of up to $500 million and

. a senior secured term loan ("Term Loan") in the aggregate principal
amount of up to $300 million.

At the closing of the offering of the outstanding notes, we borrowed $300
million under the Term Loan and made no borrowings under the Revolving Credit
Facility. The Term Loan is amortizing at 1% per annum, with all remaining
amounts due on August 24, 2007. The Revolving Credit Facility terminates on
August 24, 2006.

We may prepay borrowings under the credit facility in minimum amounts of $1
million and we may, at our option, terminate the credit facility or reduce
permanently the amount of the credit facility in a minimum amount of $25
million. We will be required to pay a 2% prepayment premium if we, at our
option, prepay amounts under the Term Loan portion of the credit facility
before August 24, 2002 and a 1% premium if we, at our option, prepay amounts
under the Term Loan between August 24, 2002 and August 24, 2003.

We are required to make mandatory prepayments of the Term Loan from net cash
proceeds of:

. asset sales, excluding receivable securitizations;

. casualty and condemnation events; and

. new debt or equity issuances.

The mandatory prepayment of our Term Loan obligation is subject to specified
exceptions and the lenders thereunder may elect not to receive any prepayment.
In addition, unless our senior unsecured debt is rated investment grade, the
commitments under the Revolving Credit Facility will be permanently and ratably
reduced by 50% of the incremental amount of any committed financing pursuant to
a receivables securitization facility.

Our obligations under the credit facility are secured by a lien upon
substantially all of our personal property, including inventory, accounts
receivable and other property, as well as a portion of our real property.
However, in no event shall "restricted property," which consists of our
principal plants, secure an aggregate outstanding amount under the credit
facility greater than the maximum amount permitted by the indentures governing
our 1999 notes and the assumed Lyondell debt (which maximum amount is currently
10% of consolidated net tangible assets).

Borrowings under the Revolving Credit Facility accrue interest at the
following rates per annum:

. Eurodollar Loans: LIBO rate, as defined in the credit facility, plus a
margin which varies between 1% and 1.75%.

. Base Rate Loans: Alternate Base Rate, defined as the higher of (i) the
rate of interest publicly announced by Bank of America, N.A. as its
prime rate, and (ii) 0.50% per annum above the Federal Funds Rate in
effect on such date, plus a margin which varies between 0% and .75%.

The margins will vary depending on our ratio of debt to EBITDA, as defined in
the credit facility.

Borrowings under the Term Loan accrue interest at the following rates per
annum:

. Eurodollar Loans: LIBO rate plus 3%; or

. Base Rate Loans: Alternate Base Rate plus 2%.

We incur a facility fee payable quarterly in arrears based on the entire amount
of our Revolving Credit Facility at a rate of .5% to .75% per year, depending
on our ratio of debt to EBITDA. If we use more than 50% of our Revolving Credit
Facility, the facility fee will be reduced by .25% and the applicable margins
on borrowings under the Revolving Credit Facility will increase by .25%.

We are also required to pay additional interest at a rate of .75% of the
outstanding amount borrowed (or in the case of the Revolving Credit Facility,
the average amount outstanding in the 30 days prior to such dividend payment)
per dividend payment (payable in kind) if we are required to issue Additional
Dividend Notes, as defined under "Description of New Notes--Certain Covenants--
Additional Interest Upon Payment of Certain Permitted Dividends."

In addition, the credit facility contains negative covenants limiting our
ability to, among other things:

. engage in another type of business;

. make investments and acquisitions and specified capital expenditures;

. engage in transactions with affiliates;

. repurchase equity or repurchase or prepay other debt, including the
notes;

. enter into restrictive agreements;

. incur other indebtedness;

. make use of proceeds of borrowings under the credit facility;

. enter into or permit to exist any agreement that restricts the ability
of a material subsidiary to pay dividends or other distributions; and

. have derivative obligations, except for bona fide hedging purposes.

The credit facility also contains the following financial covenants:

. minimum ratio of EBITDA to net interest expense;

. maximum ratio of total net debt to EBITDA; and

. maximum ratio of senior secured debt to EBITDA.

The terms used in these financial covenants have specific meanings as used in
the credit facility.

The credit facility also includes customary events of default, including a
change of control, as defined in the credit facility.

Borrowings are generally be available subject to the accuracy of all
representations and warranties, including the absence of a material adverse
change, the absence of any default or event of default and, in certain
circumstances, satisfaction of a collateral coverage test.

1999 NOTES

In February 1999, we completed a $900 million private placement of 5 and 10-
year notes, the proceeds of which were used to refinance existing debt. The
1999 notes were registered with the SEC in October 1999. As of June 30, 2001,
the outstanding portion of these notes consists of:

. $300 million aggregate principal amount of 8.50% notes due 2004; and

. $598 million aggregate principal amount of 8.75% notes due 2009.

The 1999 notes include a customary restriction on our ability to enter into
sale/leasebacks of, or grant liens secured by, our principal plants without
equally and ratably securing such notes, as well as a limit on our ability to
grant liens on the stock or indebtedness of certain of our subsidiaries. The
1999 notes also include customary events of default.

ASSUMED LYONDELL DEBT

At our formation, we assumed specific medium- and long-term notes and
debentures of Lyondell. At June 30, 2001, as adjusted for the repayment of $90
million of medium-term notes due August 30, 2001, the outstanding portion of
those obligations consists of:

. $100 million aggregate principal amount of 9.125% notes due 2002;

. $150 million aggregate principal amount of 6.50% notes due 2006;

. $150 million aggregate principal amount of 7.55% debentures due 2026;
and

. $31 million aggregate principal amount of medium-term notes with various
maturities ranging from September 2002 to March 2005 and with various
fixed interest rates ranging from 9.50% to 11.20%.

Lyondell guarantees the 9.125% notes, the 6.50% notes and the 7.55%
debentures but has been released as a primary obligor as to such debt. Lyondell
and Equistar are co-obligors on the medium-term notes, although as between the
two entities, Equistar is primarily liable.

The assumed Lyondell debt includes customary restrictions on our ability to
enter into sale/leasebacks of, or grant liens secured by, our principal plants
without equally and ratably securing such notes, as well as a limit on our
ability to grant liens on the stock or indebtedness of certain of our
subsidiaries, as well as customary events of default, including any repudiation
by Lyondell of its guarantee. In addition, some of the assumed debt also
contains limits on the incurrence of debt by any subsidiary in the future that
owns either of our Channelview olefin plants, which are currently not held
through subsidiaries.

DESCRIPTION OF NEW NOTES

The new notes will be issued under the indenture dated as of August 24, 2001
that we entered with The Bank of New York, as trustee. This indenture also
governs the outstanding notes, and the new notes will be substantially
identical to the outstanding notes.

In this Description of New Notes, "Equistar" refers only to Equistar
Chemicals, LP, and any successor obligor on the notes, and not to any of its
subsidiaries, "Equistar Funding" refers only to Equistar Funding Corporation
and any successor obligor on the notes, not to any of its subsidiaries, and
"issuers" refers to both of them. You can find the definitions of certain terms
used in this description under "--Definitions."

The following description is only a summary of the material provisions of the
new notes and the indenture. These descriptions do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
notes and the indenture and those provisions made part of the indenture by
reference to the Trust Indenture Act of 1939. You may request a copy of the
indenture at our address set forth under the heading "Where You Can Find More
Information." You can find the definitions of certain terms used in this
description under "--Definitions."

GENERAL

The form and the term of the new notes are the same as the form and term of
the outstanding notes they will replace, except that:

. we will register the new notes under the Securities Act,

. the new notes, once registered, will not bear legends restricting
transfer and

. holders of the new notes will not be entitled to some rights under the
registration rights agreement, including our payment of additional
interest for failure to meet specified deadlines, which terminate when
the exchange offer is consummated.

The new notes will be issued solely in exchange for an equal principal amount
of outstanding notes. As of the date of this prospectus, $700 million aggregate
of 10 1/8% senior notes are outstanding. See "The Exchange Offer."

The new notes will mature on September 1, 2008 and will bear interest at the
rate of 10 1/8% per annum. Interest on the new notes will accrue from August
24, 2001, the date the outstanding notes were issued, and will be payable
semiannually in arrears on March 1 and September 1 of each year, commencing
March 1, 2002. We will make each interest payment to the holders of record of
the new notes at the close of business on the February 15 or August 15
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year of twelve 30-day months.

Principal, interest and liquidated damages, if any, will be payable at the
office or agency of Equistar maintained for that purpose, which initially will
be the office of the trustee in the City of New York, provided that, payments
to the holders of global notes may be made by wire transfer under certain
circumstances. Payment of interest on new notes not in global form may be made
by check mailed to the address of the Person entitled thereto as it appears in
the register of the new notes maintained by the registrar. Initially, the
trustee will also act as paying agent and registrar for the new notes.

We will be required to pay additional interest on the notes in certain
circumstances if we pay dividends to our equity holders. See "--Certain
Covenants--Restricted Payments."

ADDITIONAL NOTES

Subject to the covenants described below, under the indenture we may issue
additional notes with the same terms as the new notes (other than interest and
liquidation damages scheduled and paid prior to the issuance of the additional
notes)("Additional Notes"). Prior to any issuance of Additional Notes, Equistar
must deliver an opinion of counsel to the trustee confirming that the holders
of the notes then outstanding will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if the Additional Notes were not issued. The new notes, the outstanding notes,
Additional Dividend Notes (as defined below) and any Additional Notes would be
treated as a single class for all purposes under the indenture. Unless the
context otherwise requires, references to the new notes in this section include
the Additional Dividend Notes and Additional Notes.

RANKING

The new notes:

. will be unsecured obligations of the issuers,

. will be equal in right of payment with all unsecured and unsubordinated
Indebtedness of the issuers and

. will rank senior in right of payment to all future indebtedness of the
issuers that by its terms is junior or subordinated in right of payment
to the new notes.

As of June 30, 2001, after giving effect to the issuance of the outstanding
notes and borrowings under our amended and restated credit facility and the use
of the proceeds therefrom, Equistar has approximately $2.4 billion of
outstanding indebtedness, none of which is subordinated.

The new notes will be unsecured obligations of Equistar and Equistar Funding.
Secured debt and other secured obligations of the issuers, including
obligations with respect to our amended and restated credit facility, totaling
$300 million as of April 24, 2001 will be effectively senior to the new notes
to the extent of the value of the assets securing such debt or other
obligations. Subject to the covenants described below, we will be permitted to
issue additional secured debt.

Equistar's subsidiaries do not guarantee the outstanding notes and will not
guarantee the new notes upon initial issuance. Claims of creditors of our
subsidiaries, including trade creditors and creditors holding guarantees issued
by our subsidiaries, and claims of preferred and minority stockholders (if any)
of our subsidiaries generally will have priority with respect to the assets and
earnings of our subsidiaries over the claims of creditors of Equistar,
including holders of the new notes. The new notes therefore will be effectively
subordinated to creditors (including trade creditors) and preferred and
minority stockholders (if any) of subsidiaries of Equistar. As of June 30,
2001, Equistar's subsidiaries (other than Equistar Funding) had no material
assets or liabilities. Although the indenture limits the incurrence of
Indebtedness and Disqualified Stock or Preferred Stock of Restricted
Subsidiaries, the limitation is subject to a number of significant exceptions.
Moreover, the indenture does not impose any limitation on the incurrence by
Restricted Subsidiaries of liabilities that are not considered Indebtedness or
Disqualified Stock or Preferred Stock under the indenture. See "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness and Issuance of
Preferred Stock."

OPTIONAL REDEMPTION

The new notes will be redeemable, in whole, at any time, or in part, from
time to time, at the option of the issuers upon not less than 30 nor more than
60 days' notice at a redemption price equal to the sum of:

. 100% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the redemption date; plus

. the Make-Whole Amount, if any.

The term "Make-Whole Amount" shall mean, in connection with any optional
redemption of any new note, the excess, if any, of:

. the aggregate present value as of the date of such redemption of each
dollar of principal being redeemed and the amount of interest (exclusive
of interest accrued to the redemption date) that would have been payable
in respect of such dollar if such prepayment had not been made,
determined by discounting, on a semiannual basis, such principal and
interest at the Treasury Rate (determined on the business day preceding
the date of such redemption) plus 0.5%, from the respective dates on
which such principal and interest would have been payable if such
payment had not been made; over

. the principal amount of the note being redeemed.

"Treasury Rate" means, in connection with the calculation of any Make-Whole
Amount with respect to any new note, the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity, as
compiled by and published in the most recent Statistical Release that has
become publicly available at least two business days prior to the redemption
date, equal to the then remaining maturity of the Note being prepaid. If no
maturity exactly corresponds to such maturity, yields for the two published
maturities most closely corresponding to such maturity shall be calculated
pursuant to the immediately preceding sentence and the Treasury Rate shall be
interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month.

"Statistical Release" means the statistical release designated "H.15(519)" or
any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded U.S. government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination, then such other reasonably
comparable index which shall be designated by the trustee.

SELECTION AND NOTICE

If less than all the new notes issued under the indenture are to be redeemed
at any time, selection of the applicable new notes for redemption will be made
by the trustee on a pro rata basis, by lot or by such method as the trustee
shall deem fair and appropriate; provided that no notes of $1,000 or less shall
be redeemed in part. Notices of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date to each holder
of notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any new note is to be redeemed in part only, the notice
of redemption that relates to such note shall state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. New notes called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on notes or portions of them called for redemption.

REPURCHASE AT OPTION OF HOLDERS

CHANGE OF CONTROL

Upon the occurrence of a Change of Control, each holder of new notes will
have the right to require the issuers to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and liquidated damages, if any, thereon to the date of purchase (the
"Change of Control Payment") on a date that is not more than 90 days after the
occurrence of such Change of Control (the "Change of Control Payment Date").
Within 30 days following any Change of Control, we will mail, or at the
issuers' request the trustee will mail, a notice to each holder offering to
repurchase the notes held by such holder pursuant to the procedures specified
in such notice. The issuers will comply with the requirements of Rule 14e-1
under the Exchange Act of 1934, as amended, and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the notes as a result of a Change of
Control.

On the Change of Control Payment Date, we will, to the extent lawful:

. accept for payment all notes or portions thereof properly tendered and
not withdrawn pursuant to the Change of Control Offer,

. deposit with the applicable paying agent an amount equal to the
aggregate Change of Control Payments in respect of all notes or portions
thereof so tendered and

. deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions thereof being purchased by the issuers.

The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such note will be in a principal amount
of $1,000 or an integral multiple thereof.

Our failure to comply with the provisions of the two preceding paragraphs
will constitute an Event of Default under the indenture. Except as described
above with respect to a Change of Control, the indenture does not contain
provisions that permit the holders of the notes to require that we purchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction. See "--Events of Default."

There can be no assurance that we will have the financial resources to
purchase the new notes, particularly if a Change of Control triggers a similar
repurchase requirement for, or results in the acceleration of, other
indebtedness. Our amended and restated credit facility provides that certain
events constituting a Change of Control constitute a default under, and could
result in the acceleration of the maturity of, our amended and restated credit
facility. Future indebtedness might contain similar provisions. If a Change of
Control occurs, we could try to refinance our amended and restated credit
facility and any such future Indebtedness. Accordingly, we might not be able to
fulfill our obligation to repurchase any notes if a Change of Control occurs.
See "Risk Factors--Risks Relating to the New Notes and Our Indebtedness--We may
be unable to purchase the new notes upon a change of control."

The issuers are not required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer at the same or a
higher purchase price, at the same times and otherwise in substantial
compliance with the requirements applicable to a Change of Control Offer
otherwise required to be made by the issuers and purchases all notes validly
tendered and not withdrawn under such Change of Control Offer.

"Change of Control" means the occurrence of any of the following:

(i) the sale, transfer, conveyance or other disposition, in one or a series
of related transactions, of all or substantially all the assets of
Equistar and its Subsidiaries taken as a whole to any person or group
(as such terms are used in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act) other than to one or more Permitted Holders;

(ii) the acquisition by any person or group (as defined above), other than
one or more Permitted Holders, of a direct or indirect interest in
more than 50% of the Capital Stock of Equistar and the right to
exercise a substantial portion of the powers of Lyondell to act on
behalf of the Partnership Governance Committee; and the
representatives of Lyondell on Equistar's partnership governance
committee (in each case as in effect on August 24, 2001), by way of
merger or consolidation or otherwise;

(iii) any person or group (as defined above), other than one or more
Permitted Holders (or their representatives on the Partnership
Governance Committee), acquires the right, directly or indirectly, to
exercise, without the need for the consent of any Permitted Holder
(or their representatives on Equistar's partnership governance
committee), a substantial portion of the rights and powers of
Equistar's partnership governance committee with respect to matters
that require unanimous consent under the partnership agreement as in
effect on August 24, 2001; or

(iv) the adoption of a plan for the liquidation or dissolution of one or
both of the issuers, except in connection with a sale, conveyance,
transfer or other disposition of all or substantially all of such
issuer's assets or an acquisition of Capital Stock of Equistar that
would not otherwise constitute a Change of Control pursuant to clauses
(i) through (iii).

The phrase "all or substantially all" the assets of Equistar will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" the
assets of Equistar has occurred, in which case a holder's ability to obtain the
benefit of a Change of Control Offer may be impaired.

ASSET SALES

Equistar will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:

(i) Equistar and/or the Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value (as conclusively evidenced by a resolution of Equistar's
partnership governance committee of Equistar set forth in an Officers'
Certificate delivered to the trustee) of the assets or Equity Interests
issued or sold or otherwise disposed of; and

(ii) at least 75% of the consideration therefor received by Equistar and/or
such Restricted Subsidiary is in the form of cash or Cash Equivalents
or a controlling interest or a joint venture interest (to the extent
otherwise permitted by the indenture) in a business engaged in a
Permitted Business or long-term property or assets that are used or
useful in a Permitted Business;

provided that the amount of:

(x) any liabilities (as shown on Equistar's or such Restricted Subsidiary's
most recent balance sheet) of Equistar or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their
terms subordinated to the notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Equistar or such Restricted Subsidiary
from further liability and

(y) any securities, notes or other obligations received by Equistar or any
such Restricted Subsidiary from such transferee to the extent they are
promptly converted or monetized by Equistar or such Restricted
Subsidiary into cash (to the extent of the cash received),

shall be deemed to be cash for purposes of this provision.

Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Equistar may apply such Net Proceeds, at its option:

(a) to permanently repay Indebtedness outstanding on August 24, 2001 (other
than Indebtedness subordinated by its terms to the notes) with a Stated
Maturity prior to the maturity of the notes (and to correspondingly
reduce commitments with respect thereto in the case of revolving
borrowings) of Equistar or any Restricted Subsidiary that is a
Subsidiary Guarantor or Indebtedness (and to correspondingly reduce
commitments with respect thereto in the case of revolving borrowings)
of any Restricted Subsidiary that is not a Subsidiary Guarantor; or

(b) to the acquisition of Additional Assets (to the extent otherwise
permitted by the indenture) or the making of a capital expenditure, in
each case, in a Permitted Business (or enter into a binding commitment
for any such acquisition or expenditure); provided that such binding
commitment shall be treated as a permitted application of Net Proceeds
from the date of such commitment until and only until the earlier of:

(x) the date on which such expenditure or acquisition is consummated;
and

(y) the 180th day following the expiration of the aforementioned 360
day period. If the acquisition or expenditure contemplated by such
binding commitment is not consummated on or before such 180th day
and Equistar shall not have applied such Net Proceeds pursuant to
clause (a) above on or before such 180th day, such commitment shall
be deemed not to have been a permitted application of Net Proceeds
at any time.

Pending the final application of any such Net Proceeds, Equistar may
temporarily reduce the revolving Indebtedness under our amended and restated
credit facility or otherwise invest such Net Proceeds in any manner that is not
prohibited by the indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds."

When the aggregate amount of Excess Proceeds under the indenture exceeds $25
million, Equistar will be required to make an offer to all holders of notes
issued under the indenture (an "Asset Sale Offer") to purchase the maximum
principal amount of notes and, if Equistar is required to do so under the terms
of any other Indebtedness ranking pari passu with such notes, such other
Indebtedness on a pro rata basis with the notes, that may be purchased out of
the Excess Proceeds, at a purchase price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, thereon, to the date of purchase in accordance with the
procedures set out in the indenture. To the extent that the aggregate amount of
notes (and any other pari passu Indebtedness subject to such Asset Sale Offer)
tendered pursuant to such Asset Sale Offers is less than the Excess Proceeds,
Equistar may, subject to the other terms of the indenture, use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of notes surrendered by holders thereof in connection with any Asset
Sale Offer exceeds the amount of Excess Proceeds, the trustee shall select the
notes to be purchased on a pro rata basis. Upon completion of the offer to
purchase made under the indenture, the amount of Excess Proceeds under the
indenture shall be reset at zero.

CERTAIN COVENANTS

RESTRICTED PAYMENTS

Equistar will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:

(1) declare or pay any dividend or make any distribution on account of
Equistar's or any of its Restricted Subsidiaries' Equity Interests,
other than:

(x) dividends or distributions payable in Qualified Equity Interests of
Equistar,

(y) dividends or distributions payable to Equistar or any Restricted
Subsidiary of Equistar and

(z) Permitted Dividends;

(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Equistar or any Affiliate of Equistar that controls
Equistar, other than any such Equity Interests owned by Equistar or any
of its Restricted Subsidiaries;

(3) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness ("Subordinated
Debt") of Equistar or any Restricted Subsidiary that is subordinated by
its terms to the notes or the Subsidiary Guarantees, as applicable,
other than Indebtedness owed to Equistar or any Restricted Subsidiary
or to Lyondell, except, in each case, payment of interest or principal
at Stated Maturity; or

(4) make any Restricted Investment;

(all such payments and other actions set forth in clauses (1) through (4) above
being collectively referred to as "Restricted Payments");

unless, at the time of and after giving effect to such Restricted Payment (the
amount of any such Restricted Payment, if other than cash, shall be the fair
market value (as conclusively evidenced by a resolution of Equistar's
partnership governance committee) of the asset(s) proposed to be transferred by
Equistar or such Restricted Subsidiary, as the case may be, pursuant to such
Restricted Payment):

(a) no Default or Event of Default shall have occurred and be continuing
after giving effect thereto; and

(b) Equistar would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the most recently ended four full fiscal quarters for
which financial statements have been filed with the SEC pursuant to the
covenant described below under the caption "--Reports" immediately
preceding the date of such Restricted Payment, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Limitation on Incurrence
of Additional Indebtedness and Issuance of Preferred Stock;" and

(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments and Permitted Dividends made by Equistar and its
Restricted Subsidiaries on or after August 24, 2001 (excluding
Restricted Payments permitted by clause (b) (to the extent paid to
Equistar or any of its Restricted Subsidiaries or to the extent such
distributions are deducted as a minority interest in calculating
Consolidated Net Income), (c), (d), (e), (f) and (g) of the next
succeeding paragraph) and 50% of any Restricted Payments permitted by
clause (f) of the next succeeding paragraph, is less than the sum,
without duplication, of:

(i) 50% of the Consolidated Net Income of Equistar for the period
(taken as one accounting period) from the beginning of the first
fiscal quarter commencing on October 1, 2001, to the end of
Equistar's most recently ended fiscal quarter for which financial
statements have been filed with the SEC pursuant to the covenant
described below under the caption "--Reports" at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus

(ii) 100% of the aggregate net cash proceeds received by Equistar or
any of its Restricted Subsidiaries from the issue or sale (other
than to a Subsidiary or Joint Venture of Equistar or if the
proceeds are used to make a Permitted Investment of the type
described in clause (e) of the definition thereof) after August
24, 2001 of Qualified Equity Interests of Equistar or of debt
securities of Equistar or any of its Restricted Subsidiaries that
have been converted into or exchanged for such Qualified Equity
Interests of Equistar, plus

(iii) to the extent that any Restricted Investment, other than a
Restricted Investment permitted to be made pursuant to clause (f)
or (i) below, that was made after August 24, 2001 is sold for
cash or otherwise liquidated, repaid or otherwise reduced,
including by way of dividend or distribution (to the extent not
included in calculating Consolidated Net Income), for cash, the
lesser of (A) the cash return with respect to such Restricted
Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus

(iv) an amount equal to the sum of:

(A) the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or other transfers
of assets (to the extent not included in calculating
Consolidated Net Income), in each case to Equistar or any
Restricted Subsidiary from Unrestricted Subsidiaries; and

(B) the portion (proportionate to Equistar's equity interest in such
Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary
is designated a Restricted Subsidiary; provided, however, that
the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Restricted Investments,
other than a Restricted Investment permitted to be made pursuant
to clause (f) or (i) below, previously made after August 24,
2001 by Equistar or any Restricted Subsidiary in such
Unrestricted Subsidiary.

The foregoing provisions will not prohibit the following Restricted
Payments:

(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the indenture;

(b) dividends or distributions by any Restricted Subsidiary of Equistar
payable:

(x) to all holders of a class of Capital Stock of such Restricted
Subsidiary on a pro rata basis or on a basis that is more favorable
to Equistar; provided that at least 50% of such class of Capital
Stock is held by Equistar and/or one or more of its Restricted
Subsidiaries or

(y) to all holders of a class of Preferred Stock of a Restricted
Subsidiary that is not a Subsidiary Guarantor issued after August
24, 2001 in compliance with the covenant described below under the
caption "--Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock;"

(c) the payment of cash dividends on any series of Disqualified Stock
issued after August 24, 2001 in an aggregate amount not to exceed the
cash received by Equistar since August 24, 2001 upon issuance of such
Disqualified Stock;

(d) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of Equistar, any Affiliate of Equistar, or any Joint
Venture (or the acquisition of any outstanding Equity Interests of any
Person the majority of whose assets are Equity Interests in Equistar or
a Joint Venture), in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Subsidiary or Joint
Venture of Equistar) of, Qualified Equity Interests of Equistar;
provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph;

(e) the defeasance, redemption or repurchase of Subordinated Debt with the
net cash proceeds from an incurrence of Permitted Refinancing or in
exchange for or out of the net cash proceeds from the substantially
concurrent sale (other than to a Subsidiary or Joint Venture of
Equistar) of Qualified Equity Interests of Equistar; provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph;

(f) Restricted Investments in any Joint Venture made during any fiscal year
of Equistar or within 45 days after the end of such fiscal year in
amounts that, together with all other Restricted Investments made in
such Joint Venture in respect of such fiscal year in reliance on this
clause (f) during such fiscal year or within 45 days after the end of
such fiscal year, do not exceed the amount of dividends or
distributions previously paid in respect of such fiscal year to
Equistar or any Restricted Subsidiary by such Joint Venture; provided
that no Default or Event of Default shall have occurred and be
continuing after giving effect to such Restricted Payment;

(g) distributions or payments of Receivables Fees;

(h) distributions by any Restricted Subsidiary or Joint Venture of
chemicals to a holder of Capital Stock of such Restricted Subsidiary or
Joint Venture if such distributions are made pursuant to a provision in
a joint venture agreement or other arrangement entered into a
connection with the establishment of such Joint Venture or Restricted
Subsidiary that requires such holder to pay a price for such chemicals
equal to that which would be paid in a comparable transaction
negotiated on an arms-length basis (or pursuant to a provision that
imposes a substantially equivalent requirement);

(i) any other Restricted Payment which, together with all other Restricted
Payments made pursuant to this clause (i) on or after August 24, 2001,
does not exceed $25 million (after giving effect to any reductions in
the aggregate amount of such Investments made pursuant to this clause
(i) as a result of the disposition thereof, including through
liquidation, repayment or other reduction, including by way of dividend
or distribution, for cash, as set forth in clause (c)(ii) above, the
aggregate amount of such reductions not to exceed the aggregate amount
of such Investments outstanding and previously made pursuant to this
clause (i)), provided that no Default or Event of Default shall have
occurred and be continuing after giving effect to such Restricted
Payment; and

(j) the repurchase of any Subordinated Debt at a purchase price not greater
than 101% of the principal amount thereof in the event of:

(x) a change of control pursuant to a provision no more favorable to
the holders thereof than the provision described under "--
Repurchase at the Option of the Holders--Change of Control" or

(y) an Asset Sale (pursuant to a provision no more favorable to the
holders thereof than the provision described under "--Repurchase at
the Option of the Holders--Asset Sales");

provided that, (1) in each case, prior to such repurchase Equistar has
made a Change of Control Offer or Asset Sale Offer, as applicable, and
repurchased all notes that were validly tendered for payment in
connection with such Change of Control Offer or Asset Sale Offer and
(2) no Default or Event of Default shall have occurred and be
continuing after giving effect to such Restricted Payment.

Equistar's partnership governance committee may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by Equistar and its Restricted Subsidiaries in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant (except to the extent such Investments
were repaid in cash). All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the fair market value of such
Investments at the time of such designation, as conclusively determined by
Equistar's partnership governance committee. Such designation will only be
permitted if any such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. In the case of any designation by Equistar of a Person as an
Unrestricted Subsidiary on the first day that such Person is a Subsidiary of
Equistar in accordance with the provisions of the indenture, such designation
shall be deemed to have occurred for all purposes of the indenture
simultaneously with, and automatically upon, such Person becoming a Subsidiary.

ADDITIONAL INTEREST UPON PAYMENT OF CERTAIN PERMITTED DIVIDENDS

Equistar will provide public notice of its intent to pay a Permitted Dividend
which would require the issuance of Additional Dividend Notes by means of a
press release on a date that is not more than twenty-one days or less than
fourteen days prior to the date of any scheduled payment of any such Permitted
Dividend (a "Notice Date"). Such notice shall provide the date of the Permitted
Dividend and the amount of additional interest that will be paid on such date
pursuant to the next paragraph.

If Equistar makes a Permitted Dividend and Equistar's Fixed Charge Coverage
Ratio calculated (on a pro forma basis as described in the following sentence)
on the Dividend Payment Date would have been less than 1.75 to 1, then we
shall, on the date when Equistar makes such Permitted Dividend (the "Dividend
Payment Date"), pay to each holder of record on the Notice Date immediately
prior to the date of such payment, as additional interest, the Additional
Interest Amount. For this purpose, the calculation shall give pro forma effect
to any Indebtedness, Disqualified Stock or Preferred Stock incurred or
contemplated to be incurred or any asset sold or contemplated to be sold, in
each case to finance such Permitted Dividend as if such incurrence or sale had
been made at the beginning of the most recently ended four full fiscal quarters
for which financial statements have been filed with the SEC pursuant to the
covenant described below under the caption "--Reports" immediately preceding
the date of such Permitted Dividend. Notwithstanding the foregoing, Equistar
shall not be required to make any such additional interest payment if it has
made an additional interest payment with respect to another Permitted Dividend
on a Dividend Payment Date that occurred within 90 days prior to the Dividend
Payment Date.

Any such interest shall be paid by the issuers in the form of additional
notes ("Additional Dividend Notes") that are identical in all respects to the
notes. Interest on such Additional Dividend Notes shall accrue from the most
recent interest payment date prior to the Dividend Payment Date or, if no
interest has been paid on the notes, from August 24, 2001. The Additional
Dividend Notes shall be issued in an aggregate principal amount that, together
with accrued interest thereon through the Dividend Payment Date, as determined
pursuant to the foregoing sentence, will be equal to the Additional Interest
Amount required to be paid on the applicable Dividend Payment Date; provided
that Equistar shall, to the extent necessary, round up the principal amount of
any Additional Dividend Note so that the principal amount of each such note is
$1,000 or a higher $1,000 increment thereof.

"Additional Interest Amount" means an amount, to be paid on the applicable
Dividend Payment Date, to each holder of record of notes on the applicable
Notice Date, equal to the amount of interest that would be paid on the
aggregate principal amount of the notes held by such holder for a period of 90
days at a rate of 3.0% per annum, calculated on the basis of a 360-day year
(without any compounding of such interest).

For example, if Equistar were to pay a Permitted Dividend and the Fixed
Charge Coverage Ratio was below 1.75 to 1, it would pay $5.25 million as
additional interest to the holders of the notes (assuming $700 million of
outstanding notes) and $2.25 million as additional interest to the term loan
lenders (assuming $300 million of outstanding term loans). Additional interest
on the revolver would depend on the amounts outstanding under the revolver at
that time.

LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK

On or after August 24, 2001:

. Equistar will not, and will not permit any of its Restricted
Subsidiaries to incur any Indebtedness (including Acquired Debt);

. Equistar will not, and will not permit any of its Restricted
Subsidiaries to, issue any Disqualified Stock (including Acquired
Disqualified Stock); and

. Equistar will not permit any of its Restricted Subsidiaries that are not
Subsidiary Guarantors to issue any shares of Preferred Stock (including
Acquired Preferred Stock);

provided, however, that Equistar and the Subsidiary Guarantors may incur
Indebtedness (including Acquired Debt) and Equistar and the Subsidiary
Guarantors may issue shares of Disqualified Stock (including Acquired
Disqualified Stock) if the Fixed Charge Coverage Ratio for Equistar's most
recently ended four full fiscal quarters for which financial statements have
been filed with the SEC pursuant to the covenant described below under "--
Reports" immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 2.0
to 1, determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred or
the Disqualified Stock or Preferred Stock had been issued, as the case may be,
at the beginning of such four-quarter period, with any letters of credit and
bankers' acceptances being deemed to have an aggregate principal amount of
Indebtedness equal to the maximum amount available thereunder.

The foregoing provisions will not apply to:

(i) the incurrence by Equistar of Indebtedness pursuant to our amended and
restated credit facility in an aggregate principal amount at any time
outstanding not to exceed an amount equal to $800.0 million less the
aggregate principal amount of all mandatory repayments (other than
mandatory prepayments triggered solely by the issuance of Indebtedness
or Preferred Stock of a Finance Subsidiary to refinance our amended and
restated credit facility) applied to (a) repay loans (other than
revolving credit loans) outstanding thereunder or (b) permanently
reduce the revolving credit commitments thereunder (and the incurrence
by its Subsidiaries of Guarantees thereof); provided that, if the
aggregate principal amount of Indebtedness pursuant to our amended and
restated credit facility permitted to be incurred hereby is reduced as
a result of any mandatory repayment made in connection with Equistar's
entry into a Receivables Facility, then such aggregate principal amount
permitted to be incurred shall be increased by the amount of such
previous reduction if and when such Receivables Facility is terminated;

(ii) the incurrence by Equistar and the Subsidiary Guarantors of
Indebtedness represented by the notes (including any Additional
Dividend Notes but not any Additional Notes), and Subsidiary
Guarantees thereof;

(iii) the incurrence by Equistar and its Restricted Subsidiaries of
Existing Indebtedness (other than Indebtedness of the type described
in clauses (i), (ii), (v) through (xii) or (xiv) of this covenant);

(iv) the incurrence by Equistar or any of its Restricted Subsidiaries of
any Permitted Refinancing in exchange for, or the Net Proceeds of
which are used to extend, refinance, renew, replace, defease or
refund, Indebtedness that was permitted to be incurred under the Fixed
Charge Coverage Ratio test set forth above or clauses (ii) or (iii)
above or (xiii) below or this clause (iv);

(v) the incurrence by Equistar or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Equistar and any of its
Restricted Subsidiaries; provided, however, that (i) if Equistar or any
Subsidiary Guarantor is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated by its terms to the prior
payment in full in cash of all Obligations with respect to the notes or
the Subsidiary Guarantee, as the case may be, and (ii) (A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than Equistar or a
Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either Equistar or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence
of such Indebtedness by Equistar or such Restricted Subsidiary, as the
case may be;

(vi) the incurrence by Equistar or any Restricted Subsidiary of Hedging
Obligations that are incurred for the purpose of (A) fixing or hedging
interest rate or currency risk with respect to any fixed or floating
rate Indebtedness that is permitted by the indenture to be outstanding
or any receivable or liability the payment of which is determined by
reference to a foreign currency; provided that the notional principal
amount of any such Hedging Obligation does not exceed the principal
amount of the Indebtedness or any receivable or liability to which
such Hedging Obligation relates or (B) managing fluctuations in the
price or cost of raw materials, manufactured products or related
commodities; provided that such obligations are entered into in the
ordinary course of business to hedge or mitigate risks to which
Equistar or any Restricted Subsidiary is exposed in the conduct of its
business or the management of its liabilities (as determined by
Equistar's or such Restricted Subsidiary's principal financial officer
in the exercise of his or her good faith business judgment);

(vii) the issuance by any of Equistar's Restricted Subsidiaries of shares
of Preferred Stock to Equistar or a Wholly Owned Restricted
Subsidiary; provided that (A) any subsequent issuance or transfer of
Equity Interests that results in such Preferred Stock being held by a
Person other than Equistar or a Wholly Owned Restricted Subsidiary or
(B) the transfer or other disposition by Equistar or a Wholly Owned
Restricted Subsidiary of any such shares to a Person other than
Equistar or a Wholly Owned Restricted Subsidiary shall be deemed, in
each case, to constitute an issuance of such Preferred Stock by such
Subsidiary on such date that is not permitted by this clause (vii);

(viii) the incurrence by Equistar or any of its Restricted Subsidiaries of
Indebtedness represented by tender, bid, performance, government
contract, surety or appeal bonds, standby letters of credit and
warranty and contractual service obligations of like nature, trade
letters of credit or documentary letters of credit, in each case to
the extent incurred in the ordinary course of business of Equistar
or such Restricted Subsidiary;

(ix) the incurrence by any Restricted Subsidiary of Equistar of
Indebtedness or the issuance by any Restricted Subsidiary of Preferred
Stock, the aggregate principal amount (or accreted value, as
applicable) or liquidation preference of which, together with all
other Indebtedness and Preferred Stock of Equistar's Restricted
Subsidiaries at the time outstanding and incurred or issued in
reliance upon this clause (ix), does not exceed $25 million;

(x) the issuance by any Finance Subsidiary of Preferred Stock with an
aggregate liquidation preference not exceeding the amount of
Indebtedness of Equistar held by such Finance Subsidiary; provided that
the Fixed Charge Coverage Ratio for Equistar's most recently ended four
full fiscal quarters for which financial statements have been filed
with the SEC pursuant to the covenant described below under "--Reports"
immediately preceding the date on which such Preferred Stock is issued
would have been at least 2.0 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom) as if
such Preferred Stock had been issued at the beginning of such four-
quarter period;

(xi) the incurrence of Indebtedness by Foreign Subsidiaries in the
aggregate principal amount (or accreted value, as applicable) of
which, together with all other Indebtedness at the time outstanding
and incurred in reliance upon this clause (xi), does not exceed $10
million;

100

(xii) the Guarantee by Equistar or any Restricted Subsidiary of
Indebtedness of Equistar or a Restricted Subsidiary that was
permitted to be incurred by another provision of this covenant;

(xiii) Acquired Debt or Acquired Disqualified Stock; provided that such
Indebtedness or Disqualified Stock was not incurred in connection
with or in contemplation of such Person becoming a Restricted
Subsidiary; and provided further that immediately after giving
effect to such incurrence, the Fixed Charge Coverage Ratio for
Equistar's most recently ended four full fiscal quarters for which
financial statements have been filed with the SEC pursuant to the
covenant described below under "--Reports" immediately preceding the
date of such incurrence would have been at least 2.0 to 1,
determined on a pro forma basis (including giving pro forma effect
to the applicable transaction related thereto);

(xiv) the incurrence by Equistar Funding of Indebtedness as a co-issuer of
Indebtedness of Equistar that was permitted to be incurred by another
provision of this covenant;

(xv) the incurrence of Indebtedness represented by industrial revenue bonds
to finance capital expenditures incurred to reduce NOx emissions in
the Houston/Galveston region pursuant to a Texas Natural Resource
Conservation Commission plan; and

(xvi) the incurrence by Equistar or any Subsidiary Guarantor of
Indebtedness or the incurrence of Disqualified Stock, the aggregate
principal amount (or accreted value, as applicable) or liquidation
preference of which, together with all other Indebtedness and
Disqualified Stock at the time outstanding and incurred in reliance
on this clause (xvi), does not exceed $100 million.

For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness or Preferred Stock meets the criteria of more than one
of the categories of permitted Indebtedness described in clauses (i) through
(xvi) above or is entitled to be incurred pursuant to the first paragraph of
this covenant, Equistar shall, in its sole discretion, classify such item of
Indebtedness or Preferred Stock in any matter that complies with this covenant
and such Indebtedness or Preferred Stock will be treated as having been
incurred pursuant to the clauses or the first paragraph hereof, as the case may
be, designated by Equistar. The amount of Indebtedness issued at a price which
is less than the principal amount thereof shall be equal to the amount of the
liability in respect thereof determined in accordance with GAAP.

The amount of Indebtedness outstanding under our amended and restated credit
facility for purposes of clause (i) of this covenant shall exclude any amounts
paid as interest-in-kind in connection with a Permitted Dividend.

LIMITATION ON LIENS

Equistar will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien,
except Permitted Liens, on any asset now owned or hereafter acquired, or any
income or profits therefrom, unless all payments due under the indenture and
the notes are secured on an equal and ratable basis with the obligations so
secured (or, if such obligations are subordinated by their terms to the notes
or the Subsidiary Guarantees, before the obligations so secured) until such
time as such obligations are no longer secured by a Lien.

101

DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES

Equistar will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any restriction on the ability of any Restricted Subsidiary
to:

(i)(a) pay dividends or make any other distributions to Equistar or any of
its Restricted Subsidiaries: (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by,
its profits, or

(b)pay any Indebtedness owed to Equistar or any of its Restricted
Subsidiaries;

(ii) make loans or advances to Equistar or any of its Restricted
Subsidiaries; or

(iii) transfer any of its properties or assets to Equistar or any of its
Restricted Subsidiaries;

except for such restrictions existing under or by reason of:

(a) existing agreements as in effect on August 24, 2001;

(b) Indebtedness permitted by the indenture to be incurred containing
restrictions on the ability of Restricted Subsidiaries to consummate
transactions of the types described in clauses (i), (ii) or (iii) above
not materially more restrictive than those contained in the indenture;

(d) applicable law;

(e) existing restrictions with respect to a Person acquired by Equistar or
any of its Restricted Subsidiaries (except to the extent such
restrictions were put in place in connection with or in contemplation
of such acquisition), which restrictions are not applicable to any
Person, or the properties or assets of any Person, other than the
Person, or the property or assets of the Person, so acquired;

(f) customary non-assignment provisions in leases and other agreements
entered into in the ordinary course of business;

(g) construction loans and purchase money obligations (including Capital
Lease Obligations) for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause
(iii) above on the property so constructed or acquired;

(h) in the case of clause (iii) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;

(i) a Permitted Refinancing, provided that the restrictions contained in
the agreements governing such Permitted Refinancing are not materially
more restrictive, taken as a whole, than those contained in the
agreements governing the Indebtedness being refinanced (as conclusively
evidenced by a resolution of Equistar's partnership governance
committee);

(j) customary restrictions on a Finance Subsidiary imposed in such Finance
Subsidiary's organizational documents or by the terms of its Preferred
Stock;

(k) any restriction with respect to shares of Capital Stock of a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of such shares of Capital Stock or any restriction with
respect to the assets of a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of such assets or
all or substantially all the Capital Stock of such Restricted
Subsidiary pending the closing of such sale or disposition;

(l) in the case of any Restricted Subsidiary that is a Joint Venture,
customary restrictions on such Restricted Subsidiary contained in its
joint venture agreement, which restrictions are consistent with the
past practice of Equistar and its Restricted Subsidiaries (as
conclusively evidenced by a resolution of Equistar's partnership
governance committee); and

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(m) our amended and restated credit facility and related documentation as
the same is in effect on August 24, 2001 and as amended, modified,
extended, renewed, refunded, refinanced, restated or replaced from time
to time; provided that our amended and restated credit facility and
related documentation as so amended, modified, extended, reviewed,
refunded, refinanced, restated or replaced is not materially more
restrictive, taken as a whole, as to the matters enumerated above than
our amended and restated credit facility and related documentation as
in effect on August 24, 2001 (as conclusively evidenced by a resolution
of Equistar's partnership governance committee).

For purposes of determining compliance with this covenant, in the event that
a restriction meets the criteria of more than one of the categories of
permitted restrictions described in clauses (a) through (m) above, Equistar
shall, in its sole discretion, classify such restriction in any matter that
complies with this covenant and such restriction will be treated as existing
pursuant to the clauses designated by Equistar.

LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS

We have agreed that Equistar will not, and will not permit any of its
Restricted Subsidiaries to, enter into any Sale and Lease-Back Transaction
unless:

(a) Equistar or such Restricted Subsidiary could have:

(i) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such Sale and Lease-Back Transaction pursuant to the
covenant described above under the caption "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness and Issuance of
Preferred Stock" (whether or not such covenant has ceased to be
otherwise in effect as described below under "--Limitation of
Applicability of Certain Covenants if New Notes Rated Investment
Grade"), and

(ii) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "--Certain Covenants--
Limitations on Liens" without securing the notes; and

(b) the gross cash proceeds of such Sale and Lease-Back Transaction are at
least equal to the fair market value (as conclusively determined by
Equistar's partnership governance committee) of the property that is
the subject of such Sale and Lease-Back Transaction.

LINE OF BUSINESS

Equistar will not, and will not permit any of its Restricted Subsidiaries to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to Equistar and its Subsidiaries taken as a whole.

TRANSACTIONS WITH AFFILIATES

Equistar will not, and will not permit any of its Restricted Subsidiaries to,
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make any
contract, agreement, understanding, loan, advance or Guarantee with, or for the
benefit of, any Affiliate, any Partner or any Affiliate of any Partner (each of
the foregoing, an "Affiliate Transaction"), unless: (i) the terms of such
Affiliate Transaction are no less favorable to Equistar or such Restricted
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
Equistar; and (ii) Equistar delivers to the trustee (a) with respect to any
Affiliate Transaction involving aggregate consideration in excess of $10
million, a resolution of Equistar's partnership governance
committee set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of Equistar's
partnership governance committee and (b) with respect to any Affiliate
Transaction involving aggregate consideration in excess of $25 million, an
opinion as to the fairness to Equistar or such Restricted

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Subsidiary of such Affiliate Transaction from a financial point of view issued
by an investment banking firm of national standing; provided that:

(i) transactions or payments pursuant to any employment arrangements or
employee, officer or director benefit plans or arrangements entered
into by Equistar or any of its Restricted Subsidiaries in the ordinary
course of business;

(ii) transactions between or among Equistar and/or its Restricted
Subsidiaries;

(iii) customary loans, advances, fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of Equistar or any of its Restricted Subsidiaries;

(iv) transactions in the ordinary course of business between Equistar or
any of its Restricted Subsidiaries and any Partner or Affiliate of any
Partner, provided that, with respect to any such Affiliate Transaction
involving aggregate consideration in excess of $25 million, such
Affiliate Transaction complies with clause (i) of the initial paragraph
hereof and has been approved by Equistar's partnership governance
committee, including a majority of the disinterested members (if any);

(v) sales (including a sale in exchange for a promissory note of or equity
interest in such Accounts Receivable Subsidiary) of accounts receivable,
related assets and the provision of billing, collection and other
services in connection therewith, in each case, to an Accounts
Receivable Subsidiary in connection with any Receivables Facility;

(vi) transactions pursuant to any contract or agreement in effect on August
24, 2001, as the same may be amended, modified or replaced from time to
time, so long as any such contract or agreement as so amended, modified
or replaced is, taken as a whole, no less favorable to Equistar and its
Restricted Subsidiaries in any material respect than the contract or
agreement as in effect on August 24, 2001 (as conclusively evidenced by
a resolution of Equistar's partnership governance committee);

(vii) any transaction or series of transactions between Equistar or any
Restricted Subsidiary and any of their Joint Ventures, provided that
(i) such transaction or series of transactions is in the ordinary
course of business between Equistar or such Restricted Subsidiary and
such Joint Venture and (ii) with respect to any such Affiliate
Transaction involving aggregate consideration in excess of $25
million, such Affiliate Transaction complies with clause (i) of the
initial paragraph above and such Affiliate Transaction has been
approved by Equistar's partnership governance committee, including a
majority of the disinterested members (if any); and

(viii) any Restricted Payment of the type described in clause (1) or (2) of
the first paragraph of the covenant described above under "--Certain
Covenants--Restricted Payments" and any Permitted Dividend;

in each case, shall not be deemed to be Affiliate Transactions and therefore
(except as otherwise specified in such clauses) not subject to the requirements
of clauses (i) and (ii) of the initial paragraph above.

LIMITATION ON BUSINESS ACTIVITIES OF EQUISTAR FUNDING

Equistar Funding may not hold any assets, become liable for any obligations
or engage in any business activities; provided that it may be a co-obligor with
respect to the notes or any other Indebtedness issued by Equistar, and may
engage in any activities directly related or in connection within those notes
or Indebtedness. Equistar Funding will be a Wholly Owned Restricted Subsidiary
of Equistar at all times.

GUARANTEES BY RESTRICTED SUBSIDIARIES

Equistar will not permit any Restricted Subsidiary that is not a Subsidiary
Guarantor, directly or indirectly, to Guarantee or secure the payment of any
other Indebtedness of Equistar or any of its Restricted Subsidiaries (except
Indebtedness of such Restricted Subsidiary or a Restricted Subsidiary of such
Restricted Subsidiary) unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the

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indenture providing for the Guarantee (a "Subsidiary Guarantee") of the
payment of the notes by such Restricted Subsidiary; provided that this
paragraph shall not be applicable to:

(i) any Guarantee of any Restricted Subsidiary that existed at the time
such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary;

(ii) Guarantees of Indebtedness of a Restricted Subsidiary that is a
Foreign Subsidiary by a Restricted Subsidiary that is a Foreign
Subsidiary; or

(iii) Equistar Funding.

If the guaranteed Indebtedness is subordinated in right of payment to the
notes or any Subsidiary Guarantee, as applicable, pursuant to a written
agreement to that effect, the Guarantee of such guaranteed Indebtedness must
be subordinated in right of payment to the Subsidiary Guarantee to at least
the extent that the guaranteed Indebtedness is subordinated to the notes.

Each Subsidiary Guarantee will be limited to the maximum amount that would
not render the Subsidiary Guarantor's obligations subject to avoidance under
applicable fraudulent conveyance provisions of the United States Bankruptcy
Code or any comparable provision of state law. By virtue of this limitation, a
Subsidiary Guarantor's obligation under its Subsidiary Guarantee could be
significantly less than amounts payable with respect to the notes, or a
Guarantor may have effectively no obligation under its Subsidiary Guarantee.

No Subsidiary Guarantor will be permitted to:

. consolidate with or merge with or into any Person; or

. sell, convey, transfer or dispose of, all or substantially all its
assets as an entirety or substantially as an entirety, in one
transaction or a series of related transactions, to any Person; or

. permit any Person to merge with or into the Subsidiary Guarantor unless:

(A) the other Person is Equistar or any Wholly Owned Restricted
Subsidiary that is a Subsidiary Guarantor or becomes a Subsidiary
Guarantor concurrently with the transaction; or

(B)(1) either (x) the Subsidiary Guarantor is the continuing Person or
(y) the resulting, surviving or transferee Person expressly
assumes by supplemental indenture all of the obligations of the
Subsidiary Guarantor under its Subsidiary Guarantee; and

(2) immediately after giving effect to the transaction, no Default
has occurred and be continuing; or

(C) the transaction constitutes a sale or other disposition (including
by way of consolidation or merger) of the Subsidiary Guarantor or
the sale or disposition of all or substantially all the assets of
the Subsidiary Guarantor (in each case other than to Equistar or a
Restricted Subsidiary) otherwise permitted by the indenture.

The Subsidiary Guarantee of a Subsidiary Guarantor will terminate upon:

(1) a sale or other disposition (including by way of consolidation or
merger) of the Subsidiary Guarantor or the sale or disposition of all
or substantially all the assets of the Subsidiary Guarantor (other than
to Equistar or a Restricted Subsidiary) otherwise permitted by the
indenture;

(2) the cessation of the circumstances requiring the Subsidiary Guarantee;

(3) the designation in accordance with the indenture of the Subsidiary
Guarantor as an Unrestricted Subsidiary; or

(4) defeasance or discharge of the notes, as provided in "--Defeasance and
Discharge."

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ACCOUNTS RECEIVABLE FACILITIES

Equistar may, and any of its Restricted Subsidiaries may, sell (including a
sale in exchange for a promissory note of or Equity Interest in such Accounts
Receivable Subsidiary) at any time and from time to time, accounts receivable
and related assets to any Accounts Receivable Subsidiary; provided that the
aggregate consideration received in each such sale is at least equal to the
aggregate fair market value of the receivables sold.

REPORTS

Whether or not required by the rules and regulations of the SEC, so long as
any new notes are outstanding, Equistar will furnish to each trustee and the
holders of the notes:

. all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if Equistar
were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by Equistar's
certified independent accountants; and

. all current reports that would be required to be filed with the SEC on
Form 8-K if Equistar were required to file such reports.

In addition, whether or not required by the rules and regulations of SEC,
Equistar will file a copy of all such information and reports with the SEC for
public availability and make such information available to securities analysts
and prospective investors upon request.

In addition, we have agreed that, for so long as any new notes remain
outstanding, we will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information, if any, required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

LIMITATION OF APPLICABILITY OF CERTAIN COVENANTS IF NEW NOTES RATED INVESTMENT
GRADE

Notwithstanding the foregoing, the issuers' obligations to comply with the
provisions of the indenture described above under the captions "--Repurchase at
Option of Holders--Asset Sales" and "--Certain Covenants-- Limitation on
Incurrence of Additional Indebtedness and Issuance of Preferred Stock," "--
Certain Covenants--Restricted Payments," "--Certain Covenants--Additional
Interest upon Payment of Certain Permitted Dividends," "--Certain Covenants--
Dividend and Other Payment Restrictions Affecting Subsidiaries," "--Certain
Covenants--Line of Business," "--Certain Covenants--Transactions with
Affiliates," "--Certain Covenants--Guaranties by Restricted Subsidiaries" and
"--Certain Covenants--Accounts Receivable Facilities" will terminate and cease
to have any further effect from and after the first date when the new notes are
rated Investment Grade.

CONSOLIDATION, MERGER AND SALE OF ASSETS

EQUISTAR

Equistar may not consolidate with or merge into, or sell, assign, transfer,
convey or otherwise dispose of all or substantially all of its assets in one or
more related transactions to, any Person, or permit any Person to merge with or
into it unless each of the following conditions is satisfied:

(1) Immediately after giving effect to such transaction and any related
incurrence of Indebtedness or issuance of Disqualified Stock, no
Default or Event of Default shall have occurred and be continuing;

(2) Either (i) Equistar shall be the continuing Person or (ii) the entity
formed by such consolidation or into which Equistar is merged, or the
Person to which such properties and assets will have been

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conveyed, transferred or leased, assumes Equistar's obligation as to the
due and punctual payment of the principal of (and premium, if any, on)
and interest, if any, on the notes and the performance and observance of
every covenant to be performed by Equistar under the indenture, the
notes and the registration rights agreement; any such entity will be
organized under the laws of the United States, one of the States thereof
or the District of Columbia;

(3) Equistar or the entity or the Person formed by or surviving any such
consolidation or merger (if other than Equistar), or to which such
sale, assignment, transfer, conveyance or other disposition shall have
been made,

(A) except in the case of a merger or consolidation with, or a sale,
assignment, transfer, conveyance or other disposition to, a
Permitted Holder, will have a Consolidated Net Worth immediately
after the transaction equal to or greater than the Consolidated Net
Worth of Equistar immediately preceding the transaction; and

(B) except with respect to a consolidation or merger of Equistar with or
into a Person that has no outstanding Indebtedness, will, at the
time of such transaction and after giving pro forma effect thereto
as if such transaction had occurred at the beginning of the
applicable four-quarter period, (i) have a Fixed Charge Coverage
Ratio of at least 2.0 to 1 or (ii) have a greater Fixed Charge
Coverage Ratio than Equistar's Fixed Charge Coverage Ratio
immediately before the transaction; and

(4) Each of the issuers has delivered to the trustee an Officers'
Certificate and Opinion of Counsel stating that the transaction
complies with these conditions.

The foregoing shall not prohibit the merger or consolidation of a Wholly
Owned Restricted Subsidiary with Equistar; provided that, in connection with
any such merger or consolidation, no consideration, other than Qualified
Equity Interests in the surviving Person or Equistar, shall be issued or
distributed to the holders of Equity Interests of Equistar.

The sale, assignment, transfer, conveyance or other disposition by Equistar
of all or substantially all its property or assets taken as a whole to one or
more of Equistar's Subsidiaries shall not relieve Equistar from its
obligations under the indentures and the notes. In addition, Equistar will not
lease all or substantially all its assets in one or more related transactions
to another Person.

EQUISTAR FUNDING

Equistar Funding shall not consolidate with, merge into, sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of
its property and assets to, any Person, or permit any Person to merge with or
into Equistar Funding unless:

. concurrently therewith, a corporate Wholly Owned Restricted Subsidiary
of Equistar organized and validly existing under the laws of the United
States of America or any jurisdiction thereof (which may be the
continuing Person as a result of such transaction) shall expressly
assume, by a supplemental indenture, executed and delivered to the
trustee and in form and substance satisfactory to the trustee, all of
the obligations of an issuer under the notes, the indenture and the
registration rights agreement; or

. after giving effect thereto, at least one obligor on the notes shall be
a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof,

and immediately after such transaction, no Default or Event of Default will
have occurred and be continuing.

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EVENTS OF DEFAULT

Each of the following is an Event of Default with respect to the notes:

(1) our failure to pay interest or liquidated damages when due for 30 days;

(2) our failure to pay principal or premium when due;

(3) our failure comply with the provisions described under the captions "--
Repurchase at Option of Holders--Change of Control," "--Repurchase at
Option of Holders--Asset Sales" or "--Consolidation, Merger and Sale of
Assets;"

(4) our failure to comply with at least 25% in principal amount of the
notes then outstanding any of the other agreements in the indenture or
the notes for 60 days after written notice;

(5) we default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Equistar or any of its Significant
Subsidiaries (or any Indebtedness for money borrowed Guaranteed by
Equistar or any of its Significant Subsidiaries if Equistar or a
Significant Subsidiary does not perform its payment obligations under
such Guarantee within any grace period provided for in the
documentation governing such Guarantee) which default constitutes a
Payment Default or results in the acceleration of such Indebtedness,
the principal amount of all Indebtedness under which there has been a
Payment Default or that has been so accelerated, aggregates at least
$50 million or more;

(6) failure by Equistar or any of its Significant Subsidiaries to pay a
final judgment or final judgments aggregating in excess of $50 million,
which judgment or judgments are not paid, discharged or stayed, for a
period of 60 days;

(7) certain events of bankruptcy or insolvency with respect to Equistar or
any of its Significant Subsidiaries; and

(8) except as permitted by the indenture, a Subsidiary Guarantee is held in
any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Subsidiary
Guarantor, or any Person acting on behalf of any Subsidiary Guarantor,
denies or disaffirms its obligations under the Subsidiary Guarantees.

If an Event of Default (other than an Event of Default specified in clause
(7) above that occurs with respect to Equistar, Equistar Funding or any
Subsidiary Guarantor) occurs and is continuing, the trustee or the holders of
at least 25% in aggregate principal amount of the notes then outstanding, by
written notice to Equistar may declare the principal of and premium, if any,
and accrued interest and liquidated damages, if any, on the notes to be
immediately due and payable. Upon a declaration of acceleration, such
principal, premium, if any, and accrued interest and liquidated damages, if
any, shall be immediately due and payable. If an Event of Default specified in
clause (7) above occurs with respect to Equistar, Equistar Funding or any
Subsidiary Guarantor, the principal of and premium, if any, and accrued
interest and liquidated damages, if any, on the notes then outstanding shall
become and be immediately due and payable without any declaration or other act
on the part of the trustee or any holder.

The holders of at least a majority in principal amount of the notes then
outstanding, by written notice to Equistar and to the trustee, may waive all
past defaults and rescind and annul a declaration of acceleration and its
consequences if:

. all existing Events of Default, other than the nonpayment of the
principal of and premium, if any, and interest and liquidated damages,
if any, on such notes that have become due solely by such declaration of
acceleration, have been cured or waived; and

. the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction.

For information as to the waiver of defaults, see "--Modification and Waiver."

108

The holders of at least a majority in aggregate principal amount of the notes
then oustanding may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee. However, the trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the
trustee in personal liability, or that the trustee determines in good faith may
be unduly prejudicial to the rights of holders of the notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of the notes. A
holder may not pursue any remedy with respect to the indenture or the notes
unless:

. the holder gives the trustee written notice of a continuing Event of
Default;

. the holders of at least 25% in aggregate principal amount of the notes
then outstanding make a written request to the trustee to pursue the
remedy;

. the holder or holders offer the trustee indemnity satisfactory to the
trustee against any costs, liability or expense;

. the trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and

. during such 60-day period, the holders of at least a majority in
aggregate principal amount of the notes then outstanding do not give the
trustee a direction that is inconsistent with the request.

However, such limitations do not apply to the right of any holder of a note
to receive payment of the principal of or premium, if any, interest or
liquidated damages, if any, on such note or to bring suit for the enforcement
of any such payment, on or after the due date expressed in the notes, which
right shall not be impaired or affected without the consent of the holder.

We are required to give the trustee a certificate each year stating whether
we are in default under the indenture and, if so, specifying all defaults and
the nature of the defaults.

MODIFICATION AND WAIVER

We and the trustee, with the consent of the holders of not less than a
majority in aggregate principal amount of the notes, may execute supplemental
indentures adding any provisions to or changing or eliminating any provisions
of the indenture or modifying the rights of such holders. However, without the
holder of each note we may not:

. change the Stated Maturity of the principal of, or any installment of
interest on, any note,

. reduce the principal amount of or premium, if any, or interest or
liquidated damages, if any, on any note,

. reduce any amount payable on redemption of the notes or upon the
occurrence of an Event of Default or reduce the Change of Control
Payment or the amount to be paid in connection with an Asset Sale Offer,

. change the place or currency of payment of principal of or premium, if
any, or interest or liquidated damages, if any, on any note,

. impair the right to institute suit for the enforcement of any payment on
or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any note,

. reduce the above-stated percentage of outstanding notes the consent of
whose holders is necessary to modify or amend the indenture,

. waive a default in the payment of principal of or premium, if any, or
interest or liquidated damages, if any, on the notes (except as set
forth under the caption "--Events of Default"),

109

. reduce the percentage or aggregate principal amount of outstanding notes
the consent of whose holders is necessary for waiver of compliance with
certain provisions of the indenture or for waiver of certain defaults,

. modify or change any provision of the indenture affecting the ranking of
the notes or the Subsidiary Guarantees in a manner adverse to the
holders of the notes or

. release any Subsidiary Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture other than in accordance with the
provisions of the indenture, or amend or modify any provision relating
to such release.

Neither Equistar nor any of its Subsidiaries or Affiliates will pay any
holder whether by way of interest, fee or otherwise, for any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes
unless paid to all holders that consent, waive or agree to amend the term or
provision.

Modification and amendment of the indenture may be made by the issuers and
the trustee without the consent of any holder:

. to cure any ambiguity, omission, defect or inconsistency in the
indenture;

. to provide for the assumption by a successor of a issuer of its
obligations under the indenture;

. to provide for uncertificated notes, subject to certain conditions;

. to secure the notes under the indenture, to add Subsidiary Guarantees
with respect to the notes, or to confirm and evidence the release,
termination or discharge of any such security or Subsidiary Guarantee
when such release, termination or discharge is permitted by the
indenture;

. to add to the covenants of the issuers for the benefit of the holders of
the notes or to surrender any right or power conferred upon the issuers;

. to provide for or confirm the issuance of Additional Notes or Additional
Dividend Notes;

. to make any other change that does not adversely affect the rights of
any holder; or

. to comply with any requirement of the SEC in connection with
qualification of the indenture under the Trust Indenture Act or
otherwise.

DEFEASANCE AND DISCHARGE

We may discharge our obligations under the notes and the indenture by
irrevocably depositing in trust with the trustee money or U.S. Government
Obligations sufficient to pay principal of interest on the notes to maturity or
redemption within one year, subject to meeting certain other conditions.

The indenture provides that we may elect either:

(i) to defease and be discharged from any and all obligations with respect
to all or a portion of the notes of any series (except for, among other
matters, the obligations to register the transfer of or exchange notes,
replace temporary or mutilated, destroyed, lost or stolen notes of such
series, maintain an office or agency in respect of such notes and hold
moneys for payment in trust) ("legal defeasance"); or

(ii) to be released from our obligations with respect to most of the
covenants and under clauses (1) and (3) of "--Consolidation, Merger
and Sale of Assets--Equistar" (and the events listed in clauses (5),
(6) and (8) under "--Events of Default" will no longer constitute
Events of Default), and any omission to comply with such obligations
will not constitute a Default or an Event of Default with respect to
such notes ("covenant defeasance"), in either case upon the
irrevocable deposit by the issuers with the trustee (or other
qualifying trustee), in trust, of:

-- an amount in cash,

-- U.S. Government Obligations that, through the payment of principal
and interest in accordance with their terms, will provide money in
an amount or

110

-- a combination thereof in an amount, sufficient to pay the principal
of (and premium, if any, on) and interest, if any, to Stated
Maturity (or redemption) on such notes, on the scheduled due dates
therefor.

Such a trust may only be established if, among other things, we have
delivered to the trustee an Opinion of Counsel to the effect that the holders
of such notes will not recognize income, gain or loss for United States federal
income tax purposes as a result of such legal defeasance or covenant defeasance
and will be subject to United States federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion, in the
case of defeasance under clause (i) above, must refer to and be based upon a
ruling of the Internal Revenue Service or a change in applicable United States
federal income tax law occurring after the date of the indenture. The
defeasance would in each case be effective when 123 days have passed since the
date of the deposit in trust.

In the case of either discharge or defeasance, the Subsidiary Guarantees, if
any, will terminate.

CONCERNING THE TRUSTEE

The indenture limits the rights of the trustee, should it become a creditor
of Equistar, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the SEC for permission to continue or resign.

The holders of a majority in principal amount of the notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the applicable trustee,
subject to certain exceptions. The indenture provides that in case an Event of
Default shall occur and be continuing, the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the trustee will not be
under any obligation to exercise any rights or powers under the indenture at
the request of any holder of notes, unless such holder shall have offered to
the applicable trustee security and indemnity satisfactory to it against any
loss, liability or expense.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, STOCKHOLDERS AND
PARTNERS

No director, officer, employee, incorporator, partner, member of Equistar's
partnership governance committee or holder of Capital Stock of either issuer or
any Subsidiary Guarantor, as such, will have any liability for any obligations
of the issuers and the Subsidiary Guarantors under the notes, the Subsidiary
Guarantees, or the indenture or for any claim based on, in respect of, or by
reason of, such obligations. Each holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. This waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.

PAYMENT, TRANSFER AND EXCHANGE

We are required to maintain an office or agency at which the principal of
(and premium, if any, on), interest and liquidated damages, if any, on the
notes will be payable. We initially designated the office of the agent of the
trustee in New York City as an office where such principal, premium, interest
and liquidated damages will be payable. We may from time to time designate
additional offices or agencies, approve a change in the location of any office
or agency and rescind the designation of any office or agency.

All moneys paid by us to the trustee or a paying agent for the payment of
principal of (or premium, if any, on) or interest, if any, on any notes that
remain unclaimed for two years after such principal, premium or interest
becomes due and payable will be repaid to us, and the holder of such notes will
(subject to applicable abandoned property or similar laws) thereafter, as an
unsecured general creditor, look only to us.

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Subject to the terms of the indenture, notes may be presented for
registration of transfer and for exchange:

. at each office or agency required to be maintained by the issuers, as
described above and

. at each other office or agency that we may designate from time to time
for such purposes.

Registration of transfers and exchanges will be effected if the transfer agent
is satisfied with the evidence of ownership and identity of the Person making
the request and if the transfer form thereon is duty executed and the transfer
agent is otherwise satisfied that the transfer is being made in accordance with
the indenture and applicable law. See "Book-Entry, Delivery and Form" for a
description of additional transfer restrictions applicable to the notes.

No service charge will be made for any registration of transfer or exchange
of notes, but we may require payment of any tax or other governmental charge
payable in connection therewith.

GOVERNING LAW

The indenture, including any Subsidiary Guarantees, and the notes shall be
governed by, and construed in accordance with, the laws of the State of New
York.

DEFINITIONS

"Accounts Receivable Subsidiary" means any Wholly Owned Subsidiary of
Equistar:

(i) which is formed solely for the purpose of, and which engages in no
activities other than activities in connection with, financing accounts
receivable of Equistar and/or its Restricted Subsidiaries,

(ii) which is designated by Equistar as an Accounts Receivables Subsidiary
pursuant to an Officers' Certificate delivered to the trustee,

(iii) no portion of Indebtedness or any other obligation (contingent or
otherwise) of which is at any time recourse to or obligates Equistar
or any Restricted Subsidiary in any way, or subjects any property or
asset of Equistar or any Restricted Subsidiary, directly or
indirectly, contingently or otherwise, to the satisfaction thereof,
other than pursuant to:

(1) representations, warranties and covenants (or, any indemnity with
respect to such representations, warranties and covenants) entered
into in the ordinary course of business in connection with the sale
(including a sale in exchange for a promissory note of or Equity
Interest in such Accounts Receivable Subsidiary) of accounts
receivable to such Accounts Receivable Subsidiary or

(2) any Guarantee of any such accounts receivable financing by Equistar
or any Restricted Subsidiary that is permitted to be incurred
pursuant to the covenants described under the caption entitled "--
Certain Covenants--Limitation on Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and "--Certain
Covenants--Restricted Payments,"

(iv) with which neither Equistar nor any Restricted Subsidiary of Equistar
has any contract, agreement, arrangement or understanding other than
contracts, agreements, arrangements and understandings entered into in
the ordinary course of business in connection with the sale (including
a sale in exchange for a promissory note of or Equity Interest in such
Accounts Receivable Subsidiary) of accounts receivable in accordance
with the covenant described under the caption "--Certain Covenants--
Accounts Receivable Facilities" and fees payable in the ordinary
course of business in connection with servicing accounts receivable
and

(v) with respect to which neither Equistar nor any Restricted Subsidiary of
Equistar has any obligation:

(a) to subscribe for additional shares of Capital Stock or other Equity
Interests therein or make any additional capital contribution or
similar payment or transfer thereto other than in connection

112

with the sale (including a sale in exchange for a promissory note of
or Equity Interest in such Accounts Receivable Subsidiary) of
accounts receivable to such Accounts Receivable Subsidiary in
accordance with the covenant described under "--Certain Covenants--
Accounts Receivable Facilities" or

(b) to maintain or preserve the solvency, any balance sheet term,
financial condition, level of income or results of operations
thereof.

"Acquired Debt" means, with respect to any specified Person:

. Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with,
or in contemplation of, such other Person merging with or into or
becoming a Subsidiary of such specified Person and

. Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.

"Acquired Disqualified Stock" means, with respect to any specified Person,
Disqualified Stock of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Disqualified Stock incurred in connection with,
or in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.

"Acquired Preferred Stock" means, with respect to any specified Person,
Preferred Stock of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Preferred Stock incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.

"Additional Assets" means:

. Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by Equistar or another
Restricted Subsidiary from any Person other than Equistar or an
Affiliate of Equistar,

. any controlling interest or joint venture interest in another business
or

. any other asset (other than securities, cash, Cash Equivalents, or other
current assets) to be owned by Equistar or any Restricted Subsidiary.

"Affiliate" of any specified Person means any other Person directly or
indirectly, through one or more intermediaries, controlling or controlled by
or under direct or indirect common control with such specified Person. For the
purpose of this definition, "control" when used with respect to any specified
Person means the possession, direct or indirect, of the power to manage or
direct or cause the direction of the management and policies of such Person
directly or indirectly, whether through the ownership of voting stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.

"Asset Sale" means:

(i) the sale, lease, conveyance or other disposition (other than the
creation of a Lien) of any assets (other than the disposition of
inventory or equipment in the ordinary course of business consistent
with industry practices or the disposition of Cash Equivalents)
(provided that the sale, conveyance or other disposition of all or
substantially all the assets of Equistar and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
indenture described above under the caption "--Repurchase at the Option
of Holders--Change of Control" and/or the provisions described above
under the caption "--Consolidation, Merger and Sale of Assets" and not
by the provisions of the Asset Sale covenant),

(ii) the sale by Equistar or any of its Restricted Subsidiaries of Equity
Interests of any of Equistar's Restricted Subsidiaries, Unrestricted
Subsidiaries or Joint Ventures and

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(iii) the issuance by any of Equistar's Restricted Subsidiaries of Equity
Interests of such Restricted Subsidiary, in the case of clauses (i),
(ii) or (iii), whether in a single transaction or a series of related
transactions:

(a) that have a fair market value in excess of $25 million or

(b) for Net Proceeds in excess of $25 million.

Notwithstanding the foregoing:

(a) a transfer of assets by Equistar to a Restricted Subsidiary or by a
Restricted Subsidiary to Equistar or to another Restricted Subsidiary;

(b) an issuance of Equity Interests by a Restricted Subsidiary to Equistar
or to another Restricted Subsidiary;

(c) an issuance of Preferred Stock by a Finance Subsidiary that is
permitted by the covenant described under the caption "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock;"

(d) sales (including a sale in exchange for a promissory note of or Equity
Interest in such Accounts Receivable Subsidiary) of accounts
receivable, related assets to an Accounts Receivable Subsidiary in
connection with any Receivables Facility;

(e) Sale and Lease-Back Transactions; and

(f) Restricted Payments (and Permitted Dividends payable in cash) permitted
by the covenant described under "--Certain Covenants--Restricted
Payments" and Permitted Investments will not be deemed to be an Asset
Sale.

"Attributable Debt" in respect of a Sale and Lease-Back Transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such Sale and Lease-Back Transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).

"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance
with GAAP.

"Capital Stock" means:

. in the case of a corporation, corporate stock,

. in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock,

. in the case of a partnership, partnership interests (whether general or
limited) and

. any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.

"Cash Equivalents" means:

(a) United States dollars,

(b) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof
having maturities of not more than one year from the date of
acquisition,

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(c) demand deposits, time deposits and certificates of deposit with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year from the date of
acquisition and overnight bank deposits, in each case with any bank or
trust company organized or licensed under the laws of the United States
or any State thereof having capital, surplus and undivided profits in
excess of $250 million,

(d) repurchase obligations with a term of not more than seven days for
underlying securities of the type described in clauses (b) and (c)
above entered into with any financial institution meeting the
qualifications specified in clause (c) above,

(e) commercial paper rated as least P-1 or A-1 by Moody's or S&P,
respectively,

(f) investments in any U.S. dollar-denominated money market fund as defined
by Rule 2a-7 of the General Rules and Regulations promulgated under the
Investment Company Act of 1940 and

(g) in the case of a Foreign Subsidiary, substantially similar investments
denominated in foreign currencies (including similarly capitalized
foreign banks).

"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period, plus in each case,
without duplication:

(i) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period (including any provision for
taxes on the Net Income of any Joint Venture that is a pass-through
entity for federal income tax purposes, to the extent such taxes are
paid or payable by such Person or any of its Restricted Subsidiaries),
to the extent that such provision for taxes was included in computing
such Consolidated Net Income;

(ii) the Fixed Charges of such Person and its Restricted Subsidiaries for
such period, to the extent that such Fixed Charges were deducted in
computing such Consolidated Net Income;

(iii) depreciation and amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation and
amortization were deducted in computing such Consolidated Net Income;
and

(iv) any non-cash charges reducing Consolidated Net Income for such period
(excluding any such non-cash charge to the extent that it represents
an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior
period); minus

(v) any non-cash items increasing Consolidated Net Income for such period;
minus

(vi) the lesser of:

(x) the aggregate amount of all Investments made by Equistar or any of
its Restricted Subsidiaries in any Joint Venture during the period
under clause (f) of the second paragraph of the covenant described
under "--Certain Covenants--Restricted Payments" and

(y) the aggregate amount of Net Income (but not loss) of any such Joint
Venture referred to in clause (x) of this clause (vi) included in
calculating Equistar's Consolidated Net Income during such period;

in each case, on a consolidated basis and determined in accordance with GAAP.

Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization of, a Restricted Subsidiary
of the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.

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"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that:

(i) the Net Income of any Person that is not a Restricted Subsidiary shall
be included only to the extent of the lesser of (x) the amount of
dividends or distributions paid in cash (but not by means of a loan) to
the referent Person or a Restricted Subsidiary thereof or (y) the
referent Person's (or, subject to clause (ii), a Restricted Subsidiary
of the referent Person's) proportionate share of the Net Income of such
other Person;

(ii) the Net Income (but not loss) of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income
is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders;

(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition
shall be excluded; and

(iv) the cumulative effect of a change in accounting principles shall be
excluded.

"Consolidated Net Tangible Assets" shall mean the total amount of assets
(less applicable reserves and other properly deductible items) after deducting
therefrom:

. all current liabilities (excluding any thereof which are by their terms
extendible or renewable at the option of the obligor thereon to a time
more than 12 months after the time as of which the amount thereof is
being computed) and

. all goodwill, trade names, trademarks, patents, purchased technology,
unamortized debt discount and other like intangible assets, all as set
forth on the most recent financial statements of Equistar and its
consolidated Subsidiaries filed with the Commission pursuant to the
covenant described under "--Reports" and computed in accordance with
GAAP.

"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum, without duplication, of:

. the consolidated equity of holders of Capital Stock (other than
Preferred Stock and Disqualified Stock) of such Person and its
consolidated Restricted Subsidiaries as of such date; plus

. the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of Preferred Stock (other than
Disqualified Stock); less

. all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern
business made in accordance with GAAP as a result of the acquisition of
such business) subsequent to August 24, 2001 in the book value of any
asset owned by such Person or a consolidated Restricted Subsidiary of
such Person; and excluding

.the cumulative effect of a change in accounting principles;

all as determined in accordance with GAAP.

"Default" means any event that is, or with the giving of notice or the lapse
of time, or both, would constitute an Event of Default.

"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the

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holder thereof, in whole or in part, on or prior to the date on which the notes
mature; provided that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of
an "asset sale" or "change of control" occurring prior to the date on which the
notes mature shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
"--Repurchase of Notes at Option of Holders--Asset Sales" and "--Repurchase of
Notes at Option of Holders--Change of Control" covenants described above and
such Capital Stock specifically provides that such Person will not repurchase
or redeem any such stock pursuant to such provision prior to Equistar's
repurchase of such notes as are required pursuant to such covenants. The
"liquidation preference" of any Disqualified Stock shall be the amount payable
thereon upon liquidation prior to any payment to holders of common stock or, if
none, the amount payable by the issuer thereof upon maturity or mandatory
redemption.

"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

"Existing Indebtedness" means Indebtedness of Equistar and its Restricted
Subsidiaries in existence, and considered Indebtedness of Equistar or any of
its Restricted Subsidiaries, on August 24, 2001, until such amounts are repaid,
including all reimbursement obligations with respect to letters of credit
outstanding as of the date of the indenture.

"Finance Subsidiary" means a Restricted Subsidiary of Equistar, all the
Capital Stock of which (other than Preferred Stock) is owned by Equistar and/or
one or more Wholly-Owned Restricted Subsidiaries thereof that does not engage
in any activity other than:

. holding of Indebtedness of Equistar and/or one or more Wholly-Owned
Restricted Subsidiaries thereof;

. the issuance of Capital Stock; and

. any activity necessary, incidental or related to the foregoing.

"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that Equistar
or any of its Restricted Subsidiaries or any other applicable Person incurs,
assumes or redeems any Indebtedness (other than revolving credit borrowings) or
issues or redeems Disqualified Stock or Preferred Stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption or redemption of Indebtedness or such issuance or
redemption of Disqualified Stock or Preferred Stock as if the same had occurred
at the beginning of the applicable four-quarter reference period.

In addition, for purposes of making the computation referred to above:

(i) acquisitions that have been made by Equistar or any of its Restricted
Subsidiaries or any other applicable Person, including through mergers
or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter reference
period;

(ii) the Consolidated Cash Flow and Fixed Charges attributable to
operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but, in the case of such Fixed Charges, only to the
extent that the obligations giving rise to such Fixed Charges will not
be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date; and

117

(iii) if since the beginning of the four-quarter reference period any
Person was designated as an Unrestricted Subsidiary or redesignated
as or otherwise became a Restricted Subsidiary, such event shall be
deemed to have occurred on the first day of the four-quarter
reference period.

"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:

(i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, determined in
accordance with GAAP;

(ii) all commissions, discounts and other fees and charges incurred in
respect of letters of credit or bankers' acceptance financings,
determined in accordance with GAAP, and net payments or receipts (if
any) pursuant to Hedging Obligations of the types described in clauses
(i) through (iii) of the definition thereof to the extent such Hedging
Obligations relate to Indebtedness that is not itself a Hedging
Obligation;

(iii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;

(iv) any interest expense on Indebtedness of another Person (other than
Non-Recourse Indebtedness of a Joint Venture that is not a Restricted
Subsidiary or Unrestricted Subsidiary secured by a Limited-Recourse
Stock Pledge) that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee
or Lien is called upon);

(v) amortization or write-off of debt discount in connection with any
Indebtedness of Equistar and its Restricted Subsidiaries, on a
consolidated basis in accordance with GAAP, other than amortization of
deferred financing costs incurred on or prior to August 24, 2001; and

(vi) the product of (a) all dividend payments (other than any payments to
the referent Person or any of its Restricted Subsidiaries and any
dividends payable in the form of Qualified Equity Interests) on any
series of Preferred Stock or Disqualified Stock of such Person and its
Restricted Subsidiaries, times (b) (x) a fraction, the numerator of
which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis
and in accordance with GAAP or (y) if the dividends are deductible by
such Person for income tax purposes, one;

provided that interest payments on Indebtedness of a Joint Venture shall, in
each case, not be deemed Fixed Charges of Equistar or any Restricted Subsidiary
as of any date of determination when such Indebtedness is not considered
Indebtedness of Equistar or any Restricted Subsidiary of Equistar shall not be
deemed Fixed Charges of Equistar or any Restricted Subsidiary.

"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States, any State thereof or the District of
Columbia.

"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, as in effect on August 24, 2001.

"General Partner" means a Restricted Subsidiary of Equistar or any of its
Restricted Subsidiaries that has no assets and conducts no operations other
than its ownership of a general partnership interest in a Joint Venture.

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"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or Disqualified Stock of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person:

. to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or Disqualified Stock of such other Person
(including those arising by virtue of partnership arrangements (other
than with respect to the obligations of a Joint Venture, solely by
virtue of a Restricted Subsidiary of Equistar being the General Partner
of such Joint Venture if, as of the date of determination, no payment on
such Indebtedness or obligation has been made by such General Partner of
such Joint Venture and such arrangement would not be classified and
accounted for, in accordance with GAAP, as a liability on a consolidated
balance sheet of Equistar)) or

. entered into for the purpose of assuring in any other manner the obligee
of such Indebtedness or Disqualified Stock of the payment thereof or to
protect such obligee against loss in respect thereof in whole or in part
(including by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, to maintain financial statement
conditions or otherwise); provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding
meaning.

"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:

(i) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements,

(ii) forward foreign exchange contracts or currency swap agreements,

(iii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates or currency values and

(iv) commodity price protection agreements or commodity price hedging
agreements designed to manage fluctuations in prices or costs in raw
materials, manufactured products or related commodities.

"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume or Guarantee such Indebtedness. If any Person becomes a Restricted
Subsidiary on any date after August 24, 2001 (including by redesignation of an
Unrestricted Subsidiary), the Indebtedness and Capital Stock of such Person
outstanding on such date will be deemed to have been Incurred by such Person on
such date for purposes of the covenant described under "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred
Stock," but will not be considered the sale or issuance of Equity Interests for
purposes of the covenant described under "--Repurchase at Option of Holders--
Asset Sales." The accretion of original issue discount or payment of interest
in kind will not be considered an incurrence of Indebtedness.

"Indebtedness" means, with respect to any Person:

. any indebtedness of such Person, whether or not contingent, in respect
of borrowed money or evidenced by bonds, notes, debentures or similar
instruments;

. letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances;

. Capital Lease Obligations and Attributable Debt in respect of Sale and
Lease-Back Transactions;

. the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; and

. net Hedging Obligations,

if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability on a balance sheet
of such Person prepared in accordance with GAAP, as well as:

. all indebtedness of others secured by a Lien on any asset of such Person
whether or not such indebtedness is assumed by such Person; provided
that, for purposes of determining the amount of

119

any Indebtedness of the type described in this clause, if recourse with
respect to such Indebtedness is limited to such asset, the amount of
such Indebtedness shall be limited to the lesser of the fair market
value of such asset or the amount of such Indebtedness and

. to the extent not otherwise included, the Guarantee by such Person of
any indebtedness of the types described above of any other Person.

The amount of any Indebtedness outstanding as of any date shall be:

. the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest and

. the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.

Notwithstanding the foregoing, a Limited Recourse Stock Pledge shall not be
considered Indebtedness of Equistar or any of its Restricted Subsidiaries.

"Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's or the equivalent of such ratings by S&P or Moody's. In the
event that Equistar shall select any other Rating Agency pursuant to the
provisions of the definition thereof, the equivalent of such ratings by such
Rating Agency shall be used.

"Investments" means, with respect to any Person, all investments by such
Person in another Person (including an Affiliate of such Person) in the form
of direct or indirect loans, advances or extensions of credit to such other
Person (including any Guarantee by such Person of the Indebtedness or
Disqualified Stock of such other Person) or capital contributions or purchases
or other acquisitions for consideration of Indebtedness, Equity Interests or
other securities of such other Person, together with all items that are or
would be classified as investments of such investing Person on a balance sheet
prepared in accordance with GAAP; provided that:

(x) trade credit and accounts receivable in the ordinary course of
business;

(y) commissions, loans, advances, fees and compensation paid in the
ordinary course of business to officers, directors and employees; and

(z) reimbursement obligations in respect of letters of credit and tender,
bid, performance, government contract, surety and appeal bonds,

in each case solely with respect to obligations of Equistar or any of its
Restricted Subsidiaries shall not be considered Investments.

If Equistar or any Restricted Subsidiary of Equistar sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Equistar such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of Equistar,
Equistar shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the first paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."

"Joint Venture" means any joint venture between Equistar or any Restricted
Subsidiary and any other Person, whether or not such joint venture is a
Subsidiary of Equistar or any Restricted Subsidiary.

"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, and any lease in the
nature thereof) or the assignment or conveyance of any right to receive income
therefrom.

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"Limited Recourse Stock Pledge" means the pledge of Equity Interests in any
Joint Venture (that is not a Restricted Subsidiary) or any Unrestricted
Subsidiary to secure Non-Recourse Debt of such Joint Venture or Unrestricted
Subsidiary, which pledge is made by a Restricted Subsidiary of Equistar, the
activities of which are limited to making and managing Investments, and owning
Equity Interests, in such Joint Venture or Unrestricted Subsidiary, but only
for so long as its activities are so limited.

"Lyondell" means Lyondell Chemical Company, any successor of Lyondell that is
a Permitted Holder or any Subsidiary of Lyondell.

"Moody's" means Moody's Investors Service, Inc. and its successors.

"Net Income" means, with respect to any Person, the net income (loss) of such
Person, determined in accordance with GAAP and before any reduction in respect
of Preferred Stock dividends, excluding, however:

(i) any gain or loss, together with any related provision for taxes on such
gain or loss, realized in connection with:

(a) any Asset Sale or any disposition pursuant to a Sale and Lease-Back
Transaction or

(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries and

(ii) any extraordinary gain or loss, together with any related provision
for taxes on such extraordinary gain or loss.

"Net Proceeds" means the aggregate cash proceeds (excluding any proceeds
deemed to be "cash" pursuant to the covenant described above under "--
Repurchase at Option of Holders--Asset Sales") received by Equistar or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of:

(i) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees and sales
commissions) and any relocation expenses incurred as a result thereof,

(ii) taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing
arrangements),

(iii) amounts required to be paid to holders of minority interests in
Restricted Subsidiaries or Joint Ventures as a result of such Asset
Sale,

(iv) amounts required to be applied to the repayment of Indebtedness (other
than Indebtedness under our amended and restated credit facility)
secured by a Lien on any asset sold in such Asset Sale, or which must
by the terms of such Lien or by applicable law be repaid out of the
proceeds of such Asset Sale,

(v) all payments made with respect to liabilities directly associated with
the assets which are the subject of the Asset Sale, including, without
limitation, trade payables and other accrued liabilities and

(vi) any reserves for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP and any reserve for
future liabilities established in accordance with GAAP; provided that
the reversal of any such reserve that reduced Net Proceeds when issued
shall be deemed a receipt of Net Proceeds in the amount of such
proceeds on such day.

"Non-Recourse Indebtedness" means Indebtedness as to which:

(i) the lenders have been notified in writing that they will not have any
recourse to the stock or assets of Equistar or any of its Restricted
Subsidiaries, other than the Equity Interests of a Joint Venture that
is not a Restricted Subsidiary or Unrestricted Subsidiary pledged by
Equistar or any of its Restricted Subsidiaries as a Limited Recourse
Stock Pledge and

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(ii) no default thereunder would, as such, constitute a default under any
Indebtedness of Equistar or any Restricted Subsidiary or give any
rights to or in other assets of Equistar as its Restricted
Subsidiaries.

"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness and in all cases whether direct or
indirect, absolute or contingent, now outstanding or hereafter created, assumed
or incurred and including, without limitation, interest accruing subsequent to
the filing of a petition in bankruptcy or the commencement of any insolvency,
reorganization or similar proceedings at the rate provided in the relevant
documentation, whether or not an allowed claim, and any obligation to redeem or
defease any of the foregoing.

"Partner" means any Person owning Equity Interests in Equistar and having the
right to select at least one member of Equistar's partnership governance
committee.

"Payment Default" means any failure to pay any scheduled installment of
interest or principal on any Indebtedness within the grace period provided for
such payment in the documentation governing such Indebtedness.

"Permitted Business" means the petrochemical, chemical and petroleum refining
businesses and any business reasonably related, incidental, complementary or
ancillary thereto.

"Permitted Dividends" means:

(i) dividends and distributions by Equistar on any class of its Equity
Interests; provided that a portion of such class is held by any
Permitted Holder or

(ii) any payment of principal on, or purchase, redemption, defeasance or
other acquisition for value of Subordinated Debt owed to Lyondell
except for a payment of principal or interest at Stated Maturity.

"Permitted Holders" means Lyondell Chemical Company, Millennium Chemicals
Inc., Occidental Petroleum Company, the successor of any Permitted Holder
(including any entity that is a party to any merger or business combination
transaction to which such Permitted Holder shall be a party; provided that
immediately after such transaction Equity Interests having a majority of the
voting power of such entity's outstanding Equity Interests shall be held by
holders of Equity Interests of such Permitted Holder immediately prior to such
transaction), and the respective Subsidiaries of any of the foregoing.

"Permitted Investments" means:

(a) any Investment in Equistar or in a Restricted Subsidiary of Equistar
that is engaged in a Permitted Business;

(b) any Investment in Cash Equivalents;

(c) any Investment by Equistar or any Subsidiary of Equistar in a Person,
if as a result of such Investment; (a) such Person becomes a Restricted
Subsidiary of Equistar engaged in a Permitted Business or (b) such
Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all its assets to, or is liquidated
into, Equistar or a Restricted Subsidiary of Equistar engaged in a
Permitted Business;

(d) any non-cash consideration received as consideration in an Asset Sale
that was made pursuant to and in compliance with the covenant described
above under the caption "--Repurchase at Option of Holders--Asset
Sales;" (other than a joint venture interest received in full or
partial satisfaction of the 75% requirement in clause (ii) of the first
paragraph of such covenant);

(e) any acquisition of assets or Equity Interests solely in exchange for,
or out of the net cash proceeds of a substantially concurrent, issuance
of Equity Interests (other than Disqualified Stock) of Equistar;

(f) Hedging Obligations entered into in the ordinary course of business and
otherwise permitted under the indenture;

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(g) Investments in an Accounts Receivable Subsidiary that, as conclusively
determined by Equistar's partnership governance committee, are
necessary or advisable to effect a Receivables Facility;

(h) Investments in Unrestricted Subsidiaries and Joint Ventures in an
aggregate amount, taken together with all other Investments made in
reliance on this clause (h), not to exceed at any time outstanding $75
million (after giving effect to any reductions in the aggregate amount
of such Investments as a result of the disposition thereof, including
through liquidation, repayment or other reduction, including by way of
dividend or distribution, for cash, the aggregate amount of such
reductions not to exceed the aggregate amount of such Investments
outstanding and previously made pursuant to this clause (h));

(i) any Investment received by Equistar or any Restricted Subsidiary as
consideration for the settlement of any litigation, arbitration or
claim in bankruptcy or in partial or full satisfaction of accounts
receivable owed by a financially troubled Person to the extent
reasonably necessary in order to prevent or limit any loss by Equistar
or any of its Restricted Subsidiaries in connection with such accounts
receivable;

(j) loans to Lyondell; provided that such loans are made in compliance with
the covenant described under "--Certain Covenants--Transactions with
Affiliates;" and

(k) Limited Recourse Stock Pledges.

"Permitted Liens" means:

(1) Liens in favor of Equistar or any Subsidiary Guarantor;

(2) Liens securing the notes and the Subsidiary Guarantees;

(3) Limited Recourse Stock Pledges;

(4) Liens on property of a Person existing at the time it becomes a
Subsidiary or at the time it is merged into or consolidated with
Equistar or a Subsidiary; provided that such Liens were in existence
prior to the contemplation of such merger, consolidation or acquisition
and do not extend to any assets of Equistar or its Restricted
Subsidiaries other than those of the Person merged into or consolidated
with Equistar or that becomes a Restricted Subsidiary of Equistar;

(5) Liens on property (together with general intangibles and proceeds
related to such property) existing at the time of acquisition thereof
by Equistar or any Restricted Subsidiary of Equistar; provided that
such Liens were in existence prior to the contemplation of such
acquisition;

(6) Liens (including the interest of a lessor under a capital lease) on any
asset (together with general intangibles and proceeds related to such
property) existing at the time of acquisition thereof or incurred
within 180 days of the time of acquisition or completion of
construction thereof, whichever is later, to secure or provide for the
payment of all or any part of the purchase price (or construction
price) thereof (including obligations of the lessee under any such
capital lease);

(7) Liens imposed by law, such as carriers', warehousemen's and mechanics'
Liens on the property of Equistar or any Restricted Subsidiary;

(8) easements, building restrictions, rights-of-ways, irregularities of
title, and such other encumbrances or charges not interfering in any
material respect with the ordinary conduct of business of Equistar or
any of its Restricted Subsidiaries;

(9) Leases, subleases or licenses by Equistar or any of its Restricted
Subsidiaries as lessor, sublessor or licensor in the ordinary course of
business and otherwise permitted by the indenture;

(10) Liens securing reimbursement obligations with respect to commercial
letters of credit obtained in the ordinary course of business which
encumber documents and other property or assets relating to such
letters of credit and products and proceeds thereof;

(11) Liens in favor of custom and revenue authorities arising as a matter
of law to secure payment of nondelinquent customs duties in connection
with the importation of goods;

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(12) Liens encumbering customary initial deposits and margin deposits,
netting provisions and setoff rights, in each case securing
Indebtedness under Hedging Obligations;

(13) Liens incurred in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory,
contractual or warranty requirements of Equistar or its Restricted
Subsidiaries or any tender, bid, performance, government contract,
surety or appeal bonds or other obligations of a like nature for which
a reserve or other appropriate provision, if any, as shall be required
by GAAP shall have been made;

(14) Liens arising out of consignment or similar arrangements for the sale
of goods entered into by Equistar or any Restricted Subsidiary in the
ordinary course of business in accordance with industry practice;

(15) Liens incurred or assumed in connection with the issuance of revenue
bonds the interest on which is exempt from federal income taxation
pursuant to Section 103(b) of the Internal Revenue Code;

(16) Liens arising by reason of deposits necessary to qualify Equistar or
any Restricted Subsidiary to conduct business, maintain self insurance
or comply with any law;

(17) until the notes are rated Investment Grade, Liens securing Obligations
with respect to Indebtedness under our amended and restated credit
facility that is permitted to be incurred under clause (i) of the
second paragraph of the covenant described under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock" (including any paid-in-kind interest
thereon) and Hedging Obligations owed to any lender thereunder or
Affiliate thereof;

(18) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings, prejudgment Liens that are being contested in
good faith by appropriate proceedings and Liens arising out of
judgments or awards against Equistar or any Restricted Subsidiary with
respect to which Equistar or such Restricted Subsidiary at the time
shall be prosecuting an appeal or proceedings for review and with
respect to which it shall have secured a stay of execution pending
such appeal or proceedings for review; provided that in each case any
reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor;

(19) Liens securing assets under construction arising from progress or
partial payments by a customer of Equistar or its Restricted
Subsidiaries relating to such property or assets;

(20) Liens resulting from the deposit of funds or evidences of Indebtedness
in trust for the purpose of (a) defeasing Indebtedness of Equistar or
any of its Restricted Subsidiaries (which defeasance is otherwise
permitted under the indenture) having an aggregate principal amount at
any one time outstanding not to exceed $25 million or (b) defeasing
Indebtedness ranking pari passu with the notes; provided that the
notes are defeased concurrently with such Indebtedness;

(21) customary Liens for the fees, costs and expenses of trustees and
escrow agents pursuant to any indenture, escrow agreement or similar
agreement establishing a trust or escrow arrangement, and Liens
pursuant to merger agreements, stock purchase agreements, asset sale
agreements, option agreements and similar agreements in respect of the
disposition of property or assets of Equistar or any Restricted
Subsidiary on the property to be disposed of, to the extent such
dispositions are permitted hereunder;

(22) from and after the first date when the notes are rated Investment
Grade, Liens on any asset of Equistar other than Restricted Property;

(23) Liens on assets (other than Restricted Property) of Equistar or any
Restricted Subsidiary arising as a result of a Sale and Lease-Back
Transaction with respect to such assets; provided that the proceeds
from such Sale and Lease-Back Transaction are applied to the repayment
of Indebtedness or acquisition of Additional Assets or the making of
capital expenditures pursuant to the covenant described above under
the caption "--Repurchase at Option of Holders--Asset Sales;"

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(24) other Liens on assets of Equistar or any Restricted Subsidiary of
Equistar securing Indebtedness or other obligations that is permitted
by the terms of the indenture to be outstanding having an aggregate
principal amount at any one time outstanding not to exceed $50
million;

(25) Liens existing on the Issue Date, other than Liens securing
Indebtedness under our amended and restated credit facility;

(26) Liens on accounts receivable and related property deemed to arise in
connection with any Receivables Facility;

(27) the interest of a lessor or licensor under an operating lease or
license under which Equistar or any of its Restricted Subsidiaries are
lessee, sublessee, or licensee, including protective financing
statement filings;

(28) Liens to secure a Permitted Refinancing incurred to refinance
Indebtedness that was secured by a Lien permitted under the indenture
and that was incurred in accordance with the provisions of the
indenture; provided that such Liens do not extend to or cover any
property or assets of Equistar or any Restricted Subsidiary other than
assets or property securing the Indebtedness so refinanced; and

(29) from and after the first date when the notes are rated Investment
Grade, Liens upon Restricted Property securing Indebtedness or other
obligations in an aggregate principal amount which, together with the
aggregate outstanding principal amount of all other Indebtedness or
other obligations secured by Restricted Property of Equistar and its
Restricted Subsidiaries which would otherwise be subject to the
restrictions set forth in the covenant "--Certain Covenants--
Limitations on Liens" (not including Indebtedness or other obligations
permitted to be secured under clauses (1) to (28) inclusive above) and
the aggregate Value of the Sale and Lease-Back Transactions of any
Restricted Property in existence at the time of the incurrence of such
Indebtedness or other obligations (not including Sale and Lease-Back
Transactions as to which the proceeds from such Sale and Lease-Back
Transaction are applied to the repayment of Indebtedness or
acquisition of Additional Assets or the making of capital expenditures
pursuant to the covenant described above under the caption "--
Repurchase at Option of Holders--Asset Sales"), does not at such time
exceed 15% of the Consolidated Net Tangible Assets of Equistar and its
consolidated Subsidiaries as shown on the most recent audited annual
consolidated balance sheet delivered at such time pursuant to the
covenant "--Certain Covenants--Reports."

"Permitted Refinancing" means any Indebtedness of Equistar or any of its
Subsidiaries or Preferred Stock of a Finance Subsidiary issued in exchange for,
or the net proceeds of which are used solely to extend, refinance, renew,
replace, defease or refund, other Indebtedness of Equistar or any of its
Restricted Subsidiaries; provided that:

(i) the principal amount (or liquidation preference in the case of
Preferred Stock) of such Permitted Refinancing (or if such Permitted
Refinancing is issued at a discount, the initial issuance price of such
Permitted Refinancing) does not exceed the principal amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of any premiums paid and reasonable expenses
incurred in connection therewith);

(ii) such Permitted Refinancing or, in the case of Preferred Stock of a
Finance Subsidiary, the Indebtedness issued to such Finance
Subsidiary, has a Stated Maturity date later than the Stated Maturity
date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded;

(iii) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated by its terms in right of payment
to the notes or the Subsidiary Guarantees, such Permitted
Refinancing, or, in the case of Preferred Stock, the Indebtedness
issued to such Finance Subsidiary, has a Stated Maturity date later
than the Stated Maturity date of, and is subordinated by it

125

terms in right of payment to, the notes on subordination terms at least
as favorable to the holders of notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;

(iv) such Indebtedness is incurred by Equistar or a Subsidiary Guarantor
(or such Preferred Stock is issued by a Finance Subsidiary) if
Equistar or a Subsidiary Guarantor is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded;
and

(v) such Indebtedness is incurred by Equistar or a Restricted Subsidiary
(or such Preferred Stock is issued by a Finance Subsidiary) if a
Restricted Subsidiary that is not a Subsidiary Guarantor is the obligor
on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.

"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of preferred or preference stock of such Person which is
outstanding or issued on or after the date of the indenture.

"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof or
other entity of any kind.

"Qualified Equity Interests" shall mean all Equity Interests of a Person
other than Disqualified Stock of such Person.

"Rating Agency" means (i) S&P and (ii) Moody's or (iii) if neither S&P nor
Moody's shall exist, a nationally recognized securities rating agency or
agencies, as the case may be, selected by Equistar, which shall be substituted
for S&P or Moody's or both, as the case may be.

"Receivables Facility" means one or more receivables financing facilities or
arrangements, as amended from time to time, pursuant to which Equistar or any
of its Restricted Subsidiaries sells (including a sale in exchange for a
promissory note of or Equity Interest in an Accounts Receivable Subsidiary) its
accounts receivable, related assets and the provision of billing, collection
and other services in connection therewith, in each case to an Accounts
Receivable Subsidiary.

"Receivables Fees" means distributions or payments made directly or by means
of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not Equistar or a
Restricted Subsidiary in connection with, any Receivables Facility.

"Restricted Investment" means an Investment other than a Permitted
Investment.

"Restricted Property" means:

(a) Any plant for the production of petrochemicals owned by Equistar or a
Subsidiary, except (i) related facilities which in the opinion of
Equistar's partnership governance committee are transportation or
marketing facilities and (ii) any plant for the production of
petrochemicals which in the opinion of Equistar's partnership
governance committee is not a principal plant of Equistar and its
Subsidiaries; and

(b) Any shares of Capital Stock or Indebtedness of a Subsidiary owning
Restricted Property owned by Equistar or a Subsidiary.

"Restricted Subsidiary" of a Person means any Subsidiary of such Person that
is not an Unrestricted Subsidiary. Unless the context otherwise requires, each
reference to a "Restricted Subsidiary" shall refer to a Subsidiary of Equistar.

"S&P" means Standard & Poor's Ratings Group and its successors.

126

"Sale and Lease-Back Transaction" means any arrangement with any Person
(other than Equistar or a Subsidiary), or to which any such Person is a party,
providing for the leasing, pursuant to a capital lease that would at such time
be required to be capitalized on a balance sheet in accordance with GAAP, to
Equistar or a Restricted Subsidiary of any property or asset which has been or
is to be sold or transferred by Equistar or such Restricted Subsidiary to such
Person or to any other Person (other than Equistar or a Subsidiary), to which
funds have been or are to be advanced by such Person.

"Significant Subsidiary" means (1) Equistar Funding and (2) any Restricted
Subsidiary of Equistar that would be a "significant subsidiary" as defined in
Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities
Act of 1933, as amended, as such Regulation is in effect on the Issue Date.

"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness (or any later date established by any amendment to
such original documentation) and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.

"Subsidiary" means, with respect to any Person:

. any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person (or a combination thereof) or

. any partnership the sole general partner or the managing general partner
of which is such Person or a Subsidiary of such Person or the only
general partners of which are such Person or of one or more Subsidiaries
of such Person (or any combination thereof).

"Subsidiary Guarantor" means any Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the indenture, in each case,
until the Subsidiary Guarantee of such Person is released in accordance with
the provisions of the indenture.

"Unrestricted Subsidiary" means:

(i) any Subsidiary of Equistar that is designated by Equistar's partnership
governance committee as an Unrestricted Subsidiary pursuant to a
resolution,

(ii) any Subsidiary of an Unrestricted Subsidiary and

(iii) any Accounts Receivable Subsidiary.

Equistar's partnership governance committee may designate any Subsidiary of
Equistar (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Equity Interest or Indebtedness of, or holds any Lien on any property of,
Equistar or any other Subsidiary of Equistar that is not a Subsidiary of the
Subsidiary to be so designated; provided that:

(a) any Guarantee by Equistar or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated or any of its
Subsidiaries shall be deemed an "Incurrence" of such Indebtedness and
an "Investment" by Equistar or such Restricted Subsidiary (or both, if
applicable) at the time of such designation,

(b) either the Subsidiary to be so designated has total assets of $1,000 or
less or if such Subsidiary has assets greater than $1,000 such
designation would be permitted under the covenant described above under
the caption "--Certain Covenants--Restricted Payments," and

(c) if applicable, the Investment and the incurrence of Indebtedness
referred to in clause (a) of this proviso would be permitted under the
covenants described above under the caption "--Certain

127

Covenants--Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock," and "--Certain Covenants--Restricted
Payments."

Any such designation by Equistar's partnership governance committee of
Equistar pursuant to clause (i) above shall be evidenced to the trustee by
filing with the trustee a certified copy of the resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenants
described above under the caption "--Certain Covenants--Restricted Payments"
and "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness
and Issuance of Preferred Stock."

If at any time Equistar or any Restricted Subsidiary Guarantees any
Indebtedness of such Unrestricted Subsidiary or makes any other Investment in
such Unrestricted Subsidiary and such incurrence of Indebtedness or Investment
would not be permitted under the covenants described above under the caption
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock" and "--Certain Covenants--Restricted Payments,"
it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of Equistar as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant described above under the caption "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness and Issuance of Preferred Stock,"
Equistar shall be in default of such covenant). Equistar's partnership
governance committee may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of Equistar of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described above under the caption "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness and Issuance of Preferred Stock" and
(ii) no Default or Event of Default would be in existence following such
designation.

"Value" means, with respect to a Sale and Lease-Back Transaction, the amount
equal to the greater of (i) the net proceeds of the sale or transfer of the
property leased pursuant to such Sale and Lease-Back Transaction or (ii) the
fair value, in the opinion of Equistar's partnership governance committee, of
such property at the time of entering into such Sale and Lease-Back
Transaction, in either case divided first by the number of full years of the
term of the lease and then multiplied by the number of full years of such term
remaining at the time of determination, without regard to any renewal or
extension options contained in the lease.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:

(i) the sum of the products obtained by multiplying:

(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof, by

(b) the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by

(ii) the then outstanding principal amount of such Indebtedness.

"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Equity Interests of which (other
than directors' qualifying shares) shall at the time be owned by such Person
or by one or more Wholly Owned Restricted Subsidiaries of such Person or by
such Person and one or more Wholly Owned Restricted Subsidiaries of such
Person.

"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all the outstanding Equity Interests of which (other than directors'
qualifying shares) shall at the time be owned by such Person or by one or more
Wholly Owned Subsidiaries of such Person or by such Person and one or more
Wholly Owned Subsidiaries of such Person.

128

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the notes. Unless
otherwise stated, this summary deals only with notes held as capital assets by
U.S. Holders. As used in this summary, "U.S. Holders" are any beneficial owners
of the notes, that are, for United States federal income tax purposes: (1)
citizens or residents of the United States, (2) corporations created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia, (3) estates, the income of which is subject to United
States federal income taxation regardless of its source or (4) trusts if (A) a
court within the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more United States persons have the
authority to control all substantial decisions of the trust. As used in this
summary, "Non-U.S. Holders" are holders of the notes that are, for United
States federal income tax purposes (1) nonresident alien individuals; (2)
foreign corporations; or (3) foreign estates or trusts that are not subject to
United States federal income taxation on their worldwide income. If a
partnership (including for this purpose any entity treated as a partnership for
United States federal income tax purposes) is a beneficial owner of notes, the
treatment of a partner in the partnership will generally depend upon the status
of the partner and upon the activities of the partnership. Holders of notes
that are a partnership or partners in such partnership should consult their tax
advisors about the United States federal income tax consequences of holding and
disposing of the notes. This summary does not deal with special classes of
holders such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
or tax-exempt investors and does not discuss notes held as part of a hedge,
straddle, "synthetic security" or other integrated transaction. This summary
also does not address the tax consequences to U.S. expatriates, persons who
own, directly or indirectly, 10% or more of our capital or profits interests or
U.S. Holders that have a functional currency other than the U.S. dollar or the
tax consequences to shareholders, partners or beneficiaries of a holder of the
notes. Further, it does not include any description of any alternative minimum
tax consequences, United States federal estate or gift tax laws or the tax laws
of any state or local government or of any foreign government that may be
applicable to the notes.

This summary applies only to an initial investor that purchased outstanding
notes at their "issue price." The "issue price" of the notes will equal the
first price at which a substantial amount of the notes is sold for cash, not
including sales to bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers.
Holders that acquired outstanding notes at a price other than their issue
price, whether upon the original issuance of the notes or otherwise, should
contact their tax advisors regarding the manner in which any difference between
the issue price and the holder's tax basis in the new notes will be taken into
account in determining the holder's federal income tax liability with respect
to the new notes. This summary is based on the Internal Revenue Code of 1986,
as amended, the Treasury regulations promulgated thereunder and administrative
and judicial interpretations thereof, all as of the date hereof, and all of
which are subject to change and differing interpretations, possibly on a
retroactive basis. There can be no assurance that the Internal Revenue Service,
or IRS, will not challenge one or more of the conclusions described in this
prospectus, and we have not obtained, nor do we currently intend to obtain, a
ruling from the IRS with respect to the United States federal income tax
consequences of acquiring, holding or disposing of the notes.

YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE,
LOCAL AND FOREIGN INCOME, FRANCHISE, PERSONAL PROPERTY, AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.

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EXCHANGE OFFER

The exchange of any outstanding note for a new note in the exchange offer
described in "The Exchange Offer" should not constitute a taxable exchange of
the outstanding notes. As a result, the new notes should have the same issue
price (and adjusted issue price) immediately after the exchange and the same
amount of original issue discount, if any, as the outstanding notes, and each
holder should have the same adjusted tax basis and holding period in the new
notes as it had in the outstanding notes immediately before the exchange. The
following discussion assumes that the exchange of outstanding notes for new
notes pursuant to the exchange offer will not be treated as a taxable exchange
and that the outstanding notes and the new notes will be treated as the same
security for federal income tax purposes. Accordingly, the discussion below
makes no distinction between the outstanding notes and the new notes and
references to the original issuance of the notes below are to the original
issuance of the outstanding notes.

APPLICABILITY OF CONTINGENT PAYMENT RULES

The notes include certain contingent rights to payments of amounts in
addition to principal and stated interest, including the right to receive
liquidated damages as described under "Registration Rights Agreement--
Liquidated Damages" and the right to receive distributions of Additional
Dividend Notes as described under "Description of New Notes--Additional
Interest Upon Payment of Certain Permitted Dividends." As a result, the tax
consequences of ownership and disposition of the notes will be governed by the
rules applicable to contingent payment debt obligations unless an exception to
those rules applies.

The contingent payment rules do not apply if, at the time the notes were
issued and at the time of any later "deemed reissuance" of the notes as
described in "--U.S. Holders--Accrual of Original Issue Discount if the
Contingent Payment Rules Apply", the likelihood that any of the contingent
payments would be made, whether considered separately or in the aggregate, is
remote or if the timing and amount of every combination of contingent payments
that could possibly be made upon the notes is known and it is significantly
more likely than not that the only payments made on the notes would be the
scheduled payments of principal and stated interest. We believe, and will take
the position that, the notes are not currently subject to the contingent
payment rules because they qualified under these exceptions to those rules at
the time they were issued and no event of "deemed reissuance" has occurred or
is expected to occur.

In general, a holder of notes is bound by our determination herein that the
contingent payment rules do not apply unless the holder discloses in the proper
manner to the IRS that the holder is taking a different position. However, the
IRS is not bound by this determination. The IRS may determine, and a court may
agree, that neither exception applies. In that event, the contingent payment
rules would apply in the manner described in "--U.S. Holders--Accrual of
Original Issue Discount if the Contingent Payment Rules Apply." If the IRS were
to challenge our position that the contingent payment rules do not apply, we
would take such action as we considered prudent at that time, which could
include changing our position. In addition, if, contrary to our expectations,
holders of notes become entitled to receive a contingent payment in the future,
the notes may become subject to the contingent payment rules at that time, as
discussed below in "--U.S. Holders--Accrual of Interest if the Contingent
Payment Rules Do Not Apply."

The discussion above of the likelihood that contingent payments will be made
is solely for the purpose of determining a holder's interest accruals in
respect of the notes for United States federal income tax purposes and does not
constitute a representation that events giving rise to payments of liquidated
damages or Additional Dividend Notes will not occur.

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U.S. HOLDERS

ACCRUAL OF INTEREST IF THE CONTINGENT PAYMENT RULES DO NOT APPLY

As described above at "--Applicability of Contingent Payment Rules," we
believe that the contingent payment rules will not apply to the notes. Assuming
this is the case, all stated interest on the notes will be "qualified stated
interest" and there will be no "original issue discount" on the notes.
"Original issue discount" is the excess of all amounts, other than any
qualified stated interest, payable on a debt instrument over the issue price of
the debt instrument. The qualified stated interest on the notes will be taxable
to a U.S. Holder as ordinary interest income, as received or accrued, in
accordance with the holder's federal income tax method of accounting.

In the event that, contrary to our expectations, holders of notes became
entitled to receive liquidated damages, as described under "Registration Rights
Agreement--Liquidated Damages," or any other cash contingent payment, the
unexpected contingent payment generally would also be taken into account as
ordinary interest income, as received or accrued, in accordance with the
holder's federal income tax method of accounting. In the event that, contrary
to our expectations, holders of notes became entitled to distributions
of Additional Dividend Notes as described under "Description of New Notes--
Additional Interest Upon Payment of Certain Permitted Dividends," the
distribution of the Additional Dividend Notes would not be treated as a payment
on the underlying notes; instead, the Additional Dividend Notes would be
aggregated with the underlying notes and payments of interest and principal on
the Additional Dividend Notes would be treated as payments on the underlying
notes.

As a further consequence of the holders of the notes becoming entitled to
receive an unexpected contingent payment (other than a payment whose amount is
insignificant relative to the total expected amount of remaining payments on
the notes), the notes would, solely for purposes of determining the amount and
timing of future interest or original issue discount income for federal income
tax purposes, be treated as redeemed, then reissued for an amount equal to
their adjusted issue price. At the time of any such "deemed reissuance", the
notes would become subject to the contingent payment rules unless they
qualified for an exception to the contingent payment rules, such as the
exception for remote contingent payments described above at "--Applicability of
Contingent Payment Rules," as of the date of the deemed reissuance. Any
determination we made as to whether or not the exception for remote contingent
payments applied at the time of the deemed reissuance would be binding on the
holders, but not the IRS, to the same extent and in the same manner as
described above with respect to determinations made by us upon the original
issuance of the notes.

If the unexpected contingent payment was in the form of Additional Dividend
Notes and the underlying notes qualified for an exception to the contingent
payment rules upon their deemed reissuance as described above, the stated
interest payable on the Additional Dividend Notes would constitute "qualified
stated interest" on the underlying notes, taxable in the manner described
above. The right to receive payments of principal on the Additional Dividend
Notes would constitute original issue discount on the underlying notes. If the
original issue discount on the underlying notes was not "de minimis," it would
be taken into account as interest income by a U.S. Holder as it accrued over
the life of the notes on a constant yield basis, without regard to the holder's
method of accounting. Original issue discount would be "de minimis" if it was
less than the product of (i) 0.0025, (ii) the number of complete years from the
date of the deemed reissuance to maturity and (iii) the aggregate principal
amount due on the underlying notes (including the principal amount of the
Additional Dividend Notes). U.S. Holders may wish to contact their tax advisors
regarding the manner in which accruals of non-de minimis original issue
discount income would be calculated under the constant yield method.

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ACCRUAL OF ORIGINAL ISSUE DISCOUNT IF THE CONTINGENT PAYMENT RULES APPLY

The contingent payment rules would apply to the notes (1) from the date they
were originally issued, if the IRS asserted, and a court agreed, that our
position, described above at "--Applicability of Contingent Payment Rules,"
that the notes qualify for exceptions to the contingent payment rules, was
incorrect or (2) from the date of any deemed reissuance of the notes, as
described above at "--U.S. Holders--Accrual of Interest if the Contingent
Payment Rules Do Not Apply," if the notes qualified for an exception to the
contingent payment rules when issued and at the time of any prior deemed
reissuance but did not qualify for such an exception at the time of the latest
deemed reissuance.

Under the contingent payment rules, a U.S. Holder generally would be required
to accrue original issue discount income (taxable as interest) on the notes, in
the amounts described below, regardless of whether the holder uses the cash or
accrual method of tax accounting. Accordingly, U.S. Holders probably would be
required to include accruals of original issue discount in taxable income in
each year in excess of the stated interest rate of the notes and in excess of
any contingent interest payments actually received in that year, subject to
adjustments as described below. The amount of the original issue discount
income accruing each year would be determined using the four steps described
below.

First, we would be required to establish the "comparable yield" for the
notes. We would determine the comparable yield for the notes as the annual
yield we would incur, as of the initial issue date (or date of the deemed
reissuance that caused the rules to apply), on a fixed rate debt security with
no contingent payments, but with terms and conditions otherwise comparable to
those of the notes including the level of subordination, term, timing of
payments and general market conditions, but excluding any adjustments for
liquidity or the riskiness of the contingencies with respect to the notes.

Second, we would be required to provide to U.S. Holders, solely for United
States federal income tax purposes, a schedule of the projected amounts of
payments on the notes. This schedule would be required to produce the
comparable yield. Our determination of the projected payment schedule for the
notes would likely include estimates for payments of interest on Additional
Dividend Notes prior to maturity and principal on the Additional Dividend Notes
at maturity.

The comparable yield and the schedule of projected payments would not be
determined for any purpose other than for the determination of a holder's
interest accruals and adjustments thereof in respect of the notes for United
States federal income tax purposes and would not constitute a projection or
representation regarding the actual amounts payable to holders of the notes.

Since, as discussed above at "--Applicability of Contingent Payment Rules,"
we do not believe the contingent payment rules apply to the issuance of the
notes, we have not attempted to determine a comparable yield or projected
payment schedule for the notes. In the event of a deemed reissuance of the
notes as a result of a contingent payment actually becoming payable on the
notes, we would make an evaluation at that time whether the reissued notes were
subject to the contingent payment rules and make that information available to
holders of notes.

Third, a U.S. Holder would be required to accrue an amount of original issue
discount income (taxable as interest) for United States federal income tax
purposes, for each accrual period prior to and including the maturity date of
the notes that equals:

. the product of (i) the adjusted issue price (as defined below) of the
notes as of the beginning of the accrual period; and (ii) the comparable
yield of the notes, adjusted for the length of the accrual period;

. divided by the number of days in the accrual period; and

. multiplied by the number of days during the accrual period that the
holder held the notes.

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The adjusted issue price of a note would be its issue price (as defined
above) at the beginning of the first accrual period, and for any accrual period
after the first accrual period will be the sum of the issue price increased by
any interest income previously accrued, determined without regard to any
positive or negative adjustments to interest accruals described below and
decreased by the projected amounts of any payments with respect to the notes
through the beginning of the accrual period as set forth in the projected
payment schedule. For this purpose, none of the stated interest would be
treated as "qualified stated interest."

Finally, a U.S. Holder would be required to recognize additional original
issue discount income equal to the amount of any net positive adjustment, i.e.,
the excess of actual payments over projected payments, in respect of the notes
for a taxable year. If a U.S. Holder incurred a net negative adjustment, i.e.,
the excess of projected payments over actual payments, in respect of the notes
for a taxable year, the net negative adjustment generally would (i) reduce the
holder's original issue discount income on the notes for that taxable year, and
(ii) to the extent of any excess after the application of (i), give rise to an
ordinary loss to the extent of the holder's original issue discount income on
the notes during the prior taxable years, reduced to the extent such original
issue discount income was offset by prior negative adjustments. A difference
between projected payments and actual payments would not produce a deemed
reissuance of the type described above at "--U.S. Holders--Accrual of Interest
if the Contingent Payment Rules Do Not Apply" as to notes that were already
subject to the contingent payment rules.

For purposes of applying the contingent payment rules to any Additional
Dividend Notes that may be distributed as described under "Description of New
Notes--Additional Interest Upon Payment of Certain Permitted Dividends," the
possible issuance of Additional Dividend Notes generally would not be treated
as a projected payment on the underlying notes in creating the projected
payment schedule and the actual issuance of Additional Dividend Notes would not
be treated as a payment on the underlying notes in making positive and negative
adjustments as described above; rather, the payments of principal and interest
on the Additional Dividend Notes would be treated as payments on the underlying
notes. However, any positive or negative adjustment on account of payments due
on an Additional Dividend Note more than six months after the date the
Additional Dividend Note was issued would be taken into account, on a present
value basis, at the time the Additional Dividend Note was issued, or, if the
Additional Dividend Note constituted contingent interest on account of a
decline in our credit quality, over the period to which the contingent interest
related in a reasonable manner.

Prospective acquirors should consult their tax advisors as to the tax
considerations relating to debt instruments providing for payments such as the
liquidated damages or Additional Dividend Notes described above, particularly
in connection with the possible application of the contingent payment rules.

SALE, EXCHANGE OR REDEMPTION

Generally, the sale, exchange or redemption of notes will result in taxable
gain or loss to a U.S. Holder. The amount of gain or loss on a taxable sale,
exchange or redemption will be equal to the difference between (a) the amount
of cash plus the fair market value of any other property received by the U.S.
Holder in the sale, exchange or redemption (other than amounts attributable to
accrued but unpaid interest) and (b) the U.S. Holder's adjusted tax basis in
the notes. A U.S. Holder's adjusted tax basis in notes will generally be equal
to the holder's original purchase price for the notes.

However, if, contrary to our expectations, the notes were subject to the
original issue discount rules as a result of the application of the contingent
payment rules as discussed above at "--U.S. Holders--Accrual of Original Issue
Discount if the Contingent Payment Rules Apply" or as a result of a deemed
reissuance of the notes upon which the contingent payment rules did not apply,
as described at "--U.S. Holders--Accrual of Interest if the Contingent Payment
Rules Do Not Apply," the holder's basis would be increased by any original
issue discount income previously accrued by the holder, and decreased by the
amount of any payments on the notes, other than payments of qualified stated
interest, to the holder. For this purpose, in the case of a note to which the
contingent payment rules applied, the prior accruals of income would be
determined without regard

133

to any positive or negative adjustments to original issue discount accruals and
the amounts listed in the projected payment schedule for the notes would be
treated as the amounts actually paid on the notes.

If, contrary to our expectations, Additional Dividend Notes were issued as
described under "Description of New Notes--Additional Interest Upon Payment of
Certain Permitted Dividends," the Additional Dividend Notes would be treated as
part of the underlying notes as described above at "--Accrual of Interest if
the Contingent Payment Rules Do Not Apply" and "--Accrual of Original Issue
Discount if the Contingent Payment Rules Apply." A holder's tax basis would be
allocated proportionately between the underlying notes and the Additional
Dividend Notes distributed with respect to the underlying notes and no
distinction would be made between the two types of notes upon any sale,
exchange or redemption.

Assuming the contingent payment rules do not apply, gain or loss recognized
on the disposition of a note generally will be capital gain or loss, and will
be long-term capital gain or loss if, at the time of such disposition, the U.S.
Holder's holding period for the note is more than one year. A reduced tax rate
on capital gain will apply to an individual U.S. Holder if such holder's
holding period for the note is more than one year at the time of disposition.

If the contingent payment rules applied to the notes, gain recognized upon a
sale, exchange or redemption of notes would generally be treated as original
issue discount income (taxable as interest); any loss would be an ordinary loss
to the extent (i) the original issue discount previously included in income by
the holder as to the notes (including the total net positive adjustments of the
holder) exceeded (ii) the total net negative adjustments previously claimed as
ordinary loss by the holder, and thereafter would be a capital loss (which
would be long-term if the notes were held for more than one year). The
deductibility of net capital losses by individuals and corporations is subject
to limitations.

NON-U.S. HOLDERS

The rules governing United States federal income taxation of Non-U.S. Holders
are complex and no attempt will be made in this prospectus to provide more than
a summary of such rules. Non-U.S. Holders should consult with their own tax
advisors to determine the effect of federal, state, local and foreign income
tax laws, as well as treaties, with regard to an investment in the notes
including any reporting requirements and, in particular, the proper application
of the United States federal withholding tax rules.

PAYMENTS MADE WITH RESPECT TO THE NOTES

Except as described below, the 30% United States federal withholding tax will
not apply to any payment on the notes to a Non-U.S. Holder or any amounts taken
into income as original issue discount under the various rules described above
under "--U.S. Holders," provided that: (i) the Non-U.S. Holder does not own,
actually or constructively, 10% or more of our capital or profits interests;
(ii) the Non-U.S. Holder is not a controlled foreign corporation related,
directly or indirectly, to us or any of our constituent partners; (iii) the
Non-U.S. Holder is not a bank which acquired the notes in consideration for an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of business; (iv) the notes are deemed not to be a United
States real property interest within the meaning of Section 897(c)(1) of the
Internal Revenue Code (as described below under "--Sale or Exchange of Notes");
and (v) either (A) the beneficial owner of notes certifies to us or our paying
agent on IRS Form W-8BEN, under penalties of perjury, that it is not a United
States person and provides its name, address and certain other information or
(B) the beneficial owner holds its notes through certain foreign intermediaries
or certain foreign partnerships and such holder satisfies certain certification
requirements.

The exemption from United States federal withholding tax described in the
preceding paragraph does not apply to any contingent interest or original issue
discount on the notes that is determined by reference to distributions we make
on our equity interests, such as Permitted Dividends. As a result, the portion
of any interest or original issue discount on the notes attributable to a Non-
U.S. Holder's right to receive Additional Dividend Notes upon our payment of
certain Permitted Dividends may not be eligible for the exemption from

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withholding tax described above. This could include the portion of any accruals
of original issue discount under the contingent payment rules (if those rules
were to apply) attributable to the right to receive Additional Dividend Notes.
See "--Applicability of Contingent Payment Rules." Since we believe that only
the stated interest payments on the notes currently are required to be accrued
for federal income tax purposes, we do not currently intend to treat payments
made on the originally issued notes as ineligible for the exemption described
in the preceding paragraph. If we were to withhold from payments on notes to
Non-U.S. Holders in the future, such Non-U.S. Holders should consult their own
tax advisors as to whether they may be able to obtain a refund for all or a
portion of the withholding tax.

To the extent a Non-U.S. Holder for any reason does not qualify for the
withholding exemption described above, payments of interest (including amounts
taken into income under the original issue discount rules described above under
"-- U.S. Holders") will be subject to the 30% United States federal withholding
tax unless the Non-U.S. Holder provides us with a properly executed (1) IRS
Form W-8BEN (or successor form) claiming an exemption from or reduction in
withholding under an applicable tax treaty or (2) IRS Form W-ECI (or successor
form) stating that interest paid on the notes is not subject to withholding tax
because it is effectively connected with the Non-U.S. Holder's conduct of a
trade or business in the United States.

If a Non-U.S. Holder of the notes is engaged in a trade or business in the
United States, and if interest or original issue discount on the notes is
effectively connected with the conduct of such trade or business, the Non-U.S.
Holder, although exempt from the withholding tax discussed in the preceding
paragraphs, will generally be subject to regular United States federal income
tax on interest, original issue discount and any gain realized on the sale or
exchange of the notes in the same manner as if it were a U.S. Holder. Such a
Non-U.S. Holder will be required to provide to the withholding agent a properly
executed IRS Form W-8ECI (or successor form) in order to claim an exemption
from withholding tax. In addition, if such a Non-U.S. Holder is a foreign
corporation, such Non-U.S. Holder may be subject to a branch profits tax equal
to 30% (or such lower tax rate provided by an applicable treaty) of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments.

SALE OR EXCHANGE OF NOTES

A Non-U.S. Holder will generally not be subject to United States federal
income or withholding tax with respect to gain upon the sale, exchange, or
other disposition of notes, unless: (1) the income or gain is "U.S. trade or
business income," which means income or gain that is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business, or, in the case of a
treaty resident, attributable to a permanent establishment or a fixed base, in
the United States; (2) such Non-U.S. Holder is an individual who is present in
the United States for 183 days or more in the taxable year of disposition and
certain other conditions are met; (3) such Non-U.S. Holder is subject to tax
pursuant to the provisions of the Internal Revenue Code applicable to certain
United States expatriates; or (4) in the case of an amount which is
attributable to original issue discount, the Non-U.S. Holder does not meet the
conditions for exemption from United States federal withholding tax described
above.

U.S. trade or business income of a Non-U.S. Holder will generally be subject
to regular United States income tax in the same manner as if it were realized
by a U.S. Holder. Non-U.S. Holders that realize U.S. trade or business income
with respect to the notes should consult their tax advisors as to the treatment
of such income or gain. In addition, U.S. trade or business income of a Non-
U.S. Holder that is a corporation may be subject to a branch profits tax at a
rate of 30%, or such lower rate provided by an applicable income tax treaty.

Under the Foreign Investment in Real Property Tax Act, any person who
acquires a "United States real property interest" (as described below) from a
foreign person must deduct and withhold a tax equal to 10% of the amount
realized by the foreign transferor. In addition, a foreign person who disposes
of a United States real property interest generally is required to recognize
gain or loss that is subject to United States federal income tax. A "United
States real property interest" includes, under some circumstances, a portion of
any interest (other than an interest solely as a creditor) in a partnership
that owns United States real property. The notes should qualify as interests in
the partnership solely as creditors, regardless of whether any contingent
payments
are made on the notes. Accordingly, the Foreign Investment in Real Property Tax
Act withholding tax should not apply to the notes.

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BACKUP WITHHOLDING AND INFORMATION REPORTING

U.S. HOLDERS

Payments of interest made by us on, or the proceeds of the sale or other
disposition of, the notes may be subject to information reporting and U.S.
federal backup withholding tax (currently 30.5%) if the recipient of such
payment fails to supply an accurate taxpayer identification number or otherwise
fails to comply with applicable United States information reporting or
certification requirements. Any amount withheld from a payment to a U.S. Holder
under the backup withholding rules is allowable as a credit against the
holder's U.S. federal income tax, provided that the required information is
furnished to the IRS.

NON-U.S. HOLDERS

A Non-U.S. Holder may be required to comply with certification procedures to
establish that the holder is not a U.S. person in order to avoid backup
withholding tax requirements with respect to our payments of principal and
interest, including cash payments in respect of original issue discount, on the
notes.

The proper tax treatment of a holder of notes is uncertain in several
respects. Holders should consult their tax advisors regarding the federal,
state, local and foreign tax consequences of an investment in the notes and
whether an investment in the notes is advisable in light of the tax treatment
of the notes generally and the holder's particular tax situation.

BOOK-ENTRY, DELIVERY AND FORM

The new notes will initially be represented by one or more permanent global
notes in definitive, fully registered book-entry form (the "Global Notes") and
registered in the name of Cede & Co., as nominee of DTC. The Global Notes will
be deposited on behalf of the acquirors of the new notes with a custodian for
DTC for credit to the respective accounts of acquirors or such other accounts
as they direct DTC. See "The Exchange Offer--Procedures for Tendering--Book-
Entry Transfer."

THE GLOBAL NOTES

We expect that under procedures established by DTC:

. upon deposit of the Global Notes with DTC or its custodian, DTC will
credit on its internal system a portion of the Global Notes that shall
be composed of the corresponding respective amounts of the Global Notes
to the respective accounts of persons who have accounts with the
depository and

. ownership of the notes will be shown on, and the transfer or ownership
will be effected only through, records maintained by DTC or its nominee,
with respect to interests and records of participants and with respect
to interests of persons other than participants.

So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the Global Notes for all purposes under the
indenture and under the notes represented thereby. Except as provided below,
owners of beneficial interest in Global Notes will not:

. be entitled to have notes represented by Global Notes registered in
their names,

. receive or be entitled to receive physical delivery of certificates
notes or

. be considered the owners or holders of the Global Notes under the
indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the trustee.

Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof.
Neither Equistar, Equistar Funding, the trustee nor any paying agent under the
indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in a Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.

We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Note, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such Global Note as shown on the records of DTC or
its

136

nominee. We also expect that payments by participants to owners of beneficial
interests in a Global Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.

Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating
procedures.

We expect that DTC will take any action permitted to be taken by a holder of
notes, including the presentation of notes for exchange as described below,
only at the direction of one or more participants to whose account the DTC
interests in a Global Note is credited and only in respect of such portion of
the aggregate principal amount of notes as to which such participant or
participants has or have given such direction. However, if there is an event of
default under the indenture or the new notes, DTC will exchange the applicable
Global Notes for Certificated Notes, which it will distribute to its
participants.

Although DTC, Euroclear and Clearstream are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Clearstream, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither Equistar, Equistar Funding nor the trustee
will have any responsibility for the performance by DTC, Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.

DESCRIPTION OF DTC

The description of the operations and procedures of DTC set forth below is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to change from time to time.
We do not take any responsibility for these operations or procedures, and
investors are urged to contact DTC or its participants directly to discuss
these matters.

DTC has advised us that it is:

. a limited purpose trust company organized under the laws of the State of
New York;

. a "banking organization" within the meaning of New York Banking Law;

. a member of the Federal Reserve System;

. a "clearing corporation" within the meaning of the Uniform Commercial
Code; and

. a "Clearing Agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.

DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. DTC is owned by a
number of its participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc.

DTC's direct participants include:

. securities brokers and dealers;

. banks and trust companies; and

. clearing corporations and other organizations.

Indirect access to the DTC system is available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.

137

Investors who are not participants may beneficially own securities held by or
on behalf of DTC only through participants or indirect participants.

The rules applicable to DTC and its participants are on file with the SEC.

CERTIFICATED NOTES

Interest in the Global Notes may be exchanged for certificated securities if:

. we notify the trustee in writing that DTC is no longer willing or able
to act as a depositary or DTC ceases to be registered as a clearing
agency under the Securities Exchange Act and a successor depositary is
not appointed within 90 days of notice or cessation,

. we, at our option, notify the trustee in writing that we elect to cause
the issuance of notes in certificated form under the indenture or

. other events occur as provided in the indenture.

Upon the occurrence of any of the events described in the preceding sentence,
we will cause the appropriate certificated securities to be delivered.

Neither Equistar, Equistar Funding nor the trustee shall be liable for any
delay by DTC or any participant or indirect participant in identifying the
beneficial owners of the related notes, and each person may conclusively rely
on, and shall be protected in relying on, instructions from DTC for all
purposes, including with respect to the registration and delivery, and the
respective principal amounts, of the notes to be issued.

SAME DAY SETTLEMENT AND PAYMENT

The indenture requires that payments in respect of the notes represented by
the Global Notes be made by wire transfer of immediately available funds to the
accounts specified by holders of the Global Notes. With respect to notes in
certificated form, we will make all payments at the agency or office maintained
by the for that purpose or, at our option, by mailing a check to each holder's
registered address.

The notes represented by the Global Notes are expected to be eligible to
trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such notes will,
therefore, be required by DTC to be settled in immediately available funds. We
expect that secondary trading in any certificated notes will also be settled in
immediately available funds.

Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a global note by or through a Euroclear or Clearstream participant
to a participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.

138

REGISTRATION RIGHTS AGREEMENT

The description of the registration rights agreement set forth below is a
summary of the material provisions of the registration rights agreement. The
registration rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part.

EXCHANGE OFFER REGISTRATION STATEMENT

In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement. In the registration rights agreement, we agreed:

. to file an exchange offer registration statement with the SEC within 90
days after August 24, 2001,

. to use our best efforts to have it declared effective no later than 210
days after August 24, 2001,

. to keep the exchange offer for the notes open for a period of not less
than 20 business days and

. to cause the exchange offer to be consummated no later than the 30th
business day after the exchange offer registration statement is declared
effective by the SEC.

To participate in an exchange offer, you must represent that:

. you are not an "affiliate," as defined in Rule 144 of the Securities
Act, of Equistar or a broker-dealer tendering outstanding notes acquired
directly from Equistar for your own account;

. you have no arrangement or understanding with any person to participate
in a distribution of the outstanding notes or the new notes within the
meaning of the Securities Act;

. you are acquiring the new notes in the ordinary course of your business;
and

As soon as practicable after the exchange offer registration statement
becomes effective, we will offer the holders of outstanding notes who are not
prohibited by any law or policy of the SEC from participating in these exchange
offers the opportunity to exchange their outstanding notes for exchange notes
registered under the Securities Act that are substantially identical to the
outstanding notes, except that the exchange notes will not contain terms with
respect to transfer restrictions, registration rights and liquidated damages.

The registration rights agreement also provides that we:

. shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any
resale of any new notes and

. shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the notes, and will indemnify
some holders of the notes, including any broker-dealer, against
liabilities including liabilities under the Securities Act.

139

A broker-dealer that delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the registration rights
agreement, including some of the indemnification rights and obligations.

If the holder is a broker-dealer that will receive registered notes for its
own account in exchange for outstanding notes that were acquired as a result of
market making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such registered notes.

SHELF REGISTRATION STATEMENT

We will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of notes that are "transfer restricted
Securities" by those holders who provide required information in connection
with the shelf registration statement under the following circumstances:

. if the exchange offer as contemplated by the registration rights
agreement is not permitted by applicable law or SEC policy; or

. any holder of transfer restricted securities notifies us before the 20th
business day following the consummation of the exchange offer that it:

. is prohibited by law or SEC policy from participating in the
exchange offer,

. may not resell the new notes to the public without delivering a
prospectus, and the prospectus contained in the exchange offer
registration statement is not appropriate or available for resales
by the holder or

. is a broker-dealer and holds notes acquired directly from Equistar
or any of Equistar's affiliates.

If we are required to file a shelf registration statement, we will use our
reasonable best efforts to cause the SEC to declare effective the shelf
registration statement within 60 days after we are required to file a shelf
registration statement. In addition, each holder will be required to deliver
information to be used in connection with the shelf registration statement in
order to have its outstanding notes included in the shelf registration
statement. We will also use our reasonable best efforts to keep the shelf
registration statement effective for up to two years after August 24, 2001.

We will have the ability to suspend the shelf registration statement for no
more than:

. 60 days in the aggregate during the first 12 month period after August
24, 2001;

. 60 days in the aggregate during the 12 month period immediately
thereafter; and

. 90 days in the aggregate during any subsequent 12 month period

if we determine, in our reasonable best judgment upon written advice of
counsel, that continued effectiveness would require disclosure of confidential
information or interfere with any financing, acquisition, reorganization or
other material transaction involving Equistar or any of its subsidiaries.

A holder who sells notes under the shelf registration statement generally
will be:

. required to be named as a selling securityholder in the related
prospectus and to deliver a prospectus to purchasers,

. subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and

. bound by the provisions of the registration rights agreement which are
applicable to such a holder (including certain indemnification
obligations).

In addition, each holder of the notes will be required to deliver information
to be used in connection with the shelf registration statement in order to have
its notes included in the shelf registration statement, and we will not be
required to pay liquidated damages, as defined below, to a holder who has not
furnished certain information specified in the registration rights agreement.

140

For the purposes of the registration rights agreement, "transfer restricted
securities" mean:

.each outstanding note until the earliest to occur of:

-- the date on which such note is exchanged in an exchange offer for a
new note and entitled to be resold to the public by the holder
thereof without complying with the prospectus delivery requirements
of the Securities Act,

-- the date on which such outstanding note has been disposed of in
accordance with the shelf registration statement, and, if the
exchange offer has previously been completed, a new note is issued
to the purchaser,

-- the date on which such outstanding note is distributed to the public
pursuant to Rule 144 under the Securities Act and, if the exchange
offer has previously been completed, a new note is issued to the
purchaser or it is saleable pursuant to Rule 144(k), and

. each new note issued to a broker-dealer in the exchange offer until the
date on which such new note is disposed of by a broker-dealer pursuant
to the "Plan of Distribution" contemplated by this prospectus (including
delivery of this prospectus).

LIQUIDATED DAMAGES

The registration rights agreement provides that if there is a registration
default, we will be obligated to pay liquidated damages to each holder of
outstanding notes. A registration default occurs if:

. a registration statement is not timely filed with the SEC;

. a registration statement is not declared effective by the SEC on or
before the applicable deadline;

. the exchange offer is not consummated on or before the 30th business day
after the exchange offer registration statement is declared effective;
and

. a registration statement is declared effective but thereafter ceases to
be effective or useable.

Liquidated damages will be in an amount equal to $.05 per week per $1,000 in
principal amount of outstanding notes held by such holder for each week or
portion thereof that the registration default continues for the first 90 day
period immediately following the occurrence of such registration default. The
amount of the liquidated damages shall increase by an additional $.05 per week
per $1,000 in principal amount of outstanding notes with respect to each
subsequent 90 day period until all registration defaults have been cured, up to
a maximum amount of liquidated damages of $.25 per week per $1,000 in principal
amount of outstanding notes. We will not be required to pay liquidated damages
for more than one registration default at any given time. Following the cure of
all registration defaults, the accrual of liquidated damages will cease. We are
not required to pay liquidated damages to a holder who has not furnished to us
the information specified in the registration rights agreement.

We will pay all accrued liquidated damages to eligible holders in the same
manner and at the same time as interest on the notes is paid.

141

PLAN OF DISTRIBUTION

Based on interpretations by the staff of the SEC in no action letters issued
to third parties, we believe that you may transfer new notes issued under the
exchange offer in exchange for the outstanding notes if:

. you acquire the new notes in the ordinary course of your business; and

. you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes.

Broker-dealers receiving new notes in the exchange offer will be subject to a
prospectus delivery requirement with respect to resales of the new notes.

We believe that you may not transfer new notes issued under the exchange
offer in exchange for the outstanding notes if you are:

. our "affiliate" within the meaning of Rule 144 under the Securities Act;

. a broker-dealer that acquired outstanding notes directly from us; or

. a broker-dealer that acquired outstanding notes as a result of market-
making or other trading activities without compliance with the
registration and prospectus delivery provisions of the Securities Act.

To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange
offer, other than a resale of an unsold allotment from the original sale of the
outstanding notes, with the prospectus contained in the exchange offer
registration statement. In the registration rights agreement, we have agreed to
permit participating broker-dealers use of this prospectus in connection with
the resale of new notes. We have agreed that, for a period of up to 180 days
after the expiration of the exchange offer, we will make this prospectus, and
any amendment or supplement to this prospectus, available to any broker-dealer
that requests these documents in the letter of transmittal.

If you wish to exchange your outstanding notes for new notes in the exchange
offer, you will be required to make representations to us as described in "The
Exchange Offer--Purpose and Effect of the Exchange Offer" and "The Exchange
Offer--Your Representations to Us" of this prospectus and in the letter of
transmittal. In addition, if you are a broker-dealer who receives new notes for
your own account in exchange for outstanding notes that were acquired by you as
a result of market-making activities or other trading activities, you will be
required to acknowledge that you will deliver a prospectus in connection with
any resale by you of new notes.

We will not receive any proceeds form any sale of new notes by broker-
dealers. Broker-dealers who receive new notes for their own account in the
exchange offer may sell them from time to time in one or more transactions
either:

. in the over-the-counter market;

. in negotiated transactions;

. through the writing of options on the new notes or a combination of
methods of resale; or

. at prices related to prevailing market prices or negotiated prices.

Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
form any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offer
and any broker or dealer that participates in a distribution of new notes may
be deemed to be an "underwriter" within

142

the meaning of the Securities Act. Any profit on any resale of new notes and
any commissions or concessions or received by any persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.

We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any broker or dealers. We will indemnify
holders of the outstanding notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.

LEGAL MATTERS

Baker Botts L.L.P, Houston, Texas, counsel for Equistar and Equistar Funding,
has issued an opinion about the legality of the new notes.

EXPERTS

The consolidated financial statements for Equistar Chemicals, LP as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers, LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

The consolidated balance sheet of Lyondell Chemical Company as of December
31, 2000 included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers, LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The consolidated balance sheet of Millennium Chemicals, Inc. as of December
31, 2000 included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers, LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The consolidated balance sheet of Occidental Chemical Holding Corporation as
of December 31, 2000 included in this prospectus, have been audited by Arthur
Andersen, LLP independent public accountants, as indicated in their report with
respect thereto and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting.

143

FORWARD-LOOKING INFORMATION

Some of the statements contained in this prospectus are "forward-looking
statements" within the meaning of the federal securities laws. Although we
believe the expectations reflected in any forward-looking statements are
reasonable, they do involve assumptions, risks and uncertainties, and we can
give no assurance that these expectations will prove to have been correct. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of various factors, including:

. the cyclical nature of the chemical industry;

. uncertainties associated with the economy;

. substantial chemical industry capacity additions resulting in oversupply
and declining prices and margins;

. the availability and cost of raw materials;

. the availability of capital markets;

. current and potential governmental regulatory actions;

. operating interruptions, including leaks, explosions, fires, mechanical
failure, unscheduled downtime, labor difficulties, transportation
interruptions, spills and releases and other environmental risks; and

. our ability to implement our business strategies, including cost
reductions.

Many of these factors are beyond our ability to control or predict. Any one
of these factors, or a combination of these factors, could materially affect
our future results of operations and the ultimate accuracy of the forward-
looking statements. These forward-looking statements are not guarantees of our
future performance, and our actual results and future developments may differ
materially from those projected in the forward-looking statements. See "Risk
Factors." Management cautions against putting undue reliance on forward-looking
statements or projecting any future results based on forward-looking statements
or present or prior earnings levels.

Forward-looking statements in this prospectus or any documents we reference
in this prospectus are identifiable by use of the following words and other
similar expressions, among others:

. estimate . will . budget . forecast
. intend . project . could . should
. expect . anticipate . plan . may
. believe

We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information or otherwise. All oral or
written forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary
statements.

144

WHERE YOU CAN FIND MORE INFORMATION

We file reports and other information with the SEC. You may read and copy any
document we file with the SEC at the SEC's public reference room located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and, once occupied, at 233 Broadway, New York, New York, 10279. You may
obtain further information regarding the operation of the SEC's Public
Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also
available to the public on the SEC's Internet site located at
http://www.sec.gov. Our SEC filings are also available from our Website at
www.equistarchem.com. Information contained on our Website or any other Website
is not incorporated by reference into this prospectus and does not constitute a
part of this prospectus.

While the notes remain outstanding, and if we are not required to file
reports under the Securities Exchange Act of 1934, we will furnish to you or
any prospective purchaser designated by you, upon request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act,
to allow you to comply with Rule 144A in connection with resales of the notes.

We are "incorporating by reference" into this prospectus information we file
with the SEC, which means we are disclosing important information to you by
referring you to those documents. The information we incorporate by reference
is considered to be part of this prospectus, unless we update or supersede that
information by the information contained in this prospectus or the information
we file subsequently that is incorporated by reference into this prospectus. We
are incorporating by reference the following documents that we have filed with
the SEC:

. our Annual Report on Form 10-K for the fiscal year ended December 31,
2000;

. our Quarterly Reports on Form 10-Q for the three months ended March 31,
2001 and June 30, 2001; and

. our current reports on Form 8-K dated August 1, 2001, August 7, 2001,
August 15, 2001 and August 28, 2001.

Also incorporated by reference are all documents we file with the SEC before
termination of this exchange offer under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934.

You may also obtain a copy of our filings with the SEC as well as copies of
the indenture, registration rights agreement and other documents described
herein, other than an exhibit to those filings unless we have specifically
incorporated an exhibit by reference, at no cost, by writing to or telephoning
us at the following address:

Equistar Chemicals, LP
1221 McKinney, Suite 700
Houston, Texas 77010
Attn: Investor Relations
(713) 652-7200

145

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
-----

EQUISTAR CHEMICALS, LP
Unaudited Financial Statements
Consolidated Statements of Income--Three and Six Months Ended June
30, 2001 and 2000................................................... F-2
Consolidated Balance Sheets--As of June 30, 2001 and December 31,
2000................................................................ F-3
Consolidated Statements of Cash Flows--Six Months Ended June 30, 2001
and 2000............................................................ F-4
Notes to Consolidated Financial Statements........................... F-5
Audited Financial Statements
Report of Independent Accountants.................................... F-12
Consolidated Statements of Income--Years Ended December 31, 2000,
1999 and 1998....................................................... F-13
Consolidated Balance Sheets--As of December 31, 2000 and 1999........ F-14
Consolidated Statements of Cash Flows--Years Ended December 31, 2000,
1999 and 1998....................................................... F-15
Consolidated Statements of Partners' Capital--Years Ended December
31, 2000, 1999
and 1998............................................................ F-16
Notes to Consolidated Financial Statements........................... F-17

The consolidated balance sheets and notes thereto of each of Lyondell
Chemical Company on pages F-35 through F-68, Millennium Chemicals Inc. on
pages F-69 - F-93 and Occidental Chemical Holding Corporation on pages F-
94 through F-112 are included because each such company guarantees to
Equistar certain obligations of its wholly owned subsidiary that serves as
a general partner of Equistar.

LYONDELL CHEMICAL COMPANY
Unaudited Consolidated Balance Sheet
Consolidated Balance Sheet--As of June 30, 2001...................... F-35
Notes to Consolidated Balance Sheet ................................. F-36
Audited Consolidated Balance Sheet
Report of Independent Accountants.................................... F-46
Consolidated Balance Sheet--As of December 31, 2000.................. F-47
Notes to Consolidated Balance Sheet.................................. F-48
MILLENNIUM CHEMICALS INC.
Unaudited Consolidated Balance Sheet
Consolidated Balance Sheet--As of June 30, 2001...................... F-69
Notes to Consolidated Balance Sheet ................................. F-70
Audited Consolidated Balance Sheet
Report of Independent Accountants.................................... F-79
Consolidated Balance Sheet--As of December 31, 2000.................. F-80
Notes to Consolidated Balance Sheet.................................. F-81
OCCIDENTAL CHEMICAL HOLDING CORPORATION
Unaudited Consolidated Balance Sheet
Consolidated Balance Sheet--As of June 30, 2001...................... F-94
Notes to Consolidated Balance Sheet.................................. F-95
Audited Consolidated Balance Sheet
Report of Independent Public Accountants............................. F-99
Consolidated Balance Sheet--As of December 31, 2000.................. F-100
Notes to Consolidated Balance Sheet.................................. F-101

F-1

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE SIX
FOR THE THREE MONTHS MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------------- --------------
MILLIONS OF DOLLARS 2001 2000 2001 2000
------------------- ---------- ---------- ------ ------

SALES AND OTHER OPERATING REVENUES:
Unrelated parties.................... $ 1,239 $ 1,426 $2,552 $2,862
Related parties...................... 361 473 821 895
---------- ---------- ------ ------
1,600 1,899 3,373 3,757
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties.................. 1,194 1,257 2,507 2,588
Related parties.................... 328 377 738 744
Selling, general and administrative
expenses............................ 45 49 91 93
Research and development expense..... 10 10 20 19
Amortization of goodwill............. 9 8 17 16
Unusual charges...................... -- -- 22 --
---------- ---------- ------ ------
1,586 1,701 3,395 3,460
---------- ---------- ------ ------
Operating income (loss).............. 14 198 (22) 297
Interest expense....................... (45) (45) (91) (91)
Interest income........................ -- 1 -- 2
Other income (expense), net............ 1 (2) 6 --
---------- ---------- ------ ------
NET INCOME (LOSS)...................... $ (30) $ 152 $ (107) $ 208
========== ========== ====== ======

See Notes to Consolidated Financial Statements.

F-2

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
------------------- -------- ------------

ASSETS
Current assets:
Cash and cash equivalents........................... $ 57 $ 18
Accounts receivable:
Trade, net........................................ 477 568
Related parties................................... 134 190
Inventories......................................... 542 506
Prepaid expenses and other current assets........... 21 50
------ ------
Total current assets.............................. 1,231 1,332
Property, plant and equipment, net.................... 3,759 3,819
Investment in PD Glycol............................... 52 53
Goodwill, net......................................... 1,069 1,086
Other assets.......................................... 280 292
------ ------
Total assets.......................................... $6,391 $6,582
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade............................................. $ 380 $ 426
Related parties................................... 34 61
Current maturities of long-term debt................ 190 90
Other accrued liabilities........................... 150 166
------ ------
Total current liabilities......................... 754 743
Long-term debt, less current maturities............... 2,058 2,158
Other liabilities..................................... 149 141
Commitments and contingencies
Partners' capital:
Partners' accounts.................................. 3,432 3,540
Accumulated other comprehensive loss................ (2) --
------ ------ ---
Total partners' capital........................... 3,430 3,540
------ ------
Total liabilities and partners' capital............... $6,391 $6,582
====== ======

See Notes to Consolidated Financial Statements.

F-3

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX
MONTHS ENDED
JUNE 30,
-------------
MILLIONS OF DOLLARS 2001 2000
------------------- ------ -----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (107) $ 208
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................. 159 152
Decrease (increase) in accounts receivable.................... 145 (81)
Increase in inventories....................................... (34) (43)
(Decrease) increase in accounts payable....................... (73) 98
Decrease in other accrued liabilities......................... (16) (90)
Net change in other working capital accounts.................. 29 9
Net (gain) loss on disposition of property, plant and equip-
ment......................................................... (3) 2
Other......................................................... (5) 4
------ -----
Net cash provided by operating activities................... 95 259
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment................. (53) (48)
Purchase of business from AT Plastics, Inc..................... (7) --
Proceeds from sales of assets.................................. 4 3
------ -----
Net cash used in investing activities....................... (56) (45)
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under lines of credit............................ -- 20
Repayment of long-term debt.................................... -- (42)
Distributions to partners...................................... -- (230)
------ -----
Net cash used in financing activities....................... -- (252)
------ -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 39 (38)
Cash and cash equivalents at beginning of period................ 18 108
------ -----
Cash and cash equivalents at end of period...................... $ 57 $ 70
====== =====

See Notes to Consolidated Financial Statements.

F-4

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.BASIS OF PREPARATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 2000 included in the Equistar Chemicals, LP ("Equistar" or "Partnership")
2000 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Certain amounts from prior periods have been
reclassified to conform to the current period presentation.

2.COMPANY OPERATIONS

Equistar is a Delaware limited partnership, which commenced operations on
December 1, 1997. Equistar is owned 41% by Lyondell Chemical Company
("Lyondell"), 29.5% by Millennium Chemicals Inc. ("Millennium), and 29.5% by
Occidental Petroleum Corporation ("Occidental").

Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses")
which consist of 18 manufacturing facilities primarily on the U.S. Gulf Coast
and in the U.S. Midwest. The petrochemicals segment manufactures and markets
olefins, oxygenated products, aromatics and specialty products. Olefins include
ethylene, propylene and butadiene, and oxygenated products include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene ("HDPE"), low-density
polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"),
polypropylene, and performance polymers, all of which are used in the
production of a wide variety of consumer and industrial products. The
performance polymers include enhanced grades of polyethylene, including wire
and cable insulating resins, and polymeric powders. Effective June 1, 2001,
Equistar expanded its wire and cable business through the acquisition of the
low- and medium-voltage power cable materials business of AT Plastics, Inc.
Equistar accounted for the acquisition as a purchase, allocating $5 million of
the purchase price to property, plant and equipment and $2 million to
inventory.

3.UNUSUAL CHARGES

Equistar discontinued production at its Port Arthur, Texas polyethylene
facility on February 28, 2001 and shut down the facility. The asset values of
the Port Arthur production units were previously adjusted as part of a $96
million restructuring charge recognized in 1999. During the first quarter 2001,
Equistar recorded a $22 million additional charge, which included environmental
remediation liabilities of $7 million (see Note 8), severance benefits of $5
million, pension benefits of $2 million, and other exit costs of $3 million.
The severance and pension benefits covered approximately 125 people employed at
the Port Arthur facility. The remaining $5 million of the charge relates
primarily to the write down of certain inventories. Payments of $3 million and
$1 million for severance and exit costs, respectively, were made through June
30, 2001.

F-5

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

4.INVENTORIES

The components of inventories consisted of the following:

JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
------------------- -------- ------------

Finished goods......................................... $266 $273
Work-in-process........................................ 24 16
Raw materials.......................................... 159 123
Materials and supplies................................. 93 94
---- ----
Total inventories.................................... $542 $506
==== ====

5.PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:

JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
------------------- -------- ------------

Land................................................... $ 81 $ 78
Manufacturing facilities and equipment................. 5,849 5,769
Construction in progress............................... 105 134
------ ------
Total property, plant and equipment.................. 6,035 5,981
Less accumulated depreciation.......................... 2,276 2,162
------ ------
Property, plant and equipment, net................... $3,759 $3,819
====== ======

6.LONG-TERM DEBT

Long-term debt consisted of the following:

JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
------------------- -------- ------------

Bank credit facilities:
5-year revolving credit facility..................... $ 820 $ 820
Other debt obligations:
Medium-term notes (due 2001-2005).................... 121 121
9.125% Notes due 2002................................ 100 100
8.50% Notes due 2004................................. 300 300
6.50% Notes due 2006................................. 150 150
8.75% Notes due 2009................................. 598 598
7.55% Debentures due 2026............................ 150 150
Other................................................ 9 9
------ ------
Total long-term debt............................... 2,248 2,248
Less current maturities................................ 190 90
------ ------
Total long-term debt, net.......................... $2,058 $2,158
====== ======

In March 2001, Equistar secured an amendment to its credit facility making
certain financial ratio requirements less restrictive. As a result of the
amendment, the interest rate on the credit facility was increased from LIBOR
plus 5/8 of 1% to LIBOR plus 8/10 of 1%.

F-6

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Equistar expects to implement a new financing package in the third quarter of
2001. The financing will include an underwritten secured $1.0 billion credit
facility with term and revolving credit facilities. The financing also
contemplates $500 million of 7-year, non-call senior unsecured notes, which
will rank pari passu with existing Equistar notes. The term and revolving
credit facilities will extend the maturity of Equistar's existing credit
facility. In addition, given the poor current business environment, Equistar
anticipates that certain financial ratio requirements will be less restrictive
in the term and revolving credit facilities. The senior unsecured notes will be
offered only to qualified institutional buyers. Such notes will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an application exemption from
registration.

Lyondell remains a guarantor of certain Equistar debt. The consolidated
financial statements (unaudited) of Lyondell are filed as an exhibit to
Equistar's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001.

7.DERIVATIVE FINANCIAL INSTRUMENTS

Equistar enters into over-the-counter "derivatives", or price swap contracts,
for crude oil with Occidental Energy Marketing, Inc., a subsidiary of
Occidental, to help manage its exposure to commodity price risk with respect to
crude-oil related raw material purchases.

As of January 1, 2001, Equistar adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative
instruments are recorded on the balance sheet at fair value. Currently,
Equistar primarily uses cash flow hedges. Gains or losses from changes in the
fair value of the derivative used in a cash flow hedge are deferred in
accumulated other comprehensive income, to the extent the hedge is effective,
and subsequently reclassified to earnings to offset the impact of the
forecasted transaction.

Equistar's Partnership Governance Committee has authorized Equistar to enter
into certain hedge transactions, but does not permit speculative positions.
Equistar formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking the hedge. This process includes specific identification of the
hedging instrument and the hedge transaction, the nature of the risk being
hedged and the method for assessing the hedging instrument's effectiveness.
Both at the inception of the hedge and on an ongoing quarterly basis, Equistar
assesses whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items.

At December 31, 2000, price swap contracts covering 5.1 million barrels of
crude oil were outstanding. The carrying value and fair market value of these
derivative instruments at December 31, 2000 represented a liability of $13
million and was based on quoted market prices. The related loss was deferred on
the consolidated balance sheet. On January 1, 2001, in accordance with the
transition provisions of SFAS No. 133, Equistar reclassified the deferred loss
of $13 million to accumulated other comprehensive income as a transition
adjustment, representing the cumulative effect of an accounting change (see
Note 9).

As of June 30, 2001, the outstanding price swap contracts, which mature from
July 2001 through March 2002, covered 7.2 million barrels of crude oil. The
contracts were recognized at their fair value on June 30, 2001, resulting in an
unrealized loss of $2 million, of which 97% was deemed effective and recognized
in accumulated other comprehensive income. The ineffective portion, which was
less than $1 million, was recorded as a component of cost of sales in the
consolidated statements of income. The $2 million loss recorded in accumulated
other comprehensive income includes the unrecognized portion of the transition
adjustment and is expected to be reclassified to the consolidated statements of
income from July 2001 through March 2002.

F-7

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

During the second quarter 2001, Equistar entered into put options covering
1.9 million barrels of crude oil. The put options were not treated as hedges
for financial reporting purposes, but are intended to reduce Equistar's crude
oil-based raw material costs. As of June 30, 2001, the outstanding put option
contracts, which mature from August 2001 through December 2001, covered 1.7
million barrels of crude oil.

The following table summarizes activity affecting the fair value of
derivative instruments for the three and six months ended June 30, 2001:

FOR THE SIX
FOR THE THREE MONTHS ENDED
MONTHS ENDED JUNE 30,
MILLIONS OF DOLLARS JUNE 30, 2001 2001
------------------- ------------- ------------

Accumulated other comprehensive income (loss):
Balance at beginning of period.................... $(2) $ --
January 1, 2001 transition adjustment--reclassifi-
cation of December 31, 2000 deferred loss........ -- (13)
Unrealized gains on derivative instruments........ 8 18
Reclassification of realized gains on maturing de-
rivative instruments to earnings................. (8) (7)
--- -----
Unrealized loss on derivative instruments at June
30, 2001......................................... $(2) $ (2)
=== =====

8.COMMITMENTS AND CONTINGENCIES

Commitments--Equistar has various purchase commitments for materials,
supplies and services incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.

Indemnification Arrangements--Lyondell, Millennium and Occidental have each
agreed to provide certain indemnifications to Equistar with respect to the
petrochemicals and polymers businesses contributed by the partners. In
addition, Equistar agreed to assume third party claims that are related to
certain pre-closing contingent liabilities that are asserted prior to December
1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental, to the
extent the aggregate thereof does not exceed $7 million to each partner,
subject to certain terms of the respective asset contribution agreements. As of
June 30, 2001, Equistar had incurred a total of $17 million for these uninsured
claims and liabilities. Equistar also agreed to assume third party claims that
are related to certain pre-closing contingent liabilities that are asserted for
the first time after December 1, 2004 for Lyondell and Millennium, and for the
first time after May 15, 2005 for Occidental.

Environmental--Equistar's policy is to be in compliance with all applicable
environmental laws. Equistar is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. Equistar cannot
accurately predict future developments, such as increasingly strict
requirements of environmental laws, inspection and enforcement policies and
compliance costs therefrom which might affect the handling, manufacture, use,
emission or disposal of products, other materials or hazardous and non-
hazardous waste. Equistar's accrued liability for environmental matters as of
June 30, 2001 was $7 million and related to the Port Arthur facility, which was
permanently shut down on February 28, 2001.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the U.S. Environmental Protection Agency ("EPA").
As a result, the Texas Natural Resource Conservation Commission ("TNRCC") has
submitted a plan to the EPA to reach and demonstrate compliance with the ozone
standard by November 2007. Ozone is a product of the reaction between volatile
organic compounds ("VOCs") and nitrogen oxides ("NOx") in the presence of
sunlight, and is a principal component of smog.

F-8

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

The proposed plans for meeting the ozone standard focus on significant
reductions in NOx emissions. NOx emission reduction controls must be installed
at each of Equistar's six plants located in the Houston/Galveston region during
the next several years, well in advance of the 2007 deadline. Compliance with
the plan will result in increased capital investment, which could be between
$150 million and $300 million before the 2007 deadline, as well as higher
annual operating costs for Equistar. The timing and amount of these
expenditures are subject to regulatory and other uncertainties, as well as
obtaining the necessary permits and approvals. Equistar has been actively
involved with a number of organizations to help solve the ozone problem in the
most cost-effective manner and, in January 2001, Equistar and an organization
composed of industry participants filed a lawsuit against the TNRCC to
encourage adoption of their alternative plan to achieve the same air quality
improvement with less negative economic impact on the region. In June 2001, the
parties entered into a consent order with respect to the lawsuit. Pursuant to
the consent order, the TNRCC agreed to review, by June 2002, the scientific
data for ozone formation in the Houston/Galveston region. If the TNRCC
scientific review supports the industry group proposal, the TNRCC has agreed to
revise the NOx emission reduction requirements set forth in its original plan.
Such revision of the NOx emission reduction requirements would reduce
Equistar's estimated capital investments required to comply with the plans for
meeting the ozone standard.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is effective in reducing automotive emissions, 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 that MTBE may, in certain limited
circumstances, affect the taste and odor of drinking water supplies, and
thereby lead to possible public concerns.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. Such actions, to be effective, would require (i) a waiver
of the state's oxygenate mandate, (ii) Congressional action in the form of an
amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested, and less widely available
additive. California has twice sought a waiver of its oxygenate mandate.
California's request was denied by both the Clinton Administration and the Bush
Administration. At the federal level, a blue ribbon panel appointed by the EPA
issued its report on July 27, 1999. That report recommended, among other
things, reducing the use of MTBE in gasoline. During 2000, the EPA announced
its intent to seek legislative changes from Congress to give the EPA authority
to ban MTBE over a three-year period. Such action would only be granted through
amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE
utilizing rulemaking authority contained in the Toxic Substance Control Act. It
would take at least three years for such a rule to issue. In January 2001,
however, senior policy analysts at the U.S. Department of Energy presented a
study stating that banning MTBE would create significant economic risk. The
study did not identify any benefits from banning MTBE. Additionally, in early
2001, after a thorough evaluation of MTBE conducted in connection with proposed
amendments to the 1998 European Council directive on gasoline and diesel fuel
specifications, the European Union concluded that the use of MTBE in gasoline
does not present a health risk to the community or a risk to the environment,
and decided not to restrict the use of MTBE in the European Union. The EPA
initiatives mentioned above or other governmental actions could result in a
significant reduction in Equistar's MTBE sales. Equistar has developed
technologies to convert its process to produce alternate gasoline blending
components should it be necessary to reduce MTBE production in the future.

General--The Partnership is also subject to various lawsuits and proceedings.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon
the financial statements or liquidity of Equistar.

F-9

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

In the opinion of management, any liability arising from the matters
discussed in this Note is not expected to have a material adverse effect on the
financial statements or liquidity of Equistar. However, the adverse resolution
in any reporting period of one or more of these matters discussed in this Note
could have a material impact on Equistar's results of operations for that
period without giving effect to contribution or indemnification obligations of
co-defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.

9.COMPREHENSIVE INCOME

Comprehensive income (loss) consisted of the following:

FOR THE
THREE FOR THE
MONTHS SIX MONTHS
ENDED ENDED JUNE
JUNE 30, 30,
---------- -----------
2001 2000 2001 2000
---- ---- ----- ----

Net income (loss)....................................... $(30) $152 $(107) $208
Other comprehensive income (loss):
SFAS No. 133 transition adjustment.................... -- -- (13) --
Unrealized gains on derivative instruments--effective
portion.............................................. 8 -- 18 --
Reclassification of gains on derivative instruments to
earnings............................................. (8) -- (7) --
Unrealized gains on securities........................ 1 -- -- --
---- ---- ----- ----
Total other comprehensive income (loss)................. 1 -- (2) --
---- ---- ----- ----
Comprehensive income (loss)............................. $(29) $152 $(109) $208
==== ==== ===== ====

The transition adjustment represents the cumulative effect of an accounting
change, resulting from the adoption of SFAS No. 133 as of January 1, 2001.

Equistar accounts for certain investments as "available-for-sale" securities
in accordance with the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, changes in the fair
value of the investments are recognized in the balance sheet and the unrealized
holding gains and losses are recognized in other comprehensive income.

F-10

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

10.SEGMENT AND RELATED INFORMATION

Equistar has two reportable segments in which it operates: (i)
petrochemicals; and (ii) polymers. Summarized financial information concerning
Equistar's reportable segments is shown in the following table:

MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS TOTAL
------------------- -------------- -------- ----------- ------------ ------

FOR THE THREE MONTHS
ENDED JUNE 30, 2001:
Sales and other operat-
ing revenues:
Customers............. $1,084 $ 516 $ -- $ -- $1,600
Intersegment.......... 391 -- -- (391) --
------ ------ ----- ----- ------
Total sales and operat-
ing revenues........... 1,475 516 -- (391) 1,600
Operating income
(loss)................. 81 (23) (44) -- 14
Interest expense........ -- -- (45) -- (45)
Other income, net....... -- -- 1 -- 1
Net income (loss)....... 81 (23) (88) -- (30)

FOR THE THREE MONTHS
ENDED JUNE 30, 2000:
Sales and other operat-
ing revenues:
Customers............. $1,304 $ 595 $ -- $ -- $1,899
Intersegment.......... 466 -- -- (466) --
------ ------ ----- ----- ------
Total sales and operat-
ing revenues........... 1,770 595 -- (466) 1,899
Operating income
(loss)................. 267 (23) (46) -- 198
Interest expense........ -- -- (45) -- (45)
Interest income......... -- -- 1 -- 1
Other expense, net...... -- -- (2) -- (2)
Net income (loss)....... 267 (23) (92) -- 152
FOR THE SIX MONTHS ENDED
JUNE 30, 2001:
Sales and other operat-
ing revenues:
Customers............. $2,315 $1,058 $ -- $ -- $3,373
Intersegment.......... 849 -- -- (849) --
------ ------ ----- ----- ------
Total sales and operat-
ing revenues........... 3,164 1,058 -- (849) 3,373
Operating income
(loss)................. 196 (112) (106) -- (22)
Interest expense........ -- -- (91) -- (91)
Other income, net....... -- -- 6 -- 6
Net income (loss)....... 196 (112) (191) -- (107)

FOR THE SIX MONTHS ENDED
JUNE 30, 2000:
Sales and other operat-
ing revenues:
Customers............. $2,546 $1,211 $ -- $ -- $3,757
Intersegment.......... 940 -- -- (940) --
------ ------ ----- ----- ------
Total sales and operat-
ing revenues........... 3,486 1,211 -- (940) 3,757
Operating income
(loss)................. 439 (54) (88) -- 297
Interest expense........ -- -- (91) -- (91)
Interest income......... -- -- 2 -- 2
Net income (loss)....... 439 (54) (177) -- 208

The "Operating income (loss)" amounts presented above in the "Unallocated"
column consist of expenses not allocated to the petrochemicals and polymers
segments, principally general and administrative expenses. Additionally, for
the six months ended June 30, 2001, the $106 million includes $22 million of
unusual charges related to the Port Arthur shutdown costs.

F-11

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partnership Governance Committee
of Equistar Chemicals, LP

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of partners'
capital and of cash flows present fairly, in all material respects, the
financial position of Equistar Chemicals, LP (the "Partnership") and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 12, 2001

F-12

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED
DECEMBER 31,
----------------------
MILLIONS OF DOLLARS 2000 1999 1998
------------------- ------ ------ ------

SALES AND OTHER OPERATING REVENUES:
Unrelated parties..................................... $5,770 $4,506 $3,987
Related parties....................................... 1,725 1,088 537
------ ------ ------
7,495 5,594 4,524
------ ------ ------
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties................................... 5,417 4,069 3,437
Related parties..................................... 1,491 933 491
Selling, general and administrative expenses.......... 182 259 229
Research and development expense...................... 38 42 40
Amortization of goodwill and other intangibles........ 33 33 31
Restructuring and other unusual charges............... -- 96 14
------ ------ ------
7,161 5,432 4,242
------ ------ ------
Operating income...................................... 334 162 282
Interest expense........................................ (185) (182) (156)
Interest income......................................... 4 6 17
Other income, net....................................... -- 46 --
------ ------ ------
NET INCOME AND COMPREHENSIVE INCOME..................... $ 153 $ 32 $ 143
====== ====== ======

See Notes to Consolidated Financial Statements.

F-13

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-------------
MILLIONS OF DOLLARS 2000 1999
------------------- ------ ------

ASSETS
Current assets:
Cash and cash equivalents...................................... $ 18 $ 108
Accounts receivable:
Trade, net................................................... 568 491
Related parties.............................................. 190 209
Inventories.................................................... 506 520
Prepaid expenses and other current assets...................... 50 32
------ ------
Total current assets......................................... 1,332 1,360
Property, plant and equipment, net............................... 3,819 3,926
Investment in PD Glycol.......................................... 53 52
Goodwill, net.................................................... 1,086 1,119
Other assets..................................................... 292 279
------ ------
Total assets................................................. $6,582 $6,736
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade........................................................ $ 426 $ 424
Related parties.............................................. 61 35
Current maturities of long-term debt........................... 90 92
Other accrued liabilities...................................... 166 233
------ ------
Total current liabilities.................................... 743 784
Long-term debt, less current maturities.......................... 2,158 2,169
Other liabilities................................................ 141 121
Commitments and contingencies.................................... -- --
Partners' capital................................................ 3,540 3,662
------ ------
Total liabilities and partners' capital.......................... $6,582 $6,736
====== ======

See Notes to Consolidated Financial Statements.

F-14

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR
ENDED DECEMBER
31,
------------------
MILLIONS OF DOLLARS 2000 1999 1998
------------------- ---- ---- ------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $153 $ 32 $ 143
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 310 300 268
Net loss on disposition of assets........................ 5 35 8
(Increase) decrease in accounts receivable............... (58) (213) 105
Decrease in receivables from partners.................... -- -- 150
Decrease in inventories.................................. 14 17 118
Increase in accounts payable............................. 28 119 98
Decrease in payables to partners......................... -- (6) (66)
(Decrease) increase in other accrued liabilities......... (65) 82 64
Net change in other working capital accounts............. (18) (5) 2
Other.................................................... (30) (17) (59)
---- ---- ------
Net cash provided by operating activities.............. 339 344 831
---- ---- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment............ (131) (157) (200)
Proceeds from sales of assets............................. 4 75 3
---- ---- ------
Net cash used in investing activities.................. (127) (82) (197)
---- ---- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (payments) under lines of credit............ 20 (502) 502
Proceeds from issuance of long-term debt.................. -- 898 --
Payment of debt issuance costs............................ -- (6) --
Repayments of long-term debt.............................. (42) (150) (35)
Repayments of obligations under capital leases............ -- (205) --
Distributions to partners................................. (280) (255) (1,421)
Proceeds from Lyondell note repayment..................... -- -- 345
---- ---- ------
Net cash used in financing activities.................. (302) (220) (609)
---- ---- ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (90) 42 25
Cash and cash equivalents at beginning of period........... 108 66 41
---- ---- ------
Cash and cash equivalents at end of period................. $ 18 $108 $ 66
==== ==== ======

See Notes to Consolidated Financial Statements.

F-15

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

MILLIONS OF DOLLARS LYONDELL MILLENNIUM OCCIDENTAL TOTAL
------------------- -------- ---------- ---------- ------

BALANCE AT JANUARY 1, 1998............... $1,055 $2,008 $ -- $3,063
Capital contributions:
Net assets........................... -- -- 2,097 2,097
Other................................ (14) 9 8 3
Net income (loss)...................... 84 64 (5) 143
Distributions to partners.............. (512) (460) (449) (1,421)
------ ------ ------ ------
BALANCE AT DECEMBER 31, 1998............. 613 1,621 1,651 3,885
Net income............................. 14 9 9 32
Distributions to partners.............. (105) (75) (75) (255)
------ ------ ------ ------
BALANCE AT DECEMBER 31, 1999............. 522 1,555 1,585 3,662
Net income............................. 63 45 45 153
Distributions to partners.............. (114) (83) (83) (280)
Other.................................. 5 -- -- 5
------ ------ ------ ------
BALANCE AT DECEMBER 31, 2000............. $ 476 $1,517 $1,547 $3,540
====== ====== ====== ======

See Notes to Consolidated Financial Statements.

F-16

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.FORMATION OF THE PARTNERSHIP AND OPERATIONS

Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell
Chemical Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium")
formed Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium.
Lyondell owns its interest in Equistar through two wholly owned subsidiaries,
Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc.
("Lyondell LP"). Millennium also owns its interest in Equistar through two
wholly owned subsidiaries, Millennium Petrochemicals GP LLC and Millennium
Petrochemicals LP LLC ("Millennium LP").

On May 15, 1998, Equistar was expanded with the contribution of certain
assets from Occidental Petroleum Corporation ("Occidental") (see Note 3). These
assets included the ethylene, propylene and ethylene oxide ("EO") and EO
derivatives businesses and certain pipeline assets held by Oxy Petrochemicals
Inc. ("Oxy Petrochemicals"), a former subsidiary of Occidental, a 50% interest
in a joint venture ("PD Glycol") between PDG Chemical Inc. and E.I. DuPont de
Nemours and Company, and a lease to Equistar of the Lake Charles, Louisiana
olefins plant and related pipelines held by Occidental Chemical Corporation
("Occidental Chemical") (collectively, "Occidental Contributed Business").
Occidental Chemical and PDG Chemical Inc. are both wholly owned, indirect
subsidiaries of Occidental. The Occidental Contributed Business included
olefins plants at Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol
("EG") and EG derivatives businesses located at Bayport, Texas, Occidental's
50% ownership of PD Glycol which operates EO/EG plants at Beaumont, Texas, 950
miles of owned and leased ethylene/propylene pipelines, and the lease to
Equistar of the Lake Charles, Louisiana olefins plant and related pipelines.

In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was
admitted as a general partner in Equistar for an aggregate partnership interest
of 29.5%. In addition, Equistar assumed approximately $205 million of
Occidental indebtedness and Equistar issued a promissory note to an Occidental
subsidiary in the amount of $420 million, which was subsequently paid in cash
in June 1998. In connection with the contribution of the Occidental Contributed
Business and the reduction of Millennium's and Lyondell's ownership interests
in the Partnership, Equistar also issued a promissory note to Millennium LP in
the amount of $75 million, which was subsequently paid in June 1998. These
payments are included in "Distributions to partners" in the accompanying
Statements of Partners' Capital and of Cash Flows. The consideration paid for
the Occidental Contributed Business was determined based upon arms-length
negotiations between Lyondell, Millennium and Occidental. In connection with
the transaction, Equistar and Occidental also entered into a long-term
agreement for Equistar to supply the ethylene requirements for Occidental
Chemical's U.S. manufacturing plants.

Upon completion of this transaction, Equistar is now owned 41% by Lyondell,
29.5% by Millennium and 29.5% by Occidental, all through wholly owned
subsidiaries.

Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses"),
which consist of 17 manufacturing facilities primarily on the U.S. Gulf Coast
and in the U.S. Midwest. The petrochemicals segment manufactures and markets
olefins, oxygenated products, aromatics and specialty products. Olefins include
ethylene, propylene and butadiene, and oxygenated products include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene ("HDPE"), low-density
polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"),
polypropylene, and performance polymers, all of which are used in the
production of a wide variety of

F-17

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

consumer and industrial products. The performance polymers include enhanced
grades of polyethylene, including wire and cable insulating resins, and
polymeric powders. The concentrates and compounds business, which was part of
performance polymers products, was sold effective April 30, 1999 (see Note 5).

The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of nine representatives, three appointed by
each partner. Most of the significant decisions of the Partnership Governance
Committee require unanimous consent, including approval of the Partnership's
Strategic Plan and annual updates thereof.

Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based upon their percentage ownership of Equistar.
Distributions are made to the partners based upon their percentage ownership of
Equistar. Additional cash contributions required by the Partnership will also
be based upon the partners' percentage ownership of Equistar.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated financial statements include the
accounts of Equistar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition--Revenue from product sales is recognized upon delivery
of products to the customer.

Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Equistar's
policy is to invest cash in conservative, highly rated instruments and limit
the amount of credit exposure to any one institution. Equistar performs
periodic evaluations of the relative credit standing of these financial
institutions which are considered in Equistar's investment strategy.

Equistar has no requirements for compensating balances in a specific amount
at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at Equistar's discretion. As a
result, none of Equistar's cash is restricted.

Accounts Receivable--Equistar sells its products primarily to companies in
the petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain
circumstances, requires letters of credit from them. The Partnership's
allowance for doubtful accounts, which is reflected in the accompanying
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $9
million and $6 million at December 31, 2000 and 1999, respectively.

Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years. Upon retirement or sale, Equistar removes the cost
of the assets and the related accumulated depreciation from the accounts and
reflects any resulting gains or losses in the Consolidated Statements of
Income. Equistar's policy is to capitalize interest cost incurred on debt
during the construction of major projects exceeding one year.

F-18

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with substantial overhauls or maintenance
turnarounds of production units at Equistar's manufacturing facilities are
deferred and amortized on a straight-line basis until the next planned
turnaround, generally five to seven years. These costs are maintenance, repair
and replacement costs that are necessary to maintain, extend and improve the
operating capacity and efficiency rates of the production units. Equistar
amortized $24 million, $25 million and $20 million of deferred turnaround
maintenance and repair costs for the years ended December 31, 2000, 1999 and
1998, respectively.

Deferred Software Costs--Costs to purchase and develop software for internal
use are deferred and amortized on a straight-line basis over a range of 3 to 10
years. Equistar amortized $13 million, $12 million and $6 million of deferred
software costs for the years ended December 31, 2000, 1999 and 1998,
respectively.

Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill
recorded in connection with the contribution of Occidental's assets. Goodwill
is being amortized using the straight-line method over 40 years. Accumulated
amortization of goodwill was $232 million, $199 million and $166 million at
December 31, 2000, 1999 and 1998, respectively.

Investment in PD Glycol--Equistar holds a 50% interest in a joint venture
with E.I. DuPont de Nemours and Company that owns an ethylene glycol facility
in Beaumont, Texas. This investment was contributed by Occidental in 1998. The
investment in PD Glycol is accounted for using the equity method of accounting.
At December 31, 2000 and 1999, Equistar's underlying equity in the net assets
of PD Glycol exceeded the cost of the investment by $7 million and $8 million,
respectively. The excess is being accreted into income on a straight-line basis
over a period of 25 years.

Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can be reasonably estimated. The estimated
liabilities have not been discounted to present value. Environmental
remediation costs are expensed or capitalized in accordance with accounting
principles generally accepted in the United States of America.

Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.

Income Taxes--The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is
no provision for income taxes in the accompanying financial statements.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Comprehensive Income--Equistar had no items of other comprehensive income
during the years ended December 31, 2000, 1999 and 1998.

Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, Equistar reviews its long-lived assets, including goodwill, for impairment
on an exception basis whenever events or changes in circumstances indicate a
potential loss in utility. Impairment losses are recognized in "Restructuring
and other unusual charges" in the Consolidated Statements of Income.

F-19

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Derivatives--Adoption of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, did not have a significant impact on the Consolidated
Financial Statements of Equistar. The statement is effective for Equistar's
calendar year 2001.

Reclassifications--Certain previously reported amounts have been reclassified
to conform to classifications adopted in 2000.

3.OCCIDENTAL CONTRIBUTED BUSINESS

On May 15, 1998, Equistar was expanded with the contribution of certain
assets from Occidental. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations for these
assets are included in the accompanying Consolidated Statements of Income
prospectively from May 15, 1998. Occidental contributed assets and liabilities
to Equistar with a net fair value of $2.1 billion in exchange for a 29.5%
interest in the Partnership. Equistar also issued a promissory note to an
Occidental subsidiary in the amount of $420 million, which was subsequently
paid in cash in June 1998. The fair value was allocated to the assets
contributed and liabilities assumed based upon the estimated fair values of
such assets and liabilities at the date of the contribution. The fair value was
determined based upon a combination of internal valuations performed by
Lyondell, Millennium and Occidental using the income approach. The fair values
of the assets contributed and liabilities assumed by the Partnership on May 15,
1998 were as follows:

MILLIONS OF DOLLARS
-------------------

Total current assets................................................. $ 281
Property, plant and equipment........................................ 1,964
Investment in PD Glycol.............................................. 58
Goodwill............................................................. 43
Deferred charges and other assets.................................... 49
------
Total assets....................................................... $2,395
======
Other current liabilities............................................ $ 79
Long-term debt....................................................... 205
Other liabilities and deferred credits............................... 14
Partners' capital.................................................... 2,097
------
Total liabilities and partners' capital............................ $2,395
======

The unaudited pro forma combined historical results of Equistar as if the
Occidental Contributed Business had been contributed on January 1, 1998 were as
follows:

FOR THE YEAR
ENDED
DECEMBER 31,
MILLIONS OF DOLLARS 1998
------------------- ------------

Sales and other operating revenues.............................. $4,869
Restructuring and other unusual charges......................... 14
Operating income................................................ 320
Net income...................................................... 154

The unaudited pro forma data presented above are not necessarily indicative
of the results of operations of Equistar that would have occurred had such
transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.

F-20

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4.RELATED PARTY TRANSACTIONS

Product Transactions with Lyondell-- Lyondell has purchased benzene,
ethylene, propylene and other products at market-related prices from Equistar
since Lyondell's acquisition of ARCO Chemical Company in July 1998. Currently,
Equistar sells ethylene, propylene and benzene to Lyondell at market-related
prices pursuant to agreements dated effective as of August 1999. Under the
agreements, Lyondell is required to purchase 100% of its benzene, ethylene and
propylene requirements for its Channelview and Bayport, Texas facilities, with
the exception of quantities of one product that Lyondell is obligated to
purchase under a supply agreement with an unrelated third party entered into
prior to 1999 and expiring in 2015. The initial term of each of the agreements
between Equistar and Lyondell expires on December 31, 2014. After the initial
term, each of those agreements automatically renews for successive one-year
periods and either party may terminate any of the agreements on one year's
notice. The pricing terms under the agreements between Equistar and Lyondell
are similar to the pricing terms under the ethylene sales agreement between
Equistar and Occidental Chemical. In addition, a wholly owned subsidiary of
Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a
significant portion of the MTBE produced by Equistar at one of its two
Channelview units at market-related prices. Sales to Lyondell totaled $572
million, $242 million and $89 million for the years ended December 31, 2000 and
1999 and for the period from August 1, 1998 to December 31, 1998, respectively.
Purchases from Lyondell totaled $2 million, $6 million and $2 million for the
years ended December 31, 2000 and 1999 and for the period from August 1, 1998
to December 31, 1998, respectively.

Product Transactions with Occidental Chemical--Equistar and Occidental
Chemical entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales
Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental
Chemical agreed to purchase an amount of ethylene from Equistar equal to 100%
of the ethylene feedstock requirements of Occidental Chemical's United States
plants less any quantities up to 250 million pounds tolled in accordance with
the provisions of such agreement. Upon three years notice from either party to
the other, Equistar's maximum supply obligation in any calendar year under the
Ethylene Sales Agreement may be "phased down" as set forth in the agreement,
provided that no phase down may occur prior to January 1, 2009. In accordance
with the phase down provisions of the agreement, the annual minimum
requirements set forth in the agreement must be phased down over at least a
five year period so that the annual required minimum cannot decline to zero
prior to December 31, 2013 unless certain specified force majeure events occur.
The Ethylene Sales Agreement provides for sales of ethylene at market-related
prices. In addition to ethylene, Equistar sells methanol, ethers, and glycols
to Occidental Chemical. During the years ended December 31, 2000 and 1999 and
the period from May 15, 1998 to December 31, 1998, Equistar sold Occidental
Chemical $558 million, $435 million and $171 million, respectively, of product,
primarily under the Ethylene Sales Agreement.

Equistar also purchases various products from Occidental Chemical. During the
years ended December 31, 2000 and 1999 and the period from May 15, 1998 to
December 31, 1998, purchases from Occidental Chemical totaled $2 million, $2
million and $4 million, respectively.

Product Transactions with Millennium--Equistar sells ethylene to Millennium
at market-related prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Millennium is required to
purchase 100% of its ethylene requirements for its LaPorte, Texas facility. The
initial term of the contract expired December 1, 2000 and thereafter, renews
annually. Either party may terminate on one year's notice. Neither party has
provided notice of termination of the agreement. The pricing terms of this
agreement are similar to the pricing terms of the Ethylene Sales Agreement with
Occidental Chemical. Equistar sold Millennium $90 million, $54 million, and $41
million of ethylene in 2000, 1999 and 1998, respectively.

Equistar purchases vinyl acetate monomer ("VAM") feedstock from Millennium at
formula-based market prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Equistar is required to
purchase 100% of its VAM feedstock requirements for its LaPorte, Texas,

F-21

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Clinton, Illinois, and Morris, Illinois plants for the production of ethylene
vinyl acetate products at those locations. The initial term of the contract
expires December 31, 2000 and thereafter, renews annually. Either party may
terminate on one year's notice of termination. The initial term will extend
until December 31, 2002 if Millennium elects to increase the amount of ethylene
purchased under the Ethylene Sales Agreement. Millennium did not elect to
increase the amount of ethylene purchased under the Ethylene Sales Agreement.
Therefore, the contract for VAM purchases expired December 31, 2000 and was
subsequently renewed for one year under the automatic renewal provisions.
During the years ending December 31, 2000, 1999 and 1998, purchases from
Millennium, primarily of vinyl acetate monomer, were $16 million, $12 million,
and $14 million, respectively.

Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy
Vinyls, LP ("Oxy Vinyls"), a joint venture company formed with an unrelated
third party effective May 1, 1999. Equistar sells ethylene to Oxy Vinyls for
Oxy Vinyls' LaPorte, Texas facility at market-related prices pursuant to an
agreement dated effective as of June 1998, which agreement was assigned to Oxy
Vinyls by one of its owners. The initial term of the agreement expires on
December 31, 2003. After the initial term, the agreement automatically renews
for successive one-year periods and either party may terminate the agreement on
24 months' notice. Ethylene sales to Oxy Vinyls totaled $67 million for the
year ended December 31, 2000 and $93 million for the period from May 1, 1999 to
December 31, 1999.

Transactions with LYONDELL-CITGO Refining LP--Lyondell's rights and
obligations under the terms of its product sales and feedstock purchase
agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment
of Lyondell, were assigned to Equistar. Accordingly, certain olefins by-
products are sold to LCR for processing into gasoline and certain refinery
products are sold to Equistar as feedstocks. Sales of product to LCR were $425
million, $250 million and $223 million and purchases from LCR were $264
million, $190 million and $131 million for the years ended December 31, 2000,
1999 and 1998, respectively. Equistar also assumed certain processing
arrangements as well as storage obligations between Lyondell and LCR and
provides certain marketing and information processing services for LCR.
Aggregate charges under these various service agreements of $15 million, $13
million and $15 million were made to LCR by Equistar for the years ended
December 31, 2000, 1999 and 1998, respectively. All of the agreements between
LCR and Equistar are on terms generally representative of prevailing market
prices.

Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of
its products to Equistar. For the years ending December 31, 2000, 1999 and
1998, purchases from LMC were $165 million, $95 million and $103 million,
respectively. Equistar sells natural gas to LMC at prices generally
representative of its cost. Purchases by LMC of natural gas feedstock from
Equistar totaled $85 million, $46 million and $44 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Equistar provides operating and
other services for LMC under the terms of existing agreements that were assumed
by Equistar from Lyondell, including the lease to LMC by Equistar of the real
property on which its methanol plant is located. Pursuant to the terms of those
agreements, LMC pays Equistar a management fee and reimburses certain expenses
of Equistar at cost. Management fees charged by Equistar to LMC totaled $6
million during each of the years ending December 31, 2000, 1999 and 1998.

Shared Services Agreement with Lyondell--During 1998 and 1999, Lyondell
provided certain administrative services to Equistar, including legal, risk
management, treasury, tax and employee benefit plan administrative services,
while Equistar provided services to Lyondell in the areas of health, safety and
environment, human resources, information technology and legal. In November
1999, Lyondell and Equistar announced an agreement to utilize shared services
more broadly, consolidating such services among Lyondell and Equistar. These
services included information technology, human resources, materials
management, raw material supply, customer supply chain, health, safety and
environmental, engineering, research and

F-22

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

development, facility services, legal, accounting, treasury, internal audit,
and tax (the "Shared Services Agreement"). Beginning January 1, 2000, employee-
related and indirect costs were allocated between the two companies in the
manner prescribed in the Shared Services Agreement, while direct third party
costs, incurred exclusively for either Lyondell or Equistar, were charged
directly to that entity. During the years ended December 31, 2000, 1999 and
1998, Lyondell charged Equistar $133 million, $9 million and $3 million for
these services. The increased charges to Equistar during 2000 resulted from the
increase in services provided by Lyondell under the Shared Services Agreement.
During the years ended December 31, 1999 and 1998, Equistar charged Lyondell
approximately $8 million and approximately $1 million, respectively, for
services. There were no billings from Equistar to Lyondell for the year ended
December 31, 2000.

Shared Services and Shared-Site Agreements with Millennium--Equistar and
Millennium have entered into a variety of operating, manufacturing and
technical service agreements related to the business of Equistar and the
businesses retained by Millennium Petrochemicals. These agreements include the
provision by Equistar to Millennium Petrochemicals of materials management,
certain utilities, administrative office space, and health and safety services.
During the years ended December 31, 2000, 1999 and 1998, Equistar charged
Millennium Petrochemicals $2 million, $3 million and $5 million for these
services. These agreements also include the provision by Millennium
Petrochemicals to Equistar of certain operational services, including barge
dock access. During each of the years ended December 31, 2000, 1999 and 1998,
Millennium Petrochemicals charged Equistar less than $1 million for these
services.

Operating Agreement with Occidental Chemical--On May 15, 1998, Occidental
Chemical and Equistar entered into an Operating Agreement ("Operating
Agreement") whereby Occidental Chemical agreed to operate and maintain the
Occidental Contributed Business and to cause third-parties to continue to
provide equipment, products and commodities to those businesses upon
substantially the same terms and conditions as provided prior to the transfer.
The Operating Agreement terminated on June 1, 1998. During the term of the
Operating Agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million.

Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and Equistar entered into a Transition Services Agreement.
Under the terms of the Transition Services Agreement, Occidental Chemical
agreed to provide Equistar certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Predominantly all services under the Transition Services Agreement ceased in
June 1999 in accordance with the terms of the agreement. Health, safety, and
environmental services were extended until December 31, 1999 as permitted by
the Transition Services Agreement. During the year ended December 31, 1999 and
the period from June 1, 1998 to December 31, 1998, Equistar expensed $2 million
and $6 million, respectively, in connection with services provided pursuant to
the Transition Service Agreement.

Loans to Millennium and Occidental--In connection with Occidental's admission
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75 million and $420 million,
respectively. Each of the notes provided for the annual accrual of interest at
a rate equal to LIBOR plus 0.6%. These notes were paid in full in June 1998.
Interest expense incurred on these notes during 1998 was $3 million.

Note Receivable from Lyondell LP--Upon formation of the Partnership, Lyondell
LP contributed capital to Equistar in the form of a $345 million promissory
note ("Lyondell Note"). The Lyondell Note bore interest at LIBOR plus a market
spread. The note was repaid in full by Lyondell in July 1998. Interest income
on the Lyondell Note totaled $13 million during 1998.

F-23

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5.SALE OF CONCENTRATES AND COMPOUNDS BUSINESS

Effective April 30, 1999, Equistar completed the sale of its concentrates and
compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar's
proceeds from the sale were approximately $75 million.

6.RESTRUCTURING AND OTHER UNUSUAL CHARGES

During the fourth quarter 1999, Equistar recorded a charge of $96 million
associated with decisions to shut down certain polymer reactors and to
consolidate certain administrative functions between Lyondell and Equistar. The
decision to shut down the reactors was based on their high production cost,
market conditions in the polyethylene industry and the flexibility to utilize
more efficient reactors to meet customer requirements. Accordingly, Equistar
recorded a charge of $72 million to adjust the asset carrying values. The
remaining $24 million of the total charge represents severance and other
employee-related costs for approximately 500 employee positions that are being
eliminated. The eliminated positions, primarily administrative functions,
resulted from opportunities to share such services between Lyondell and
Equistar and, to a lesser extent, positions associated with the shut down
polymer reactors. Through December 31, 2000, approximately $19 million of
severance and other employee-related costs had been paid and charged against
the accrued liability. As of December 31, 2000, substantially all of the
employee terminations had been completed and the remaining liability was
eliminated.

In 1998, Equistar recorded and paid, as incurred, an additional $12 million
in restructuring charges related to the initial merger and integration of
Equistar. These costs included costs associated with the consolidation of
operations and facilities of $11 million and other miscellaneous charges of $1
million.

7.ACCOUNTS RECEIVABLE

In December 1998, Equistar entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, Equistar agreed to sell on an ongoing basis and without
recourse, designated accounts receivable. To maintain the balance of the
accounts receivable sold, Equistar is obligated to sell new receivables as
existing receivables are collected. The agreement continues until terminated
upon notice by either party.

At December 31, 1998, 1999 and 2000, Equistar's gross accounts receivable
that had been sold to the purchasers aggregated $130 million. Increases and
decreases in the amount have been reported as operating cash flows in the
Consolidated Statements of Cash Flows. Costs related to the sale are included
in "Selling, general and administrative expenses" in the Consolidated
Statements of Income.

8.INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out ("LIFO") basis except for materials and supplies, which
are valued at average cost. Inventories at December 31, 2000 and 1999 consisted
of the following:

MILLIONS OF DOLLARS 2000 1999
------------------- ---- ----

Finished goods..................................................... $273 $278
Work-in-process.................................................... 16 10
Raw materials...................................................... 123 137
Materials and supplies............................................. 94 95
---- ----
Total inventories................................................ $506 $520
==== ====

F-24

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The excess of the current cost of inventories over book value was
approximately $165 million at December 31, 2000.

9.PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:

MILLIONS OF DOLLARS 2000 1999
------------------- ------ ------

Land.......................................................... $ 78 $ 78
Manufacturing facilities and equipment........................ 5,769 5,656
Construction in progress...................................... 134 134
------ ------
Total property, plant and equipment......................... 5,981 5,868
Less accumulated depreciation................................. 2,162 1,942
------ ------
Property, plant and equipment, net.......................... $3,819 $3,926
====== ======

No interest was capitalized during 2000, 1999 and 1998. Depreciation expense
for the years ending December 31, 2000, 1999 and 1998 was $229 million, $221
million and $200 million, respectively.

In July 1998, the depreciable lives of certain assets, primarily
manufacturing facilities and equipment, were increased from a range of 5 to 25
years to a range of 5 to 30 years. The change was made to more accurately
reflect the estimated periods during which such assets will remain in service,
based upon Equistar's actual experience with those assets. This change was
accounted for as a change in accounting estimate and resulted in a $33 million
decrease in depreciation expense for 1998.

10.OTHER ACCRUED LIABILITIES

Other accrued liabilities at December 31, 2000 and 1999 were as follows:

MILLIONS OF DOLLARS 2000 1999
------------------- ---- ----

Accrued property taxes............................................ $ 73 $ 68
Accrued payroll costs............................................. 38 68
Accrued interest.................................................. 52 50
Other............................................................. 3 47
---- ----
Total other accrued liabilities................................. $166 $233
==== ====

11.PENSION AND OTHER POSTRETIREMENT BENEFITS

All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by Equistar. The plans became effective January
1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to Equistar on December 1, 1997, and
union represented employees formerly employed by Occidental, whose plans were
contributed to Equistar on May 15, 1998. In connection with the formation of
Equistar, there were no pension assets or obligations contributed to Equistar,
except for the union represented plans described above. Retirement benefits are
based upon years of service and the employee's highest three consecutive years
of compensation during the last ten years of service. Equistar accrues pension
costs based upon an actuarial valuation and funds the plans through periodic
contributions to pension trust funds as required by applicable law. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits. In addition, Equistar sponsors unfunded postretirement benefit plans
other than pensions for both salaried and nonsalaried employees, which provide
medical and life insurance benefits. These postretirement health care plans are
contributory while the life insurance plans are noncontributory.

F-25

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of these plans:

OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------ ----------------
MILLIONS OF DOLLARS 2000 1999 2000 1999
------------------- ----- ----- ------- -------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1................ $ 99 $ 88 $ 77 $ 69
Service cost................................. 17 22 2 4
Interest cost................................ 9 7 6 6
Actuarial loss (gain)........................ 8 (8) 11 (2)
Net effect of curtailments, settlements and
special termination benefits................ (1) -- 1 --
Transfer to Lyondell......................... -- -- (3) --
Benefits paid................................ (12) (10) (2) --
----- ----- ------- -------
Benefit obligation, December 31.............. 120 99 92 77
----- ----- ------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1......... 101 88 -- --
Actual return of plan assets................. (3) 7 -- --
Partnership contributions.................... 31 16 2 --
Benefits paid................................ (12) (10) (2) --
----- ----- ------- -------
Fair value of plan assets, December 31....... 117 101 -- --
----- ----- ------- -------

Funded status................................ (3) 2 (91) (77)
Unrecognized actuarial loss.................. 24 5 20 13
----- ----- ------- -------
Net amount recognized........................ $ 21 $ 7 $ (71) $ (64)
===== ===== ======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Prepaid benefit cost......................... $ 35 $ 33 $ -- $ --
Accrued benefit liability.................... (14) (26) (71) (64)
----- ----- ------- -------
Net amount recognized........................ $ 21 $ 7 $ (71) $ (64)
===== ===== ======= =======

The benefit obligation, accumulated benefit obligation and fair value of
assets for pension plans with benefit obligations in excess of plan assets were
$63 million, $42 million and $40 million, respectively, as of December 31, 2000
and $40 million, $26 million and $13 million, respectively, as of December 31,
1999.

F-26

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------- --------------
MILLIONS OF DOLLARS 2000 1999 1998 2000 1999 1998
------------------- ---- ---- ---- ---- ---- ----

COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................... $17 $22 $16 $ 2 $ 4 $ 3
Interest cost.................................. 9 7 5 6 6 4
Amortization of actuarial loss................. -- 1 -- 1 1 --
Expected return of plan assets................. (8) (8) (6) -- -- --
Net effect of curtailments, settlements and
special termination benefits.................. (1) -- -- 1 -- --
--- --- --- --- --- ---
Net periodic benefit cost...................... $17 $22 $15 $10 $11 $ 7
=== === === === === ===

PENSION OTHER
BENEFITS POSTRETIREMENT BENEFITS
---------------- -------------------------
MILLIONS OF DOLLARS 2000 1999 1998 2000 1999 1998
------------------- ---- ---- ---- ------- ------- -------

WEIGHTED-AVERAGE ASSUMPTIONS AS
OF DECEMBER 31:
Discount rate.................. 7.50% 8.00% 6.75% 7.50% 8.00% 6.75%
Expected return on plan as-
sets.......................... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase.. 4.50% 4.75% 4.75% 4.50% 4.75% 4.75%

For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 2000 was 7.0%
for 2001 and 5.0% thereafter. The health care cost trend rate assumption does
not have a significant effect on the amounts reported. To illustrate,
increasing or decreasing the assumed health care cost trend rates by one
percentage point in each year would change the accumulated postretirement
benefit liability as of December 31, 2000 by less than $1 million and would not
have a material effect on the aggregate service and interest cost components of
the net periodic postretirement benefit cost for the year then ended.

Equistar also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Equistar were $17 million,
$20 million and $15 million for the years ended December 31, 2000, 1999 and
1998, respectively.

12.LONG-TERM DEBT AND FINANCING ARRANGEMENTS

In February 1999, Equistar and Equistar Funding Corporation ("Equistar
Funding") co-issued $900 million of debt securities. Equistar Funding, a wholly
owned subsidiary of Equistar, is a Delaware corporation formed for the sole
purpose of facilitating the financing activities of Equistar. Equistar is
jointly and severally liable with Equistar Funding on the outstanding notes and
new notes. The debt securities include $300 million of 8.50% Notes, which will
mature on February 15, 2004, and $600 million of 8.75% Notes, which will mature
on February 15, 2009. Equistar used the net proceeds from this offering (i) to
repay the $205 million outstanding under a capitalized lease obligation
relating to Equistar's Corpus Christi facility, (ii) to repay the outstanding
balance under the $500 million credit agreement, after which the $500 million
credit agreement was terminated, (iii) to repay the outstanding $150 million,
10.00% Notes due in June 1999, and (iv) to the extent of the remaining net
proceeds, to reduce outstanding borrowing under the five-year credit facility
and for Partnership working capital purposes.

F-27

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Equistar has a five-year, $1.25 billion credit facility with a group of banks
expiring November 2002. Borrowing under the facility bears interest at either
the Federal Funds rate plus 1/2 of 1%, LIBOR plus 0.675%, a fixed rate offered
by one of the sponsoring banks or interest rates that are based on a
competitive auction feature wherein the interest rate can be established by
competitive bids submitted by the sponsoring banks, depending upon the type of
borrowing made under the facility. Borrowing under the facility had a weighted
average interest rate of 7.13% and 6.0% at December 31, 2000 and 1999,
respectively. Millennium America Inc., a subsidiary of Millennium, provided
limited guarantees with respect to the payment of principal and interest on a
total of $750 million principal amount of indebtedness under the $1.25 billion
revolving credit facility. However, the lenders may not proceed against
Millennium America Inc. until they have exhausted their remedies against
Equistar. The guarantee will remain in effect indefinitely, but at any time
after December 31, 2004, Millennium America Inc. may elect to terminate the
guarantee if certain conditions are met including financial ratios and
covenants. In addition, Millennium America Inc. may elect to terminate the
guarantee if Millennium Petrochemicals Inc. sells its interests in Millennium
GP and Millennium LP or if those entities sell their interests in Equistar,
provided certain conditions are met including financial ratios and covenants.

The credit facility is available for working capital and general Partnership
purposes as needed and contains covenants that, subject to exceptions, restrict
sale and leaseback transactions, lien incurrence, debt incurrence, sales of
assets and mergers and consolidations, and require Equistar to maintain
specified financial ratios, in all cases as provided in the credit facility.
The breach of these covenants could permit the lenders to declare the loans
immediately payable and to terminate future lending commitments.

Equistar was in compliance with all covenants under its credit facility as of
December 31, 2000. However, given the poor current business environment,
Equistar is seeking an amendment to its credit facility that would increase its
financial and operating flexibility, primarily by making certain financial
ratio requirements less restrictive. Equistar anticipates that the amendment
will become effective prior to March 31, 2001.

The terminated $500 million credit agreement was entered into on June 12,
1998. Borrowing under the agreement bore interest at either the Federal Funds
rate plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate offered by one of the
sponsoring banks or interest rates that were based on a competitive auction
feature.

Long-term debt at December 31 consisted of the following:

MILLIONS OF DOLLARS 2000 1999
------------------- ------- -------

Bank credit facilities:
5-year term credit facility.................................. $ 820 $ 800
Other debt obligations:
Medium-term notes (due 2000-2005)............................ 121 163
9.125% Notes due 2002........................................ 100 100
8.50% Notes due 2004......................................... 300 300
6.50% Notes due 2006......................................... 150 150
8.75% Notes due 2009......................................... 598 598
7.55% Debentures due 2026.................................... 150 150
Other........................................................ 9 --
------- -------
Total long-term debt....................................... 2,248 2,261
Less current maturities........................................ 90 92
------- -------
Total long-term debt, net.................................. $ 2,158 $ 2,169
======= =======

F-28

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Aggregate maturities of long-term debt during the next five years are as
follows: 2001-$90 million; 2002-$921 million; 2003-$29 million; 2004-$300
million; 2005-$5 million and thereafter-$903 million. The 8.75% Notes have a
face amount of $600 million and are shown net of unamortized discount. The
medium-term notes mature at various dates from 2001 to 2005 and had a weighted
average interest rate of 9.6% and 10.0% at December 31, 2000 and 1999,
respectively.

The medium-term Notes, the 9.125% Notes, the 6.5% Notes and the 7.55%
Debentures were assumed by Equistar from Lyondell when Equistar was formed in
1997. As between Equistar and Lyondell, Equistar is primarily liable for this
debt. Lyondell remains a co-obligor for the medium-term notes and certain
events involving only Lyondell could give rise to events of default under those
notes, permitting the obligations to be accelerated. If such an event permitted
more than $50 million of the medium-term notes to be accelerated, the lenders
under Equistar's $1.25 billion revolving credit facility would have the right
to accelerate all debt outstanding under the facility and to terminate future
lending commitments. $90 million aggregate principal amount of the medium-term
notes will mature on August 1, 2001. Under certain limited circumstances, the
holders of the medium-term notes have the right to require repurchase of the
notes. Following amendments to the indentures for the 9.125% Notes and 6.5%
Notes and the 7.55% Debentures in November 2000, Lyondell remains a guarantor
of that debt but not a co-obligor. The consolidated financial statements of
Lyondell are filed as an exhibit to Equistar's Annual Report on Form 10-K for
the year ended December 31, 2000.

13.FINANCIAL INSTRUMENTS

Equistar does not buy, sell, hold or issue financial instruments for
speculative trading purposes.

Beginning October 1999, Equistar entered into over-the-counter "derivatives"
and price collar agreements for crude oil with Occidental Energy Marketing,
Inc., a subsidiary of Occidental, to help manage its exposure to commodity
price risk with respect to crude-oil related raw material purchases. At
December 31, 2000, "derivatives" agreements covering 5.1 million barrels and
maturing from January 2001 through July 2001 were outstanding. The carrying
value and fair market value of these derivative instruments at December 31,
2000 represented a liability of $13 million and was based on quoted market
prices. At December 31, 1999, "derivatives" and collar agreements covering 2.4
million and 1.5 million barrels, respectively, and maturing in January 2000,
were outstanding. Both the carrying value and fair market value of these
derivative instruments at December 31, 1999 represented an asset of $7 million
and was based on quoted market prices. Unrealized gains and losses on
"derivatives" and price collars are deferred until realized at which time they
are reflected in the cost of the purchased raw material. See Item 7a.
Disclosure of Market and Regulatory Risk--Commodity Price Risk.

The fair value of all nonderivative financial instruments included in current
assets and current liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, approximated their
carrying value due to their short maturity. Based on the borrowing rates
currently available to Equistar for debt with terms and average maturities
similar to Equistar's debt portfolio, the fair value of Equistar's long-term
debt, including amounts due within one year, was approximately $2.1 billion and
$2.2 billion at December 31, 2000 and 1999, respectively.

Equistar had issued letters of credit totaling $1 million and $6 million at
December 31, 2000 and 1999, respectively.

14.COMMITMENTS AND CONTINGENCIES

F-29

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Equistar is party to various unconditional purchase obligation contracts as a
purchaser for product and services. At December 31, 2000, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:

MILLIONS OF DOLLARS
-------------------

2001................................................................... $ 29
2002................................................................... 27
2003................................................................... 23
2004................................................................... 22
2005................................................................... 22
Thereafter............................................................. 118
----
Total minimum contract payments........................................ $241
====

Equistar's total purchases under these agreements were $35 million, $39
million and $35 million for the years ending December 31, 2000, 1999 and 1998,
respectively.

Indemnification Arrangements--Lyondell, Millennium and Occidental have each
agreed to provide certain indemnifications to Equistar with respect to the
petrochemicals and polymers businesses contributed by the partners. In
addition, Equistar agreed to assume third party claims that are related to
certain pre-closing contingent liabilities that are asserted prior to December
1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental, to the
extent the aggregate thereof does not exceed $7 million to each partner,
subject to certain terms of the respective asset contribution agreements. As of
December 31, 2000, Equistar had incurred a total of $16 million for these
uninsured claims and liabilities. Equistar also agreed to assume third party
claims that are related to certain pre-closing contingent liabilities that are
asserted for the first time after December 1, 2004 for Lyondell and Millennium,
and for the first time after May 15, 2005 for Occidental.

Environmental--Equistar's policy is to be in compliance with all applicable
environmental laws. Equistar is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Equistar
cannot accurately predict future developments, such as increasingly strict
requirements of environmental laws, inspection and enforcement policies and
compliance costs therefrom which might affect the handling, manufacture, use,
emission or disposal of products, other materials or hazardous and non-
hazardous waste. Equistar had no reserves for environmental matters as of
December 31, 2000 and 1999.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the Texas Natural Resource
Conservation Commission ("TNRCC") has submitted a plan to the EPA to reach and
demonstrate compliance with the ozone standard by the year 2007. These emission
reduction controls must be installed during the next several years, well in
advance of the 2007 deadline. This could result in increased capital
investment, which could be between $150 million and $300 million before the
2007 deadline, as well as higher annual operating costs for Equistar. Equistar
has been actively involved with a number of organizations to help solve the
ozone problem in the most cost-effective manner and, in January 2001, Equistar
and an organization composed of industry participants filed a lawsuit against
the TNRCC to encourage adoption of their alternative plan to achieve the same
air quality improvement with less negative economic impact on the region.

F-30

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 that MTBE may, in certain limited circumstances, affect the taste and
odor of drinking water supplies, and thereby lead to possible environmental
issues.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. Such actions, to be effective, would require (i) a waiver
of the state's oxygenate mandate, (ii) Congressional action in the form of an
amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested, and less widely available
additive. At the federal level, a blue ribbon panel appointed by the EPA issued
its report on July 27, 1999. That report recommended, among other things,
reducing the use of MTBE in gasoline. During 2000, the EPA announced its intent
to seek legislative changes from Congress to give the EPA authority to ban MTBE
over a three-year period. Such action would only be granted through amendments
to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing
rulemaking authority contained in the Toxic Substance Control Act. It would
take at least three years for such a rule to issue. Recently, however, senior
policy analysts at the U.S. Department of Energy presented a study stating that
banning MTBE would create significant economic risk. The presentation did not
identify any benefits from banning MTBE. The EPA initiatives mentioned above or
other governmental actions could result in a significant reduction in
Equistar's MTBE sales. Equistar has developed technologies to convert its
process to produce alternate gasoline blending components should it be
necessary to reduce MTBE production in the future.

15.LEASE COMMITMENTS

Equistar leases various facilities and equipment under noncancelable lease
arrangements for various periods. At December 31, 2000, future minimum lease
payments relating to noncancelable operating leases with lease terms in excess
of one year were as follows:

MILLIONS OF DOLLARS
-------------------

2001................................................................... $ 83
2002................................................................... 66
2003................................................................... 59
2004................................................................... 54
2005................................................................... 48
Thereafter............................................................. 317
----
Total minimum lease payments......................................... $627
====

Operating lease net rental expense was $115 million, $112 million and $110
million for the years ending December 31, 2000, 1999 and 1998, respectively.

F-31

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Equistar leases railcars for the distribution of products in its polymers
business segment. The railcars are leased under two master leases entered into
in 1999 and a third master lease entered into in 1996 by Millennium and assumed
by Equistar upon its formation on December 1, 1997. The leases have five
renewable one-year terms and mature after the fifth year. Equistar may, at its
option, purchase the railcars during or at the end of the lease term for an
amount generally equal to the lessor's unrecovered costs, as defined. If
Equistar does not exercise the purchase option, the railcars will be sold and
Equistar will pay the lessor to the extent the proceeds from the sale of the
railcars are less than their guaranteed residual value, as defined by the
agreements. The guaranteed residual value under these leases was approximately
$185 million at December 31, 2000.

16.SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is summarized as follows for the periods
presented:

FOR THE YEAR
ENDED
DECEMBER 31,
--------------
MILLIONS OF DOLLARS 2000 1999 1998
------------------- ---- ---- ----

Cash paid for interest....................................... $180 $146 $154
==== ==== ====

17.SEGMENT INFORMATION AND RELATED INFORMATION

Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, Equistar has identified two reportable
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated products,
aromatics and specialty products. Olefins include ethylene, propylene and
butadiene, and the oxygenated products include ethylene oxide, ethylene glycol,
ethanol and MTBE. Aromatics include benzene and toluene. The polymers segment
consists of polyolefins, including high-density polyethylene, low-density
polyethylene, linear low-density polyethylene, polypropylene, and performance
polymers. The performance polymers include enhanced grades of polyethylene,
including wire and cable insulating resins, and polymeric powders. The
concentrates and compounds business, which was part of performance polymers,
was sold effective April 30, 1999 (see Note 5).

No customer accounted for 10% or more of sales during the years ended
December 31, 2000, 1999 or 1998.

The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).

F-32

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Summarized financial information concerning Equistar's reportable segments is
shown in the following table. Intersegment sales between the petrochemicals and
polymers segments were made at prices based on current market values.

MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
------------------- -------------- -------- ----------- ------------ ------------

FOR THE YEAR ENDED
DECEMBER 31, 2000:
Sales and other operat-
ing revenues:
Customers............. $ 5,144 $ 2,351 $ -- $ -- $ 7,495
Intersegment.......... 1,887 -- -- (1,887) --
------- ------- ------ -------- -------
7,031 2,351 -- (1,887) 7,495
Operating income
(loss)................. 694 (185) (175) -- 334
Total assets............ 3,693 1,534 1,355 -- 6,582
Capital expenditures.... 79 46 6 -- 131
Depreciation and amorti-
zation expense......... 199 55 56 -- 310

FOR THE YEAR ENDED
DECEMBER 31, 1999:
Sales and other operat-
ing revenues:
Customers............. 3,435 2,159 -- -- 5,594
Intersegment.......... 1,324 -- -- (1,324) --
------- ------- ------ -------- -------
4,759 2,159 -- (1,324) 5,594

Restructuring and other
unusual charges........ -- -- 96 -- 96
Operating income
(loss)................. 447 51 (336) -- 162
Total assets............ 3,671 1,551 1,514 -- 6,736
Capital expenditures.... 61 83 13 -- 157
Depreciation and amorti-
zation expense......... 194 53 53 -- 300
FOR THE YEAR ENDED
DECEMBER 31, 1998:
Sales and other operat-
ing revenues:
Customers............. 2,362 2,162 -- -- 4,524
Intersegment.......... 1,112 46 -- (1,158) --
------- ------- ------ -------- -------
3,474 2,208 -- (1,158) 4,524

Restructuring and other
unusual charges........ -- -- 14 -- 14
Operating income
(loss)................. 319 177 (214) -- 282
Total assets............ 3,625 1,563 1,477 -- 6,665
Capital expenditures.... 71 116 13 -- 200
Depreciation and amorti-
zation expense......... 152 65 51 -- 268

F-33

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table presents the details of "Operating income (loss)" as
presented above in the "Unallocated" column for the years ended December 31,
2000, 1999 and 1998.

MILLIONS OF DOLLARS 2000 1999 1998
------------------- ------ ------ ------

Expenses not allocated to petrochemicals and poly-
mers:
Principally general and administrative expenses.. $ (175) $ (240) $ (200)
Restructuring and other unusual charges.......... -- (96) (14)
------ ------ ------
Total--Unallocated............................. $ (175) $ (336) $ (214)
====== ====== ======

The following table presents the details of "Total assets" as presented above
in the "Unallocated" column as of December 31, for the years indicated:

MILLIONS OF DOLLARS 2000 1999 1998
------------------- ------ ------ ------

Cash................................................... $ 18 $ 108 $ 66
Accounts receivable--trade and related parties......... 16 18 14
Prepaids and other current assets...................... 17 22 25
Property, plant and equipment, net..................... 56 58 48
Goodwill, net.......................................... 1,086 1,119 1,151
Other assets........................................... 162 189 173
------ ------ ------
$1,355 $1,514 $1,477
====== ====== ======

18.SUBSEQUENT EVENT

Equistar discontinued production at its Port Arthur, Texas, polyethylene
facility on February 28, 2001 and shut down the facility. Closed production
units include a 240 million pounds per year HDPE reactor and an LDPE reactor
with annual capacity of 160 million pounds. These units and a 300 million
pounds per year HDPE reactor mothballed in 1999 have been shut down
permanently. The asset values of these production units were previously
adjusted as part of a $96 million restructuring charge recognized in 1999.
Equistar expects to incur approximately $20 million of costs, including
severance benefits for approximately 125 people at the Port Arthur facility as
well as shutdown-related costs.

F-34

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2001

MILLIONS OF DOLLARS
-------------------

ASSETS
Current assets:
Cash and cash equivalents................................ $ 105
Accounts receivable, net................................. 420
Inventories.............................................. 390
Prepaid expenses and other current assets................ 66
Deferred tax assets...................................... 132
------
Total current assets................................... 1,113
------
Property, plant and equipment, net......................... 2,321
Investments and long-term receivables:
Investment in PO joint ventures.......................... 652
Investment in Equistar Chemicals, LP..................... 574
Receivable from LYONDELL-CITGO Refining LP............... 229
Investment in LYONDELL-CITGO Refining LP................. 44
Other investments and long-term receivables.............. 126
Goodwill, net.............................................. 1,111
Other assets............................................... 515
------
Total assets............................................... $6,685
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 284
Current maturities of long-term debt..................... 11
Other accrued liabilities................................ 258
------
Total current liabilities.............................. 553
------
Long-term debt, less current maturities.................... 3,838
Other liabilities.......................................... 483
Deferred income taxes...................................... 686
Commitments and contingencies
Minority interest.......................................... 165
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares autho-
rized, none outstanding................................. --
Common stock, $1.00 par value, 250,000,000 shares
authorized, 120,250,000 shares issued................... 120
Additional paid-in capital............................... 854
Retained earnings........................................ 421
Accumulated other comprehensive loss..................... (360)
Treasury stock, at cost, 2,687,080 shares................ (75)
------
Total stockholders' equity............................. 960
------
Total liabilities and stockholders' equity................. $6,685
======

See Notes to Consolidated Balance Sheet

F-35

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)

1.BASIS OF PREPARATION

The accompanying unaudited consolidated balance sheet has been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, it does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments, consisting only of normal,
recurring adjustments considered necessary for a fair presentation, have been
included. For further information, refer to the consolidated financial
statements and notes thereto for the year ended December 31, 2000 included in
the Lyondell Chemical Company ("Lyondell") 2000 Annual Report on Form 10-K
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

2.GAIN ON SALE OF ASSETS

On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. propylene oxide ("PO") manufacturing operations
to Bayer AG and Bayer Corporation (collectively "Bayer") for approximately
$2.45 billion. Lyondell recorded a pretax gain on the sale of $544 million
during the first quarter 2000. In the third quarter 2000, the final settlement
of working capital with Bayer and resolution of certain estimated liabilities
resulted in the recording of an additional pretax gain on the sale of $46
million.

As part of the asset sale, Lyondell accrued liabilities of $53 million for
employee severance, relocation and other employee benefits, covering
approximately 850 employees. The affected employees were generally terminated
on or about April 1, 2000, with a limited number providing transition services
through mid-2001. During the third quarter 2000, Lyondell reduced the accrued
liability by $25 million due to a reduction in the number of affected employees
and significantly lower than expected payments of severance and other benefits.
Payments of $27 million for severance, relocation and other employee benefits
were made through June 30, 2001. Lyondell expects to settle the remainder of
the liability during the second half of 2001.

F-36

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
3.EQUITY INTEREST IN EQUISTAR CHEMICALS, LP

Lyondell has a 41% joint venture ownership interest in Equistar Chemicals, LP
("Equistar"), while Millennium Chemicals Inc. ("Millennium") and Occidental
Petroleum Corporation ("Occidental") each have a 29.5% joint venture ownership
interest. Because the partners jointly control certain management decisions,
Lyondell accounts for its investment in Equistar using the equity method of
accounting. As a partnership, Equistar is not subject to federal income taxes.
Summarized balance sheet information for Equistar as of June 30, 2001 follows:

MILLIONS
OF DOLLARS
----------

Total current assets.............................................. $1,231
Property, plant and equipment, net................................ 3,759
Goodwill, net..................................................... 1,069
Other assets...................................................... 332
------
Total assets...................................................... $6,391
======
Current maturities of long-term debt.............................. $ 190
Other current liabilities......................................... 564
Long-term debt, less current maturities........................... 2,058
Other liabilities................................................. 149
Partners' capital................................................. 3,430
------
Total liabilities and partners' capital........................... $6,391
======

4.EQUITY INTEREST IN LYONDELL-CITGO REFINING LP

Lyondell has a 58.75% participation interest in LYONDELL-CITGO Refining LP
("LCR"), while CITGO Petroleum Corporation ("CITGO") has a 41.25% participation
interest. As a partnership, LCR is not subject to federal income taxes. Net
income before depreciation expense for the period is allocated to the partners
based upon participation interests. Depreciation expense is allocated to the
partners based upon contributed assets. Summarized balance sheet information
for LCR as of June 30, 2001 follows:

MILLIONS
OF DOLLARS
----------

Total current assets.............................................. $ 262
Property, plant and equipment, net................................ 1,305
Other assets...................................................... 59
------
Total assets...................................................... $1,626
======
Other current liabilities......................................... $ 313
Long-term debt.................................................... 450
Loans payable to partners......................................... 264
Other liabilities................................................. 61
Partners' capital................................................. 538
------
Total liabilities and partners' capital........................... $1,626
======

F-37

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
5.INVENTORIES

The components of inventories consisted of the following as of June 30, 2001:

MILLIONS
OF DOLLARS
----------

Finished goods.................................................... $308
Work-in-process................................................... 8
Raw materials..................................................... 42
Materials and supplies............................................ 32
----
Total inventories............................................... $390
====

6.PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following as of June 30, 2001:

MILLIONS
OF DOLLARS
----------

Land.............................................................. $ 10
Manufacturing facilities and equipment............................ 2,511
Construction in progress.......................................... 104
------
Total property, plant and equipment............................. 2,625
Less accumulated depreciation..................................... 304
------
Property, plant and equipment, net.............................. $2,321
======

7.LONG-TERM DEBT

Long-term debt consisted of the following as of June 30, 2001:

MILLIONS
OF DOLLARS
----------

Term Loan B....................................................... $ 192
Term Loan E....................................................... 831
Senior Secured Notes, Series A due 2007, 9.625%................... 900
Senior Secured Notes, Series B due 2007, 9.875%................... 1,000
Senior Subordinated Notes due 2009, 10.875%....................... 500
Debentures--due 2005, 9.375%...................................... 100
Debentures--due 2010, 10.25%...................................... 100
Debentures--due 2020, 9.8%........................................ 224
Other............................................................. 2
------
Total long-term debt............................................ 3,849
Less current maturities........................................... 11
------
Long-term debt, net............................................. $3,838
======

Lyondell's credit facility required Lyondell to issue $470 million of
subordinated notes, or more junior securities, by June 2002. The requirement to
issue $470 million of subordinated notes could be reduced by $2 for each $1 of
equity securities issued by Lyondell, and could be eliminated if Lyondell
achieved either (1) a specified total debt to adjusted EBITDA ratio, as
defined, or (2) a specified credit rating for its senior unsecured debt. As of
December 31, 2000, Lyondell satisfied the first condition. Therefore, in May
2001, the requirement to issue $470 million of subordinated notes was
eliminated.

F-38

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

In March 2001, Lyondell secured an amendment to its credit facility making
certain financial ratio requirements less restrictive. Lyondell will seek an
additional amendment to its credit facility to make certain financial ratio
requirements less restrictive. Lyondell anticipates that the amendment will
become effective prior to September 30, 2001.

8.DERIVATIVE FINANCIAL INSTRUMENTS

During 2000, Lyondell entered into foreign currency forward contracts to
hedge foreign exchange exposures related to euro-denominated capital
commitments on the PO-11 construction project.

As of January 1, 2001, Lyondell adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative
instruments are recorded on the balance sheet at fair value. Currently,
Lyondell uses only cash flow hedges. Gains or losses from changes in the fair
value of the derivative used in a cash flow hedge are deferred in accumulated
other comprehensive income, to the extent the hedge is effective, and
subsequently reclassified to earnings to offset the impact of the forecasted
transaction.

Lyondell's Board of Directors has authorized Lyondell to enter into certain
hedge transactions, but does not permit speculative positions. Lyondell
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategy for undertaking
the hedge. This process includes specific identification of the hedging
instrument and the hedge transaction, the nature of the risk being hedged and
the method for assessing the hedging instrument's effectiveness. Both at the
inception of the hedge and on an ongoing quarterly basis, Lyondell assesses
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.

During the second quarter 2001, Lyondell entered into additional foreign
currency forward contracts in the notional amount of 86 million euros to hedge
foreign exchange exposures related to euro-denominated capital commitments on
the PO-11 construction project for the year 2002. In addition, Lyondell entered
into price swap contracts with Occidental Energy Marketing, Inc., a subsidiary
of Occidental Petroleum Corporation, covering 37.8 million gallons of unleaded
gasoline to hedge its margins on future sales of MTBE.

As of June 30, 2001, the notional amounts of outstanding foreign currency
forward contracts, which mature from July 2001 through December 2002, totaled
180 million euros, or approximately $152 million at June 30, 2001 exchange
rates. The contracts were recognized at their fair value on June 30, 2001,
resulting in an unrealized pretax loss of $8 million, all of which was deemed
effective and, therefore, a $5 million after tax loss was recognized in
accumulated other comprehensive income. The $5 million loss recorded in
accumulated other comprehensive income is expected to be reclassified from July
through December 2002 and included in plant construction costs. As of June 30,
2001, price swap contracts covering 37.8 million gallons of unleaded gasoline,
which mature from October 2001 through December 2001, were outstanding. The
contracts were recognized at their fair value on June 30, 2001, resulting in an
unrealized pretax gain of $2 million of which 90% was deemed effective and
recognized in accumulated other comprehensive income. The ineffective portion,
which was less than $1 million, was recorded as a component of cost of sales in
the consolidated statements of income. The $1 million after-tax gain related to
the effective portion of the $2 million pretax gain was recorded in accumulated
other comprehensive income and is expected to be reclassified to the
consolidated statements of income from October 2001 through December 2001.

9.COMMITMENTS AND CONTINGENCIES

Bayer Claim--In June 2001, Bayer AG delivered a notice of claim to Lyondell
in relation to its March 2000 purchase of Lyondell's polyols business,
asserting various claims relating to alleged breaches of

F-39

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
representations and warranties related to condition of the business and assets.
The notice of claim seeks damages in excess of $100 million. Lyondell will
vigorously contest the claims and does not expect the resolution of the claims
to result in any material adverse effect on its business, financial condition,
results of operations or liquidity. The agreement governing the transaction
with Bayer provides a formal dispute resolution process, the final step of
which would be binding arbitration in Houston, Texas.

Capital Commitments--Lyondell has commitments, including those related to
capital expenditures, all made in the normal course of business. At June 30,
2001, major capital commitments included Lyondell's 50% share of those related
to the construction of a world-scale PO facility, known as PO-11, in The
Netherlands and a major expansion of a toluene diisocyanate ("TDI") facility in
France. Lyondell's outstanding commitments on these two projects totaled
approximately $186 million as of June 30, 2001.

Leases--During the third quarter 2000, construction began on a new butanediol
("BDO") facility in Europe known as BDO-2. Construction is being financed by a
third party lessor. Upon completion in the second quarter of 2002, a subsidiary
of Lyondell will lease the facility under an operating lease for a term of five
years. Lyondell may, at its option, purchase the facility at any time up to the
end of the lease term for an amount equal to the unrecovered construction costs
of the lessor, as defined. If Lyondell does not exercise the purchase option,
the facility will be sold and Lyondell will pay the lessor a termination fee to
the extent the sales price is less than the residual value of the facility, as
defined. The residual value at the end of the lease term is estimated at
approximately 206 million euros, or $174 million using June 30, 2001 exchange
rates. In the transaction documents for BDO-2, Lyondell agreed to comply with
certain financial and other covenants that are substantially the same as those
contained in the credit facility. A breach of those covenants could result in,
among other things, Lyondell having to pay the project costs incurred to date.
In March 2001, Lyondell secured amendments to the transaction documents
consistent with the March 2001 amendment to its credit facility. Lyondell will
seek additional amendments to the transaction documents consistent with the
amendment it will seek to its credit facility. Lyondell anticipates that the
amendments will become effective prior to September 30, 2001. See Note 7 for a
discussion of the proposed amendments to the credit facility.

TDI Agreements--In January 1995, ARCO Chemical Company ("ARCO Chemical")
entered into a tolling agreement and a resale agreement with Rhodia covering
the entire TDI output of Rhodia's two plants in France, which have a combined
average annual capacity of approximately 264 million pounds. Lyondell is
currently required to purchase an average minimum of 212 million pounds of TDI
per year under the agreements. The aggregate purchase price is a combination
based on plant cost and market price. In the second quarter 2000, Lyondell
entered into a series of arrangements with Rhodia to expand the capacity at the
Pont de Claix plant, which provides TDI to Lyondell under the tolling
agreement. The expansion will add approximately 105 million pounds of average
annual capacity at the Pont de Claix plant, resulting in a total average annual
capacity of approximately 269 million pounds, which is scheduled to be
available in December 2001. After the completion of the expansion, all of the
TDI that Lyondell receives from Rhodia will come from the Pont de Claix plant,
which is designed to have a more efficient cost structure. Lyondell's average
minimum TDI purchase commitment under the revised tolling agreement will be 197
million pounds of TDI per year and will be extended through 2016. The resale
agreement, which covered output at the Lille plant, will expire December 31,
2001.

Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Petroleo y
Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO and of Petroleos de Venezuela,
S.A. ("PDVSA"), the national oil company of the Republic of Venezuela, is
required to sell, and LCR is required to purchase, 230,000 barrels per day of
extra heavy crude oil. This constitutes approximately 86% of the refinery's
refining capacity of 268,000 barrels per day of crude oil. By letter dated
April 16, 1998, 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

F-40

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
reduced. The letter stated that PDVSA Oil declares itself in a force majeure
situation and that PDVSA Oil will reduce deliveries of crude oil. Such
reductions in deliveries were purportedly based on announced OPEC production
cuts. LCR began receiving reduced deliveries of crude oil from PDVSA Oil in
August 1998, amounting to 195,000 barrels per day in that month. LCR was
advised by PDVSA Oil in May 1999 of a further reduction in the deliveries of
crude oil supplied under the Crude Supply Agreement to 184,000 barrels per day,
effective May 1999.

On several occasions since then, PDVSA Oil has further reduced crude oil
deliveries, although it made payments under a different provision of the Crude
Supply Agreement in partial compensation for such reductions. Subsequently,
PDVSA Oil unilaterally increased deliveries of crude oil to LCR to 195,000
barrels per day effective April 2000, to 200,000 barrels per day effective July
2000 and to 230,000 barrels per day effective October 2000.

By letter dated February 9, 2001, 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 effective February 1,
2001. The letter states that PDVSA Oil declares itself in a force majeure
situation, but does not announce any reduction in crude oil deliveries to LCR.
Although some reduction in crude oil delivery may be forthcoming, it is unclear
as to the level of reduction, if any, which may be anticipated. LCR has
consistently contested the validity of PDVSA Oil's and PDVSA's reductions in
deliveries under the Crude Supply Agreement and, on March 12, 2001, Lyondell,
on behalf of LCR, sent a letter to PDVSA Oil and PDVSA disputing the existence
and validity of the purported force majeure situation declared by the February
9, 2001 letter.

PDVSA has announced that it intends to renegotiate the Crude Supply
Agreements that it has with all third parties, including LCR. However, they
have confirmed that they expect to honor their commitments if a mutually
acceptable restructuring of the Crude Supply Agreement is not achieved. The
breach or termination of the Crude Supply Agreement would require LCR to
purchase all or a portion of its crude oil feedstocks in the merchant market,
would subject LCR to significant volatility and price fluctuations and could
adversely affect LCR and, therefore, Lyondell.

LCR Debt--On July 20, 2001, LCR completed the refinancing of its one-year
credit facilities dated September 15, 2000, which consisted of a $450 million
term loan and a $70 million revolving credit facility. The new 18-month credit
facilities mature in January 2003 and include a $450 million term loan and $70
million revolving credit facility to be used for working capital and general
business purposes.

Cross Indemnity Agreement--In connection with the 1988 transfer of assets and
liabilities to Lyondell from Atlantic Richfield Company ("ARCO"), now wholly
owned by BP p.l.c., Lyondell agreed to assume certain liabilities arising out
of the operation of Lyondell's integrated petrochemicals and refining business
prior to July 1, 1988. In connection with the transfer of such liabilities,
Lyondell and ARCO entered into an agreement, updated in 1997 ("Revised Cross-
Indemnity Agreement"), whereby Lyondell agreed to defend and indemnify ARCO
against certain uninsured claims and liabilities which ARCO may incur relating
to the operation of Lyondell prior to July 1, 1988, including certain
liabilities which may arise out of pending and future lawsuits. For current and
future cases related to Lyondell's products and operations, ARCO and Lyondell
bear a proportionate share of judgment and settlement costs according to a
formula that allocates responsibility based upon years of ownership during the
relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell
will assume responsibility for its proportionate share of future costs for
waste site matters not covered by ARCO insurance.

In connection with the acquisition of ARCO Chemical, Lyondell succeeded,
indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical
indemnified ARCO against certain claims or

F-41

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
liabilities that ARCO may incur relating to ARCO's former ownership and
operation of the businesses of ARCO Chemical, including liabilities under laws
relating to the protection of the environment and the workplace, and
liabilities arising out of certain litigation. As part of the agreement, ARCO
indemnified ARCO Chemical with respect to claims or liabilities and other
matters of litigation not related to the ARCO Chemical business.

Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and
Occidental have each agreed to provide certain indemnifications to Equistar
with respect to the petrochemicals and polymers businesses contributed by the
partners. In addition, Equistar agreed to assume third party claims that are
related to certain pre-closing contingent liabilities that are asserted prior
to December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for
Occidental, to the extent the aggregate thereof does not exceed $7 million to
each partner, subject to certain terms of the respective asset contribution
agreements. As of June 30, 2001, Equistar had incurred approximately $5 million
under the $7 million indemnification basket with respect to the business
contributed by Lyondell. Equistar also agreed to assume third party claims that
are related to certain pre-closing contingent liabilities that are asserted for
the first time after December 1, 2004 for Lyondell and Millennium, and for the
first time after May 15, 2005 for Occidential.

Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. Lyondell cannot
accurately predict future developments, such as increasingly strict
environmental laws and inspection and enforcement policies, as well as higher
compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or
hazardous and non-hazardous waste.

Lyondell is also subject to certain assessment and remedial actions at the
LCR refinery under the Resource Conservation and Recovery Act ("RCRA"). In
addition, Lyondell has negotiated an order with the Texas Natural Resource
Conservation Commission ("TNRCC") for assessment and remediation of groundwater
and soil contamination at the LCR refinery. Lyondell also has liabilities under
RCRA and various state and foreign government regulations related to five
current plant sites and three former plant sites.

Lyondell is currently contributing funds to the clean up of two waste sites
located near Houston, Texas under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended, and the Superfund
Amendments and Reauthorization Act of 1986. Lyondell has also been named, along
with several other companies, as a potentially responsible party for a third
CERCLA site near Houston, Texas. In addition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell estimates, based upon currently available information,
that potential loss contingencies associated with the latter CERCLA sites,
individually and in the aggregate, are not significant.

As of June 30, 2001, Lyondell's environmental liability for future assessment
and remediation costs at the above-mentioned sites totaled $28 million. The
liabilities per site range from less than $1 million to $12 million and are
expected to be incurred over the next two to seven years. In the opinion of
management, there is currently no material range of loss in excess of the
amount recorded for these sites. 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 other CERCLA, RCRA, TNRCC or other
comparable state or foreign law investigations, could require Lyondell to
reassess its potential exposure related to environmental matters.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the U.S. Environmental Protection Agency ("EPA").
As a result, the TNRCC has submitted a plan to the EPA

F-42

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
to reach and demonstrate compliance with the ozone standard by November 2007.
Ozone is a product of the reaction between volatile organic compounds ("VOCs")
and nitrogen oxides ("NOx") in the presence of sunlight, and is a principal
component of smog. The proposed plans for meeting the ozone standard focus on
significant reductions in NOx emissions. NOx emission reduction controls must
be installed at LCR's refinery and each of Lyondell's two facilities and
Equistar's six facilities in the Houston/Galveston region during the next
several years, well in advance of the 2007 deadline. Compliance with the
provisions of the plan will result in increased capital investment during the
next several years and higher annual operating costs for Equistar, Lyondell and
LCR. As a result, Lyondell estimates that aggregate related capital
expenditures could total between $400 million and $500 million for Lyondell,
Equistar and LCR before the 2007 deadline. Lyondell's share of such
expenditures could total between $65 million and $80 million, and Lyondell's
share of Equistar's and LCR's expenditures could total between $160 million and
$195 million. The timing and amount of these expenditures are subject to
regulatory and other uncertainties, as well as obtaining the necessary permits
and approvals. Lyondell has been actively involved with a number of
organizations to help solve the ozone problem in the most cost-effective manner
and, in January 2001, Lyondell and an organization composed of industry
participants filed a lawsuit against the TNRCC to encourage adoption of their
alternative plan to achieve the same air quality improvement with less negative
economic impact on the region. In June 2001, the parties entered into a consent
order with respect to the lawsuit. Pursuant to the consent order, the TNRCC
agreed to review, by June 2002, the scientific data for ozone formation in the
Houston/Galveston region. If the TNRCC scientific review supports the industry
group proposal, the TNRCC has agreed to revise the NOx emission reduction
requirements set forth in its original plan. Such revision of the NOx emission
reduction requirements would reduce the estimated capital investments required
by Lyondell, Equistar and LCR to comply with the plans for meeting the ozone
standard.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as methyl tertiary butyl ether ("MTBE"), in gasoline sold
in areas not meeting specified air quality standards. However, while studies by
federal and state agencies and other organizations have shown that MTBE is safe
for use in gasoline, is not carcinogenic and is effective in reducing
automotive emissions, 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 that MTBE
may, in certain limited circumstances, affect the taste and odor of drinking
water supplies, and thereby lead to possible public concerns.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. Such actions, to be effective, would require (i) a waiver
of the state's oxygenate mandate, (ii) Congressional action in the form of an
amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested and less widely available
additive. California has twice sought a waiver of its oxygenate mandate.
California's request was denied by both the Clinton Administration and the Bush
Administration. At the federal level, a blue ribbon panel appointed by the EPA
issued its report on July 27, 1999. That report recommended, among other
things, reducing the use of MTBE in gasoline. During 2000, the EPA announced
its intent to seek legislative changes from Congress to give the EPA authority
to ban MTBE over a three-year period. Such action would only be granted through
amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE
utilizing rulemaking authority contained in the Toxic Substance Control Act. It
would take at least three years for such a rule to issue. In January 2001,
however, senior policy analysts at the U.S. Department of Energy presented a
study stating that banning MTBE would create significant economic risk. The
study did not identify any benefits from banning MTBE. Additionally, in early
2001, after a thorough evaluation of MTBE conducted in connection with proposed
amendments to the 1998 European Council directive on gasoline and diesel fuel
specifications, the European Union concluded that the use of MTBE in gasoline
does not present a health risk to the community or a risk to the environment,
and decided not to restrict the use of MTBE in the European

F-43

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
Union. The EPA initiatives mentioned above or other governmental actions could
result in a significant reduction in Lyondell's MTBE sales. Lyondell has
developed technologies to convert tertiary butyl alcohol ("TBA") into alternate
gasoline blending components should it be necessary to reduce MTBE production
in the future.

The Clean Air Act specified certain emissions standards for vehicles
beginning in the 1994 model year and required the EPA to study whether further
emissions reductions from vehicles were necessary starting no earlier than the
2004 model year. In 1998, the EPA concluded that more stringent vehicle
emission standards were needed and that additional controls on gasoline and
diesel were necessary to meet these emission standards. New standards for
gasoline were finalized in 1999 and will require 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 to produce ultra
low sulfur diesel by June 2006, with some allowance for a conditional phase-in
period that could extend final compliance until 2009. Lyondell estimates that
these rules will result in increased capital investment for LCR, totaling
between $175 million to $225 million for the new gasoline standards and
$250 million to $300 million for the new diesel standard, between now and the
implementation dates. Lyondell's share of LCR's capital expenditures would be
between $250 million and $300 million. In addition, these rules could result in
higher operating costs for LCR. Equistar's olefins fuel business may also be
impacted if these rules increase the cost for processing fuel components.

General--Lyondell is involved in various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the Lyondell
consolidated financial statements.

In the opinion of management, any liability arising from the matters
discussed in this note is not expected to have a material adverse effect on the
consolidated financial statements. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this note could
have a material impact on Lyondell's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.

10.PURCHASE OF ARCO CHEMICAL COMPANY

In connection with the July 28, 1998 acquisition of ARCO Chemical, Lyondell
accrued liabilities for costs associated with the delay of construction of the
PO-11 plant, vesting of certain key manager benefits pursuant to a change of
control provision, severance costs for the involuntary termination of certain
headquarters employees and relocation costs for moving personnel to Lyondell's
Houston headquarters. The total accrued liability for these items was
approximately $255 million at the date of acquisition. Lyondell subsequently
revised the portion of the estimated liabilities for penalties and cancellation
charges related to the PO-11 lump-sum construction contract and related
commitments. Based on the final negotiated terms, Lyondell reduced the accrued
liability by $13 million in 1999 and by $8 million in 2000. In addition, during
2000 Lyondell finalized the portion of the accrued liability related to
employee costs and reduced the liability by $10 million. The benefit in 2000
from the accrual reversal was substantially offset by other acquisition-related
costs. Through June 30, 2001, Lyondell had paid and charged approximately $214
million against the accrued liability. The remaining $10 million of the accrued
liability related to PO-11 commitments and will be paid periodically through
the first quarter 2003.

11.SUPPLEMENTAL GUARANTOR INFORMATION

ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P.
("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors
(collectively "Guarantors") of the $500 million

F-44

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)
senior subordinated notes and $1.9 billion senior secured notes issued by
Lyondell in May 1999. LCNL, a Delaware corporation, is a wholly owned
subsidiary of Lyondell that operates, through wholly owned foreign
subsidiaries, a chemical production facility in Rotterdam, The Netherlands.
ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a
Delaware limited partnership, which holds and licenses technology to other
Lyondell affiliates and to third parties. Separate financial statements of the
Guarantors are not considered to be material to the holders of the senior
subordinated notes and senior secured notes. The following condensed
consolidating financial information present supplemental balance sheet
information for the Guarantors as of June 30, 2001.

CONSOLIDATED
LYONDELL GUARANTORS NON-GUARANTORS ELIMINATIONS LYONDELL
-------- ---------- -------------- ------------ ------------
(MILLIONS OF DOLLARS)

Total current assets.... $ 876 $ 237 $-- $ -- $1,113
Property, plant and
equipment, net......... 1,816 505 -- -- 2,321
Investments and long-
term receivables....... 3,694 1,161 920 (4,150) 1,625
Goodwill, net........... 727 384 -- -- 1,111
Other assets............ 451 64 -- -- 515
------ ------- ---- ------- ------
Total assets............ $7,564 $ 2,351 $920 $(4,150) $6,685
====== ======= ==== ======= ======
Current maturities of
long-term debt......... $ 11 $ -- $-- $ -- $ 11
Other current liabili-
ties................... 321 221 -- -- 542
Long-term debt, less
current maturities..... 3,838 -- -- -- 3,838
Other liabilities....... 430 53 -- -- 483
Deferred income taxes... 561 125 -- -- 686
Intercompany liabilities
(assets)............... 1,278 (1,292) 14 -- --
Minority interest....... 165 -- -- -- 165
Stockholders' equity.... 960 3,244 906 (4,150) 960
------ ------- ---- ------- ------
Total liabilities and
stockholders' equity... $7,564 $ 2,351 $920 $(4,150) $6,685
====== ======= ==== ======= ======

F-45

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Lyondell Chemical Company

In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of Lyondell Chemical Company
and its subsidiaries at December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. This financial
statement is the responsibility of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of this statement in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet presentation. We believe
that our audit of the balance sheet provides a reasonable basis for our
opinion.

/ s / PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 12, 2001

F-46

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000

MILLIONS OF DOLLARS
-------------------

ASSETS
Current assets:
Cash and cash equivalents................................ $ 260
Accounts receivable:
Trade, net............................................. 465
Related parties........................................ 43
Inventories.............................................. 392
Prepaid expenses and other current assets................ 49
Deferred tax assets...................................... 136
------
Total current assets................................. 1,345
Property, plant and equipment, net......................... 2,429
Investments and long-term receivables:
Investment in PO joint ventures.......................... 621
Investment in Equistar Chemicals, LP..................... 599
Receivable from LYONDELL-CITGO Refining LP............... 229
Investment in LYONDELL-CITGO Refining LP................. 20
Other investments and long-term receivables.............. 137
Goodwill, net.............................................. 1,152
Other assets............................................... 515
------
Total assets............................................... $7,047
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.................................................. $ 313
Related parties........................................ 86
Current maturities of long-term debt..................... 10
Other accrued liabilities................................ 325
------
Total current liabilities............................ 734
Long-term debt, less current maturities.................... 3,844
Other liabilities.......................................... 441
Deferred income taxes...................................... 702
Commitments and contingencies.............................. --
Minority interest.......................................... 181
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares autho-
rized, none outstanding................................. --
Common stock, $1.00 par value, 250,000,000 shares autho-
rized, 120,250,000 issued............................... 120
Additional paid-in capital............................... 854
Retained earnings........................................ 504
Accumulated other comprehensive loss..................... (258)
Treasury stock, at cost, 2,689,667 shares................ (75)
------
Total stockholders' equity........................... 1,145
------
Total liabilities and stockholders' equity................. $7,047
======

See Notes to Consolidated Balance Sheet

F-47

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET

1.DESCRIPTION OF THE COMPANY AND OPERATIONS

Lyondell Chemical Company ("Lyondell") operates in the (i) intermediate
chemicals and derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining
and (v) methanol businesses through the operations of the former ARCO Chemical
Company ("ARCO Chemical") acquired by Lyondell as of July 28, 1998 (see Note
3), and through Lyondell's joint venture ownership interests in Equistar
Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP ("LCR") and Lyondell
Methanol Company, L.P. ("LMC").

Lyondell is a leading worldwide producer and marketer of propylene oxide
("PO"), polyether polyols, propylene glycol, propylene glycol ethers, toluene
diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether
("MTBE"). The polyether polyols business was sold effective March 31, 2000 (see
Note 4). These operations are reported as the intermediate chemicals and
derivatives ("IC&D") segment.

Lyondell's operations in the petrochemicals and polymers segments are
conducted through its joint venture ownership interest in Equistar (see Note
5). Lyondell accounts for its investment in Equistar using the equity method of
accounting.

Equistar's petrochemicals segment produces olefins, including ethylene,
propylene and butadiene; aromatics, including benzene and toluene; oxygenated
products, including ethylene oxide and derivatives, ethylene glycol, ethanol
and MTBE, and specialty products, including refinery blending stocks.

Equistar's polymers segment produces polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including wire and cable insulating resins and compounds, adhesive resins, and
fine powders. Equistar's color concentrates and compounds business, which was
part of performance polymers products, was sold effective April 30, 1999.

Lyondell's refining segment operations are conducted through its joint
venture ownership interest in LCR (see Note 6). Lyondell accounts for its
investment in LCR using the equity method of accounting. LCR's full-conversion
Houston, Texas refinery ("Refinery") produces refined petroleum products,
including conventional and reformulated gasoline, low sulfur diesel and jet
fuel; aromatics, including benzene, toluene, paraxylene and orthoxylene;
lubricants, including industrial lubricants, white oils and process oils;
carbon black oil; sulfur; residual fuel and petroleum coke. LCR sells its
principal refined products to Lyondell's joint venture partner in LCR, CITGO
Petroleum Corporation ("CITGO").

Lyondell has additional operations conducted through its 75% joint venture
ownership interest in LMC, which produces methanol. Lyondell accounts for its
investment in LMC using the equity method of accounting.

From its formation in 1985 through June 1988, Lyondell operated as a division
of Atlantic Richfield Company ("ARCO"), which is now wholly owned by BP. In
July 1988, ARCO transferred the division's assets and liabilities along with
additional pipeline assets, to its wholly owned subsidiary, Lyondell
Petrochemical Company (subsequently renamed Lyondell Chemical Company in 1998),
a Delaware corporation. In January 1989, ARCO completed an initial public
offering of approximately 50.1% of Lyondell's common stock. In August 1994,
ARCO issued three-year debt securities ("Exchangeable Notes") which were
exchangeable upon maturity on September 15, 1997 into Lyondell common stock or
an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO
delivered shares of Lyondell common stock to the holders of the Exchangeable
Notes. Lyondell purchased the remaining 383,312 shares of common stock held by
ARCO after the conversion, and ARCO no longer owns any shares of Lyondell
common stock.

F-48

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated balance sheet includes the accounts
of Lyondell and its subsidiaries, including the results of the operations of
the business acquired from ARCO Chemical prospectively from August 1, 1998. All
significant intercompany transactions have been eliminated in consolidation.
Lyondell's joint venture ownership interests are accounted for using the equity
method of accounting.

Equity Method of Accounting--Investments in joint ventures where Lyondell
exerts a certain minimum level of management control, but lacks full decision
making ability over all major issues, are accounted for using the equity method
of accounting. Under those circumstances, this accounting treatment is used
even though Lyondell's ownership percentage may exceed 50%.

Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Lyondell's
policy is to invest cash in conservative, highly rated instruments and limit
the amount of credit exposure to any one institution. Lyondell performs
periodic evaluations of the relative credit standing of these financial
institutions, which are considered in Lyondell's investment strategy.

Lyondell has no requirements for compensating balances in a specific amount
at a specific point in time. Lyondell does maintain compensating balances for
some of its banking services and products. Such balances are maintained on an
average basis and are solely at Lyondell's discretion. As a result, none of
Lyondell's cash is restricted.

Accounts Receivable--Lyondell sells its products primarily to other
industrial concerns in the petrochemicals and refining industries. Lyondell
performs ongoing credit evaluations of its customers' financial condition, and,
in certain circumstances, requires letters of credit from them. Lyondell's
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheet as a reduction of accounts receivable, totaled $12
million at December 31, 2000.

Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of manufacturing facilities and equipment is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from 5 to 30 years. Upon retirement or sale, Lyondell removes the cost
of the asset and the related accumulated depreciation from the accounts and
reflects any resulting gain or loss in the Consolidated Statements of Income.
Lyondell's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.

Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at Lyondell's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method until the next planned turnaround, generally four to
six years. These costs are maintenance, repair and replacement costs that are
necessary to maintain, extend and improve the operating capacity and efficiency
rates of the production units.

Deferred Software Costs--Costs to purchase and develop software for internal
use are deferred and amortized on a straight-line basis over a range of 3 to 7
years.

F-49

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Goodwill--Goodwill represents the excess of purchase price paid over the
value assigned to the net tangible and identifiable intangible assets of a
business acquired. Goodwill is amortized over 40 years, the estimated useful
life, using the straight-line method.

Deferred Charges--Deferred charges are carried at cost and consist primarily
of company-owned life insurance, capacity reservation fees and other long-term
processing rights and costs, deferred debt issuance costs and patents and
licensed technology. These assets are amortized using the straight-line method
over their estimated useful lives or the term of the related agreement, if
shorter.

Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.

Minority Interest--Minority interest in 2000 primarily represents the
interest of third-party investors in a partnership that owns Lyondell's PO/SM
II plant at the Channelview, Texas complex. Lyondell retains a majority
interest in the partnership.

Income Taxes--Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
Consolidated Balance Sheet in accordance with SFAS No. 109, Accounting for
Income Taxes. Valuation allowances are provided against deferred tax assets
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.

Foreign Currency Translation--Where the local currency is the functional
currency, the financial statements of international operations are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and the average exchange rate for each period for revenues,
expenses, gains and losses. Translation adjustments are recorded as a separate
component of "Accumulated other comprehensive income (loss)" in the
stockholders' equity section of the Consolidated Balance Sheet.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, Lyondell reviews its long-lived assets, including goodwill, for impairment
on an exception basis whenever events or changes in circumstances indicate a
potential loss in utility.

F-50

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Derivatives--Adoption of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, did not have a significant impact on the Consolidated
Financial Statements of Lyondell. The statement is effective for Lyondell's
calendar year 2001.

3.PURCHASE OF ARCO CHEMICAL COMPANY

As of July 28, 1998, Lyondell completed its acquisition of ARCO Chemical. The
transaction was financed through a $7 billion Credit Facility (see Note 14).
This acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of the acquired business are included in
Lyondell's Consolidated Statements of Income prospectively from August 1, 1998.
The acquisition cost of approximately $5.9 billion has been allocated to the
assets acquired and liabilities assumed based upon the estimated fair value of
such assets and liabilities at the date of acquisition. In connection with the
acquisition, Lyondell accrued liabilities for costs associated with the delay
of construction of the PO-11 plant, vesting of certain key manager benefits
pursuant to change of control provisions, severance costs for the involuntary
termination of certain headquarters employees, and relocation costs for moving
personnel to Lyondell's Houston headquarters. The liability totaled $255
million at the date of acquisition. Lyondell subsequently revised the portion
of the estimated liabilities for penalties and cancellation charges related to
the PO-11 lump-sum construction contract and related commitments. Based on the
final negotiated terms, Lyondell reduced the accrued liability by $13 million
in 1999 and by $8 million in 2000. In addition, during 2000 Lyondell finalized
the portion of the accrued liability related to employee costs and reduced the
liability by $10 million. The benefit in 2000 from the accrual reversal was
substantially offset by other acquisition-related costs. Through December 31,
2000, Lyondell had paid and charged approximately $213 million in total against
the accrued liability. The remaining $11 million of the accrued liability
relates to PO-11 commitments and final settlement is subject to negotiations
with the affected third parties.

Approximately $57 million, or less than 1% of the purchase price, was
allocated to purchased in-process research and development. This included three
projects valued at $29 million, $18 million and $10 million, respectively,
representing two new product applications and one new process technology.
Lyondell is continuing activities represented by these projects and the values
assigned represent intangibles with no alternative future use. Accordingly,
Lyondell wrote off the in-process research and development, recording a
nonrecurring charge of $57 million in the third quarter 1998. The excess of
purchase price paid over the estimated fair value of net assets acquired was
allocated to goodwill. The amount allocated to goodwill was approximately $1.4
billion.

The fair value of the assets acquired and liabilities assumed, net of cash
acquired, was as follows:

MILLIONS
OF DOLLARS
----------

Current assets, net of cash acquired............................ $1,133
Property, plant and equipment................................... 4,454
Purchased in-process research and development................... 57
Goodwill........................................................ 1,445
Deferred charges and other assets............................... 1,124
Current liabilities............................................. (599)
Long-term debt.................................................. (952)
Other liabilities and deferred credits.......................... (793)
------
Purchase price, net of cash acquired............................ $5,869
======

F-51

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

During 1999, Lyondell obtained the additional information needed to complete
its review of the deferred tax effects of purchase accounting. This additional
information resulted in an increase in goodwill of $188 million, primarily due
to an increase in the long-term deferred income tax liability and a reduction
of long-term deferred tax assets.

4.GAIN ON SALE OF ASSETS

On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer AG and
Bayer Corporation (collectively "Bayer") for approximately $2.45 billion.
Lyondell recorded a pretax gain on the sale of $544 million. In the third
quarter 2000, the final settlement of working capital with Bayer and resolution
of certain estimated liabilities resulted in the recording of an additional
pretax gain on the sale of $46 million. Lyondell used net proceeds of the asset
sale to retire a significant portion of its outstanding debt (see Note 14). As
part of the transaction, Lyondell entered into a U.S. PO manufacturing joint
venture with Bayer and a separate joint venture with Bayer for certain related
PO/SM technology. Lyondell contributed approximately $1.2 billion of assets to
the joint ventures, and sold $522 million of ownership interests to Bayer.
Lyondell's residual interests are reported as "Investment in PO joint ventures"
in the accompanying Consolidated Balance Sheets (see Note 11). In addition, on
December 19, 2000, Lyondell and Bayer formed a separate 50/50 joint venture for
the construction of PO-11, a previously announced world-scale PO/SM plant
located in Rotterdam, The Netherlands.

The major components of the net assets divested, were as follows:

MILLIONS
OF DOLLARS
----------

Working capital, net of cash sold............................... $ 241
Property, plant and equipment................................... 492
Investment in PO joint ventures................................. 522
Goodwill........................................................ 348
Other intangibles............................................... 134
Other liabilities, net.......................................... (15)
------
Total net assets divested....................................... $1,722
======

As part of the asset sale, Lyondell accrued liabilities of $53 million for
employee severance, relocation and other employee benefits, covering
approximately 850 employees. The affected employees were generally terminated
on or about April 1, 2000, with a limited number providing transition services
through mid-2001. Payments of $25 million for severance, relocation and other
employee benefits were made through December 31, 2000. During the third quarter
2000, Lyondell reduced the accrued liability by $25 million due to a reduction
in the number of affected employees and significantly lower than expected
payments of severance and other benefits. The $25 million reduction in accrued
liability was included as part of the gain on sale recognized in the third
quarter. Lyondell expects to settle the remainder of the liability within the
next year.

5.EQUITY INTEREST IN EQUISTAR CHEMICALS, LP

Equistar was formed on December 1, 1997 as a joint venture between Lyondell
and Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses
contributed by the partners. Lyondell contributed substantially all of the
assets comprising its petrochemicals and polymers business segments, while
Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethanol businesses.
On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives
businesses of Occidental Petroleum Corporation ("Occidental") were contributed
to Equistar ("Occidental

F-52

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Contributed Business"). Equistar is operated as a Delaware limited partnership
owned by subsidiaries of Lyondell, Millennium and Occidental.

Lyondell currently has a 41% joint venture ownership interest, while
Millennium and Occidental each have 29.5%. Prior to the addition of Occidental
as a partner on May 15, 1998, Lyondell had a 57% joint venture ownership
interest, while Millennium had 43%.

Summarized balance sheet information for Equistar is as follows as of
December 31, 2000:

MILLIONS
OF DOLLARS
----------

Total current assets............................................ $1,332
Property, plant and equipment, net.............................. 3,819
Goodwill, net................................................... 1,086
Deferred charges and other assets............................... 345
------
Total assets.................................................... $6,582
======
Current maturities of long-term debt............................ $ 90
Other current liabilities....................................... 653
Long-term debt, less current maturities......................... 2,158
Other liabilities and deferred credits.......................... 141
Partners' capital............................................... 3,540
------
Total liabilities and partners' capital......................... $6,582
======

6.EQUITY INTEREST IN LYONDELL-CITGO REFINING LP

In July 1993, LCR was formed to own and operate Lyondell's refining business.
LCR is structured as a Delaware limited partnership owned by subsidiaries of
Lyondell and CITGO. LCR completed a major upgrade project at the Refinery
during the first quarter of 1997, which enabled the facility to process
substantial additional volumes of extra heavy crude oil. As a result of the
completion of the upgrade project, effective April 1, 1997, the participation
interests changed to reflect CITGO's equity contribution to the upgrade
project. The participation interests changed from approximately 86% and 14% for
Lyondell and CITGO, respectively, and are currently 58.75% and 41.25% for
Lyondell and CITGO, respectively. Net income before depreciation expense for
the period is allocated to LCR's partners based upon participation interests.
Depreciation expense is allocated to the partners based upon contributed
assets.

F-53

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

Summarized balance sheet information for LCR is as follows as of December 31,
2000:

MILLIONS
OF DOLLARS
----------

Total current assets............................................ $ 310
Property, plant and equipment, net.............................. 1,319
Deferred charges and other assets............................... 67
------
Total assets.................................................... $1,696
======
Notes payable................................................... $ 450
Other current liabilities....................................... 417
Long-term debt, less current maturities......................... 264
Other liabilities and deferred credits.......................... 57
Partners' capital............................................... 508
------
Total liabilities and partners' capital......................... $1,696
======

LCR has a long-term crude supply agreement ("Crude Supply Agreement") with
Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an
affiliate of CITGO (see Note 16, Commitments and Contingencies--Crude Supply
Agreement). The Crude Supply Agreement incorporates formula prices to be paid
by LCR for the crude oil supplied based on the market value of a slate of
refined products deemed to be produced from each particular crude oil or
feedstock, less: (i) certain deemed refining costs, adjustable for inflation
and energy costs; (ii) certain actual costs; and (iii) a deemed margin, which
varies according to the grade of crude oil or other feedstock delivered.
Although Lyondell believes that the Crude Supply Agreement reduces the
volatility of LCR's earnings and cash flows, the Crude Supply Agreement also
limits LCR's ability to enjoy higher margins during periods when the market
price of crude oil is low relative to then current market prices for refined
products. In addition, if the actual yields, costs or volumes of the LCR
refinery differ substantially from those contemplated by the Crude Supply
Agreement, the benefits of this agreement to LCR could be substantially
different, and could result in lower earnings and cash flow for LCR.
Furthermore, there may be periods during which LCR's costs for crude oil under
the Crude Supply Agreement may be higher than might otherwise be available to
LCR from other sources. A disparity in the price of crude oil under the Crude
Supply Agreement relative to the market prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

In addition, under the terms of a long-term product sales agreement
("Products Agreement"), CITGO purchases substantially all of the refined
products produced at the Refinery. Both PDVSA Oil and CITGO are direct or
indirect, wholly owned subsidiaries of Petroleos de Venezuela, S.A., the
national oil company of the Republic of Venezuela.

Under the terms of the limited partnership agreement of LYONDELL-CITGO
Refining LP, CITGO had a one-time option to increase its participation interest
in LCR up to 50% by making an additional capital contribution. This option
expired September 30, 2000.

F-54

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

7.INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Significant components
of Lyondell's deferred tax liabilities and assets were as follows as of
December 31, 2000:

MILLIONS
OF DOLLARS
----------

Deferred tax liabilities:
Tax over book depreciation and amortization................... $ 717
Investments in partnerships................................... 358
Other......................................................... 36
-----
Total deferred tax liabilities.............................. 1,111
-----
Deferred tax assets:
Net operating loss carryforwards.............................. 161
Provisions for benefit plans and estimated expenses........... 70
Federal benefit attributable to foreign taxes................. 96
Federal tax credit carryforwards.............................. 135
Other......................................................... 103
-----
Total deferred tax assets................................... 565
Deferred tax asset valuation allowance........................ (20)
-----
Net deferred tax assets..................................... 545
-----
Net deferred tax liabilities.................................... 566
Less current portion of:
Deferred tax asset............................................ (136)
Deferred tax liability........................................ --
-----
Long-term deferred income taxes............................... $ 702
=====

Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
elected to treat ARCO Chemical as an asset acquisition, which resulted in a
step up of the U.S. tax basis of the ARCO Chemical net assets purchased. This
has resulted in significantly increased depreciation and amortization
deductions for U.S. tax purposes. The March 2000 sale of assets to Bayer
reversed a significant portion of the accelerated depreciation, while utilizing
net operating loss carryforwards.

8.ACCOUNTS RECEIVABLE

In December 1998, Lyondell entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, Lyondell agreed to sell on an ongoing basis
and without recourse, designated accounts receivable through December 2001. To
maintain the balance of the accounts receivable sold, Lyondell is obligated to
sell new receivables as existing receivables are collected. The agreement
currently permits the sale of up to $100 million of accounts receivable. The
amount of receivables permitted to be sold and actually sold is determined by a
formula, which takes into account, among other factors, Lyondell's credit
rating. As of December 31, 2000 Lyondell's gross accounts receivable that had
been sold to the purchasers aggregated $53 million.

F-55

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

9.INVENTORIES

Inventories are stated at the lower of cost or market. In 2000 approximately
97% of inventories, excluding materials and supplies, were determined by the
last-in, first-out ("LIFO") method. Materials and supplies and other non-LIFO
inventories are valued using either the first-in, first-out ("FIFO") or the
average cost methods. Inventories were as follows at December 31, 2000:

MILLIONS
OF DOLLARS
----------

Finished goods.................................................. $301
Work-in-process................................................. 7
Raw materials................................................... 51
Materials and supplies.......................................... 33
----
Total inventories............................................. $392
====

10.PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31, 2000:

MILLIONS
OF DOLLARS
----------

Land............................................................ $ 10
Manufacturing facilities and equipment.......................... 2,580
Construction projects in progress............................... 95
------
Total property, plant and equipment........................... 2,685
Less accumulated depreciation................................... 256
------
Property, plant and equipment, net............................ $2,429
======

11.INVESTMENT IN PO JOINT VENTURES

As part of the sale of the polyols business and ownership interests in its
U.S. PO manufacturing operations to Bayer, Lyondell entered into a U.S. PO
manufacturing joint venture with Bayer (the "PO Joint Venture") and a separate
joint venture with Bayer for certain related PO/SM technology (the "PO
Technology Joint Venture") (see Note 4). Bayer's ownership interest represents
ownership of an in kind portion of the PO production of the PO Joint Venture.
Bayer's share of PO production from the PO Joint Venture will increase from
approximately 1.0 billion pounds for the last nine months of 2000 to
approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell
takes in kind the remaining PO production and all co-product (SM and TBA)
production from the PO Joint Venture. Under the terms of the operating and
logistics agreements, Lyondell operates the PO Joint Venture plants and
arranges and coordinates the logistics of PO delivery. The partners share in
the cost of production based on their product offtake. Lyondell reports the
cost of its product offtake as inventory and cost of sales in its Consolidated
Financial Statements. Related cash flows are reported in the operating cash
flow section of the Consolidated Statement of Cash Flows. Lyondell's investment
in the PO Joint Venture and the PO Technology Joint Venture is reduced through
recognition of its share of the depreciation and amortization of the assets of
the joint ventures, which is included in cost of sales. Other changes in the
investment balance are principally due to additional capital investments by
Lyondell in the PO Joint Venture and the PO Technology Joint Venture.
Additionally, in December 2000, Lyondell and Bayer formed a separate joint
venture for the construction of a world-scale PO/SM plant, known as PO-11,
located in The Netherlands. Lyondell sold a 50% interest in the construction
project, based on project expenditures to

F-56

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
date, to Bayer for approximately $52 million. Lyondell and Bayer each
contributed their 50% interest in PO-11 into the joint venture and each will
bear 50% of the costs going forward to complete the project. The plant is
expected to start up in the second quarter of 2003. Lyondell and Bayer do not
share marketing or product sales under either the PO Joint Venture or PO-11.

12.OTHER ACCRUED LIABILITIES

Other accrued liabilities were as follows at December 31, 2000:

MILLIONS
OF DOLLARS
----------

Accrued taxes other than income................................. $ 71
Accrued payroll and benefits.................................... 69
Accrued interest................................................ 67
Accrued income taxes............................................ 20
Accrued contractual obligations................................. 58
Other........................................................... 40
----
Total other accrued liabilities............................... $325
====

F-57

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
13.PENSION AND OTHER POSTRETIREMENT BENEFITS

Lyondell provides defined pension and postretirement benefit plans to
employees. The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the plans:

OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
MILLIONS OF DOLLARS

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1..................... $399 $ 72
Service cost...................................... 14 2
Interest cost..................................... 31 5
Plan participants' contributions.................. 1 --
Actuarial (gain) loss............................. 64 (11)
Net effect of settlements, curtailments and
special termination benefits..................... (10) 1
Sale of polyols business.......................... (9) --
Benefits paid..................................... (53) (3)
Transfer from Equistar............................ -- 3
Foreign exchange effects.......................... (6) --
---- ----
Benefit obligation, December 31................... 431 69
---- ----
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1.............. 456 --
Actual return of plan assets...................... 5 --
Company contributions............................. 14 3
Benefits paid..................................... (53) (3)
Foreign exchange effects.......................... (10) --
---- ----
Fair value of plan assets, December 31............ 412 --
---- ----
Funded status..................................... (19) (69)
Unrecognized actuarial (gain) loss................ 73 9
Unrecognized prior service cost................... 5 (26)
Unrecognized transition obligation................ 3 --
---- ----
Net amount recognized............................. $ 62 $(86)
==== ====
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET
CONSIST OF:
Prepaid benefit cost.............................. $ 71 $--
Accrued benefit liability......................... (9) (86)
Additional minimum liability...................... (19) --
Intangible asset.................................. 3 --
Accumulated other comprehensive income............ 16 --
---- ----
Net amount recognized............................. $ 62 $(86)
==== ====

The above table for pension benefits includes foreign pension plans of
Lyondell. These plans constituted approximately 20% of the benefit obligation
and 25% of the plan assets at December 31, 2000. The assumptions used in
determining the net periodic pension cost and pension obligation for foreign
pension plans were based on the economic environment of each applicable
country.

F-58

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

The benefit obligation and fair value of assets for pension plans with
benefit obligations in excess of plan assets were $152 million and $86 million,
respectively, as of December 31, 2000. The accumulated benefit obligation and
fair value of assets for pension plans with accumulated benefit obligations in
excess of plan assets were $112 million and $86 million, respectively, as of
December 31, 2000.

In connection with the formation of Equistar, pension obligations and assets
were not contributed by Lyondell to Equistar. The employees transferred to
Equistar became fully vested in the Lyondell pension plan effective December 1,
1997 and no longer accrue pension service with Lyondell. However, an accrued
postretirement benefit obligation of $12 million associated with Lyondell
employees transferred to Equistar was contributed to Equistar by Lyondell.

The assumptions used as of December 31, 2000 in determining the domestic net
pension liability were as follows:

PENSION OTHER
BENEFITS POSTRETIREMENT BENEFITS
-------- -----------------------

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEM-
BER 31:
Discount rate.......................... 7.50% 7.50%
Expected return on plan assets......... 9.50% --
Rate of compensation increase.......... 4.50% 4.50%

For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 2000 was 7.0%
for 2001 and 5.0% thereafter. A one-percentage-point increase or decrease in
assumed health care cost trend rates would not have a material effect on the
postretirement benefit obligation or the total of the service and interest cost
components.

14.LONG-TERM DEBT AND FINANCING ARRANGEMENTS

In connection with the ARCO Chemical Acquisition, Lyondell executed a bank
credit agreement providing for aggregate borrowing of up to $7 billion. As part
of the acquisition, Lyondell assumed approximately $870 million of ARCO
Chemical debt. Borrowing under the $7 billion Credit Facility of $6.5 billion
was used for: (i) the purchase of approximately 97.4 million shares of ARCO
Chemical common stock; (ii) repayment of debt, including the $345 million term
note payable to Equistar, short-term borrowing of Lyondell and ARCO Chemical
and other long-term borrowing of ARCO Chemical; and (iii) payment of certain
debt issuance costs.

The $7 billion Credit Facility was originally comprised of a five-year, $500
million revolving Credit Facility and four separate term loans as follows:

(a) Term Loan A--$2.0 billion to be amortized over five years;

(b) Term Loan B--$1.25 billion to be amortized over seven years;

(d) Term Loan D--$2.0 billion with principal maturing on June 30, 2000.

All of the term loans were funded on July 28, 1998. No amounts have been
funded to date under the revolving Credit Facility. The Credit Facility was
initially collateralized by cash flow streams from Lyondell's three joint
ventures and Lyondell's common stock ownership in its subsidiaries.

During May 1999, Lyondell amended the $7 billion Credit Facility. The amended
Credit Facility retained the $500 million revolving Credit Facility and also
provided the lenders with additional collateral consisting of its domestic
assets (excluding the assets of its subsidiaries), re-priced the existing loans
to reflect then market

F-59

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
interest rates and revised certain financial covenants. Also in May 1999,
Lyondell issued 40.25 million shares of common stock, receiving net proceeds of
$736 million. Lyondell also issued $500 million of senior subordinated notes
and $1.9 billion of senior secured notes. Lyondell borrowed additional amounts
under the amended Credit Facility through the Credit Facility's new $850
million Term Loan E, maturing June 30, 2006, and the Credit Facility's new $150
million Term Loan F, maturing December 31, 2003. Lyondell used the proceeds to
retire the $1.25 billion principal amount of Term Loan C, maturing June 30,
1999, and the $2 billion principal amount of Term Loan D, maturing June 30,
2000, and to partially repay principal amounts outstanding under Term Loans A
and B under the Credit Facility.

Lyondell used the net proceeds of the March 31, 2000 asset sale to
significantly reduce its variable-rate debt. During the first and second
quarter 2000, Lyondell used the net proceeds to repay the $1.1 billion of
Term Loan A, the $149 million outstanding balance of Term Loan F and $810
million of the outstanding balance of Term Loan B. During the fourth quarter
2000, Lyondell repaid the 9.9% debentures, which matured in November 2000 and
reduced the outstanding balance of Term Loan B by an additional $150 million.

Long-term debt consisted of the following at December 31, 2000:

MILLIONS
OF DOLLARS
----------

Term Loan B..................................................... $ 193
Term Loan E..................................................... 835
Senior Secured Notes, Series A due 2007, 9.625%................. 900
Senior Secured Notes, Series B due 2007, 9.875%................. 1,000
Senior Subordinated Notes due 2009, 10.875%..................... 500
Debentures--due 2005, 9.375%.................................... 100
Debentures--due 2010, 10.25%.................................... 100
Debentures--due 2020, 9.8%...................................... 224
Other........................................................... 2
------
Total long-term debt.......................................... 3,854
Less current maturities......................................... 10
------
Long-term debt, net........................................... $3,844
======

The term loans bear interest at the following variable rates: (i) Term Loan
A--LIBOR plus 3.25%; (ii) Term Loan B--LIBOR plus 3.75%; (iii) Term Loan E--
LIBOR plus 3.875%; and (iv) Term Loan F--LIBOR plus 3.5%.

Aggregate maturities of all long-term debt during the next five years are $10
million in 2001, $11 million in 2002, $44 million in 2003, $85 million in 2004,
$87 million in 2005 and $3.6 billion thereafter.

The amended Credit Facility requires Lyondell to issue $470 million of
subordinated notes, or more junior securities, by June 2002. The requirement to
issue $470 million of subordinated notes will be reduced by $2 for each $1 of
equity securities issued by Lyondell, and will be eliminated if Lyondell
achieves either (1) a specified total debt to adjusted EBITDA ratio, as
defined, or (2) a specified credit rating for its senior unsecured debt.
As part of the amendments to the Credit Facility discussed below, Lyondell is
seeking additional flexibility with respect to this requirement.

Under the covenant provisions of the amended Credit Facility, Lyondell has
agreed to, among other things, (i) maintain certain specified financial ratios
and consolidated net worth, in all cases as provided in the Credit Facility,
(ii) refrain from making certain distributions with respect to Lyondell's
capital stock, (iii) refrain from

F-60

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
making certain investments, as defined, (iv) refrain from allowing its
subsidiaries to incur certain types and amounts of debt, and (v) use its best
efforts to maintain certain ownership interests in its joint ventures and to
ensure that the joint ventures maintain certain capital expenditure and debt
levels and cash distribution policies. The breach of these covenants could
permit the lenders to declare the loans immediately payable and to terminate
future lending commitments.

The indentures under which the senior secured notes and the senior
subordinated notes were issued contain covenants that, subject to exceptions,
restrict the ability of Lyondell and its subsidiaries to (i) incur additional
debt or issue subsidiary preferred stock, (ii) increase aggregate dividends on
Lyondell capital stock, (iii) redeem or repurchase capital stock or repurchase
subordinated debt, (iv) engage in transactions with affiliates, except on an
arms-length basis, (v) create liens or engage in sale and leaseback
transactions, (vi) make some types of investments and sell assets, and (vii)
consolidate or merge with, or sell substantially all of its assets to, another
person. Some of the covenants will no longer apply if the notes achieve
specified credit ratings. The notes are unconditionally guaranteed by certain
Lyondell subsidiaries (see Note 19). The breach of these covenants could permit
the lenders to declare the loans immediately payable.

Lyondell secured an amendment to certain financial covenants in the Credit
Facility in February 2000 designed to increase its financial and operating
flexibility in the near term. Additionally, the amendment eliminated a cross-
default provision in the Credit Facility that could have been triggered by a
default by LCR under its debt instruments.

Lyondell was in compliance with all covenants under its Credit Facility and
the indentures for the senior secured notes and senior subordinated notes as of
December 31, 2000. However, given the poor current business environment,
Lyondell is seeking an amendment to the Credit Facility that would further
increase its financial and operating flexibility, primarily by making certain
financial ratio requirements less restrictive. Lyondell anticipates that the
amendment will become effective prior to March 31, 2001.

Lyondell transferred $745 million of long-term debt to Equistar on December
1, 1997 of which $521 million was outstanding at December 31, 2000. As between
Equistar and Lyondell, Equistar is primarily liable for the debt. Following
amendments to the indentures for $400 million of the debt in November 2000,
Lyondell remains a guarantor of $400 million of the debt and a co-obligor for
$121 million of the debt. Under certain limited circumstances the debt holders
have the right to require repurchase of up to $121 million of the debt.

15.FINANCIAL INSTRUMENTS

Lyondell does not buy, sell, hold or issue financial instruments for
speculative trading purposes.

Foreign currency forward contracts are being used to minimize foreign
exchange exposures, which result from euro-denominated capital commitments
related to the construction of PO-11. At December 31, 2000, Lyondell had
forward contracts outstanding in the notional amount of 134 million euros
(approximately $125 million), maturing monthly from January 2001 to December
2001.

F-61

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
The carrying value and the estimated fair value of Lyondell's financial
instruments as of December 31, 2000 are shown as assets (liabilities) in the
table below:

CARRYING FAIR
VALUE VALUE
--------------------
MILLIONS OF DOLLARS

Nonderivatives:
Investments and long-term receivables................ $ 1,606 $ 1,606
Long-term debt (including current maturities)........ 3,854 3,777
Derivatives:
Foreign currency forwards............................ -- 1

All derivative instruments are off-balance-sheet instruments.

The fair value of all nonderivative financial instruments included in current
assets and current liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and notes payable, approximated their carrying
value due to their short maturity. Investments and long-term receivables, which
consist primarily of equity investments in affiliated companies, were valued
using current financial and other available information. Long-term debt,
including amounts due within one year, was valued based upon the borrowing
rates currently available to Lyondell for debt with terms and average
maturities similar to Lyondell's debt portfolio. The fair value of derivative
financial instruments represents the amount to be exchanged if the existing
contracts were settled at year end and are based on market quotes.

Lyondell is exposed to credit risk related to its financial instruments in
the event of nonperformance by the counterparties. Lyondell does not generally
require collateral or other security to support these financial instruments.
The counterparties to these transactions are major institutions deemed
creditworthy by Lyondell. Lyondell does not anticipate nonperformance by the
counterparties.

16.COMMITMENTS AND CONTINGENCIES

Capital Commitments--Lyondell has commitments, including those related to
capital expenditures, all made in the normal course of business. At December
31, 2000, major capital commitments included Lyondell's 50% share of those
related to the construction of a world-scale PO facility, known as PO-11, in
The Netherlands and a major expansion of a TDI facility in France. The
outstanding commitments on these two projects totaled $290 million as of
December 31, 2000.

Leases--During the third quarter 2000, construction began on a new BDO
facility in Europe known as BDO-2. Construction is being financed by a third
party lessor. Upon completion in the second quarter of 2002, a subsidiary of
Lyondell will lease the facility under an operating lease for a term of five
years. Lyondell may, at its option, purchase the facility at any time up to the
end of the lease term for an amount equal to the unrecovered construction costs
of the lessor, as defined. If Lyondell does not exercise the purchase option,
the facility will be sold and Lyondell will pay the lessor a termination fee to
the extent the sales price is less than the residual value of the facility, as
defined. The residual value at the end of the lease term is estimated at
approximately $185 million. In the transaction documents for BDO-2, Lyondell
agreed to comply with certain financial and other covenants that are
substantially the same as those contained in the Credit Facility. A breach of
those covenants could result in, among other things, Lyondell having to pay the
project costs incurred to date. As of December 31, 2000, Lyondell was in
compliance with all of those covenants. However, given the poor current
business environment, Lyondell is seeking amendments to the transaction
documents consistent with the amendments being sought to its Credit Facility.
Lyondell anticipates that the amendments will become effective prior to March
31, 2001. See Note 14 above for a discussion of the proposed amendments to the
Credit Facility.

F-62

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
TDI Agreements--In January 1995, ARCO Chemical entered into a tolling
agreement and a resale agreement with Rhodia covering the entire TDI output of
Rhodia's two plants in France, which have a combined average annual capacity of
approximately 264 million pounds. Lyondell is currently required to purchase an
average minimum of 212 million pounds of TDI per year under the agreements. The
aggregate purchase price is a combination based on plant cost and market price.
In the second quarter 2000, Lyondell entered into a series of arrangements with
Rhodia to expand the capacity at the Pont de Claix plant, which provides TDI to
Lyondell under the tolling agreement. The expansion will add approximately 105
million pounds of average annual capacity at the Pont de Claix plant, resulting
in a total average annual capacity of approximately 269 million pounds, which
is scheduled to be available in the fourth quarter of 2001. After the
completion of the expansion, all of the TDI that Lyondell receives from Rhodia
will come from the Pont de Claix plant, which is designed to have a more
efficient cost structure. Lyondell's average minimum TDI purchase commitment
under the revised tolling agreement will be 197 million pounds of TDI per year
and will be extended through 2016. The resale agreement, which covered output
at the Lille plant, will expire December 31, 2001.

Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil, an
affiliate of CITGO and of Petroleos de Venezuela, S.A. ("PDVSA"), the national
oil company of the Republic of Venezuela, is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil. This
constitutes approximately 88% of the refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce deliveries of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced deliveries of crude
oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that
month. LCR was advised by PDVSA Oil in May 1999 of a further reduction to
184,000 barrels per day, effective May 1999. On several occasions since then,
PDVSA Oil has further reduced certain crude oil deliveries, although it has
made payments in partial compensation for such reductions. Subsequently, PDVSA
Oil unilaterally increased deliveries of crude oil to LCR to 195,000 barrels
per day effective April 2000, to 200,000 barrels per day effective July 2000
and to 230,000 barrels per day effective October 2000. By letter dated February
9, 2001, PDVSA Oil informed LCR that the Venezuelan government, through the
Ministry of Energy and Mines, has instructed that production of certain grades
of crude oil be reduced effective February 1, 2001. The letter states that
PDVSA Oil declares itself in a force majeure situation, but does not announce
any reduction in crude oil deliveries to LCR. Although some reduction in crude
oil delivery may be forthcoming, it is unclear as to the level of reduction, if
any, which may be anticipated. LCR has consistently contested the validity of
PDVSA Oil's and PDVSA's reductions in deliveries under the Crude Supply
Agreement and, on March 12, 2001, Lyondell, on behalf of LCR, sent a letter to
PDVSA Oil and PDVSA disputing the existence and validity of the purported force
majeure situation declared by the February 9 letter. PDVSA has announced that
it intends to renegotiate the crude supply agreements that it has with all
third parties, including LCR. However, they have confirmed that they expect to
honor their commitments if a mutually acceptable restructuring of the Crude
Supply Agreement is not achieved. The breach or termination of the Crude Supply
Agreement would require LCR to purchase all or a portion of its crude oil
feedstocks in the merchant market, would subject LCR to significant volatility
and price fluctuations and could adversely affect LCR and, therefore, Lyondell.

LCR Debt--On May 5, 2000, Lyondell and CITGO, as partners of LCR, arranged
interim financing for LCR to repay the $450 million outstanding under its
Construction Facility. On September 15, 2000, Lyondell and CITGO completed the
syndication of one-year credit facilities for LCR, which consist of a $450
million term loan to replace the interim financing and a $70 million revolving
Credit Facility to be used for working capital and general business purposes.
Lyondell and CITGO, as partners of LCR, have agreed to pursue a refinancing of
the indebtedness, although the final terms have not been determined. Based on
previous experience of refinancing LCR's debt and the current conditions of the
financial markets, the management of LCR, Lyondell and CITGO anticipate that
this debt can be refinanced prior to its maturity.

F-63

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from ARCO (now wholly owned by BP) to Lyondell in 1988, Lyondell
agreed to assume certain liabilities arising out of the operation of Lyondell's
integrated petrochemicals and refining business prior to July 1, 1988. In
connection with the transfer of such liabilities, Lyondell and ARCO entered
into an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"),
whereby Lyondell agreed to defend and indemnify ARCO against certain uninsured
claims and liabilities which ARCO may incur relating to the operation of
Lyondell prior to July 1, 1988, including certain liabilities which may arise
out of pending and future lawsuits. For current and future cases related to
Lyondell's products and operations, ARCO and Lyondell bear a proportionate
share of judgment and settlement costs according to a formula that allocates
responsibility based upon years of ownership during the relevant time period.
Under the Revised Cross-Indemnity Agreement, Lyondell will assume
responsibility for its proportionate share of future costs for waste site
matters not covered by ARCO insurance.

In connection with the acquisition of ARCO Chemical Company ("ARCO
Chemical"), Lyondell succeeded, indirectly, to a cross indemnity agreement with
ARCO whereby ARCO Chemical indemnified ARCO against certain claims or
liabilities that ARCO may incur relating to ARCO's former ownership and
operation of the businesses of ARCO Chemical, including liabilities under laws
relating to the protection of the environment and the workplace, and
liabilities arising out of certain litigation. As part of the agreement, ARCO
indemnified ARCO Chemical with respect to claims or liabilities and other
matters of litigation not related to the ARCO Chemical business.

Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and
Occidental have each agreed to provide certain indemnifications to Equistar
with respect to the petrochemicals and polymers businesses contributed by the
partners. In addition, Equistar agreed to assume third party claims that are
related to certain pre-closing contingent liabilities that are asserted prior
to December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for
Occidental, to the extent the aggregate thereof does not exceed $7 million to
each partner, subject to certain terms of the respective asset contribution
agreements. As of December 31, 2000, Equistar had expensed approximately $5
million under the $7 million indemnification basket with respect to the
business contributed by Lyondell. Equistar also agreed to assume third party
claims that are related to certain pre-closing contingent liabilities that are
asserted for the first time after December 1, 2004 for Lyondell and Millennium,
and for the first time after May 15, 2005 for Occidental.

Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Lyondell
cannot accurately predict future developments, such as increasingly strict
environmental laws and inspection and enforcement policies, as well as higher
compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or
hazardous and non-hazardous waste.

F-64

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
along with several other companies, as a potentially responsible party for a
third CERCLA site near Houston, Texas. In addition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell estimates, based upon currently available information,
that potential loss contingencies associated with the latter CERCLA sites,
individually and in the aggregate, are not significant.

As of December 31, 2000, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled $31
million. The liabilities per site range from less than $1 million to
$13 million and are expected to be incurred over the next two to seven years.
In the opinion of management, there is currently no material range of loss in
excess of the amount recorded for these sites. 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 other CERCLA, RCRA,
TNRCC or other comparable state or foreign law investigations, could require
Lyondell to reassess its potential exposure related to environmental matters.

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
the year 2007. These emission reduction controls must be installed during the
next several years, well in advance of the 2007 deadline. This could result in
increased capital investment, which could, in the aggregate, be between $400
million and $500 million before the 2007 deadline, and higher operating costs
for Equistar, Lyondell and LCR. Lyondell has been actively involved with a
number of organizations to help solve the ozone problem in the most cost-
effective manner and, in January 2001, Lyondell and an organization composed of
industry participants filed a lawsuit against the TNRCC to encourage adoption
of their alternative plan to achieve the same air quality improvement with less
negative economic impact on the region.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. Such actions, to be effective, would require (i) a waiver
of the state's oxygenate mandate, (ii) Congressional action in the form of an
amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999.
That report recommended, among other things, reducing the use of MTBE in
gasoline. During 2000, the EPA announced its intent to seek legislative changes
from Congress to give the EPA authority to ban MTBE over a three-year period.
Such action would only be granted through amendments to the Clean Air Act.
Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority
contained in the Toxic Substance Control Act. It would take at least three
years for such a rule to issue. Recently, however, senior policy analysts at
the U.S. Department of Energy presented a study stating that banning MTBE would
create significant economic risk. The presentation did not identify any
benefits from banning MTBE. The EPA initiatives mentioned above or other
governmental actions could result in a significant reduction in Lyondell's MTBE
sales. The Company has developed technologies to convert TBA into alternate
gasoline blending components should it be necessary to reduce MTBE production
in the future.

F-65

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
General--Lyondell is involved in various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the Lyondell
Consolidated Financial Statements.

In the opinion of management, any liability arising from the matters
discussed in this note is not expected to have a material adverse effect on the
Consolidated Financial Statements. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this note could
have a material impact on Lyondell's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.

17.LEASE COMMITMENTS

Lyondell leases various facilities and equipment under noncancelable lease
arrangements for varying periods. As of December 31, 2000, future minimum lease
payments for the next five years and thereafter, relating to all noncancelable
operating leases with terms in excess of one year were as follows:

MILLIONS
OF DOLLARS
----------

2001............................................ $ 51
2002............................................ 43
2003............................................ 36
2004............................................ 34
2005............................................ 34
Thereafter...................................... 163
Less sublease rentals........................... (51)
----
Total minimum lease payments.................. $310
====

18.STOCKHOLDERS' EQUITY

Treasury Stock--From time to time Lyondell purchases its shares in the open
market to issue under its employee compensation and benefits plans, including
stock option and restricted stock plans. During 1998, Lyondell purchased
500,000 shares for approximately $10 million to be used for such plans. In
addition during 1998, Lyondell completed the stock repurchase program
authorized by Lyondell's Board of Directors in September 1997. A total of
2,567,051 shares were purchased for $75 million under this stock
repurchase program. For the year ended December 31, 2000 Lyondell reissued,
under the Restricted Stock Plan, 71,127 shares previously purchased.

1999 Incentive Plan--The 1999 Long-Term Incentive Plan ("1999 LTIP") provides
for the grant of awards to employees of Lyondell and its subsidiaries. Awards
to employees may be in the form of (i) stock options, (ii) stock appreciation
rights, payable in cash or common stock, (iii) restricted grants of common
stock or units denominated in common stock, (iv) performance grants denominated
in common stock or units denominated in common stock that are subject to the
attainment of one or more goals, (v) grants of rights to receive the value of a
specified number of shares of common stock (phantom stock), and (vi) a cash
payment. Awards of common stock under the 1999 LTIP are generally limited to
the lesser of ten million shares or 10% of the number of shares of common stock
outstanding at the time of granting of the award. During 2000, Lyondell awarded
stock option grants for 2,228,241 shares and grants for 706,345 performance
shares under this plan. The weighted-average grant-date fair value of the
performance share grants was $12.91 per share.

F-66

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Restricted Stock Plan--Under the 1995 Restricted Stock Plan, one million
shares of common stock are available for grants and awards to officers and
other key management employees. Lyondell grants fixed awards of common stock
that are forfeitable and subject to restrictions on transfer. Vesting is
contingent on the participant's continuing employment at Lyondell for a period
specified in the award. During 2000 and 1999, Lyondell granted and issued
restricted stock of 71,127 shares and 299,227 shares, respectively, to officers
and employees. During 1998 Lyondell granted and issued 88,848 shares of
restricted stock to former employees of ARCO Chemical. The shares vest on
various dates through May 4, 2003, depending upon the terms of the individual
grants. Employees are entitled to receive dividends on the restricted shares.

Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors
of Lyondell declared a dividend of one right ("Right") for each outstanding
share of Lyondell's common stock to stockholders of record on December 20,
1995. The Rights become exercisable upon the earlier of: (i) ten days following
a public announcement by another entity that it has acquired beneficial
ownership of 15% or more of the outstanding shares of common stock; or (ii) ten
business days following the commencement of a tender offer or exchange offer to
acquire beneficial ownership of 15% or more of the outstanding shares of common
stock, except under certain circumstances. The Rights expire at the close of
business on December 8, 2005 unless earlier redeemed at a price of $.0005 per
Right or exchanged by Lyondell as described in the Rights Agreement dated as of
December 8, 1995.

Stock Options--The following table summarizes activity relating to stock
options under the 1999 LTIP. As of December 31, 2000, options covering
3,665,767 shares with a weighted average remaining life of 8 years were
outstanding at prices ranging from $11.8125 to $20.00 per share of which
520,189 shares were exercisable.

AVERAGE
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ------------

Balance, January 1, 2000........................... 1,623,434 17.79
Granted.......................................... 2,228,241 13.07
Cancelled........................................ (185,908) 16.64
---------
Balance, December 31, 2000......................... 3,665,767 14.98
=========

Lyondell's Executive Long-Term Incentive Plan ("LTI Plan") became effective
in November 1988. The last stock options granted under the LTI Plan were
granted in March 1994. No additional stock option grants will be made under
this plan. As of December 31, 2000, options covering 596,264 shares were
outstanding under the LTI Plan with a weighted average remaining life of 2
years, all of which were exercisable at prices ranging from $20.25 to $26.00
per share.

The following summarizes stock option activity for the LTI Plan:

AVERAGE
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ------------

Balance, January 1, 2000............................ 608,597 23.61
Exercised......................................... (6,850) 20.25
Cancelled......................................... (5,483) 21.30
-------
Balance, December 31, 2000.......................... 596,264 23.67
=======

F-67

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

19.SUPPLEMENTAL GUARANTOR INFORMATION

ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P.
("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors
(collectively "Guarantors") of the Credit Facility as well as the $500 million
senior subordinated notes and $1.9 billion senior secured notes issued by
Lyondell in May 1999. LCNL, a Delaware corporation, is a wholly owned
subsidiary of Lyondell that operates a chemical production facility in
Rotterdam, The Netherlands and has been a Guarantor since the Credit Facility
was entered into. In April 2000, pursuant to the terms of Lyondell's Credit
Facility, ACTI and ACTLP became "significant subsidiaries" as defined in the
Credit Facility, and, as such, guarantors of the above-mentioned debt
securities. ACTI is a Delaware corporation, which holds the investment in
ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses
technology to other Lyondell affiliates and to third parties. Separate
financial statements of the Guarantors are not considered to be material to the
holders of the senior subordinated notes and senior secured notes. The
following condensed consolidating financial information present supplemental
balance sheet information for the Guarantors as of December 31, 2000.

CONSOLIDATED
LYONDELL GUARANTOR NON-GUARANTORS ELIMINATIONS LYONDELL
-------- --------- -------------- ------------ ------------
(MILLIONS OF DOLLARS)

Total current assets.... $1,103 $ 242 $-- $ -- $1,345
Property, plant and
equipment, net......... 1,863 566 -- -- 2,429
Other investments and
long-term receivables.. 3,154 413 920 (2,881) 1,606
Goodwill, net........... 738 414 -- -- 1,152
Other assets............ 450 61 -- 4 515
------ ------ ---- ------- ------
Total assets............ $7,308 $1,696 $920 $(2,877) $7,047
====== ====== ==== ======= ======
Current maturities of
long-term debt......... $ 10 $ -- $-- $ -- $ 10
Other current liabili-
ties................... 501 223 -- -- 724
Long-term debt, less
current maturities..... 3,844 -- -- -- 3,844
Other liabilities....... 382 59 -- -- 441
Deferred income taxes... 562 140 -- -- 702
Intercompany liabilities
(assets)............... 1,173 (1,245) 68 4 --
Minority interest....... 181 -- -- -- 181
Stockholders' equity.... 655 2,519 852 (2,881) 1,145
------ ------ ---- ------- ------
Total liabilities and
stockholders' equity... $7,308 $1,696 $920 $(2,877) $7,047
====== ====== ==== ======= ======

F-68

MILLENNIUM CHEMICALS INC.

CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2001
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

ASSETS
Current assets
Cash and cash equivalents......................................... $ 67
Trade receivables, net............................................ 285
Inventories....................................................... 333
Other current assets.............................................. 109
------
Total current assets.......................................... 794
Property, plant and equipment, net.................................. 915
Investment in Equistar.............................................. 729
Other assets........................................................ 242
Goodwill............................................................ 385
------
Total assets.................................................. $3,065
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.............................. 2
Trade accounts payable............................................ 159
Accrued expenses and other liabilities............................ 167
------
Total current liabilities..................................... 328
Long-term debt...................................................... 1,207
Deferred income taxes............................................... 4
Other liabilities................................................... 617
------
Total liabilities............................................. 2,156
------
Commitments and contingencies (Note 7)
Minority interest................................................... 20
Shareholders' equity
Preferred stock (par value $.01 per share, authorized 25,000,000
shares, none issued and outstanding)............................. --
Common stock (par value $.01 per share, authorized 225,000,000
shares;
77,896,586 shares issued)........................................ 1
Paid in capital................................................... 1,310
Retained deficit.................................................. (1)
Unearned restricted shares........................................ (10)
Cumulative other comprehensive loss............................... (143)
Treasury stock (at cost, 14,567,318 shares)....................... (282)
Deferred compensation............................................. 14
------
Total shareholders' equity.................................... 889
------
Total liabilities and shareholders' equity.......................... $3,065
======

See Notes to Consolidated Balance Sheet

F-69

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

NOTE 1--DESCRIPTION OF COMPANY

The Company and Occidental each have a 29.5% interest in Equistar and
Lyondell has a 41% interest. Equistar owns and operates the petrochemical,
polymer and derivative businesses contributed to it by its partners. Equistar
is managed by a Partnership Governance Committee consisting of representatives
of each partner. Approval of Equistar's strategic plans and other major
decisions require the consent of the representatives of the three partners. All
decisions of Equistar's Governance Committee that do not require unanimity
among the partners may be made by Lyondell's representatives alone. The Company
accounts for its interest in Equistar using the equity method.

In March 2001, the Company restructured its operations into two business
units, the "Growth and Development" unit and the "Operational Excellence" unit.
The Growth and Development unit will focus on identifying, developing and
managing businesses that the Company believes have growth potential and
operating margins exceeding chemical industry averages. The Growth and
Development unit includes the Fragrance and Flavor Chemicals business and the
Performance Chemicals business. The Operational Excellence unit will focus on
identifying, developing and managing businesses with steady cash flow for
disciplined growth, and includes the Acetyls business and the portion of the
Titanium Dioxide and Related Products business that is not included in
Performance Chemicals, as well as the interest in Equistar.

The Company was incorporated on April 18, 1996, and has been publicly owned
since October 1, 1996, when Hanson PLC ("Hanson") transferred its chemical
operations to the Company and, in consideration, all of the then outstanding
shares of the Company's common stock ("Common Stock") were distributed pro rata
to Hanson's shareholders (the "Demerger").

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. Minority
interest represents the minority ownership of the Company's Brazilian
subsidiary. All significant intercompany accounts and transactions have been
eliminated. The unaudited consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
adjustments necessary for a fair presentation of the results of operations and
financial position for the periods presented in conformity with generally
accepted accounting principles. Such adjustments are normal recurring items.

Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

F-70

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Cash Equivalents: Cash equivalents represent investments in short-term
deposits and commercial paper with banks which have original maturities of 90
days or less. In addition, other assets include approximately $16 in restricted
cash at June 30, 2001 which is on deposit to satisfy insurance claims.

Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 28% of consolidated inventories
at June 30, 2001, cost is determined under the last-in, first-out (LIFO)
method. The first-in, first-out (FIFO) method, or methods which approximate
FIFO, are used by all other subsidiaries.

Finished products..................................................... $175
In-process products................................................... 25
Raw materials......................................................... 85
Other inventories..................................................... 48
----
$333
====

Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings
and 5 to 25 years for machinery and equipment. Major repairs and improvements
incurred in connection with substantial overhauls or maintenance turnaround are
capitalized and amortized on a straight-line basis until the next planned
turnaround (generally 18 months). Other less substantial maintenance and repair
costs are expensed as incurred.

Goodwill: Goodwill represents the excess of the purchase price over the fair
value of net assets allocated to acquired companies. Goodwill is being
amortized using the straight-line method over 40 years. Management periodically
evaluates goodwill for impairment based on the anticipated future cash flows
attributable to its operations. Such expected cash flows, on an undiscounted
basis, are compared to the carrying value of the tangible and intangible
assets, and if impairment is indicated, the carrying value of goodwill is
adjusted. In the opinion of management, no impairment of goodwill existed at
June 30, 2001.

Environmental Liabilities and Expenditures: Accruals for environmental
matters are recorded in operating expenses when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties, except where
payment has been received or the amount of liability or contribution by such
other parties, including insurance companies, has been agreed, and are not
discounted. Environmental costs are capitalized if the costs increase the value
of the property and/or mitigate or prevent contamination from future
operations.

F-71

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Derivative Instruments and Hedging Activities: All derivatives are recognized
on the balance sheet at their fair value. On the date the derivative contract
is entered into, the Company designates the derivative as (1) a hedge of the
fair value of a recognized asset or liability or of an unrecognized firm
commitment ("fair value" hedge), (2) a hedge of a forecasted transaction ("cash
flow" hedge), (3) a foreign-currency fair-value or cash-flow hedge ("foreign
currency" hedge) or (4) a hedge of a net investment in a foreign operation.

Changes in the fair value of a derivative that is highly effective as--and
that is designated and qualifies as--a fair-value hedge, along with the loss or
gain on the hedged asset or liability that is attributable to the hedged risk
(including losses or gains on firm commitments), are recorded in current-period
earnings. Changes in the fair value of a derivative that is highly effective
as--and that is designated and qualifies as--a cash-flow hedge are recorded in
Other comprehensive income ("OCI"), until earnings are affected by the
variability of cash flows. Changes in the fair value of derivatives that are
highly effective as--and that are designated and qualify as--foreign-currency
hedges are recorded in either current-period earnings or OCI, depending on
whether the hedge transaction is a fair-value hedge or a cash-flow hedge. If,
however, a derivative is used as a hedge of a net investment in a foreign
operation, its changes in fair value, to the extent effective as a hedge, are
recorded in the cumulative translation adjustments account within shareholders'
equity. For derivative instruments not designated as hedging instruments,
changes in fair values are recognized in earnings in the current period.

The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge, or that it has
ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively.

Income Taxes: Deferred income taxes result from temporary differences between
the financial statement basis and income tax basis of assets and liabilities
and are computed using enacted marginal tax rates of the respective tax
jurisdictions. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full. The Company and certain of its
subsidiaries have entered into tax-sharing and indemnification agreements with
Hanson or its subsidiaries in which the Company and/or its subsidiaries
generally agreed to indemnify Hanson or its subsidiaries for income tax
liabilities attributable to periods when such other operations were included in
the consolidated tax returns of the Company's subsidiaries.

NOTE 3--REORGANIZATION AND PLANT CLOSURE CHARGES

A provision for restructuring and other plant closure costs of $36 before-tax
($24 after-tax or $0.37 per share) was recorded in the first half of 2001
related to restructuring activities within each of the Company's business
segments. During the second quarter of 2001, $31 was recorded in connection
with the Company's announced decision to indefinitely idle its sulfate-process
TiO\\2\\ plant in Hawkins Point, Maryland and reduce its worldwide workforce by
10%. The $31 charge includes severance and other employee related costs of $19
for the termination of approximately 400 employees involved in manufacturing,
technical, sales and marketing, finance and administrative support. In
addition, the $31 charge included a $10 write-down of assets related to the
Hawkins Point sulfate-process plant which will be shutdown by September 1, 2001
and $2 in other costs associated with the idling of the plant. Employee
terminations and charges against reserves will begin in the third quarter of
2001.

F-72

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

During the first quarter of 2001, the Company announced the realignment of
its operating and management structure to take better advantage of the
Company's existing growth-oriented businesses and achieve higher returns from
its operations that have lower growth rates. In connection with the
realignment, the Company announced the closure of its facilities in Cincinnati,
Ohio and recorded restructuring and other charges of $5 in the Acetyls segment.
These charges included $3 of severance and other termination benefits related
to the termination of about 35 employees involved in technical, marketing and
administrative activities, as well as $2 related to the write-down of assets,
lease termination costs and other charges associated with the Cincinnati
facility. The office in Cincinnati was closed during the second quarter of
2001.

NOTE 4--LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Revolving Credit Facility bearing interest at the option of the
Company at the higher of the federal funds rate plus one-half of
1% and the bank's prime lending rate plus .50%, or at LIBOR or
NIBOR plus 1.50% plus a facility fee of .50% to be paid quarterly. $ 40
Term loan bearing interest at the option of the Company at the
higher of the federal funds rate plus one-half of 1% and the
bank's prime lending rate plus 1.50%, or at LIBOR or NIBOR plus
2.50% to be paid quarterly........................................ 125
7% Senior Notes due 2006........................................... 500
7.625% Senior Debentures due 2026.................................. 249
9.25% Senior Notes due 2008........................................ 275
Debt payable through 2007 at interest rates ranging from 2% to
9.5%.............................................................. 20
Less current maturities of long-term debt.......................... (2)
------
$1,207
======

On June 18, 2001, Millennium America Inc. ("Millennium America"), a wholly
owned indirect subsidiary of the Company, entered into a five-year Secured
Credit Agreement (the "Credit Agreement") to replace the previously existing
Revolving Credit Agreement which was due to expire in July 2001. Under the new
Credit Agreement, certain of the Company's subsidiaries including Millennium
America may borrow up to $175 under a revolving credit portion of the Credit
Agreement ("Revolving Loans") and up to $125 under the term loan portion of the
Credit Agreement ("Term Loans"). As of June 30, 2001, the Company has borrowed
$125 of Term Loans and has $135 of unused availability under the Revolving
Loans.

The Company and Millennium America guarantee the obligations under the Credit
Agreement.

The Revolving Loans are available in U.S. dollars, pounds sterling, euros and
any other freely tradable currencies in the London market. The Revolving Loans
may be borrowed, repaid, prepaid and reborrowed from time to time. The
Revolving Loans include a $50 letter of credit subfacility and a swingline
facility in the amount of $25. The Term Loans may be prepaid at the option of
the Company at any time, but may not be reborrowed if prepaid.

The Credit Agreement contains negative covenants, subject to certain
exceptions and specified baskets, that limit, among other things, the ability
of the Company and/or certain subsidiaries of the Company to: (i) incur debt
and issue preferred stock; (ii) create liens; (iii) engage in sale and
leaseback transactions; (iv) declare or pay dividends on, or purchase, the
Company's stock; (v) make restricted payments; (vi) engage in transactions with
affiliates; (vii) sell assets; (viii) engage in mergers or acquisitions; (ix)
engage in domestic account receivable securitization transactions; (x) increase
the amount of the $750 limited guarantee of collection by Millennium America on
behalf of Equistar (as described below in this note); and (xi) enter into

F-73

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
restrictive agreements. In the event the Company sells certain assets as
specified in the Credit Agreement, the Term Loans must be prepaid with a
portion of the net cash proceeds of such sale. In addition, the Credit
Agreement requires the Company to satisfy financial performance criteria with
respect to debt coverage and interest coverage ratios.

The obligations are collateralized by: (1) a pledge of 100% of the stock of
the Company's existing and future domestic subsidiaries and 65% of the stock of
certain of the Company's existing and future foreign subsidiaries, in both
cases other than subsidiaries that hold immaterial assets (as defined in the
Credit Agreement), (2) all the equity interests held by the Company's
subsidiaries in Equistar and the LaPorte Methanol Company (which pledges are
limited to the right to receive distributions made by Equistar and the LaPorte
Methanol Company, respectively), and (3) all present and future accounts
receivable, intercompany indebtedness, and inventory of the Company's domestic
subsidiaries, other than subsidiaries that hold immaterial assets (as defined
in the Credit Agreement).

The 7% Senior Notes and 7.625% Senior Debentures were issued by Millennium
America, and are guaranteed by the Company. The indenture under which the
Senior Notes and Senior Debentures were issued contains certain covenants that
limit, among other things: (i) the ability of Millennium America and its
Restricted Subsidiaries (as defined) to grant liens or enter into sales-and
leaseback transactions; (ii) the ability of the Restricted Subsidiaries to
incur additional indebtedness; and, (iii) the ability of Millennium America and
the Company to merge, consolidate or transfer substantially all of their
respective assets.

The 9.25% Senior Notes were issued by Millennium America, and are guaranteed
by the Company. The indenture under which the 9.25% Senior Notes were issued
contains certain covenants that limit, among other things, the ability of the
Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) pay dividends or
make distributions; (iv) repurchase capital stock; (v) make other restricted
payments including, without limitation, investments; (vi) create liens;
(vii) redeem debt that is junior in right of payment to the 9.25% Senior Notes;
(viii) sell or otherwise dispose of assets, including capital stock of
subsidiaries; (ix) enter into arrangements that restrict dividends from
subsidiaries; (x) enter into mergers or consolidations; (xi) enter into
transactions with affiliates; and, (xii) enter into sale/leaseback
transactions. In addition, if the 9.25% Senior Notes receive debt ratings from
both Standard & Poor's and Moody's Investors Service as specified in the
indenture and meet certain other requirements, certain of these covenants will
no longer apply.

The maturities of long term debt during the next five years are as follows:

2002................................................... 2
2003................................................... 6
2004................................................... 6
2005................................................... 47
2006................................................... 606
Thereafter............................................. 542

In connection with the formation of Equistar in December 1997, Millennium
America provided a limited guarantee of collection with respect to principal
and interest on a total of $750 principal amount of indebtedness under
Equistar's $1,250 revolving credit facility. However, pursuant to the terms of
this guarantee, the lenders may not proceed against Millennium America until
they have exhausted their remedies against Equistar. The guarantee will remain
in effect indefinitely, but at any time after December 31, 2004, Millennium
America may elect to terminate the guarantee if certain conditions are met
including financial ratios and covenants. In addition, Millennium America may
elect to terminate the guarantee in the event the

F-74

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Company sells its interests in the subsidiaries that directly hold the
partnership interests of Equistar or if those subsidiaries sell their interests
in Equistar, provided certain conditions are met including financial ratios and
covenants.

NOTE 5--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities," as amended, which requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting SFAS 133 as of January 1, 2001 was not material
to the Company's financial statements.

The Company is exposed to market risk, such as changes in currency exchange
rates, interest rates and commodity pricing. To manage the volatility relating
to these exposures, the Company selectively enters into derivative transactions
pursuant to the Company's policies for hedging practices. Designation is
performed on a specific exposure basis to support hedge accounting. The changes
in fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the fair value or cash flows of the underlying
exposures being hedged. The Company does not hold or issue derivative financial
instruments for trading purposes.

Foreign Currency Exposure Management: The Company manufactures and sells its
products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company primarily utilizes forward exchange contracts with maturities of less
than twelve months.

The Company utilizes forward exchange contracts with contract 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 have not been designated as
hedges for accounting purposes. The gains and losses on both the derivatives
and the foreign currency denominated trade receivables and payables are
recorded in current earnings.

In addition, the Company utilizes forward exchange contracts which qualify as
cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in OCI until the underlying transaction is
recognized in earnings. The earnings impact is reported either in Net sales or
Cost of products sold to match the underlying transaction being hedged. As of
June 30, 2001, approximately $0.3 of deferred net gains on foreign currency
cash flow hedges accumulated in OCI are expected to be reclassified to earnings
during the next twelve months.

Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by weather and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
to manage the volatility related to anticipated purchases of natural gas with a
maximum maturity of three years. These market instruments are designated as
cash flow hedges. The mark-to-market gain or loss on qualifying hedges is
included in OCI to the extent effective, and reclassified into cost of products
sold in the period during which the hedged transaction affects earnings. The
mark-to-market gains or losses on ineffective portions of hedges are recognized
in cost of products sold immediately. As of June 30, 2001, approximately $5 of
deferred net losses on commodity swaps accumulated in OCI are expected to be
reclassified to earnings during the next twelve months. No cash flow hedges
were discontinued during the quarter ended June 30, 2001.

F-75

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

Interest-rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates and to lower (where possible) the cost of its
borrowed funds. As of June 30, 2001 the Company has entered into interest-rate
swap agreements to convert $50 of its fixed-rate debt into variable-rate debt.
These derivatives do not qualify for hedge accounting because the maturity of
the swaps is less than the maturity of the hedged debt. Accordingly, the fair
value of such arrangements as of June 30, 2001 of ($0.5) has been recognized as
interest expense.

NOTE 6--RELATED PARTY TRANSACTIONS

One of the Company's subsidiaries purchases ethylene from Equistar at market-
related prices pursuant to an agreement made in connection with the formation
of Equistar. Under the agreement, the subsidiary is required to purchase 100%
of its ethylene requirements for its La Porte, Texas, facility up to a maximum
of 330 million pounds per year from Equistar. The agreement automatically
renews annually. The initial term of the contract was through December 1, 2000
and was automatically renewed. Either party may terminate on one year's notice
and neither party has provided such notice.

One of the Company's subsidiaries sells vinyl acetate monomer ("VAM") to
Equistar at formula-based prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Equistar is
required to purchase 100% of its VAM feedstock requirements for its La Porte,
Texas, Clinton and Morris, Illinois plants, estimated to be 48 to 55 million
pounds per year, up to a maximum of 60 million pounds per year ("Annual
Maximum") for the production of ethylene vinyl acetate products at those
locations. If Equistar fails to purchase at least 42 million pounds of VAM in
any calendar year, the Annual Maximum quantity may be reduced by as much as the
total purchase deficiency for one or more successive years. In order to reduce
the Annual Maximum quantity, Equistar must be notified within at least 30 days
prior to restricting the VAM purchases provided that the notice is not later
than 45 days after the year of the purchase deficiency. The agreement
automatically renews annually. The initial term of the contract was through
December 31, 2000 and was automatically renewed. Either party may terminate on
one year's notice and neither party has provided such notice.

One of the Company's subsidiaries and Equistar have entered into various
operating, manufacturing and technical service agreements. These agreements
provide the subsidiary with certain utilities, administrative office space, and
health, safety and environmental services.

NOTE 7--COMMITMENTS AND CONTINGENCIES

Legal and Environmental: The Company and various of its subsidiaries are
defendants in a number of pending legal proceedings incidental to present and
former operations. These include several proceedings alleging injurious
exposure of the plaintiffs to asbestos, as well as various chemicals and
materials manufactured by the Company's current and former subsidiaries.
Typically, such proceedings involve large claims made by many plaintiffs
against many defendants in the chemical industry. The Company does not expect
that the outcome of these proceedings, either individually or in the aggregate,
will have a material adverse effect upon the consolidated financial position,
results of operations or cash flows of the Company.

F-76

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
market share liability, fraud, misrepresentation and nuisance. The plaintiffs
in these actions generally seek to impose on the defendants responsibility for
alleged damages and health concerns associated with the use of lead-based
paints. These cases are in various pre-trial stages. The Company is vigorously
defending all litigation related to the use of lead. Although liability, if
any, that may result is not reasonably capable of estimation, the Company
believes that, based on information currently available, the disposition of
such claims in the aggregate should not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.

Certain of the Company's subsidiaries have been named as defendants,
potentially responsible parties ("PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites and facilities currently or
previously owned, operated or used by the Company's subsidiaries or their
predecessors, some of which disposal sites or facilities are on the Superfund
National Priorities List of the United States Environmental Protection Agency
("EPA") or similar state lists. These proceedings seek cleanup costs, damages
for personal injury or property damage, or both. Certain of these proceedings
involve claims for substantial amounts, individually ranging in estimates from
less than $0.3 to $29. One potentially significant matter in which a Company
subsidiary is one of four PRPs concerns alleged PCB contamination of a section
of the Kalamazoo River from Kalamazoo, Michigan, to Lake Michigan. This matter
has been stayed and now is being addressed through the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") by the
Kalamazoo River Study Group ("KRSG"), of which the Company's subsidiary is a
member. In October 2000, the KRSG submitted to the State of Michigan a Draft
Remedial Investigation and Draft Feasibility Study which evaluated a number of
remedial options and recommended a remedy involving the stabilization of
several miles of river bank and the long-term monitoring of river sediments at
a total collective cost of approximately $73. The Company has accrued for its
estimated share of costs for this matter.

Celanese International Corporation ("Celanese") filed suit in 1999 against a
Company subsidiary alleging infringement of a Celanese patent relating to
acetic acid production technology. In this suit, Celanese seeks monetary
damages and injunctive relief. The Company has substantial defenses to this
lawsuit and is vigorously defending it.

The Company believes that the range of potential liability for environmental
and other legal contingencies, collectively, but which primarily relates to
environmental remediation activities and other environmental proceedings, is
between $95 and $100 and has accrued $100 as of June 30, 2001. The Company's
ultimate liability in connection with these proceedings may depend on many
factors, including the volume of material contributed to the sites, the number
of other PRPs and their financial viability and the remediation methods and
technologies to be used.

Purchase Commitments: The Company has various agreements for the purchase of
ore used in the production of titanium dioxide that expire in 2002. Total
commitments to purchase ore under these agreements is approximately $319. The
Company has certain other agreements to purchase raw materials and utilities
with various terms extending through 2020. The aggregate obligation under these
agreements is approximately $446.

F-77

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
invariably will be held in the United Kingdom during this period. The Company
has agreed not to take, or fail to take, during such five-year period, any
action that would result in a breach of, or constitute non-compliance with, any
of the representations and undertakings made by Hanson in its agreement with
the United Kingdom Inland Revenue and to indemnify Hanson against any liability
and penalties arising out of a breach of such agreement. The Company's By-Laws
provide for similar constraints. The Company and Hanson estimate that such
indemnification obligation would have amounted to approximately $421 if it had
arisen during the twelve months ended September 30, 1997, and that such
obligation will decrease by approximately $84 on each October 1st prior to
October 1, 2001, when it will expire.

If the Company ceases to be a United Kingdom tax resident at any time, the
Company will be deemed for purposes of United Kingdom corporation tax on
chargeable gains to have disposed of all of its assets at such time. In such a
case, the Company would be liable for United Kingdom corporation tax on
chargeable gains on the amount by which the fair market value of those assets
at the time of such deemed disposition exceeds the Company's tax basis in those
assets. The tax basis of the assets would be calculated in pounds sterling,
based on the fair market value of the assets (in pounds sterling) at the time
of acquisition of the assets by the Company, adjusted for United Kingdom
inflation. Accordingly, in such circumstances, the Company could incur a tax
liability even though it has not actually sold the assets and even though the
underlying value of the assets may not actually have appreciated (due to
currency movements). Since it is impossible to predict the future value of the
Company's assets, currency movements and inflation rates, it is possible to
predict the magnitude of such liability, should it arise.

NOTE 8--INFORMATION ON EQUISTAR

The following is summarized financial information for Equistar as of June 30,
2001:

Current assets..................................................... $1,231
Noncurrent assets.................................................. 5,160
------
Total assets..................................................... $6,391
======
Current liabilities................................................ $ 754
Non-current liabilities............................................ 2,207
Partners' capital.................................................. 3,430
------
Total liabilities and partners' capital.......................... $6,391
======

F-78

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Millennium Chemicals Inc.:

In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of Millennium Chemicals Inc.
(the "Company") at December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. This financial statement is
the responsibility of the Company's management; our responsibility is to
express an opinion on this financial statement based on our audit. We conducted
our audit of this statement in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet presentation. We believe
that our audit of the balance sheet provides a reasonable basis for our
opinion.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Florham Park, New Jersey
January 26, 2001

F-79

MILLENNIUM CHEMICALS INC.

CONSOLIDATED BALANCE SHEET

(MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, 2000

ASSETS
Current assets
Cash and cash equivalents............................................ $ 107
Trade receivables, net............................................... 306
Inventories.......................................................... 373
Other current assets................................................. 115
------
Total current assets............................................... 901
Property, plant and equipment, net..................................... 957
Investment in Equistar................................................. 760
Other assets........................................................... 211
Goodwill............................................................... 391
------
Total assets....................................................... $3,220
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable........................................................ $ 39
Current maturities of long-term debt................................. 391
Trade accounts payable............................................... 165
Accrued expenses and other liabilities............................... 188
------
Total current liabilities.......................................... 783
Long-term debt......................................................... 767
Deferred income taxes.................................................. 19
Other liabilities...................................................... 646
------
Total liabilities.................................................. 2,215
------
Commitments and contingencies (Note 11)
Minority interest...................................................... 22
------
Shareholders' equity
Preferred stock (par value $0.01 per share, authorized 25,000,000
shares; none issued and outstanding)................................ --
Common stock (par value $0.01 per share, authorized 225,000,000
shares; issued 77,896,586 shares)................................... 1
Paid in capital........................................................ 1,326
Retained earnings...................................................... 55
Unearned restricted shares............................................. (25)
Cumulative other comprehensive loss.................................... (107)
Treasury stock (at cost, 13,747,228 shares)............................ (282)
Deferred compensation.................................................. 15
------
Total shareholders' equity......................................... 983
------
Total liabilities and shareholders' equity............................. $3,220
======

See Notes to Consolidated Balance Sheet

F-80

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

NOTE 1--DESCRIPTION OF COMPANY

Millennium Chemicals Inc. (the "Company") is a major international chemical
company, with leading market positions in a broad range of commodity,
industrial, performance and specialty chemicals, operating through its
subsidiaries: Millennium Inorganic Chemicals Inc. (and its non-United States
affiliates), Millennium Petrochemicals Inc. and Millennium Specialty Chemicals
Inc.; and, beginning December 1, 1997, through its interest in Equistar
Chemicals, LP ("Equistar"), a joint venture formed by the Company and Lyondell
Chemical Company ("Lyondell") to jointly own and operate the petrochemical and
polymer businesses of the Company and Lyondell. On May 15, 1998, the Company's
interest in Equistar was reduced to 29.5% with the addition of the ethylene,
propylene, ethylene oxide and derivatives businesses of Occidental Petroleum
Corporation's ("Occidental") chemical subsidiary (see Note 3).

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES

Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash Equivalents: Cash equivalents represent investments in short-term
deposits and commercial paper with banks which have original maturities of 90
days or less. In addition, other assets include approximately $28 in restricted
cash at December 31, 2000 which is on deposit to satisfy insurance claims.

F-81

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 37% of consolidated inventories
at December 31, 2000, cost is determined under the last-in, first-out (LIFO)
method. The first-in, first-out (FIFO) method, or methods that approximate
FIFO, are used by all other subsidiaries.

Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings
and 5 to 25 years for machinery and equipment. Major repairs and improvements
incurred in connection with substantial overhauls or maintenance turnarounds
are capitalized and amortized on a straight-line basis until the next planned
turnaround (generally 18 months). Other less substantial maintenance and repair
costs are expensed as incurred.

Capitalized Software Costs: The Company capitalizes costs incurred in the
acquisition and modification of computer software used internally, including
consulting fees and costs of employees dedicated solely to a specific project.
Such costs are amortized over periods not exceeding 7 years and are subject to
impairment evaluation under SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed of". Unamortized capitalized
software costs of $64 at December 31, 2000 are included in property, plant and
equipment.

Foreign Currency: Assets and liabilities of the Company's foreign
subsidiaries are translated at the exchange rates in effect at the balance
sheet dates, while revenue, expenses and cash flows are translated at average
exchange rates for the reporting period. Resulting translation adjustments are
recorded as a component of cumulative other comprehensive loss in Shareholders'
equity. Gains and losses resulting from changes in foreign currency on
transactions denominated in currencies other than the functional currency of
the respective subsidiary are recognized in income as they occur.

Derivative Instruments: The Company uses derivative instruments to manage the
exposure to foreign currency fluctuations on certain transactions. Derivative
instruments currently used by the Company primarily include foreign currency
forward contracts. Gains or losses on instruments that hedge foreign currency
denominated receivables and payables are recognized in income as they occur.
Gains or losses on instruments that hedge firm commitments are deferred and
reported as part of the underlying transaction when settled. The cash flows
from such contracts are classified consistent with cash flows from the
transactions being hedged.

F-82

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
respective tax jurisdictions. Valuation allowances are provided against
deferred tax assets which are not likely to be realized in full.

NOTE 3--INVESTMENT IN EQUISTAR

On December 1, 1997, the Company and Lyondell completed the formation of
Equistar, a joint venture partnership created to own and operate the
petrochemical and polymer businesses of the Company and Lyondell. The Company
contributed to Equistar substantially all of the net assets of its
polyethylene, performance polymer and ethyl alcohol businesses. The Company
retained $250 from the proceeds of accounts receivable collections and
substantially all the accounts payable and accrued expenses of its contributed
businesses existing on December 1, 1997, and received proceeds of $750 from
borrowings under a new credit facility entered into by Equistar. The Company
used the $750 that it received to repay debt. A subsidiary of the Company
guarantees $750 of Equistar's credit facility. Equistar was owned 57% by
Lyondell and 43% by the Company until May 15, 1998, when the Company and
Lyondell expanded Equistar with the addition of the ethylene, propylene,
ethylene oxide and derivatives businesses of Occidental's chemical subsidiary.
Occidental contributed the net assets of those businesses (including
approximately $205 of related debt) to Equistar. In exchange, Equistar borrowed
an additional $500, $420 of which was distributed to Occidental and $75 to the
Company. Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5%
by the Company. No gain or loss resulted from these transactions.

Equistar is managed by a Partnership Governance Committee consisting of
representatives of each partner. Approval of Equistar's strategic plans and
other major decisions requires the consent of the representatives of the three
partners. All decisions of Equistar's Governance Committee that do not require
unanimity among the partners may be made by Lyondell's representatives alone.

The Company accounts for its interest in Equistar using the equity method. In
1999 and 1998, the difference between the carrying value of the Company's
investment and its underlying equity in the net assets of Equistar ("goodwill")
had been amortized over 25 years.

In furthering the Company's business strategy to de-emphasize commodity
chemicals, the Board of Directors of the Company approved actions in December
1999 to advance the Company's efforts to dispose of its Equistar interest. As a
result of the Board's adopting the strategy to dispose of the Equistar interest
in the short-term, the Company reduced the carrying amount of its interest at
December 31, 1999 (including all of the underlying goodwill) to an estimated
fair value of $800 by recording a charge of $639 ($400 after tax) in the fourth
quarter of 1999. The estimated fair value was determined by evaluating, among
other things, the estimated discounted future cash flows of Equistar, current
market interest and estimated disposal costs, including income taxes. On
September 14, 2000, the Company announced that it had not received an
acceptable offer for its investment in Equistar and that it had terminated
active marketing of its stake.

F-83

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
NOTE 4--SUPPLEMENTAL INFORMATION

TRADE RECEIVABLES
Trade receivables.................................................. $ 310
Allowance for doubtful accounts.................................... (4)
------
$ 306
======
INVENTORIES
Finished products.................................................. $ 188
In-process products................................................ 26
Raw materials...................................................... 111
Other inventories.................................................. 48
------
$ 373
======

Inventories valued on a LIFO basis were approximately $35 less than the amount
of such inventories valued at current cost at December 31, 2000.

PROPERTY, PLANT AND EQUIPMENT
Land and buildings................................................. $ 247
Machinery, equipment and software.................................. 1,346
Construction-in-progress........................................... 119
------
1,712
Accumulated depreciation and amortization.......................... (755)
------
$ 957
======
GOODWILL........................................................... 484
Accumulated amortization........................................... (93)
------
$ 391
======

Future minimum rental commitments under non-cancelable operating leases, as
of December 31, 2000, are as follows:

2001................................................... $14
2002................................................... 9
2003................................................... 7
2004................................................... 6
2005................................................... 5
Thereafter............................................. 27

F-84

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

NOTE 5--INCOME TAXES

Significant components of deferred taxes are as follows as of December 31,
2000:

Deferred tax assets
Environmental and legal obligations.................................. $ 16
Other post-retirement benefits and pension........................... 29
Net operating loss carryforwards..................................... 52
Capital loss carryforwards........................................... 70
AMT credits.......................................................... 101
Other accruals....................................................... 75
----
343
Valuation allowance against capital loss carryforwards................. (70)
----
Total deferred tax assets.......................................... 273
----
Deferred tax liabilities
Excess of book over tax basis in property, plant and equipment....... 81
Taxes related to potential disposal of Equistar...................... 184
Other................................................................ 27
----
Total deferred tax liabilities..................................... 292
----
Net deferred tax liabilities....................................... $ 19
====

At December 31, 2000, certain foreign subsidiaries of the Company had
available net operating loss carryforwards aggregating $162, which are subject
to certain limitations on their use. The capital loss carryforwards expire
between 2001 and 2005, while the AMT credits and net operating loss
carryforwards have no expiration.

The Company settled certain issues relating to the tax years 1986 through
1988 and a payment of $151 in taxes was made in July 2000.

Certain of the income tax returns of the Company's subsidiaries are currently
under examination by the Internal Revenue Service and various state tax
agencies. In the opinion of management, any assessments that may result will
not have a material adverse effect on the financial position, results of
operation or cash flows of the Company.

NOTE 6--LONG-TERM DEBT AND CREDIT ARRANGEMENTS

As of December 31, 2000:

Revolving Credit Agreement bearing interest at the bank's prime lend-
ing rate,
or at LIBOR or NIBOR plus .275% at the option of the Company plus a
Facility Fee
of .15% to be paid quarterly......................................... $388
7% Senior Notes due 2006.............................................. 500
7.625% Senior Debentures due 2026..................................... 249
Debt payable through 2007 at interest rates ranging from 2% to 9.5%... 21
Less current maturities of long-term debt............................. (391)
----
$767
====

F-85

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Under the Revolving Credit Agreement, as most recently amended on January 12,
2000, certain of the Company's subsidiaries may borrow up to $500 under an
unsecured multi-currency revolving credit facility, which matures in July 2001
(the "Credit Agreement"). The Company guarantees borrowings under this
facility. Borrowings under the Credit Agreement may consist of standby loans or
uncommitted competitive loans offered by syndicated banks through an auction
bid procedure. Loans may be borrowed in U.S. dollars and/or other currencies.
The proceeds from the borrowings may be used to provide working capital and for
general corporate purposes.

The Company is in the process of refinancing the Credit Agreement. The
Company expects to complete the refinancing late in the first quarter or early
in the second quarter of 2001.

The weighted-average interest rate for borrowings under the Credit Agreement
was 6.7% for 2000.

The Credit Agreement contains covenants and provisions that restrict, among
other things, the ability of the Company and its material subsidiaries to: (i)
create liens on any of its property or assets, or assign any rights to or
security interests in future revenues; (ii) engage in sale-and-leaseback
transactions; (iii) engage in mergers, consolidations or sales of all or
substantially all of their assets on a consolidated basis; (iv) enter into
agreements restricting dividends and advances by their subsidiaries; and, (v)
engage in transactions with affiliates other than those based on arm's-length
negotiations. The Credit Agreement also limits the ability of certain
subsidiaries of the Company to incur indebtedness or issue preferred stock. In
addition, the Credit Agreement requires the Company to satisfy certain
financial performance criteria. On January 12, 2000, one of the financial
covenants in the Credit Agreement was amended to permit the Company to remain
compliant after the 1999 charge for loss in value of the Equistar interest (see
Note 3).

The Senior Notes and Senior Debentures were issued by Millennium America
Inc., a wholly owned subsidiary of the Company, and are guaranteed by the
Company. The indenture under which the Senior Notes and Senior Debentures were
issued contains certain covenants that limit, among other things: (i) the
ability of Millennium America Inc. and its Restricted Subsidiaries (as defined)
to grant liens or enter into sale-and-leaseback transactions; (ii) the ability
of the Restricted Subsidiaries to incur additional indebtedness; and, (iii) the
ability of Millennium America Inc. and the Company to merge, consolidate or
transfer substantially all of their respective assets.

The Company had outstanding notes payable of $39 as of December 31, 2000
bearing interest at an average rate of approximately 6% with maturity of 30
days or less. At December 31, 2000, the Company had outstanding standby letters
of credit amounting to $13 and had unused availability under short-term lines
of credit and the Credit Agreement of $234. In addition, Millennium America
Inc. has guaranteed certain debt obligations of Equistar up to $750.

The maturities of long-term debt during the next five years are as follows:
2001--$391; 2002--$9; 2003--$4; 2004--$3; 2005--$2; and, thereafter--$749.

NOTE 7--FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments: The fair value of all short-term
financial instruments and restricted cash approximates their carrying value,
due to their short maturity or ready availability. The fair value of the

F-86

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Company's other financial instruments are based upon estimates received from
independent financial advisors as follows as of December 31, 2000:

CARRYING FAIR
VALUE VALUE
-------- -----

Borrowings under the Revolving Credit Agreement............. $388 $386
Senior Notes and Debentures................................. $749 $605

Off Balance Sheet Risk: The Company generates revenue from export sales and
revenue from operations conducted outside the United States that may be
denominated in currencies other than the relevant functional currency. In
addition, certain of the Company's subsidiaries make purchases (primarily raw
materials) in currencies other than the functional currency of that subsidiary.

The Company selectively uses derivative instruments to manage its exposure to
the risk that the eventual functional currency net cash inflows or outflows
resulting from foreign currency sales or purchases will be adversely affected
by changes in exchange rates.

The Company's major foreign currency exposures involve the markets in Europe
and Asia/Pacific. In addition, the Company purchases a significant portion of
its primary raw materials in Australian dollars.

Gains or losses on instruments that hedge foreign currency denominated
receivables and payables are recognized in income as they occur. Gains or
losses on instruments that hedge firm commitments are deferred and reported as
part of the underlying transaction when settled.

The table below summarizes the notional amounts of the Company's derivative
instruments at December 31, 2000 with maturity dates ranging from one month to
twelve months. The notional amounts have been translated into U.S. dollars
using applicable exchange rates at December 31, 2000.

NOTIONAL UNREALIZED
AMOUNT GAIN
-------- ----------

Forward Contracts...................................... $116 $ 2
Currency Swaps......................................... $ 7 $--

The increase in the notional amount of outstanding derivative instruments
primarily reflects the Company's strategy of hedging anticipated sales revenues
denominated in foreign currency other then the relevant functional currency.
These anticipated sales revenues are expected to be received during the next
twelve months.

SFAS 137: In June 1999, the Financial Accounting Standards Board issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of SFAS 133", which defers the effective date of SFAS 133
for one year. The Company plans to adopt SFAS 133 in the first quarter of 2001.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in Net income or as a component of Comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The adoption of SFAS 133 is not
expected to have a material effect on the financial position, results of
operations or cash flows of the Company.

NOTE 8--PENSION AND OTHER POSTRETIREMENT BENEFITS

Domestic Benefit Plans: On January 1, 1999, the Company merged and amended
its noncontributory defined benefit pension plans and its other postretirement
benefit plans that cover substantially all of its United

F-87

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
States employees. The benefits for the pension plans continue to be based
primarily on years of credited service and average compensation as defined
under the respective plan provisions. The Company's funding policy is to
contribute amounts to the pension plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Company may determine to be appropriate
from time to time. The pension plans' assets are held in a master asset trust
and are managed by independent portfolio managers. Such assets include the
Company's Common Stock, which account for less than 1% of master trust assets
at December 31, 2000.

The Company also sponsors defined contribution plans for its salaried and
certain union employees. Contributions relating to defined contribution plans
are made based upon the respective plan provisions.

Foreign Benefit Arrangements: Certain of the Company's foreign subsidiaries
have defined benefit plans. The assets of these plans are held separately from
the Company in independent funds.

The following table provides a reconciliation of the changes in the benefit
obligations and the fair value of the plan assets over the year ending December
31, 2000, and a statement of the funded status as of December 31, 2000.

OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------

Reconciliation of benefit obligation
Projected benefit obligation at beginning of year.... $ 757 $ 110
Service cost, including interest..................... 12 8
Interest in PBO...................................... 54 --
Benefit payments..................................... (83) (13)
Net experience loss (gain)........................... 28 (7)
Amendments........................................... -- (1)
Translation adjustment............................... (8) --
------ -----
Projected benefit obligation at end of year.......... $ 760 $ 97
------ -----
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year....... $1,013 $ --
Return on plan assets................................ (34) --
Employer contributions............................... 6 13
Benefit payments..................................... (83) (13)
Asset transfer....................................... 5 --
Translation adjustment............................... (12) --
------ -----
Fair value of plan assets at end of year............. $ 895 $ --
------ -----
Funded status
Funded status at December 31......................... $ 135 $ (97)
Unrecognized net asset............................... (11) --
Unrecognized prior-service cost...................... 8 (12)
Unrecognized loss (gain)............................. 20 (28)
------ -----
Prepaid benefit (accrued) cost....................... $ 152 $(137)
------ -----

F-88

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

The projected benefit obligation, accumulated benefit obligation and the fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of the plan assets were $51, $47 and $32, respectively, at December 31,
2000.

The assumptions used in the measurement of the Company's benefit obligations
as of December 31, 2000 are shown in the following table:

OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- --------------

Weighted-average assumptions as of December 31
Discount rate................................. 6.50%-7.50% 7.50%
Expected return on plan assets................ 8.00%-9.00% --
Rate of compensation increase................. 4.00%-5.00% 4.25%

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The assumed health care cost trend rate
used in measuring the health care portion of the postretirement cost for 2000
was 7.5% declining to 6.0% for 2002 and thereafter. A 1% increase or decrease
in assumed health care cost trend rates would affect service and interest
components of postretirement health care benefit costs by $1 in the year ended
December 31, 2000. The effect on the accumulated postretirement benefit
obligation would be $6 at December 31, 2000.

NOTE 9--STOCK-BASED COMPENSATION PLANS

Long-Term Stock Incentive Plan: The Company adopted a Long-Term Stock
Incentive Plan ("Stock Incentive Plan") for the purpose of enhancing the
profitability and value of the Company for the benefit of its shareholders. A
maximum of 3,909,000 shares of Common Stock may be issued or used for reference
purposes pursuant to the Stock Incentive Plan.

The Stock Incentive Plan provides for the following types of awards to
employees: (i) stock options, including incentive stock options and non-
qualified stock options; (ii) stock appreciation rights; (iii) restricted
shares; (iv) performance units; and, (v) performance shares. The vesting
schedule for granted restricted share awards is as follows: (i) three equal
tranches aggregating 25% of the total award vesting in each of October 1999,
2000 and 2001; and, (ii) three equal tranches aggregating 75% of the total
award subject to the achievement of "value creation" performance criteria
established by the Compensation Committee for each of the three performance
cycles commencing January 1, 1997 and ending December 31, 1999, 2000 and 2001,
respectively. If and to the extent such criteria are achieved, half of the
earned portion of a tranche relating to a particular performance-based cycle of
the award vests immediately and the remainder vests in five equal annual
installments commencing on the first anniversary of the end of the cycle.

Stock options granted under the Stock Incentive Plan vest three years from
the date of grant and expire ten years from the date of grant. All stock
options have been granted at exercise prices equal to the market price of the
Company's Common Stock on the date of grant. All grants under the Stock
Incentive Plan fully vest in the event of a change-in-control (as defined by
the plan) of the Company, or in the case of employees of a subsidiary of the
Company, a change-in-control of the relevant subsidiary.

The Company has authorization under the Stock Incentive Plan to grant awards
for up to an additional 211,667 shares at December 31, 2000.

F-89

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Unearned restricted shares, based on the market value of the shares at each
balance sheet date, are included as a separate component of Shareholders'
equity and amortized over the restricted period.

A summary of changes in the awards under the Stock Incentive Plan (other than
awards to non-employee directors) is as follows:

WEIGHTED- WEIGHTED-
RESTRICTED AVERAGE STOCK AVERAGE
SHARES GRANT PRICE OPTIONS EXERCISE PRICE
---------- ----------- ------- --------------

Balance at December 31,
1999...................... 2,212,224 $23.71 538,000 $21.75
Vested and issued.......... (460,914) 23.70 (5,000) 19.00
Canceled................... (172,495) 23.75 (40,000) 21.24
Granted.................... -- 117,000 19.07
--------- -------
Balance at December 31,
2000...................... 1,578,815 $23.73 610,000 $21.31
========= ------ ======= ------

For stock options outstanding at December 31, 2000, the range of exercise
prices was $15.94 to $34.875 per share, and the estimated weighted-average
remaining contractual life was 5 years. The weighted-average fair value of
stock options at grant date approximated $9 per share 2000 using a Black-
Scholes model with the following assumptions: expected dividend yield of 2.4%;
risk-free interest rate of 6%; an expected life of 5 years; and, an expected
volatility of 60% for 2000. At December 31, 2000, 266,000 options were
exercisable at an average price of $20.35 per share option.

Salary and Bonus Deferral Plan: The Company has a deferred compensation plan
that permits officers, directors and certain management employees to defer a
portion of their compensation on a pre-tax basis in the form of Common Stock. A
rabbi trust (the "Trust") has been established to hold shares of Common Stock
purchased in open market transactions to fund this obligation. Shares purchased
by the Trust are reflected as Treasury stock, at cost, and, along with the
related obligation for this plan, are included in Shareholders' equity. At
December 31, 2000, 472,091 shares have been purchased at a total cost of $10
and are held in the Trust.

Long-Term Incentive Plan: The Company has a Long-Term Incentive Plan for
certain management employees. The plan provides for awards of Common Stock to
be granted if annual EVA'R' targets are achieved. Such earned shares are held
in a trust until vested, which is three years from the date of grant. Unvested
shares will be forfeited.

Executive Long-Term Incentive Plan: In 2000, the Company established a Long-
Term Incentive Plan for its senior executives. One half of the award granted to
each executive provides for Common Stock to be granted if annual EVA'r' targets
are achieved. Such earned shares are held in a trust until vested, which is
three years from the date of grant. Unvested shares will be forfeited. The
remaining half of the award is based on the Company's performance against its
peer group (companies in the Standard & Poor's Chemical Composite Index) over a
three-year period. This award will be paid in cash.

NOTE 10--RELATED PARTY TRANSACTIONS

One of the Company's subsidiaries purchases ethylene from Equistar at market-
related prices pursuant to an agreement made in connection with the formation
of Equistar. Under the agreement, the subsidiary is required to purchase 100%
of its ethylene requirements for its La Porte, Texas facility up to a maximum
of 330 million pounds per year. The initial term of the contract was through
December 1, 2000 and automatically renews annually. Either party may terminate
on one year's notice, and neither party has provided such notice.

F-90

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
One of the Company's subsidiaries sells vinyl acetate monomer ("VAM") to
Equistar at formula-based prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Equistar is
required to purchase 100% of its VAM feedstock requirements for its La Porte,
Texas and Clinton and Morris, Illinois plants, estimated to be 48 to 55 million
pounds per year, up to a maximum of 60 million pounds per year ("Annual
Maximum") for the production of ethylene vinyl acetate products at those
locations. If Equistar fails to purchase at least 42 million pounds of VAM in
any calendar year, the Annual Maximum quantity may be reduced by as much as the
total purchase deficiency for one or more successive years. In order to reduce
the Annual Maximum quantity, Equistar must be notified within at least 30 days
prior to restricting the VAM purchases provided that the notice is not later
than 45 days after the year of the purchase deficiency. The initial term of the
contract was through December 31, 2000 and renews annually. Either party may
terminate on one year's notice, and neither party has provided such notice.

NOTE 11--COMMITMENTS AND CONTINGENCIES

Legal and Environmental: The Company and various of its subsidiaries are
defendants in a number of pending legal proceedings incidental to present and
former operations. These include several proceedings alleging injurious
exposure of the plaintiffs to various chemicals and other materials
manufactured by the Company's current and former subsidiaries. Typically, such
proceedings involve large claims made by many plaintiffs against many
defendants in the chemical industry. The Company does not expect that the
outcome of these proceedings, either individually or in the aggregate, will
have a material adverse effect upon the consolidated financial position,
results of operations or cash flows of the Company.

Together with other alleged past manufacturers of lead pigments for use in
paint and lead-based paint, a former subsidiary of a discontinued operation has
been named as a defendant or third party defendant in various legal proceedings
alleging that it and other manufacturers are responsible for personal injury
and property damage allegedly associated with the use of lead pigments in paint
and lead-based paint. The legal proceedings seek recovery under a variety of
theories, including negligence, failure to warn, breach of warranty,
conspiracy, market share liability, fraud, misrepresentation and nuisance. The
plaintiffs in these actions generally seek to impose on the defendants
responsibility for alleged damages and health concerns associated with the use
of lead pigments in paint and lead-based paint. These cases are in various pre-
trial stages. The Company is vigorously defending all litigation related to the
use of lead. Although liability, if any, that may result is not reasonably
capable of estimation, the Company believes that, based on information
currently available, the disposition of such claims in the aggregate should not
have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.

Certain Company subsidiaries have been named as defendants, potentially
responsible parties ("PRPs"), or both, in a number of environmental proceedings
associated with waste disposal sites and facilities currently or previously
owned, operated or used by the Company's subsidiaries or their predecessors,
some of which disposals or facilities are on the Superfund National Priorities
List of the United States Environmental Protection Agency ("EPA") or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage, or both. Certain of these proceedings involve claims for
substantial amounts, individually ranging in estimates from less than $0.3 to
$29. One potentially significant matter in which a Company subsidiary is a PRP
concerns alleged PCB contamination of a section of the Kalamazoo River from
Kalamazoo, Michigan to Lake Michigan for which a remedial
investigation/feasibility study has been

F-91

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
completed and submitted to the State of Michigan. This matter has been stayed
and now is being addressed through the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") by the Kalamazoo River Study Group,
of which the Company's subsidiary is a member.

The Company believes that the range of potential liability for environmental
and other legal contingencies, collectively, but which primarily relates to
environmental remediation activities and other environmental proceedings, is
between $100 and $105 and has accrued $105 as of December 31, 2000. The
Company's ultimate liability in connection with these proceedings may depend on
many factors, including the volume of material contributed to the sites, the
number of other PRPs and their financial viability and the remediation methods
and technologies to be used.

Purchase Commitments: The Company has various agreements for the purchase of
ore used in the production of TiO\\2\\, which expire in 2002. The total
unconditional obligation to purchase the ore under these agreements is
approximately $345. The Company has certain other agreements to purchase raw
materials and utilities with various terms extending through 2020. The fixed
and determinable portion of obligations under these purchase commitments at
December 31, 2000 (at current exchange rates, where applicable) is as follows:

2001.................................................. $ 35
2002.................................................. 35
2003.................................................. 32
2004.................................................. 32
2005.................................................. 32
2006 through 2020..................................... 280
----
Total................................................. $446
====

One of the Company"s subsidiaries has entered into an agreement to toll
acetic acid through a third-party VAM plant, thereby acquiring all of the VAM
production at such plant not utilized by the third party. The tolling fee is
based on the market price of ethylene, plus a processing charge. The term of
the contract is from January 1, 2001 through December 31, 2006, and thereafter
from year-to-year. The total commitment over the term of the contract is
expected to be $334.

Other Contingencies: The Company is organized under the laws of Delaware and
is subject to United States federal income taxation of corporations. However,
in order to obtain clearance from the United Kingdom Inland Revenue as to the
tax-free treatment of the Demerger stock dividend for United Kingdom tax
purposes for Hanson and Hanson's shareholders, Hanson agreed with the United
Kingdom Inland Revenue that the Company will continue to be centrally managed
and controlled in the United Kingdom at least until September 30, 2001. Hanson
also agreed that the Company's Board of Directors will be the only medium
through which strategic control and policy-making powers are exercised, and
that board meetings almost invariably will be held in the United Kingdom during
this period. The Company has agreed not to take, or fail to take, during such
five-year period, any action that would result in a breach of, or constitute
non-compliance with, any of the representations and undertakings made by Hanson
in its agreement with the United Kingdom Inland Revenue and to indemnify Hanson
against any liability and penalties arising out of a breach of such agreement.
The Company's By-Laws provide for similar constraints.

F-92

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

The Company and Hanson estimate that such indemnification obligation would
have amounted to approximately $421, if it had arisen during the twelve months
ended September 30, 1997, and that such obligation will decrease by
approximately $84 on each October 1st prior to October 1, 2001, when it will
expire.

Prior to the Demerger, the United States earnings of the Company were
included in the consolidated federal income tax return filed by Hanson's
ultimate United States parent which is now a subsidiary of the Company.
Pursuant to an informal tax allocation agreement prior to the Demerger, the
Company provided for income taxes as if it filed separate income tax returns.
Accordingly, the Company had not reflected in the historical financial
statements prior to the Demerger certain tax benefits arising out of the
consolidated tax group (including certain predecessor entities, the
"Consolidated Group") that became allocable to the Company once the Demerger
was completed. Upon the Demerger, such tax benefits have been included in
deferred taxes and accounted for as a capital transaction. Certain other
operations of Hanson previously included in the Consolidated Group upon
completion of the Demerger no longer qualified to be members of the
Consolidated Group. The Company and certain of its subsidiaries have entered
into tax sharing and indemnification agreements with Hanson or its subsidiaries
in which the Company and/or its subsidiaries generally agreed to indemnify
Hanson or its subsidiaries for income tax liabilities attributable to periods
when such other operations were included in the consolidated tax returns of the
Consolidated Group.

F-93

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(AMOUNTS IN THOUSANDS)

UNAUDITED

ASSETS
Current assets:
Cash and cash equivalents........................................ $ 26,814
Trade receivables, net of reserves of $11,281.................... 88,910
Other receivables................................................ 51,415
Inventories...................................................... 289,460
Deferred domestic income taxes................................... 55,279
Prepaid expenses................................................. 22,438
----------
Total current assets........................................... 534,316
Due from Occidental Petroleum Corporation and affiliates, net...... 3,261,246
Long-term receivables, net......................................... 20,499
Equity investments................................................. 1,154,919
Property, plant and equipment, net................................. 2,135,294
Other assets....................................................... 207,614
----------
$7,313,888
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable to banks........................................... $ 631
Current maturities of long-term debt and capital lease liabili-
ties............................................................ 591
Accounts payable................................................. 265,682
Accrued liabilities.............................................. 209,635
----------
Total current liabilities...................................... 476,539
Long-term debt, net of current maturities and unamortized discount. 210,064
Capital lease liabilities, net of current maturities............... 25,733
Deferred credits and other liabilities:
Deferred domestic and foreign income taxes....................... 855,830
Due to Miller Springs Remediation Management, Inc................ 172,472
Other............................................................ 486,450
----------
Total deferred credits and other liabilities................... 1,514,752
Minority interest.................................................. 245,573
Shareholder's equity:
Common stock, $1.00 par value; authorized 50 million shares; is-
sued 22.5 million shares........................................ 22,500
Additional paid-in capital....................................... 1,676,269
Retained earnings................................................ 3,200,684
Accumulated other comprehensive income........................... (58,226)
----------
Total shareholder's equity..................................... 4,841,227
----------
$7,313,888
==========

The accompanying notes are an integral part of this consolidated balance sheet.

F-94

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET

JUNE 30, 2001

UNAUDITED

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

The accompanying unaudited consolidated balance sheet has been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in notes to
consolidated financial statements have been condensed or omitted pursuant to
such rules and regulations, but resultant disclosures are in accordance with
generally accepted accounting principles as they apply to interim reporting.
The consolidated balance sheet should be read in conjunction with the
Occidental Chemical Holding Corporation (OCHC) audited balance sheet and the
notes thereto as of December 31, 2000 (2000 Balance Sheet).

In the opinion of OCHC's management, the accompanying consolidated balance
sheet contains all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly OCHC's consolidated financial position
as of June 30, 2001.

Reference is made to Note 1 to the 2000 Balance Sheet for a summary of
significant accounting policies.

DERIVATIVE ACTIVITIES--

OCHC periodically uses forward exchange contracts to hedge the risk
associated with fluctuations in foreign currency exchange rates. OCHC does not
use forward exchange contracts for speculative or trading purposes. Gains and
losses on foreign currency forward exchange contracts that hedge identifiable
future commitments are deferred until recognized when the related item being
hedged is settled. There were no open forward exchange contracts at June 30,
2001.

Effective January 1, 2001, OCHC implemented Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging,"
as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements establish accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and hedging activities and require an entity to recognize all
derivatives in the statement of financial position and measure these
instruments at fair value, and classify them as either assets or liabilities on
the consolidated balance sheet. Changes in the derivative instruments' fair
value must be recognized in earnings unless specific hedge accounting criteria
are met. OCHC's initial adoption of SFAS No. 133 did not have a significant
effect on OCHC's consolidated financial position.

(2)ACCOUNTING CHANGES

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations." SFAS No. 141 establishes new standards for
accounting and reporting business combinations including the elimination of the
pooling method of accounting. The standard applies to all business combinations
initiated after June 30, 2001. OCHC has implemented the provisions of SFAS No.
141, which had no impact on the consolidated balance sheet.

In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting and reporting
requirements for acquired goodwill and intangible assets. The

F-95

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

JUNE 30, 2001 (UNAUDITED)
provisions of this statement must be applied starting with fiscal years
beginning after December 15, 2001. OCHC must implement SFAS No. 142 in the
first quarter of 2002 and has not yet made a determination of its impact on the
consolidated balance sheet.

(3)TRADE RECEIVABLES

During the six months ended June 30, 2001, OCHC sold, with limited recourse,
to an affiliate certain trade receivables under a revolving sale program in
connection with the ultimate sale for cash of an undivided ownership interest
in such receivables by the affiliate. OCHC has retained the collection
responsibility with respect to the receivables sold. An interest in new
receivables is sold monthly in noncash transactions representing the net
difference between newly created receivables and collections made from
customers. The net receivables balance sold as of June 30, 2001 was $530
million.

(4)INVESTMENTS

Investments in entities in which OCHC has a voting interest of no more than
50 percent and certain partnerships are accounted for on the equity method. At
June 30, 2001, OCHC's equity investments consisted of a 29.5% interest in
Equistar Chemicals LP (Equistar), a petrochemical limited partnership, and
various chemical partnerships and joint ventures. At June 30, 2001, OCHC's
investment in equity investees exceeded the historical underlying equity in net
assets by approximately $125 million, which is being amortized into income over
25 years.

An indirect subsidiary of OCHC, Occidental Petrochem Partner GP, Inc.
("General Partner") holds a 0.001% general partner interest in Equistar. The
General Partner has no independent operations of its own and its obligations as
general partner have, under an agreement signed between OCHC and Equistar, been
guaranteed by OCHC. Accordingly, the June 30, 2001 balance sheet of OCHC, as
guarantor of certain of the General Partner's obligation, is presented. The
General Partner had assets consisting of its investment in Equistar of
$320,000, and invested capital, after intercompany balances, of $320,000 as of
June 30, 2001.

(5)INVENTORIES

A portion of inventories is valued under the last-in, first-out (LIFO) cost
method which did not exceed market value, at June 30, 2001. The remaining
inventories are stated at cost determined on the first-in, first-out (FIFO) and
weighted-average-cost methods and did not exceed market value.

Inventories consisted of the following as of June 30, 2001 (in thousands):

Raw materials.................................................... $ 48,921
Materials and supplies........................................... 52,538
Work in process.................................................. 2,186
Finished goods................................................... 227,946
--------
331,591
LIFO reserve..................................................... (42,131)
--------
Total............................................................ $289,460
========

F-96

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

JUNE 30, 2001 (UNAUDITED)

(6)PROPERTY, PLANT AND EQUIPMENT

Reference is made to Note 7 to the 2000 Balance Sheet for a summary of
property, plant and equipment.

(7)ACCRUED LIABILITIES

Accrued liabilities include, among other items, the following as of June 30,
2001, (in thousands):

Accrued invoices and costs........................................ $33,075
Environmental reserve............................................. $25,000
Accrued taxes, other than income taxes............................ $24,948
Salaries, wages and other compensation............................ $33,481

(8)RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

Reference is made to Note 14 to the 2000 Balance Sheet for a summary of
retirement plans and postretirement benefits.

(9)LAWSUITS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS

OCHC and certain of its subsidiaries have been named as defendants or
potentially responsible parties in a substantial number of lawsuits, claims and
proceedings, including governmental proceedings under CERCLA and corresponding
state acts. These governmental proceedings seek funding, remediation and, in
some cases, compensation for alleged property damage, punitive damages and
civil penalties, aggregating substantial amounts. OCHC, or any of its
subsidiaries, is usually one of many companies in these proceedings, and has to
date been successful in sharing response costs with other financially sound
companies. OCHC has accrued reserves at the most likely cost to be incurred in
those proceedings where it is probable that OCHC will incur remediation costs
which can be reasonably estimated. Maxus Energy Corporation has retained all
liability for remediation in certain proceedings.

OCHC has entered into agreements providing for minimum future payments to
purchase certain raw materials, steam and water. At June 30, 2001, the net
present value of the fixed and determinable portion of the obligations under
these agreements, which were used to collateralize financings of the respective
suppliers, are as follows for the twelve month periods ending June 30 (in
thousands):

2001.............................................. $ 26,845
2002.............................................. 25,107
2003.............................................. 23,481
2004.............................................. 21,964
2005.............................................. 20,503
2006 through 2016................................. 119,406
--------
$237,306
========

OCHC purchases vinyls chloride monomer (VCM) from OxyMar, an unconsolidated
subsidiary that owns an Ingleside, Texas VCM facility operated by OCHC. The
purchases from OxyMar are made under the terms of a VCM purchase agreement that
runs until such time as OCHC ceases to own an equity interest in OxyMar. The
agreement requires OCHC to purchase at market prices a minimum of 700 million
of the first 1.1 billion pounds of VCM produced and 530 million of the next 1.0
billion pounds produced each year. Additionally,

F-97

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

JUNE 30, 2001 (UNAUDITED)
OCHC is obligated to purchase all of its ethylene feedstock requirements (not
to exceed 2.55 billion pounds per year) from Equistar through 2013.

Oxy Vinyls, LP (OxyVinyls), a consolidated subsidiary of OCHC, is a limited
partnership which is 24 percent owned by PolyOne Corporation (PolyOne) and 76
percent owned and operated by OCHC. OxyVinyls sells polyvinyl chlroride (PVC)
and VCM to PolyOne under the terms of separate sales agreements that expire in
2013. The PVC agreement requires PolyOne to purchase its and its affiliates'
annual PVC requirements in North America from OxyVinyls in excess of 290
million pounds. PolyOne will pay a price based on cost and market
considerations for the first 880 million pounds it purchases each year, and a
competitive market price on any volumes greater than 880 million pounds in each
year. PolyOne is required to purchase at market price all of its VCM
requirements for production of PVC in North America under the VCM agreement.
PolyOne receives an integration credit on the first 210 million pounds
purchased in any year to compensate for surrendering purchasing power on major
feedstocks.

During the six months ended June 30, 2001, OxyVinyls purchased chlorine from
Sunbelt Chlor Alkali Partnership (Sunbelt), an equity investee of PolyOne,
under the terms of an agreement that expires on December 31, 2094. This
agreement requires OxyVinyls to purchase at market price, less a discount, all
chlorine produced by Sunbelt at its chlorine manufacturing process facility in
McIntosh, Alabama, up to a maximum of 250 thousand tons per year.

OCHC has certain other commitments under contracts, guarantees and joint
ventures, and certain other contingent liabilities, all in the ordinary course
of business.

It is impossible at this time to determine the ultimate liabilities that OCHC
and its subsidiaries may incur resulting from the foregoing lawsuits, claims
and proceedings, audits, commitments, contingencies and related matters.
Several of these matters may involve substantial amounts and if these were to
be ultimately resolved unfavorably to the full amount of their maximum
potential exposure, an event not currently anticipated, it is possible that
such event could have a material adverse effect upon OCHC's consolidated
financial position. However, in management's opinion, after taking into account
reserves, it is unlikely that any of the foregoing matters will have a material
adverse effect upon OCHC's consolidated financial position.

F-98

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Occidental Chemical Holding Corporation:

We have audited the accompanying consolidated balance sheet of Occidental
Chemical Holding Corporation (a California corporation and indirect wholly-
owned subsidiary of Occidental Petroleum Corporation) and subsidiaries as of
December 31, 2000. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement based on our audit. We did not audit the financial
statements of Equistar Chemicals, LP, an investment which is reflected in the
accompanying consolidated balance sheet at December 31, 2000, using the equity
method of accounting and for which summarized financial information is
contained in Note 5. The investment in Equistar Chemicals, LP represents 14% of
total assets as of December 31, 2000. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Equistar Chemicals, LP, is based solely on
the report of the other auditors.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the
balance sheet referred to above presents fairly, in all material respects, the
financial position of Occidental Chemical Holding Corporation and subsidiaries
as of December 31, 2000, in conformity with accounting principles generally
accepted in the United States.

Dallas, Texas
April 10, 2001

F-99

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents........................................ $ 51,569
Trade receivables, net of reserves of $13,622.................... 120,102
Other receivables................................................ 49,137
Inventories...................................................... 335,059
Deferred domestic income taxes................................... 55,279
Prepaid expenses................................................. 28,978
----------
Total current assets........................................... 640,124
Due from Occidental Petroleum Corporation and affiliates, net...... 3,233,243
Long-term receivables, net......................................... 28,573
Equity investments................................................. 1,194,594
Property, plant and equipment, net................................. 2,191,086
Other assets....................................................... 213,366
----------
$7,500,986
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable to banks........................................... $ 2,456
Current maturities of long-term debt and capital lease liabili-
ties............................................................ 826
Accounts payable................................................. 325,807
Accrued liabilities.............................................. 303,116
----------
Total current liabilities...................................... 632,205
Long-term debt, net of current maturities and unamortized discount. 201,029
Capital lease liabilities, net of current maturities............... 25,773
Deferred credits and other liabilities:
Deferred domestic and foreign income taxes....................... 855,830
Due to Miller Springs Remediation Management, Inc................ 184,796
Other............................................................ 513,815
----------
Total deferred credits and other liabilities................... 1,554,441
Contingent liabilities and commitments (Note 10)
Minority interest.................................................. 252,266
Shareholder's equity:
Common stock, $1.00 par value; authorized 50 million shares; is-
sued 22.5 million shares........................................ 22,500
Additional paid-in capital....................................... 1,676,269
Retained earnings................................................ 3,186,964
Accumulated other comprehensive income........................... (50,461)
----------
Total shareholder's equity..................................... 4,835,272
----------
$7,500,986
==========

The accompanying notes are an integral part of this consolidated balance sheet.

F-100

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2000

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND MINORITY INTEREST

The consolidated balance sheet includes the accounts of Occidental Chemical
Holding Corporation, a California corporation (OCHC), and all entities where
OCHC has a majority ownership of voting interests (subsidiaries). All material
intercompany accounts have been eliminated. Investments in less than majority-
owned enterprises are accounted for on the equity method (see Note 5).

Oxy Vinyls L.P. (OxyVinyls) is a limited partnership which is 24 percent
owned by PolyOne Corporation (formerly the Geon Company) and 76 percent owned
and operated by OCHC. The consolidated balance sheet includes 100 percent of
the accounts of OxyVinyls. PolyOne Corporation's 24 percent interest in
OxyVinyls has been reflected as minority interest.

NATURE OF OPERATIONS

OCHC manufactures and markets, domestically and internationally, a variety of
basic chemicals (principally chlorine and caustic soda), vinyls and specialty
products. OCHC also has an interest in petrochemicals through its 29.5 percent
ownership in the Equistar Chemicals, LP petrochemical limited partnership
(Equistar). OCHC is a multinational organization whose outstanding common
shares are all indirectly owned by Occidental Petroleum Corporation
(Occidental).

RISKS AND UNCERTAINTIES

The process of preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the consolidated financial
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts, generally not by material amounts. Management believes that
these estimates and assumptions provide a reasonable basis for the fair
presentation of OCHC's financial position.

Included in the accompanying consolidated balance sheet are deferred tax
assets of $240 million, the noncurrent portion of which is netted against
deferred income tax liabilities. Realization of these assets is dependent upon
OCHC generating sufficient future taxable income. OCHC expects to realize the
recorded deferred tax assets through future operating income and reversal of
taxable temporary differences.

RELATIONSHIP WITH OCCIDENTAL PETROLEUM CORPORATION

As an indirect, wholly-owned subsidiary of Occidental, OCHC engages in
transactions with Occidental and its other subsidiaries relating to tax
sharing, insurance, borrowing, cash management, guarantees, advisory services
and other matters. These transactions are reflected in due from Occidental and
affiliates, net in the accompanying consolidated balance sheet. An Occidental
subsidiary furnishes OCHC with data processing and other services for which
OCHC has been charged at Occidental's approximate cost.

OCHC's deficiency in or excess of funds is financed by or transferred to
Occidental in conjunction with a consolidated cash management system under
multiple agreements. Under one such agreement, interest was computed on the
average intercompany balance between Occidental and OCHC at an agreed upon
average annual rate of 6.6 percent in 2000.

F-101

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
Under another cash management agreement related to OxyVinyls, OCHC computes
interest income and expense on a portion of OxyVinyls' gross amounts due to and
from Occidental. The net amount receivable from Occidental under this agreement
at December 31, 2000 was $46.0 million and is included in due from Occidental
and affiliates, net. PolyOne Corporation has guaranteed $42.3 million of the
amounts payable to Occidental under this agreement.

TRANSLATION OF FOREIGN CURRENCIES

OCHC has foreign subsidiaries and investments accounted for under the equity
method located in Latin America, the Far East and Europe. Assets and
liabilities of the foreign subsidiaries as well as OCHC's investments in less
than majority-owned foreign companies are translated into U.S. dollars at the
exchange rate prevailing at the balance sheet date. Revenue and expense
accounts for these subsidiaries are translated using the weighted average
exchange rate during the period. The net effect of these transactions is
included in accumulated other comprehensive income.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid money-market mutual funds and bank
deposits with initial maturities of three months or less. Cash equivalents
totaled approximately $24 million at December 31, 2000. See Note 10 regarding
restricted bank deposits.

OTHER ASSETS

The excess of cost over fair value of net assets at acquisition date is
amortized over 40 years. The net book value of these assets was $87.4 million
at December 31, 2000. Other assets are being amortized over the estimated
periods to be benefited, which do not exceed 28 years.

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, OCHC uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. Probable recoveries or reimbursements are recorded as an asset.

Environmental reserves are discounted only when the aggregate amount of the
estimated costs for a specific site and the timing of cash payments are
reliably determinable. As of December 31, 2000, reserves that were recorded on
a discounted basis were not material.

In 1998, OCHC transferred environmental remediation liabilities associated
with certain designated properties, amounting to $281 million at that time, to
Miller Springs Remediation Management, Inc. (MS), an 87.5% indirectly owned
subsidiary of Occidental. This transfer was made in order to more effectively
manage the environmental remediation liabilities and related costs at the
designated properties and to provide financial incentives for the efficient
resolution of such liabilities. In connection with this transfer, MS assumed
full responsibility for remediation of the designated properties covered by
these liabilities, including any future

F-102

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
changes in the cost or scope of such remediation. However, under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and analogous state laws, courts have discretion under certain circumstances to
hold potentially responsible parties jointly and severally liable until all
required remediation efforts have been completed. Accordingly, even though MS
has fully assumed remediation liabilities at the designated properties, OCHC
may be held liable until the required remediation efforts at those properties
are completed or for any remaining liability not assumed or funded by MS.

The environmental reserves are included in accrued liabilities, other
noncurrent liabilities and due to MS in the accompanying consolidated balance
sheet and amounted to $25.0 million, $46.0 million and $184.8 million,
respectively, at December 31, 2000.

MAJOR MAINTENANCE EXPENDITURES

OCHC uses the accrue-in-advance method to account for major maintenance
turnaround expenditures. Under this method, an estimate is made of the costs
expected to be incurred in connection with the next planned periodic
maintenance shutdown. That estimate is then accrued on a straight-line basis
over the period of time until the next planned major maintenance shutdown
occurs. Accrued liabilities included $15.7 million as of December 31, 2000, for
major maintenance turnaround.

DERIVATIVE ACTIVITIES

SFAS No. 133--"Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS 137--"Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," and SFAS
138--"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," is effective for OCHC as of January 1, 2001. These statements
establish accounting and reporting standards for derivative instruments and
hedging activities and require an entity to recognize all derivatives in the
statement of financial position and measure those instruments at fair value.
Changes in the derivative instrument's fair value must be recognized into
earnings unless specific hedge accounting criteria are met. Adoption of these
new accounting standards in the first quarter of 2001 did not have a
significant effect on OCHC's consolidated financial position.

FAIR VALUE OF FINANCIAL INSTRUMENTS

OCHC values financial instruments as required by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments." The carrying amounts of cash and
cash equivalents and short-term notes payable approximate fair value because of
the short maturity of those instruments. OCHC estimates the fair value of its
long-term debt based on the quoted market prices for the same or similar issues
or on the yields offered to OCHC for debt of similar rating and similar
remaining maturities. The estimated fair value of OCHC's long-term debt at
December 31, 2000 was $198.9 million, compared with a carrying value of $201.0
million (see Note 9).

The carrying value of other on-balance sheet financial instruments
approximates fair value. However, the fair value of due from Occidental and
affiliates, net cannot be practicably determined due to the related party
nature of the balances. The cost, if any, to terminate off-balance sheet
financial instruments is not significant.

F-103

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000

(2)ACQUISITIONS AND DISPOSITIONS

In November 2000, an OCHC subsidiary assumed a 28.6 percent interest in
OxyMar, a Texas general partnership that owns the Ingleside, Texas vinyl
chloride monomer (VCM) facility operated by OCHC. The interest was acquired
from U.S. VCM Corporation, an affiliate of Marubeni Corporation, which
continues to own a 21.4 percent interest and remains a 50 percent partner for
corporate governance purposes. OxyVinyls owns the remaining 50 percent
interest. In connection with the acquisition, OCHC received proceeds of $37.2
million in return for Occidental guaranteeing an additional $110 million of
OxyMar's debt.

On November 1, 2000, OCHC completed the sale of its Durez phenolic resins and
compounding businesses and assets to Sumitomo Bakelite Co., Ltd. for gross
proceeds of approximately $150 million. Manufacturing facilities included in
the sale are located in Niagara Falls, New York; Kenton, Ohio; Fort Erie,
Ontario, Canada; and Genk, Belgium, as well as OCHC's share in joint ventures
located in Japan, Singapore, Indonesia and Canada. OCHC recognized a $34
million pre-tax gain on this disposition of assets.

On April 18, 2000, OCHC completed the sale of its 29.2 percent interest in
Canadian Occidental Petroleum Ltd. (CanadianOxy) for gross proceeds of
approximately $788 million, following approval of the sale by CanadianOxy
stockholders. Of OCHC's 40.2 million shares of CanadianOxy, 20.2 million were
sold to the Ontario Teachers Pension Plan Board and 20 million to CanadianOxy.
In addition, OCHC sold equity interests in two chemical partnerships to
CanadianOxy for gross proceeds of approximately $38 million. These sales
resulted in a combined net pre-tax gain of approximately $501 million.

(3)ACCOUNTING CHANGES

In the fourth quarter of 2000, OCHC adopted the disclosure provisions of SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a Replacement of FASB Statement No. 125," which
revises disclosure standards for asset securitizations and other financial
asset transfers. SFAS No. 140 also contains provisions which revise certain
criteria for accounting for securitization, financial asset transfers and
collateral. These provisions will be adopted by OCHC on April 1, 2001.
Management believes the implementation of all of the provisions of SFAS No. 140
will not have an impact on OCHC's consolidated financial position.

(4)TRADE RECEIVABLES

During 2000, OCHC sold, with limited recourse, to an affiliate certain trade
receivables under a revolving sale program in connection with the ultimate sale
for cash of an undivided ownership interest in such receivables by the
affiliate. OCHC has retained the collection responsibility with respect to the
receivables sold. An interest in new receivables is sold monthly in noncash
transactions representing the net difference between newly created receivables
and collections made from customers. The net receivables balance sold as of
December 31, 2000 was $371 million. In January 2001, OCHC replaced the existing
agreement with a similar one.

(5)INVESTMENTS

Investments in entities in which OCHC has a voting interest of no more than
50 percent and certain partnerships are accounted for on the equity method. At
December 31, 2000, OCHC's equity investments consisted of a 29.5 percent
interest in Equistar and various chemical partnerships and joint ventures. See
Note 2 regarding the sale of the CanadianOxy equity investment during 2000.
Equity investments paid dividends of $97 million to OCHC in 2000. At December
31, 2000, OCHC's investment in equity investees exceeded the

F-104

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
historical underlying equity in net assets by approximately $128 million, which
is being amortized into income over periods not exceeding 40 years.

The following table presents summarized financial information of OCHC's
equity method investments as of December 31, 2000 (in thousands):

ALL
EQUISTAR OTHERS
---------- --------

Current assets......................................... $1,331,808 $208,998
Noncurrent assets...................................... $5,250,215 $669,212
Current liabilities.................................... $ 742,847 $106,196
Noncurrent liabilities................................. $2,299,540 $613,986
Equity................................................. $3,539,636 $158,028

An indirect subsidiary of OCHC, Occidental Petrochem Partner GP, Inc.
("General Partner") holds a 0.001% general partner interest in Equistar. The
General Partner has no independent operations of its own and its obligations as
general partner have, under an agreement signed between OCHC and Equistar, been
guaranteed by OCHC. Accordingly, the audited balance sheet of OCHC, as
guarantor of certain of the General Partner's obligation, is presented at
December 31, 2000. The General Partner had assets consisting of its investment
in Equistar of $321,000, and invested capital, after intercompany balances, of
$321,000 as of December 31, 2000.

(6)INVENTORIES

Inventories of approximately $249 million were valued under the last-in,
first-out (LIFO) method, which did not exceed market value, at December 31,
2000. The remaining inventories are stated at cost determined on the first-in,
first-out (FIFO) and weighted-average-cost methods and did not exceed market
value.

Inventories consisted of the following as of December 31, 2000 (in
thousands):

Raw materials.................................................... $ 60,230
Materials and supplies........................................... 53,642
Work in process.................................................. 2,066
Finished goods................................................... 278,872
--------
394,810
LIFO reserve..................................................... (59,751)
--------
Total............................................................ $335,059
========

Finished product exchange transactions, which involve homogeneous commodities
held for sale in the ordinary course in the same line of business and do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal inventory valuation policy.

(7)PROPERTY, PLANT AND EQUIPMENT

Property additions and major renewals and improvements are capitalized at
cost. Leases that qualify as capital leases have been capitalized at the
present value of future minimum lease payments. Depreciation of plant and
equipment is primarily provided using the unit-of-production method based on
estimated total productive life.

F-105

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets. Capitalized
interest is calculated based on the average borrowing rate of Occidental,
unless a specific new borrowing is associated with the qualifying asset, in
which case the interest rate on that borrowing is used as the capitalization
rate. The amount of interest capitalized was $1.5 million in 2000.

Property, plant and equipment at December 31, 2000 consisted of the following
(in thousands):

Land and land improvements..................................... $ 102,966
Buildings...................................................... 273,618
Machinery and equipment........................................ 3,140,596
Construction in progress....................................... 121,486
----------
3,638,666
Accumulated depreciation and amortization...................... (1,447,580)
----------
Property, plant and equipment, net............................. $2,191,086
==========

(8)ACCRUED LIABILITIES

Accrued liabilities include, among other items, the following as of
December 31, 2000 (in thousands):

Accrued invoices and costs........................................ $47,460
Environmental reserve............................................. $25,000
Accrued taxes, other than income taxes............................ $37,712
Salaries, wages and other compensation............................ $45,720

(9)LONG-TERM DEBT

Long-term debt at December 31, 2000 consisted of the following (in
thousands):

Solid waste disposal and pollution control bonds,
5.5% through 9.5%, due through 2030............................. $129,330
Refunding revenue bonds, variable rate,
4.65% at December 31, 2000, due in 2018......................... 46,500
Loan payable to Canadian bank under credit agreement,
variable rate, 7.8% at December 31, 2000, due in 2004........... 28,000
--------
203,830
Less: unamortized discount, net.................................. (2,048)
Less: current maturities......................................... (753)
--------
Long-term debt................................................. $201,029
========

F-106

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
Minimum principal payments on long-term debt subsequent to 2000 are as
follows (in thousands):

2001.............................................. $ 753
2002.............................................. 752
2003.............................................. 4,433
2004.............................................. 28,632
2005.............................................. 2,310
Thereafter........................................ 166,950
--------
$203,830
========

Unamortized discount, net is being amortized to interest expense over the
lives of the related issues.

Certain of OCHC's debt obligations, such as certain pollution control bonds
and other types of bonds issued through public authorities, are secured by the
equipment purchased with the proceeds of the bond financing.

At December 31, 2000, $178 million of OCHC's long-term debt, including
current maturities, was guaranteed by Occidental.

(10)LEASE COMMITMENTS

Operating and capital lease agreements frequently include renewal and/or
purchase options and require OCHC to pay for utilities, taxes, insurance and
maintenance expense.

At December 31, 2000, future net minimum lease payments for capital and
operating leases were the following (in thousands):

CAPITAL OPERATING
------- ---------

2001.................................................... $ 1,205 $ 64,958
2002.................................................... 1,205 47,043
2003.................................................... 1,205 38,253
2004.................................................... 1,205 24,666
2005.................................................... 1,205 18,006
Thereafter.............................................. 41,931 142,047
------- --------
Total minimum lease payments............................ 47,956 $334,973
========
Less: imputed interest.................................. (22,110)
Less: current maturities................................ (73)
-------
Present value of long-term capital lease liabilities.... $25,773
=======

OxyVinyls leases certain manufacturing facilities in LaPorte, Texas, and
railcars under the terms of various related agreements dated April 30, 1999
(collectively, the LaPorte Lease). The initial lease term extends through April
20, 2004 and has a provision for annual renewals for an additional five years.
Upon termination of the LaPorte Lease, OxyVinyls may purchase the assets based
upon their estimated fair values. In the event OxyVinyls does not purchase the
assets, the LaPorte Lease provides a residual value guarantee by OxyVinyls of
approximately $152 million. Currently, OxyVinyls does not expect to make
payments under this provision. Total estimated future rental commitments of
$32.5 million under the LaPorte Lease are included in the net operating lease
commitments above. Actual rent payments under the LaPorte Lease are calculated
using

F-107

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
variable interest rates. OxyVinyls has restricted bank deposits included in
cash and cash equivalents in the accompanying consolidated balance sheets
associated with the LaPorte Lease of $3.6 million as of December 31, 2000.
OxyVinyls earns interest on these deposits, which will be returned to OxyVinyls
upon termination of the LaPorte Lease. All obligations under the LaPorte Lease
are guaranteed by Occidental.

At December 31, 2000, sublease rental amounts included in the net operating
lease commitments above totaled $98 million, as follows (in millions): 2001--
$8, 2002--$7, 2003--$7, 2004--$7, 2005--$7, 2006 and thereafter--$62. In
addition, OCHC has undertaken certain commitments in connection with the
construction and leasing of a co-generation facility in Louisiana. Upon
completion of construction and satisfaction of certain other conditions, lease
payments are expected to commence on or before December 31, 2002.

(11)LAWSUITS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS

OCHC and certain of its subsidiaries have been named as defendants or as
potentially responsible parties in a substantial number of lawsuits, claims and
proceedings, including governmental proceedings under CERCLA and corresponding
state acts. These governmental proceedings seek funding, remediation and, in
some cases, compensation for alleged property damage, punitive damages and
civil penalties, aggregating substantial amounts. OCHC, or any of its
subsidiaries, is usually one of many companies in these proceedings, and has to
date been successful in sharing response costs with other financially sound
companies. OCHC has accrued reserves at the most likely cost to be incurred in
those proceedings where it is probable that OCHC will incur remediation costs
which can be reasonably estimated. Maxus Energy Corporation has retained all
liability for remediation in certain proceedings.

During the course of its operations, OCHC is subject to audit by taxing
authorities for varying periods in various tax jurisdictions.

OCHC has entered into agreements providing for minimum future payments to
purchase certain raw materials, steam and water. At December 31, 2000, the net
present value of the fixed and determinable portion of the obligations under
these agreements, which were used to collateralize financings of the respective
suppliers, are as follows (in thousands):

2001............................................. $ 27,743
2002............................................. 25,947
2003............................................. 24,266
2004............................................. 22,696
2005............................................. 21,232
2006 through 2016................................ 129,293
---------
$ 251,177
=========

OCHC purchases VCM from OxyMar under the terms of a VCM purchase agreement
that runs until such time as OCHC ceases to own an equity interest in OxyMar.
The agreement requires OCHC to purchase at market prices a minimum of 700
million of the first 1.1 billion pounds of VCM produced and 530 million of the
next 1.0 billion pounds produced each year. Total purchases under the agreement
were $305 million in 2000. OCHC is also obligated to purchase all of its
ethylene feedstock requirements (not to exceed 2.55 billion pounds per year)
from Equistar through 2013. Purchases under this agreement were $368 million in
2000.

OxyVinyls sells PVC and VCM to PolyOne Corporation (PolyOne) under the terms
of separate sales agreements that expire in 2013. The PVC agreement requires
PolyOne to purchase its and its affiliates' annual

F-108

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
PVC requirements in North America from OxyVinyls in excess of 290 million
pounds. PolyOne will pay a price based on cost and market considerations for
the first 880 million pounds it purchases each year, and a competitive market
price on any volumes greater than 880 million pounds in each year. PolyOne is
required to purchase at market price all of its VCM requirements for production
of PVC in North America under the VCM agreement. PolyOne receives an
integration credit on the first 210 million pounds purchased in any year to
compensate for surrendering purchasing power on major feedstocks. Sales of PVC
and VCM to PolyOne under the terms of these agreements were approximately $297
million in 2000.

During 2000, OxyVinyls purchased $38.7 million of chlorine from Sunbelt Chlor
Alkali Partnership (Sunbelt), an equity investee of PolyOne, under the terms of
an agreement that expires on December 31, 2094. This agreement requires
OxyVinyls to purchase at market price, less a discount, all chlorine produced
by Sunbelt at its chlorine manufacturing process facility in McIntosh, Alabama,
up to a maximum of 250 thousand tons per year.

OCHC has certain other commitments under contracts, guarantees and joint
ventures, and certain other contingent liabilities, all in the ordinary course
of business.

It is impossible at this time to determine the ultimate liabilities that OCHC
and its subsidiaries may incur resulting from the foregoing lawsuits, claims
and proceedings, audits, commitments, contingencies and related matters.
Several of these matters may involve substantial amounts, and if these were to
be ultimately resolved unfavorably to the full amount of their maximum
potential exposure, an event not currently anticipated, it is possible that
such event could have a material adverse effect upon OCHC's consolidated
financial position. However, in management's opinion, after taking into account
reserves, it is unlikely that any of the foregoing matters will have a material
adverse effect upon OCHC's consolidated financial position.

(12)DOMESTIC AND FOREIGN INCOME AND OTHER TAXES

OCHC and its 80 percent or more owned domestic subsidiaries are included in
the consolidated U.S. federal income tax return and in certain unitary state
income tax returns of Occidental, which allocates a portion of the income tax
provision for these returns to OCHC. Deferred income taxes are recorded at
enacted rates to recognize the future effects of temporary differences which
arise between financial statement assets and liabilities and their basis for
income tax reporting purposes. Current and deferred income tax provisions are
based on taxable income determined as though OCHC filed as an independent
company, making the same tax return elections used in Occidental's consolidated
U.S. federal return. Occidental also permits OCHC to recognize income tax
benefits for current year operating losses and deductible temporary differences
without limiting such benefits. Any unpaid current income tax allocations are
included in due from Occidental and affiliates, net, in the accompanying
consolidated balance sheet. OCHC also records current and deferred income tax
provisions for operations required to be reported in separate tax returns, the
current portion of which is included in prepaid expenses as of December 31,
2000 in the accompanying consolidated balance sheet.

Deferred tax liabilities of approximately $63 million at December 31, 2000
have not been recognized for temporary differences of $147 million related to
OCHC's investment in certain foreign subsidiaries, primarily as a result of
unremitted earnings of these subsidiaries, as it is OCHC's intention,
generally, to reinvest such earnings permanently.

The foreign currency translation adjustment included in other comprehensive
income was net of an income tax charge of $1.7 million in 2000.

Deferred income taxes reflect the future tax consequences of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts. At December 31, 2000, OCHC had deferred tax

F-109

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
assets of $240 million and deferred tax liabilities of $1.0 billion. The
temporary differences resulting in deferred tax assets and liabilities are
primarily related to property, plant and equipment, environmental and other
business reserves, and postretirement benefit accruals.

In connection with the transfer of certain postretirement benefit accruals in
1999 (see Note 14) and certain environmental remediation liabilities in 1998
(see Note 1), approximately $50 million and $109 million, respectively, of
deferred tax assets were transferred by OCHC through an intercompany account
included in due from Occidental and affiliates, net. Additionally, in
connection with the transfer to OCHC of certain casualty insurance reserves in
1999, approximately $21 million of deferred tax assets were transferred to OCHC
through an intercompany account included in due from Occidental and affiliates,
net.

(13)STOCK INCENTIVE PLANS

Certain OCHC executives participate in various Occidental stock incentive
plans. During 2000, 1,555,000 options to purchase common stock of Occidental,
respectively, were granted to OCHC executives. Generally, these options vest
over three years with a maximum term of ten years and one month.

Performance stock awards by Occidental were made to various executive
officers pursuant to the 1995 Incentive Stock Plan. The number of shares of
Occidental common stock to be received, under these awards, by such officers at
the end of the performance period will depend on the attainment of performance
objectives based on a combination of peer company comparison of total
stockholder return for such period and return on assets of OCHC. The grantees
will receive shares of Occidental common stock in an amount ranging from zero
to 200 percent of the Target Share Award (as such amount is defined in the
grant). The shares vest or fail to vest by the end of the four-year performance
term. In 2000, awards for 70,116 target shares were granted to OCHC executive
officers at a weighted-average grant-date value of $21.625 per share.

In 1997, 875,000 performance stock options were granted to certain executive
officers at an exercise price of $25.375. Under the terms of these grants, as
amended in 1999, these options expire ten years from the grant date and will
become vested upon the earlier of the following events occurring, at which time
the grants become fully vested and exercisable: (a) for twenty consecutive
trading days, the New York Stock Exchange closing price of Occidental common
stock must be $25; or (b) July 2, 2002. As of December 31, 2000, none of the
options were exercisable. Any income effect will be recognized at the time the
options are exercisable.

(14)RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

OCHC participates in various defined contribution retirement plans sponsored
by Occidental for its salaried, domestic union and nonunion hourly, and certain
foreign national employees that provide for periodic contributions by OCHC
based on plan-specific criteria, such as base pay, age level, and/or employee
contributions.

OCHC provides medical and dental benefits and life insurance coverage for
certain active, retired and disabled employees and their eligible dependents.
The benefits generally are funded by OCHC as the benefits are paid during the
year. The cost of providing these benefits is based on claims filed and
insurance premiums paid for the period.

In July 1999, OCHC transferred certain postretirement benefit obligations to
Oxy Retiree Medical Management, Inc. (ORMMI), a consolidated subsidiary of
Occidental. ORMMI was established in order to more effectively manage certain
Occidental postretirement benefit obligations The accompanying consolidated

F-110

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
balance sheet as well as the benefit information provided in this note include
all postretirement benefit obligations and related charges of OCHC including
those transferred to ORMMI.

Pension costs for OCHC's defined benefit pension plans, determined by
independent actuarial valuations, are generally funded by payments to trust
funds, which are administered by independent trustees.

In 2000, OCHC recorded adjustments to accumulated other comprehensive income
of $1.5 million to reflect the net-of-tax difference between the additional
liability required under pension accounting provisions and the corresponding
intangible asset.

OCHC's defined benefit pension and postretirement benefit plans are accrued
based on various assumptions and discount rates, as described below. The
actuarial assumptions used could change in the near term as a result of changes
in expected future trends and other factors which, depending on the nature of
the changes, could cause increases or decreases in the liabilities accrued.

The following table sets forth the reconciliation of the beginning and ending
balances of the benefit obligation for OCHC's defined benefit pension and
postretirement benefit plans (in thousands):

POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------

Changes in benefit obligation:
Benefit obligation--January 1, 2000....... $162,383 $233,237
Service cost--benefits earned during the
period................................. 2,133 2,752
Interest cost on projected benefit obli-
gation................................. 11,879 18,221
Employee contributions.................. 86 --
Actuarial loss.......................... 1,938 14,058
Foreign currency exchange rate changes.. (1,171) --
Benefits paid........................... (14,472) (23,007)
Plan amendments......................... 472 --
Divestitures (related to Durez business-
es).................................... (15,703) --
Curtailments and settlements............ 701 (7,743)
-------- --------
Benefit obligation--December 31, 2000..... $148,246 $237,518
======== ========

The following table sets forth the reconciliation of the beginning and ending
balances of the fair value of plan assets for OCHC's defined benefit pension
plans (in thousands):

PENSION BENEFITS
2000
----------------

Changes in plan assets:
Fair value of plan assets--January 1, 2000.............. $179,456
Actual return on plan assets.......................... 9,367
Foreign currency exchange rate changes................ (831)
Employer contributions................................ 1,156
Employee contributions................................ 86
Benefits paid......................................... (14,472)
Divestitures (related to Durez businesses)............ (16,639)
--------
Fair value of plan assets--December 31, 2000............ $158,123
========

F-111

OCCIDENTAL CHEMICAL HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)

DECEMBER 31, 2000
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $33 million, $30 million and $28
million, respectively, as of December 31, 2000.

The weighted average discount rate used in determining the benefit
obligations was 7.75 percent as of December 31, 2000. The weighted average rate
of increase in future compensation levels used in determining the benefit
obligations was approximately 4.5 percent in 2000. The expected weighted
average long-term rate of return on assets was 9 percent in 2000.

The postretirement benefit obligation was determined by application of the
terms of medical and dental benefits and life insurance coverage, including the
effect of established maximums on covered costs, together with relevant
actuarial assumptions and health care cost trend rates projected at a Consumer
Price Index (CPI) increase of 3 percent as of December 31, 2000 (beginning in
1993, participants other than certain union employees pay for all medical cost
increases in excess of increases in the CPI). For certain union employees, the
health care cost trend rates were projected at annual rates ranging ratably
from 7 percent in 2000 to 5 percent through the year 2004 and level thereafter.
A 1 percent increase or a 1 percent decrease in these assumed health care cost
trend rates would result in an increase or reduction of $12 million in the
postretirement benefit obligation as of December 31, 2000 and an increase or
reduction of $1 million in interest cost in 2000. The annual service cost would
not be materially affected by these changes.

The following table sets forth the funded status and amounts recognized in
OCHC's consolidated balance sheet for the defined pension and postretirement
benefit plans at December 31, 2000 (in thousands):

POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------

Funded status.............................. $ 9,877 $(237,518)
Unrecognized net transition obligation..... 1,921 --
Unrecognized prior service cost............ 2,828 9,587
Unrecognized net loss...................... 8,579 863
-------- ---------
Net amount recognized...................... $ 23,205 $(227,068)
======== =========
Prepaid benefit cost....................... $ 32,525 $ --
Accrued benefit liability.................. (10,669) (227,068)
Intangible asset........................... -- --
Accumulated other comprehensive income..... 1,349 --
-------- ---------
Net amount recognized...................... $ 23,205 $(227,068)
======== =========

(15)RELATED PARTY TRANSACTIONS

At December 31, 2000, OCHC had receivables of $33.3 million from equity
method investees. Additionally, liabilities of $31.7 million to equity method
investees were included in accounts payable in the accompanying consolidated
balance sheet at December 31, 2000.

F-112

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PROSPECTUS

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

$700,000,000

OFFER TO ISSUE

REGISTERED

10 1/8% SENIOR NOTES DUE 2008

IN EXCHANGE FOR

ALL OUTSTANDING

10 1/8% SENIOR NOTES DUE 2008

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