10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2006

¨ Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934

Commission File No. 333-76473

EQUISTAR CHEMICALS, LP

(Exact name of Registrant as specified in its charter)

Delaware	76-0550481
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1221 McKinney Street, Suite 700, Houston, Texas	77010
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨        Accelerated filer  ¨        Non-accelerated filer  x

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

There is no established public trading market for the Registrant’s equity securities. As of June 30, 2006, the last business day of the Registrant’s most recently completed second fiscal quarter, all of the Registrant’s equity securities were held by affiliates.

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

TABLE OF CONTENTS

PART I	1
Item 1. Business	1
EQUISTAR	1
Overview of the Business	1
Additional Information Available	1
BUSINESS OPERATIONS	2
Overview	2
Marketing and Sales	4
Raw Materials	5
Competition and Industry Conditions	6
ENVIRONMENTAL CAPITAL EXPENDITURES	7
RESEARCH AND TECHNOLOGY; INTELLECTUAL PROPERTY	7
EMPLOYEE RELATIONS	7
Item 1A. Risk Factors	8
Risks Relating to the Businesses	8
Risks Relating to Debt	14
FORWARD-LOOKING STATEMENTS	16
INDUSTRY AND OTHER INFORMATION	17
NON-GAAP FINANCIAL MEASURES	17
Item 2. Properties	18
Principal Manufacturing Facilities	18
Other Locations and Properties	18
Item 3. Legal Proceedings	19
Litigation Matters	19
Environmental Matters	19
Indemnification	20
Item 4. Submission of Matters to a Vote of Security Holders	20
PART II	21
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6. Selected Financial Data	22

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Overview	22
Results Of Operations	24
Financial Condition	27
Current Business Outlook	31
Related Party Transactions	31
Critical Accounting Policies	31
Accounting And Reporting Changes	33
Environmental And Other Matters	34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	35
Commodity Price Risk	35
Interest Rate Risk	35
Item 8. Financial Statements and Supplementary Data	36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	65
Item 9A. Controls and Procedures	65
Item 9B. Other Information	65
PART III	66
Item 10. Directors, Executive Officers and Corporate Governance	66
Item 11. Executive Compensation	66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	66
Item 13. Certain Relationships and Related Transactions, and Director Independence	66
Item 14. Principal Accountant Fees and Services	66
Audit and Non-Audit Fees	66
Pre-Approval Policy	67
PART IV	68
Item 15. Exhibits and Financial Statement Schedules	68

PART I

Item 1. Business

EQUISTAR

Overview of the Business

Equistar Chemicals, LP (together with its consolidated subsidiaries, “Equistar”) is one of the world’s largest producers of basic chemicals, with total 2006 revenues of approximately $12.8 billion, and assets of approximately $5.4 billion as of December 31, 2006. It is North America’s second largest producer of ethylene, the world’s most widely used petrochemical. Equistar also is the third largest producer of polyethylene in North America.

Equistar operates in one reportable business segment: ethylene, co-products and derivatives. Ethylene co-products primarily include propylene, butadiene and aromatics, which include benzene and toluene. Equistar’s derivatives primarily include polyethylene, ethylene oxide (“EO”), ethylene glycol (“EG”) and other EO derivatives, as well as ethanol and polypropylene. Equistar also produces fuel products, such as methyl tertiary butyl ether (“MTBE”) and alkylate.

Since November 30, 2004, Equistar has been an indirect, wholly-owned subsidiary of Lyondell Chemical Company (“Lyondell”). Prior to that, Equistar was owned jointly by Lyondell and Millennium Chemicals Inc. (“Millennium”). Lyondell acquired Millennium in a stock-for-stock business combination on November 30, 2004, thereby also indirectly acquiring Millennium’s 29.5% interest in Equistar. From May 1998 to August 2002, Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively, “Occidental”) shared ownership of Equistar with Lyondell and Millennium until Lyondell purchased Occidental’s interest in Equistar. Equistar was formed in October 1997 as a Delaware limited partnership by Lyondell and Millennium, and holds assets contributed by Lyondell, Millennium and Occidental.

Additional Information Available

Equistar’s principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010. Its telephone number is (713) 652-7200 and its website address is www.lyondell.com. Equistar’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge through www.lyondell.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission.

In addition, Equistar has adopted a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Equistar’s code of ethics, known as its Business Ethics and Conduct Policy, is part of the overall Lyondell Business Ethics and Conduct Policy. It applies to all members of Equistar’s Partnership Governance Committee and to all officers and employees of Equistar, including Equistar’s principal executive officer, principal financial officer, principal accounting officer and controller. A copy of the Business Ethics and Conduct Policy is available at www.lyondell.com free of charge. In addition, Equistar intends to satisfy the disclosure requirements of Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of the Business Ethics and Conduct Policy that applies to Equistar’s principal executive officer, principal financial officer, principal accounting officer or controller and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation S-K by posting such information at www.lyondell.com.

Information contained on Equistar’s website (www.lyondell.com) or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

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BUSINESS OPERATIONS

Overview

Equistar produces ethylene, co-products and derivatives at fifteen facilities located in five states in the U.S. Ethylene co-products primarily include propylene, butadiene and aromatics, which include benzene and toluene. Derivatives primarily include polyethylene, EO, EG and other EO derivatives, as well as ethanol and polypropylene. Equistar also produces fuel products, such as MTBE and alkylate. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics. Ethylene, co-products and derivatives are fundamental to many segments of the economy, including the production of consumer products, packaging, housing and automotive components and other durable and nondurable goods.

The following table outlines:

• Equistar’s primary products;

• annual processing capacity as of December 31, 2006; and

• the primary uses for those products.

See “Item 2. Properties” for the locations where Equistar produces its products.

Unless otherwise specified, annual processing capacity was calculated by estimating the average 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. Capacities shown include 100% of the capacity of joint venture facilities.

Product	Annual Capacity	Primary Uses
ETHYLENE AND CO-PRODUCTS:
Ethylene	10.8 billion pounds (a)	Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride, styrene and vinyl acetate monomer.
Co-Products:
Propylene	4.8 billion pounds (a)(b)	Propylene is used to produce polypropylene, acrylonitrile and propylene oxide.
Butadiene	1.2 billion pounds	Butadiene is used to manufacture styrene-butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets, paper coatings and engineered plastics.
Aromatics:
Benzene	310 million gallons	Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, synthetic rubber and polystyrene. Polystyrene is used in insulation, packaging and drink cups.
Toluene	66 million gallons	Toluene is used as an octane enhancer in gasoline, as a chemical raw material for benzene and/or paraxylene production, and a core ingredient in toluene diisocyanate, a compound used in urethane production.
Fuel Products:
MTBE	284 million gallons (18,500 barrels/day) (c)	MTBE is a high octane gasoline blending component.
Alkylate	337 million gallons (d)	Alkylate is a high octane gasoline blending component.

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Product	Annual Capacity	Primary Uses
DERIVATIVES:
High density polyethylene (HDPE)	3.2 billion pounds	HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays; pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household and industrial chemicals and motor oil; milk, water, and juice bottles; large (rotomolded) tanks for storing liquids such as agricultural and lawn care chemicals; and pipe.
Low density polyethylene (LDPE)	1.4 billion pounds	LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; 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. Ethylene vinyl acetate is a specialized form of LDPE used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders.
Linear low density polyethylene (LLDPE)	1.2 billion pounds	LLDPE is used to manufacture garbage and lawn-leaf bags; industrial can liners; housewares; lids for coffee cans and margarine tubs, dishpans, home plastic storage containers, kitchen trash containers; large (rotomolded) toys like outdoor gym sets; drip irrigation tubing; wire and cable insulating resins and compounds used to insulate copper and fiber optic wiring, and film; shrink wrap for multi-packaging canned food, bag-in-box bags, produce bags, and pallet stretch wrap.
Ethylene Oxide (EO)	1.5 billion pounds EO equivalents; 400 million pounds as pure EO (e)	EO is used to produce surfactants, industrial cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol.
Ethylene Glycol (EG)	1.4 billion pounds (e)	EG is used to produce polyester fibers and film, polyethylene terephthalate (“PET”) resin, heat transfer fluids and automobile antifreeze.
Other Ethylene Oxide Derivatives	225 million pounds	EO derivatives include ethylene glycol ethers and ethanolamines, and are used to produce paint and coatings, polishes, solvents and chemical intermediates.
Ethanol	50 million gallons	Ethanol is used in the production of solvents as well as household, medicinal and personal care products.
Polypropylene	280 million pounds	Polypropylene is used to manufacture fibers for carpets, rugs and 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.

_________

(a) Excludes 850 million pounds/year of ethylene capacity and 200 million pounds/year of propylene capacity at Equistar’s Lake Charles, Louisiana ethylene and co-products facility, which has been idled since the first quarter 2001. Although Equistar retains the physical ability to restart or sell that facility, in the third quarter of 2006 Equistar determined that it had no expectation of resuming production at that facility.

(b) Does not include refinery-grade material from Lyondell’s refinery or production from the product flexibility unit at the Channelview facility, which can convert ethylene and other light petrochemicals into propylene. These facilities have an annual processing capacity of an additional one billion pounds/year of propylene.

(c) Includes up to 44 million gallons/year of capacity produced for and returned to Lyondell.

(d) Includes up to 172 million gallons/year of capacity produced for and returned to Lyondell.

(e) Includes 700 million pounds/year of EO equivalents capacity and 800 million pounds/year of EG capacity at the Beaumont, Texas facility, which represents 100% of the EO equivalents capacity and EG capacity, respectively, at the facility. The Beaumont, Texas facility is owned by PD Glycol, a partnership owned 50% by Equistar and 50% by E. I. du Pont de Nemours and Company (“DuPont”).

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Marketing and Sales

Other than Lyondell, which accounted for approximately 11% of Equistar’s total revenues in 2006, no single customer accounted for 10% or more of Equistar’s total revenues in 2006.

Ethylene and Co-Products—Equistar produces ethylene at six sites located in three states. Ethylene produced by Equistar generally is consumed internally as a raw material in the production of derivatives, or is shipped by pipeline to customers. For the year ended December 31, 2006, approximately 87% of Equistar’s ethylene, based on sales dollars, was used by Equistar’s derivatives facilities or sold to related parties at market-related prices. The sales to related parties during 2006 include significant ethylene sales to Occidental Chemical Corporation pursuant to a long-term ethylene supply agreement. Occidental Chemical Corporation is a subsidiary of Occidental, which owned 8.5% of Lyondell’s outstanding common stock as of December 31, 2006 and after giving effect to Occidental’s January 26, 2007 exercise of its warrant to purchase Lyondell common stock. See Note 5 to the Consolidated Financial Statements. Sales of ethylene accounted for approximately 12% of Equistar’s total revenues in 2006, 13% in 2005 and 12% in 2004.

Ethylene co-products are manufactured by Equistar primarily at four facilities in Texas. The Morris, Illinois and Clinton, Iowa facilities also can produce propylene.

Equistar consumes propylene in the production of polypropylene and also sells propylene to Lyondell at market-related prices. Equistar’s propylene production that is not consumed internally or sold to related parties generally is sold under multi-year contracts. In addition, pursuant to a 15-year propylene supply arrangement entered into in 2003 with a subsidiary of Sunoco, Inc. (“Sunoco”), Equistar supplies 700 million pounds of propylene annually to Sunoco. Under the arrangement, a majority of the propylene is supplied under a cost-based formula and the balance is supplied on a market-related basis. Sales of propylene accounted for approximately 20% of Equistar’s total revenues in 2006 and approximately 18% in 2005 and 2004.

Equistar generally sells its butadiene under multi-year contracts. Equistar sells benzene and toluene to Lyondell at market-related prices. Most of Equistar’s benzene and toluene production that is not sold to related parties generally is sold under multi-year contracts. Equistar also sells benzene produced by Lyondell, which it purchases from Lyondell at market-related prices. Sales of benzene accounted for less than 10% of Equistar’s total revenues in 2006 and 2005 and approximately 10% in 2004. Equistar serves as Lyondell’s sole agent to market toluene, paraxylene and orthoxylene produced by Lyondell and receives a marketing fee for such services.

Equistar at times purchases ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchased for resale can vary significantly from period to period. However, purchased volumes generally do not have a significant impact on profitability.

MTBE produced at one of the two Channelview units and at the Chocolate Bayou plant is sold to Lyondell at market-related prices. MTBE is produced for Lyondell at the second Channelview unit for a processing fee. Equistar produces alkylate for and returns alkylate to Lyondell for a processing fee, and also sells alkylate both under short-term contracts and on a spot basis.

Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi and La Porte facilities is shipped via a pipeline system which has connections to numerous U.S. Gulf Coast consumers. This pipeline system, some of which is owned and some of which is leased, 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 ethylene and co-products producers allow access to customers who are not directly connected to Equistar’s pipeline system. Some ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois and also to customers. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. Butadiene, benzene, toluene and other products are distributed by pipeline, railcar, truck, barge or ocean-going vessel.

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Derivatives—Polyethylene is manufactured by Equistar using a variety of technologies at five facilities in Texas and at the Morris, Illinois and Clinton, Iowa facilities. Polyethylene includes high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low density polyethylene (“LLDPE”). HDPE accounted for approximately 12% of Equistar’s total revenues in 2006 and 2005 and 14% in 2004, and polyethylene (HDPE, LDPE and LLDPE collectively) accounted for approximately 21% of Equistar’s total revenues in 2006 and 2005 and 26% in 2004.

Polyethylene products primarily are sold to an extensive base of established customers. Approximately two-thirds of Equistar’s domestic polyethylene product volumes are sold to customers under annual or multi-year contracts. The remainder of the polyethylene volume generally is sold under customary terms and conditions without formal contracts. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement. Equistar also produces performance polymer products, which include enhanced grades of polyethylene and polypropylene. Equistar believes 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.

EO or EO equivalents, and EO’s primary derivative, EG, are produced at the Bayport facility located in Pasadena, Texas and through a 50/50 joint venture between Equistar and DuPont in Beaumont, Texas. The Bayport facility also produces other derivatives of EO, principally ethylene glycol ethers and ethanolamines. EO and EG typically are sold under multi-year contracts, with market-based pricing. Glycol ethers, ethanolamines and brake fluids are sold primarily into the solvent and distributor markets at market prices. Ethanol and ethers primarily are sold under contracts at market prices. EO is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-going vessel.

Other derivatives products are primarily distributed by railcar. The vast majority of the derivatives products are sold in North America, primarily through Equistar’s sales organization. Sales agents are generally engaged to market the derivatives products in the rest of the world.

Raw Materials

Ethylene and Co-Products—Raw material cost is the largest component of the total cost for the production of ethylene and co-products. The primary raw materials used are heavy liquids and natural gas liquids (“NGLs”). Heavy liquids include crude oil-based naphtha and gas oil, as well as condensate, a very light crude oil resulting from natural gas production (collectively referred to as “heavy liquids”). NGLs include ethane, propane and butane. The use of heavy liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, as well as gasoline blending components, while the use of NGLs results in the production of a smaller amount of co-products, such as propylene.

The flexibility to consume a wide range of raw materials, including heavy liquids, has historically provided plants with that flexibility with an advantage over plants that are restricted in their raw material processing capability to NGLs such as ethane and propane, assuming the co-products were recovered and sold. Facilities using heavy liquids historically have generated, on average, approximately four cents of additional variable margin per pound of ethylene produced compared to facilities restricted to using ethane. This margin advantage is based on an average of historical data over a period of years and is subject to short-term fluctuations, which can be significant. For example, the advantage during first quarter 2006 was well below the historical average. However, strengthening market conditions increased the advantage significantly for the remainder of the year. As a result, the advantage for the full year 2006 was above the historical average. Equistar has the capability to realize this margin advantage due to its ability to process heavy liquids at its Channelview, Corpus Christi and Chocolate Bayou ethylene and co-products facilities. Equistar’s Channelview and Corpus Christi facilities have the greatest operational flexibility among Equistar’s facilities to process significant quantities of either heavy liquids or NGLs, depending upon the relative economic advantage of the alternative raw materials.

5

As described above, management believes that this raw material flexibility is a key advantage in the production of ethylene and co-products. As a result, Equistar’s heavy liquids requirements are sourced globally via a mix of contractual and spot arrangements. Spot market purchases are made in order to maintain raw material flexibility and to take advantage of raw material pricing opportunities. A large portion of Equistar’s NGLs requirements are purchased via contractual arrangements from a variety of sources, but NGLs also are purchased on the spot market. Equistar also obtains a portion of its heavy liquids requirements from Lyondell’s refinery at market-related prices. Heavy liquids generally are delivered by ship or barge, and NGLs generally are delivered via pipeline.

Equistar purchases all of its methanol requirements for ethylene and co-products from Lyondell at market-based prices. Also, Equistar purchases large amounts of natural gas to be used as energy for consumption in its business via market-based contractual arrangements with a variety of sources.

The raw materials for ethylene and co-products are, in general, commodity heavy liquids and NGLs with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability for ethylene and co-products has not been an issue. For additional discussion regarding the effects of raw material pricing and supply on recent operating results, see “Item 1A. Risk Factors—Risks Relating to the Businesses—Costs of raw materials and energy, as well as reliability of supply, may result in increased operating expenses and reduced results of operations” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Derivatives—The primary raw material for the derivatives products is ethylene. Equistar’s derivatives facilities generally can receive their ethylene directly from Equistar’s ethylene and co-products facilities via its pipeline system, pipelines owned by unrelated parties or on-site production. Substantially all of the ethylene used in Equistar’s polyethylene production is produced internally by Equistar’s ethylene and co-products facilities. However, the polyethylene plants at Chocolate Bayou, La Porte and Bayport, Texas are connected by pipeline to unrelated parties and could receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois receives propylene from Equistar’s ethylene and co-products facilities, as well as unrelated parties.

The raw materials for the derivatives products are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability for derivatives products has not been an issue. For additional discussion regarding the effects of raw material pricing and supply on recent operating results, see “Item 1A. Risk Factors—Risks Relating to the Businesses—Costs of raw materials and energy, as well as reliability of supply, may result in increased operating expenses and reduced results of operations” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition and Industry Conditions

Competition in the ethylene, co-products and derivatives businesses is based on price, product quality, product delivery, reliability of supply, product performance and customer service. Industry consolidation has brought North American production capacity under the control of fewer, although larger, competitors.

Profitability is affected not only by supply and demand for ethylene, co-products and derivatives, but also by raw material costs and price competition among producers, which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions, capacity utilization and other factors that will affect industry profitability in the future. In 2005, temporary hurricane-related shutdowns greatly impacted supply and demand during the last four months of 2005, and significant U.S. production outages carried over into the first quarter of 2006. During the next five years, forecasts for the worldwide average annual ethylene capacity additions are projected at more than 5%, with more than 80% of these additions in the Middle East and Northeast Asia. The average worldwide demand growth is expected to lag this rate only by approximately 1%. In the U.S., relatively stable ethylene supply combined with sustained demand levels are projected to result in continued high average operating rates through 2008. Capacity share figures for Equistar and its competitors, discussed below, are based on completed production facilities and, where appropriate, include the full capacity of joint venture facilities and certain long-term supply arrangements.

6

Equistar competes with other large domestic marketers and producers for sales of ethylene and co-products, including Chevron Phillips Chemical Company LP (“ChevronPhillips”), Enterprise Products Partners L.P., Exxon Mobil Corporation (“ExxonMobil”), Huntsman Corporation (“Huntsman”), Ineos and Shell Chemical Company. Equistar’s ethylene rated capacity at December 31, 2006 was approximately 10.8 billion pounds per year, or approximately 14% of total North American ethylene production capacity. Based on published rated production capacities, Equistar is the second largest producer of ethylene in North America. North American ethylene rated capacity at December 31, 2006 was approximately 77 billion pounds per year, with approximately 77% of that North American capacity located along the Gulf Coast.

Equistar competes with other large marketers and producers for sales of derivatives, including Celanese Corporation (“Celanese”), ChevronPhillips, The Dow Chemical Company (“Dow”), Eastman Chemical Company, ExxonMobil, Formosa Plastics Corporation, Huntsman, Ineos, NOVA Chemicals Corporation, TOTAL and Westlake Polymers. Based on published rated industry capacities, Equistar is the third largest producer of polyethylene in North America. The rated capacity of Equistar’s polyethylene units as of December 31, 2006 was approximately 5.8 billion pounds per year, or approximately 14% of total industry capacity in North America. There are many other North American producers of polyethylene, the most significant of which are ChevronPhillips, Dow and ExxonMobil.

ENVIRONMENTAL CAPITAL EXPENDITURES

Equistar (together with the industries in which it operates) is subject to extensive national, state and local environmental laws and regulations concerning, and is required to have permits and licenses regulating, emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. In the years ended December 31, 2006, 2005 and 2004, Equistar spent approximately $60 million, $62 million and $44 million, respectively, for environmentally related capital expenditures at existing facilities. Equistar currently estimates that environmentally related capital expenditures at its facilities will be approximately $30 million for 2007 and $15 million for 2008. Capital expenditures during 2005 and 2006 included significant expenditures for projects related to air emission reduction and wastewater management. The decreasing levels of estimated environmentally related capital expenditures for 2007 and 2008 reflect the completion or near completion of these projects. For additional information regarding environmentally related capital expenditures, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

RESEARCH AND TECHNOLOGY; INTELLECTUAL PROPERTY

Equistar conducts research and development principally at technology centers in Cincinnati, Ohio and Chocolate Bayou, Texas. Equistar’s research and development expenditures were $34 million in 2006, $33 million in 2005 and $34 million in 2004.

Equistar maintains an extensive patent portfolio and continues to file new patent applications related to its businesses. As of December 31, 2006, Equistar owned approximately 260 United States patents and approximately 410 worldwide patents. Equistar owns trademarks and trademark registrations in the United States and in other countries, including the “Equistar” trade name. Equistar does not regard its business as being materially dependent upon any single patent, trademark or license.

EMPLOYEE RELATIONS

At December 31, 2006, Equistar employed approximately 3,260 full-time and part-time employees. Approximately 4.5% of Equistar’s employees are covered by collective bargaining agreements. In addition to its own employees, Equistar uses the services of Lyondell and Millennium employees pursuant to shared services and loaned employee arrangements and also uses the services of independent contractors in the routine conduct of its business. Equistar believes that its relations with its employees are good.

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Item 1A. Risk Factors

There are many factors that may affect the businesses and results of operations of Equistar. For additional discussion regarding factors that may affect the businesses and operating results of Equistar, see “Item 1. Business,” “Item 3. Legal Proceedings,” “Forward-Looking Statements,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market Risk.” If one or more of these risks actually occur, Equistar’s business, financial position or results of operations could be materially and adversely affected.

Risks Relating to the Businesses

Costs of raw materials and energy, as well as reliability of supply, may result in increased operating expenses and reduced results of operations.

Equistar purchases large amounts of raw materials and energy for its businesses. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of its operating expenses. The costs of raw materials and energy used for Equistar’s products generally follow price trends of, and vary with the market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. Raw material and energy costs remain at high levels. There have been in the past, and will likely be in the future, periods of time when Equistar is unable to pass raw material and energy cost increases on to customers quickly enough to avoid adverse impacts on its results of operations. Customer consolidation also has made it more difficult to pass along cost increases to customers. Equistar’s results of operations have been, and could be in the future, significantly affected by increases and volatility in these costs. Cost increases also may increase working capital needs, which could reduce Equistar’s liquidity and cash flow. In addition, when raw material and energy costs increase rapidly and are passed along to customers as product price increases, the credit risks associated with certain customers can be compounded. To the extent Equistar increases its product sales prices to reflect rising raw material and energy costs, demand for products may decrease as customers reduce their consumption or use substitute products, which may have an adverse impact on Equistar’s results of operations. See “Equistar sells commodity products in highly competitive global markets and faces significant price pressures” below.

In addition, higher North American natural gas prices relative to natural gas cost-advantaged regions, such as the Middle East, have diminished the ability of many domestic chemical producers to compete internationally since natural gas prices affect a significant portion of the industry’s raw materials and energy sources. This environment has in the past caused and may in the future cause a reduction in Equistar’s exports, and has in the past reduced and may in the future reduce the competitiveness of U.S. producers. It also has in the past increased the competition for sales of chemicals in North America, as U.S. production that would otherwise have been sold overseas was instead offered for sale domestically, resulting in excess supply and lower margins in North America, and may do so in the future.

Furthermore, across Equistar, there are a limited number of suppliers for some of its raw materials and utilities and, in some cases, the number of sources for and availability of raw materials is specific to the particular geographic region in which a facility is located. In addition, for some Equistar’s products, the facilities and/or distribution channels of raw material suppliers and Equistar form an integrated system. This is especially true in the U.S. Gulf Coast where the infrastructure of the chemical and refining industries is tightly integrated such that a major disruption of supply of a given commodity can negatively affect numerous participants, including suppliers of other raw materials. If one or more of Equistar’s significant suppliers were unable to meet its obligations under present supply arrangements or supplies are otherwise disrupted, Equistar’s businesses could suffer reduced supplies or be forced to incur increased costs for their raw materials, which would have a direct negative impact on plant operations. For example, Hurricanes Katrina and Rita negatively affected crude oil and natural gas supplies, as well as supplies of some of Equistar’s other raw materials, contributing to increases in raw material prices during the second half of 2005 and, in some cases, disrupting production. In addition, hurricane-related disruption of rail and pipeline traffic in the U.S. Gulf Coast area negatively affected shipments of raw materials and product.

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The cyclicality and volatility of the chemical industry may cause significant fluctuations in Equistar’s operating results.

Equistar’s historical operating results reflect the cyclical and volatile nature of the supply-demand balance in the chemical industry, and Equistar’s future operating results are expected to continue to be affected by this cyclicality and volatility. The chemical industry historically has experienced alternating periods of capacity shortages leading to 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. The volatility this industry experiences occurs as a result of changes in the supply and demand for products, changes in energy prices and changes in various other economic conditions around the world. This cyclicality and volatility results in significant fluctuations in profits and cash flow from period to period and over the business cycles.

The chemical industry has experienced tight supply in many product areas and increased demand as the global economy has improved over the past several years. As a result, profitability in the industry increased, even in a world of volatile raw material and energy costs. However, the sustainability of these positive business conditions remains subject to uncertainty. The global economic and political environment continues to be uncertain, and a recession or other negative changes could result in a decline in demand and place pressure on Equistar’s results of operations. In addition, new capacity additions by some participants in the industry, especially those in the Middle East and Asia that began in 2006 and are expected to continue through the latter part of the decade, could lead to another period of oversupply and poor profitability.

Equistar may reduce production at or idle a facility for an extended period of time or exit a business because of an oversupply of a particular product and/or a lack of demand for that particular product, or high raw material prices, which makes production uneconomical. Any decision to permanently close facilities or exit a business would result in impairment and other charges to earnings. Temporary outages sometimes last for several quarters or, in certain cases, longer, and could cause Equistar to incur costs, including the expenses of maintaining and restarting these facilities. It is possible that factors such as increases in raw material costs or lower demand in the future will cause Equistar to reduce operating rates, idle facilities or exit uncompetitive businesses.

External factors beyond Equistar’s control can cause fluctuations in demand for its products and in its prices and margins, which may result in lower operating results.

External factors beyond Equistar’s control can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for its products and can magnify the impact of economic cycles on its businesses. Examples of external factors include:

• supply of and demand for raw materials;

• changes in customer buying patterns and demand for Equistar’s products;

• general economic conditions;

• domestic and international events and circumstances;

• competitor actions;

• governmental regulation in the U.S. and abroad; and

• severe weather and natural disasters.

Equistar believes that events in the Middle East have had an impact on its businesses in recent years and may continue to do so. In addition, a number of Equistar’s products are highly dependent on durable goods markets, such as the housing and automotive markets, which also are cyclical and impacted by many of the external factors referenced above. Many of Equistar’s products are components of other chemical products that, in turn, are subject to the supply-demand balance of the chemical industry and general economic conditions. The global economy has remained strong, with relatively stable demand for Equistar’s products resulting in improved operating results compared to previous years as operations have remained at high capacity for the majority of Equistar’s products. This has occurred even as the volatility and elevated level of prices for crude oil and natural gas have resulted in

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increased raw material costs. However, the impact of the factors cited above and others may once again cause a slowdown in the business cycle, reducing demand and lowering operating rates and, ultimately, reducing profitability.

Equistar sells commodity products in highly competitive global markets and faces significant price pressures.

Equistar sells its products in highly competitive global markets. Due to the commodity nature of many of its products, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, Equistar generally is not able to protect its market position for these products by product differentiation and may not be able to pass on cost increases to its customers.

In addition, Equistar faces increased competition from companies that may have different cost structures or strategic goals than Equistar, such as privately-held companies, large integrated oil companies (many of which also have chemical businesses), government-owned businesses, and companies that receive subsidies or other government incentives to produce certain products in a specified geographic region. Increased competition from these companies could limit Equistar’s ability to increase product sales prices in response to raw material and other cost increases, or could cause Equistar to reduce product sales prices to compete effectively, which could reduce Equistar’s profitability.

Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. In addition, Equistar’s ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for its products, as well as the capacity utilization rates for those products. Timing differences in pricing between rising raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have reduced and may continue to reduce profitability.

Further, volatility in costs and pricing can result in commercial disputes with customers and suppliers with respect to interpretations of complex contractual arrangements. Significant adverse resolution of any such disputes also could reduce profitability.

Equistar obtains a portion of its raw materials from sources outside the U.S., which subjects it to exchange controls, political risks and other risks.

Equistar obtains a portion of its principal raw materials from sources outside the U.S., which subjects it to risks such as transportation delays and interruptions, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory environments. These events could increase the prices at which Equistar can obtain raw materials or disrupt the supply of raw materials, which could reduce Equistar’s operating results. Although Equistar has compliance programs and processes intended to ensure compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which it may be subject, Equistar is subject to the risk that its compliance could be challenged.

Equistar’s operations and assets are subject to extensive environmental, health and safety and other laws and regulations, which could result in material costs or liabilities.

Equistar cannot predict with certainty the extent of future liabilities and costs under environmental, health and safety and other laws and regulations and whether liabilities and costs will be material. Equistar also may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at its facilities or chemicals that it manufactures, handles or owns. In addition, because Equistar’s chemical products are components of a variety of other end-use products, Equistar, along with other members of the chemical industry, is inherently subject to potential claims related to those end-use products. Although claims of the types described above have not historically had a material impact on Equistar’s operations, a substantial increase in the success of

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these types of claims could result in the expenditure of a significant amount of cash by Equistar to pay claims, and could reduce its operating results.

Equistar (together with the industries in which it operates) is subject to extensive national, state and local environmental laws and regulations concerning, and is required to have permits and licenses regulating, emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require Equistar to meet specific financial responsibility requirements. Equistar cannot accurately predict future developments, such as increasingly strict environmental laws, and inspection and enforcement policies, as well as higher compliance costs, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Some risk of environmental costs and liabilities is inherent in Equistar’s operations and products, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the costs and risks described above, Equistar does not expect that it will be affected differently than the rest of the chemical industry where its facilities are located.

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. Also, U.S. “Superfund” statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including Equistar) may be required to bear all of such costs regardless of fault, the legality of the original disposal or ownership of the disposal site.

Equistar has on-site solid-waste management units at several facilities. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to these facilities. Equistar also has liabilities under the Resource Conservation and Recovery Act and various state government regulations related to several current and former plant sites. Equistar also is responsible for a portion of the remediation of certain off-site waste disposal facilities. Equistar’s policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. For further discussion regarding Equistar’s environmental matters and related accruals, and environmentally-related capital expenditures, see also “Item 1. Business—Environmental Capital Expenditures,” “Item 3. Legal Proceedings—Environmental Matters,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” and Note 16 to the Consolidated Financial Statements. If actual expenditures exceed the amounts accrued, that could have an adverse effect on Equistar’s results of operations and financial position.

In addition to the matters described above, Equistar is subject to other material regulatory requirements that could result in higher operating costs, such as regulatory requirements relating to the security of chemical facilities, and the transportation, exportation or registration of products. Although Equistar has compliance programs and other processes intended to ensure compliance with all such regulations, Equistar is subject to the risk that its compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could be significant.

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Legislative and other actions have substantially eliminated all U.S. demand for MTBE. Therefore, Equistar has been selling its MTBE for use outside of the U.S. and may produce alternative gasoline blending components that may be less profitable than MTBE.

The presence of MTBE in some water supplies in certain U.S. states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft led to public concern about the use of MTBE and resulted in U.S. federal and state governmental initiatives to reduce or ban the use of MTBE. Substantially all refiners and blenders have discontinued the use of MTBE in the U.S.

Accordingly, Equistar’s MTBE is sold for use outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Should it become necessary or desirable to significantly reduce MTBE production, Equistar may make capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene (also known as “di-isobutylene”) or ETBE, at its MTBE plant. Conversion and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to iso-octane or iso-octene may be lower than that historically realized on MTBE.

Interruptions of operations at Equistar’s facilities may result in liabilities or lower operating results.

Equistar owns and operates large-scale chemical facilities, and Equistar’s operating results are dependent on the continued operation of its various production facilities and the ability to complete construction and maintenance projects on schedule. Material operating interruptions at Equistar’s facilities, including, but not limited to, interruptions caused by the events described below, may materially reduce the productivity and profitability of a particular manufacturing facility, or Equistar as a whole, during and after the period of such operational difficulties.

Although Equistar takes precautions to enhance the safety of its operations and minimize the risk of disruptions, its operations, along with the operations of other members of the chemical industry, are subject to hazards inherent in chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These potential hazards include:

• pipeline leaks and ruptures;

• explosions;

• fires;

• severe weather and natural disasters;

• mechanical failure;

• unscheduled downtimes;

• supplier disruptions;

• labor shortages or other labor difficulties;

• transportation interruptions;

• remediation complications;

• chemical spills;

• discharges or releases of toxic or hazardous substances or gases;

• storage tank leaks;

• other environmental risks; and

• terrorist acts.

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Some of these hazards can 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, Equistar also will continue to be subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters.

Equistar maintains property, business interruption and casualty insurance that it believes are in accordance with customary industry practices, but it is not fully insured against all potential hazards incident to its businesses, including losses resulting from natural disasters, war risks or terrorist acts. Changes in insurance market conditions have caused, and may in the future cause, premiums and deductibles for certain insurance policies to increase substantially and, in some instances, for certain insurance to become unavailable or available only for reduced amounts of coverage. If Equistar were to incur a significant liability for which it was not fully insured, it might not be able to finance the amount of the uninsured liability on terms acceptable to it or at all, and might be obligated to divert a significant portion of its cash flow from normal business operations.

Conflicts of interest between Equistar and its owners could be resolved in a manner that may be perceived to be adverse to Equistar.

Lyondell owns 70.5% of Equistar, and Millennium owns the remaining 29.5% of Equistar. As a result of Lyondell’s November 30, 2004 acquisition of Millennium, Millennium and Equistar are wholly-owned subsidiaries of Lyondell. All executive officers of Millennium and Equistar and all members of Equistar’s Partnership Governance Committee and Millennium’s Board of Directors also serve as officers of Lyondell. Conflicts of interest may arise between Lyondell, Equistar and/or Millennium when decisions arise that could have different implications for Lyondell, Equistar and/or Millennium. Their respective debt agreements generally require related party transactions to be on an arm’s-length basis; however, because Lyondell owns both Millennium and Equistar, conflicts of interest could be resolved in a manner that may be perceived to be adverse to Equistar.

Equistar depends to a significant degree on its owners for the administration of its business and has product supply arrangements with its owners and other related parties. If those parties do not fulfill their obligations under the arrangements, Equistar’s revenues, margins and cash flow could be adversely affected.

Equistar has various agreements and transactions with its owners (Lyondell and Millennium) and other related parties. For example, Equistar is party to shared services, loaned employee and operating arrangements with Lyondell and Millennium pursuant to which Lyondell, Equistar and Millennium provide many administrative and operating services to each other. Lyondell provides to Equistar services that are essential to the administration and management of Equistar’s business, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Accordingly, Equistar depends to a significant degree on Lyondell for the administration of Equistar’s business. If Lyondell did not fulfill its obligations under the shared services arrangement, it would disrupt Equistar’s business and could have a material adverse effect on Equistar’s business and results of operations. In addition, Equistar has product supply agreements with Lyondell and Millennium and various other related parties, pursuant to which Equistar sells a substantial amount of its products. Equistar expects to continue to derive a significant portion of its business from transactions with these parties. If they are unable or otherwise cease to purchase Equistar’s products, Equistar’s revenues, margins and cash flow could be adversely affected.

Equistar pursues acquisitions, dispositions and joint ventures, which may not yield the expected benefits.

Equistar may purchase or sell assets or enter into contractual arrangements or joint ventures in an effort to generate value. To the extent permitted under Equistar’s credit facility and other debt agreements, some of these transactions may be financed with additional borrowings by Equistar. Although these transactions may be expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could reduce Equistar’s operating results in the short term because of the costs, charges and financing arrangements associated with such transactions or the benefits of a transaction may not be realized to the extent anticipated. Other transactions may advance future cash flows from some of Equistar’s businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

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Risks Relating to Debt

Equistar’s consolidated balance sheet is highly levered, and Equistar’s business and future prospects could be limited by its significant amount of debt and other financial obligations.

Equistar’s consolidated balance sheet is highly levered. Equistar’s total consolidated debt was $2.2 billion at December 31, 2006. This debt represented approximately 57% of Equistar’s total capitalization. In addition, Equistar has contractual commitments and ongoing pension and post-retirement benefit obligations that will require cash contributions in 2007 and beyond, as described in “—Contractual and Other Obligations” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Equistar’s level of debt and other obligations could have significant adverse consequences on its business and future prospects, including the following:

• Equistar may not be able to obtain financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;

• less levered competitors could have a competitive advantage because they have lower debt service requirements; and

• in the event of poor business conditions, Equistar may be less able to take advantage of significant business opportunities and to react to changes in market or industry conditions than its competitors.

For a discussion regarding Equistar’s ability to pay or refinance its debt, see the “—Liquidity and Capital Resources” section under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Equistar requires a significant amount of cash to service its indebtedness, and its ability to generate cash depends on many factors beyond its control.

Due to debt covenant limitations on transferring cash between the entities discussed below in this “Item 1A. Risk Factors,” the ability of Equistar to make payments on and to refinance its indebtedness may depend solely upon its individual ability to generate cash. Equistar is separately responsible for its outstanding debt (except that $150 million of Equistar’s debt is guaranteed by Lyondell). Equistar’s businesses may not generate sufficient cash flow from operations to meet its debt service obligations, future borrowings may not be available under current or future credit facilities in an amount sufficient to enable Equistar to pay its indebtedness at or before maturity, and Equistar may not be able to refinance its indebtedness on reasonable terms, if at all. Factors beyond Equistar’s control affect its ability to make these payments and refinancings. These factors include those discussed elsewhere in these “Risk Factors” and the “Forward-Looking Statements” section of this Annual Report on Form 10-K.

Further, Equistar’s ability to fund capital expenditures and working capital depends on its ability to generate cash and depends on the availability of funds under lines of credit and other liquidity facilities. If, in the future, sufficient cash is not generated from Equistar’s operations to meet its debt service obligations and sufficient funds are not available under lines of credit or other liquidity facilities, Equistar may need to reduce or delay non-essential expenditures, such as capital expenditures and research and development efforts. In addition, Equistar may need to refinance debt, obtain additional financing or sell assets, which it may not be able to do on reasonable terms, if at all.

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Debt and other agreements restrict Equistar’s ability to take certain actions; failure to comply with these requirements could result in acceleration of debt.

Equistar has an inventory-based revolving credit facility and an accounts receivable sales facility. Both of these facilities and Equistar’s indentures contain covenants that, subject to exceptions, restrict, among other things, lien incurrence, debt incurrence, dividends, sales of assets, investments, accounts receivable securitizations, purchase of equity, payments on indebtedness, affiliate transactions, sale and leaseback transactions and mergers. Equistar’s credit facility does not require the maintenance of specified financial ratios as long as certain conditions are met. Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when Equistar’s Fixed Charge Coverage Ratio (as defined) is less than 1.75 to 1. Equistar met this ratio as of December 31, 2006.

A breach by Equistar of any of the covenants or other requirements in its debt instruments could (1) permit its note holders or lenders to declare the outstanding debt under the breached debt instrument due and payable, (2) permit its lenders under the credit facility to terminate future lending commitments and (3) permit acceleration of Equistar’s other debt instruments that contain cross-default or cross-acceleration provisions. The debt agreements of Equistar contain various event of default and cross-default provisions. It is not likely that Equistar would have, or be able to obtain, sufficient funds to make these accelerated payments. In that event, Equistar’s lenders could proceed against any assets that secure their debt. Similarly, the breach by Equistar of covenants in its accounts receivable sales facility would permit the counterparties under the facility to terminate further purchases of interests in accounts receivable and to receive all collections from previously sold interests until they had collected on their interests in those receivables, thus reducing Equistar’s liquidity.

Debt covenants limit the ability of Lyondell and Millennium to contribute cash to Equistar and Equistar’s partnership agreement requires it to distribute cash.

Although Equistar and Millennium are wholly-owned subsidiaries of Lyondell, debt covenants limit the ability of Lyondell and Millennium to contribute cash to Equistar. For example, Lyondell’s indentures contain a covenant that prohibits it from making investments in subsidiaries and joint ventures that are not restricted subsidiaries as defined in the indentures, subject to limited exceptions. Equistar currently is not a restricted subsidiary. Lyondell’s credit facility also contains a covenant that places limitations on its ability to make investments in joint ventures. Millennium’s flexibility to make investments in Equistar also is limited by its debt covenants. Future borrowings by Lyondell or Millennium also may contain restrictions on making investments in Equistar. As a result of these limitations, cash flow of Lyondell and Millennium may not be available to fund cash needs of Equistar, such as servicing debt or paying capital expenditures. The ability of Lyondell and Millennium to make investments in Equistar also is dependent upon their economic performance, which is dependent on a variety of factors, including factors described elsewhere in these “Risk Factors” and the “Forward-Looking Statements” section of this Annual Report on Form 10-K.

Conversely, under its partnership agreement, Equistar is required to distribute to its owners (Lyondell and Millennium), as soon as practicable following the end of each month, all of its surplus cash in excess of its estimated cash needs for its next 12 months. Under the partnership agreement, distributions other than of surplus cash may only be made upon approval of Equistar’s Partnership Governance Committee. Equistar’s credit facility and indentures do not contain any restrictions on Equistar’s ability to make distributions to its owners in accordance with its partnership agreement, except that the credit facility prohibits distributions during any default under the facility. However, some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when Equistar does not meet a specified fixed charge coverage ratio. Equistar met this ratio as of December 31, 2006.

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FORWARD-LOOKING STATEMENTS

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

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

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

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

• the cyclical nature of the chemical industry,

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

• legal and environmental proceedings,

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

• terrorist acts and international political unrest,

• competitive products and pricing pressures,

• access to capital markets,

• technological developments, and

• Equistar’s ability to implement its business strategies.

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

All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. See “Item 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market Risk” for additional information about factors that may affect the businesses and operating results of Equistar. These factors are not necessarily all of the important factors that could affect Equistar. Use caution and common sense when considering these forward-looking statements. Equistar does not intend to update these statements unless securities laws require it to do so.

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

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INDUSTRY AND OTHER INFORMATION

The data included or incorporated by reference in this report regarding the chemical industry, product capacity and ranking, including Equistar’s capacity positions, the capacity positions of its competitors for certain products and expected rates of demand, is based on independent industry publications, reports from government agencies or other published industry sources and estimates of Equistar. These estimates are based on information obtained from Equistar’s customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which Equistar operates and Equistar’s managements’ knowledge and experience. These estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Item 1A. Risk Factors” and “Forward-Looking Statements.”

NON-GAAP FINANCIAL MEASURES

The body of generally accepted accounting principles is commonly referred to as “GAAP.” For this purpose, a non-GAAP financial measure is generally defined by the Securities and Exchange Commission as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time Equistar discloses so-called non-GAAP financial measures, primarily EBITDA, or earnings before interest, taxes, depreciation and amortization of long-lived assets. The non-GAAP financial measures described herein or in other documents issued by Equistar are not a substitute for the GAAP measures of earnings, for which management has responsibility.

Equistar sometimes uses EBITDA in its communications with investors, financial analysts and the public. This is because EBITDA is perceived as a useful and comparable measure of operating performance and the contributions of operations to liquidity. For example, interest expense is dependent on the capital structure and credit rating of a company. However, debt levels, credit ratings and, therefore, the impact of interest expense on earnings vary in significance between companies. Similarly, the tax positions of individual companies can vary. Equistar, as a partnership, is not subject to U.S. federal income taxes. Other companies may be subject to U.S. federal or state income taxes as well as income taxes in countries outside of the U.S., and will differ in their abilities to take advantage of tax benefits, with the result that their effective tax rates and tax expense can vary considerably. Finally, companies differ in the age and method of acquisition of productive assets, and thus the relative costs of those assets, as well as in the depreciation (straight-line, accelerated, units of production) method, which can result in considerable variability in depreciation and amortization expense between companies. Thus, for comparison purposes, management believes that EBITDA can be useful as an objective and comparable measure of operating profitability and the contribution of operations to liquidity because it excludes these elements of earnings that do not provide information about the current operations of existing assets. Accordingly, management believes that disclosure of EBITDA can provide useful information to investors, financial analysts and the public in their evaluation of companies’ operating performance and the contribution of operations to liquidity.

Equistar also sometimes reports adjusted net income (loss) or adjusted EBITDA, excluding specified items that are unusual in nature or are not comparable from period to period and that are included in GAAP measures of earnings. Management believes that excluding these items may help investors compare operating performance between two periods. Such adjusted data is always reported with an explanation of the items that are excluded.

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Item 2. Properties

Principal Manufacturing Facilities

The principal manufacturing facilities used by Equistar are set forth below. The facilities are wholly owned, except as otherwise noted below.

Location	Principal Products
Bayport (Pasadena), Texas †	EO, EG and other EO Derivatives
Bayport (Pasadena), Texas (a)†	LDPE
Beaumont, Texas (b)†	EG
Channelview, Texas (c)†	Ethylene, Propylene, Butadiene, Benzene, Toluene, Alkylate and MTBE
Chocolate Bayou, Texas (d)(e)†	Ethylene, Propylene, Butadiene, Benzene, Toluene and MTBE
Chocolate Bayou, Texas (d) †	HDPE
Clinton, Iowa †	Ethylene, Propylene, LDPE and HDPE
Corpus Christi, Texas †	Ethylene, Propylene, Butadiene and Benzene
Fairport Harbor, Ohio (f)	Performance polymers
Lake Charles, Louisiana (g)†	Ethylene and Propylene
La Porte, Texas †	Ethylene, Propylene, LDPE and LLDPE
Matagorda, Texas †	HDPE
Morris, Illinois †	Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Newark, New Jersey	Denatured Alcohol
Tuscola, Illinois †	Ethanol
Victoria, Texas (e)†	HDPE

 † Facilities which received the OSHA Star Certification, which is the highest safety designation issued by the U.S. Department of Labor.

(a) The facility is located on leased land. The facility is operated by an unrelated party.

(b) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by an unrelated party.

(c) The Channelview facility has two ethylene processing units. An unrelated party owns an idled facility at the site on land leased from Equistar. Equistar also operates a styrene maleic anhydride unit and a polybutadiene unit, which are owned by an unrelated party and are located on property leased from Equistar within the Channelview facility.

(d) Millennium and Occidental each contributed a facility located at the Chocolate Bayou site. These facilities are not on contiguous property.

(e) The facility is located on leased land.

(f) The building and land are leased.

(g) The Lake Charles facility has been idled since the first quarter of 2001. Although Equistar retains the physical ability to restart or sell that facility, in the third quarter of 2006 Equistar determined that it had no expectation of resuming production at that facility. The facility and land are leased from Occidental under a lease that expires in May 2009.

Other Locations and Properties

Equistar owns storage capacity for NGLs, ethylene, propylene and other hydrocarbons in caverns within a salt dome in Mont Belvieu, Texas. There are additional ethylene and propylene storage facilities with related brine facilities operated by Equistar on leased property in Markham, Texas.

Equistar uses an extensive pipeline system, some of which it owns and some of which it leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. Equistar owns other pipelines in connection with its Chocolate Bayou, Corpus Christi, La Porte, Matagorda and Victoria facilities. Equistar uses a pipeline owned and operated by an unaffiliated party to transport ethylene from its Morris facility to its Tuscola facility. Equistar owns and leases several pipelines connecting the Channelview facility, Lyondell’s refinery and the Mont Belvieu storage facility, which are used to transport raw materials, butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also has barge docking facilities and related terminal equipment for loading and unloading raw materials and products. Equistar owns and leases railcars for use in its businesses.

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Lyondell provides office space to Equistar for its executive offices in downtown Houston, Texas as part of a shared services arrangement. In addition, Equistar owns facilities that house its research operations. Equistar also leases various sales facilities and storage facilities, primarily in the U.S. Gulf Coast area, for the handling of products.

Item 3. Legal Proceedings

Litigation Matters

Equistar is, 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, Equistar does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on its business or financial position. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Equistar’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of co-defendants or others, or by any insurance coverage that may be available.

Although Equistar is involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose in five contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by Equistar or located on Equistar’s premises; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; (3) claims for personal injury, property damage and/or air, noise and water pollution allegedly arising out of operations; (4) employment and benefits related claims; and (5) commercial disputes.

Environmental Matters

From time to time Equistar receives notices or inquiries 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. Any such alleged violations may become the subject of enforcement actions, settlement negotiations or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs). For additional information regarding environmental matters, see “Item 1A. Risk Factors—Risks Relating to the Businesses—Equistar’s operations and assets are subject to extensive environmental, health and safety and other laws and regulations, which could result in material costs or liabilities” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

In December 2006, the State of Texas filed a lawsuit in the District Court, Travis County, Texas, against Equistar and its owners, Lyondell and Millennium, alleging past violations of various environmental regulatory requirements at Equistar’s Channelview, Chocolate Bayou and La Porte, Texas facilities and seeking an unspecified amount of damages. The previously disclosed Texas Commission on Environmental Quality notification seeking a civil penalty of $167,000 and alleging noncompliance of emissions monitoring requirements at Equistar’s Channelview facility has been included as part of this lawsuit. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business, financial position, liquidity or results of operations of Equistar.

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Indemnification

In connection with the formation of Equistar, Lyondell, Millennium and Occidental each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the businesses they each contributed to Equistar. Lyondell, Millennium and Occidental remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar and Lyondell’s November 2004 acquisition of Millennium.

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

Omitted pursuant to General Instruction I of Form 10-K.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Equistar does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. There is no established public trading market for the partnership interests of Equistar. As a result of Lyondell’s acquisition of Millennium, Equistar is an indirect, wholly-owned subsidiary of Lyondell.

Under its partnership agreement, Equistar is required to distribute to its owners (Lyondell and Millennium), as soon as practicable following the end of each month, all of its surplus cash in excess of its estimated cash needs for its next 12 months. Under the partnership agreement, distributions other than of surplus cash may only be made upon approval of Equistar’s Partnership Governance Committee. Equistar made the following distributions to its owners in 2005 and 2006:

Period	Distribution Amount
2005:
First Quarter		—
Second Quarter	$	475 million
Third Quarter		—
Fourth Quarter	$	250 million
2006:
First Quarter	$	200 million
Second Quarter	$	100 million
Third Quarter	$	75 million
Fourth Quarter	$	200 million

Equistar’s credit facility and indentures do not contain any restrictions on Equistar’s ability to make distributions to its owners in accordance with its partnership agreement, except that the credit facility prohibits distributions during any default under the facility. However, the indentures under which the 10 1/8% Senior Notes due 2008 and the 10 5/8% Notes due 2011 were issued require that Equistar pay additional interest, in the form of additional notes, if Equistar makes distributions when Equistar’s Fixed Charge Coverage Ratio (as defined) is less than 1.75 to 1. All distributions by Equistar to date have been made when that ratio requirement was satisfied and, accordingly, no additional interest was due.

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Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	For the Year Ended December 31,
Millions of dollars	2006			2005			2004			2003			2002
Results of Operations Data:
Sales and other operating revenues	$	12,765		$	11,686		$	9,316		$	6,545		$	5,537
Net income (loss) (a) (b)		614			748			276			(339	)		(1,299	)
Balance Sheet Data:
Total assets		5,359			5,320			5,074			5,028			5,052
Long-term debt		2,160			2,161			2,312			2,314			2,196
Cash Flow Data:
Cash provided (used) by -
Operating activities		807			1,047			215			164			55
Investing activities		(166	)		(150	)		(60	)		(37	)		(124	)
Financing activities		(723	)		(721	)		(315	)		45			(106	)

(a) Net income for 2006 includes a $135 million charge for impairment of the net book value of the idled Lake Charles, Louisiana ethylene facility.

(b) The 2002 net loss includes a $1,053 million charge related to goodwill impairment.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements of Equistar Chemicals, LP, together with its consolidated subsidiaries (collectively, “Equistar”) and the notes thereto.

In addition to comparisons of annual operating results, Equistar has included, as additional disclosure, certain “trailing quarter” comparisons of fourth quarter 2006 operating results to third quarter 2006 operating results. Equistar’s businesses are highly cyclical, in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Equistar.

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

OVERVIEW

General—Equistar manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene. Equistar also manufactures and markets ethylene derivatives, primarily polyethylene (including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear-low density polyethylene (“LLDPE”)), ethylene glycol, ethylene oxide (“EO”) and other EO derivatives, and ethanol. Equistar also manufactures and markets fuel products, such as methyl tertiary butyl ether (“MTBE”) and alkylate, as well as polypropylene. As a result of the acquisition of Millennium Chemicals Inc. (“Millennium”) by Lyondell Chemical Company (“Lyondell”) on November 30, 2004, Equistar became a wholly-owned subsidiary of Lyondell.

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2006 Versus 2005—During 2006 and 2005, the markets for Equistar’s ethylene products generally continued to experience favorable supply and demand conditions. Raw material costs averaged higher in 2006 compared to the already high levels experienced in 2005, resulting primarily from the effect of higher average crude oil prices. Despite increased volatility during 2006 and a decrease late in the year, crude oil prices averaged higher in 2006 compared to 2005. U.S. market demand increased an estimated 5% for ethylene and an estimated 5% for polyethylene in 2006 compared to 2005.

Equistar’s operating results for 2006 reflected the benefits of higher sales prices, including significantly higher co-product and polyethylene sales prices, which were substantially offset by higher costs, primarily higher raw material costs, compared to 2005. Results for 2006 included a charge of $135 million related to impairment of the net book value of the idled Lake Charles, Louisiana ethylene facility.

2005 Versus 2004—In 2005, the chemical industry experienced improved profitability compared to 2004, despite higher crude oil and natural gas prices that pushed up raw material costs for most of the year and the disruptive effects of two major U.S. Gulf Coast hurricanes. Improvement in supply and demand balances, which began in mid-2004 continued into 2005. Tight gasoline markets in 2005 resulted in higher sales prices and margins for fuel products compared to the already high levels experienced in 2004. U.S. ethylene industry demand decreased 6% and polyethylene demand decreased 4% in 2005 compared to 2004, due primarily to the effects of the U.S. Gulf Coast hurricanes.

The U.S. Gulf Coast hurricanes, Katrina and Rita, negatively affected crude oil and natural gas supplies, as well as supplies of other raw materials, contributing to the increases in raw material prices in 2005. Supply/demand balances and prices were affected beginning in September 2005 as most Gulf Coast refiners and producers of chemicals suspended operations in preparation for the hurricanes, with some sustaining major damage as a result of the hurricanes. Equistar’s Gulf Coast plants experienced only minor hurricane damage; however, Equistar suspended plant operations in preparation for Hurricane Rita, resulting in lost production and higher costs during 2005.

Equistar’s earnings in 2005 reflected higher average product margins compared to 2004, partly offset by the negative effects of hurricane-related costs and lower sales volumes.

Benchmark Indicators—Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Ethylene and its co-products are produced from two major raw material groups:

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

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

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

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

	Average Benchmark Price for the Year and Percent Change Versus Prior Year Average
	2006	Percent Increase (Decrease)		2005	Percent Increase		2004
Crude oil – dollars per barrel	66.03	17	%	56.44	36	%	41.42
Natural gas – dollars per million BTUs	6.42	(15	)%	7.58	31	%	5.78
Weighted average cost of ethylene production – cents per pound	31.08	5	%	29.58	25	%	23.68
Ethylene – cents per pound	48.08	9	%	44.21	31	%	33.75
Propylene – cents per pound	45.83	12	%	40.75	28	%	31.96
Benzene – cents per gallon	326.33	13	%	289.88	1	%	287.96
HDPE – cents per pound	71.42	6	%	67.29	23	%	54.75

Although benchmark crude oil prices decreased late in 2006, benchmark crude oil prices averaged higher in 2006 compared to 2005 and averaged significantly higher in 2005 compared to 2004. Natural gas prices, which affect energy costs in addition to NGL-based raw materials, averaged lower in 2006 compared to 2005, and averaged significantly higher in 2005 compared to 2004. Despite the 2006 decrease in natural gas prices, NGL-based raw material prices averaged higher in 2006 than in 2005. As a result, overall raw material costs averaged higher in 2006 compared to 2005 and significantly higher in 2005 compared to 2004.

RESULTS OF OPERATIONS

Equistar is a wholly-owned subsidiary of Lyondell. Management evaluates the performance of the Equistar businesses and allocates resources based on the integrated economics of ethylene, co-products and derivatives. Accordingly, Equistar has one reportable segment, ethylene, co-products and derivatives (“EC&D”). As additional information, Equistar’s operating results are reviewed below in two product groups: ethylene and co-products; and derivatives. Ethylene co-products primarily include propylene, butadiene and aromatics, which include benzene and toluene. Fuel products, which include MTBE and alkylates, are included with the co-product group because fuel products are produced from the co-products. Derivatives primarily include polyethylene, ethylene glycol, EO and other EO derivatives, and ethanol and polypropylene.

The operating results of Equistar, as a whole, are analyzed below, followed by a review of the product group results.

Revenues—Equistar’s revenues of $12,765 million in 2006 were 9% higher compared to revenues of $11,686 million in 2005. The higher revenues in 2006 reflected the effects of higher average sales prices compared to 2005. Sales volumes increased 2% in 2006 compared to 2005.

Revenues of $11,686 million in 2005 increased 25% compared to revenues of $9,316 million in 2004. The increase in 2005 reflected higher average sales prices, partially offset by lower sales volumes. As noted in the table above, benchmark sales prices for ethylene, propylene and HDPE averaged significantly higher in 2005 compared to 2004, while benzene average sales prices in 2005 were comparable to 2004. Ethylene and derivative sales volumes were 5% lower in 2005 compared to 2004.

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Cost of Sales—Equistar’s cost of sales of $11,562 million in 2006 was 10% higher compared to $10,487 million in 2005. The increase reflected the effects of higher raw material costs, primarily resulting from the effects of higher average crude oil prices. Cost of sales also included charges representing Equistar’s exposure to industry losses expected to be underwritten by industry insurance consortia of $12 million, $28 million and $7 million, respectively, in 2006, 2005 and 2004.

Cost of sales of $10,487 million in 2005 increased 22% compared to $8,583 million in 2004. The increase reflects the effects of significantly higher raw material costs, resulting from the escalation of crude oil and natural gas prices. The costs of raw materials were affected by crude oil prices that averaged 36% higher in 2005, using benchmark prices, compared to 2004. Benchmark natural gas prices averaged 31% higher in 2005 compared to 2004.

Asset Impairment—Charges of $135 million in 2006 reflected impairment of the net book value of Equistar’s idled ethylene facility in Lake Charles, Louisiana. See Note 3 to the Consolidated Financial Statements.

SG&A Expenses—Selling, general and administrative (“SG&A”) expenses were $210 million in 2006, $198 million in 2005 and $205 million in 2004. The higher costs in 2006 compared to 2005 reflect higher compensation expense, including higher provisions for incentive compensation, while the decrease in 2005 compared to 2004 was primarily due to lower incentive compensation expense.

Operating Income—Equistar had operating income of $824 million in 2006 compared to $968 million in 2005. The decrease is primarily due to the $135 million impairment charge. Higher 2006 costs, primarily higher raw material costs, were substantially offset by higher average sales prices, including significantly higher co-product and polyethylene sales prices compared to 2005.

Equistar had operating income of $968 million in 2005 compared to $494 million in 2004. The $474 million improvement was primarily the result of higher average product margins. The benefit of the higher 2005 average product margins was partly offset by the negative effects of hurricane-related costs and lower sales volumes. Hurricane-related costs included $20 million of charges, representing Equistar’s exposure to industry losses expected to be underwritten by industry insurance consortia, and $19 million of costs incurred in conjunction with suspending and restarting operations.

Net Income—Equistar had net income of $614 million in 2006 compared to $748 million in 2005. The decrease was primarily attributable to the $135 million impairment charge. Operationally, higher 2006 sales prices were substantially offset by higher costs, primarily higher raw material costs.

Equistar had net income of $748 million in 2005 compared to $276 million in 2004. The $472 million improvement was primarily the result of higher average product margins. The benefit of the higher 2005 average product margins was partly offset by the negative effects of hurricane-related costs and lower sales volumes. Hurricane-related costs included $20 million of charges, representing Equistar’s exposure to industry losses expected to be underwritten by industry insurance consortia, and $19 million of costs incurred in conjunction with suspending and restarting operations.

Fourth Quarter 2006 versus Third Quarter 2006—Equistar had net income of $152 million in the fourth quarter 2006 compared to $78 million in the third quarter 2006, which included the impairment charge of $135 million. Fourth quarter 2006 underlying operating results reflected lower average sales prices, which were only partly offset by lower raw material costs. Fourth quarter 2006 sales volumes for ethylene and derivatives were comparable to the third quarter 2006.

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Product Group Analysis

The following analysis discusses Equistar’s operating results focusing on two product groups: ethylene and co-products; and derivatives. Ethylene co-products primarily include propylene, butadiene and aromatics, which include benzene and toluene. Fuel products, which include MTBE and alkylates, are included with the co-products group because fuel products are produced from the co-products. Derivatives primarily include polyethylene, ethylene glycol, ethylene oxide and its other derivatives, and ethanol and polypropylene.

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

	For the year ended December 31,
Millions of dollars	2006			2005			2004
Sales and other operating revenues:
Ethylene and co-products	$	11,319		$	10,344		$	8,136
Derivatives		4,150			3,793			3,257
Product group eliminations		(2,704	)		(2,451	)		(2,077	)
Total	$	12,765		$	11,686		$	9,316
Operating income:
Ethylene and co-products	$	691		$	891		$	476
Derivatives		133			77			18
Total	$	824		$	968		$	494
Volumes, in millions
Selected ethylene and co-products:
Ethylene and co-products (pounds)		17,918			17,293			17,935
Aromatics (gallons)		358			412			377
Derivatives products (pounds)		7,193			6,923			7,596

Ethylene and Co-products

Revenues—Revenues of $11,319 million in 2006 were 9% higher compared to $10,344 million in 2005. The increase reflected the effects of higher average sales prices, especially for co-products, and 2% higher sales volumes compared to 2005.

Revenues of $10,344 million in 2005 increased 27% compared to $8,136 million in 2004. The increase in revenues reflected higher average sales prices, particularly for propylene and fuel products, partially offset by lower sales volumes. Sales volumes, including sales of ethylene and co-products included in derivatives, decreased 4% in 2005 compared to 2004. Benchmark ethylene prices averaged 31% higher and benchmark propylene sales prices averaged 28% higher in 2005 compared to 2004.

Operating Income—Operating income in 2006 was $691 million compared to $891 million in 2005. The decrease was primarily due to the $135 million impairment charge related to the Lake Charles, Louisiana ethylene facility and lower product margins as higher costs, primarily higher raw material costs, more than offset the effect of higher average sales prices and sales volumes compared to 2005.

Operating income in 2005 for the ethylene and co-products product group was $891 million compared to $476 million in 2004. The increase of $415 million in 2005 was primarily due to higher product margins. The benefit of the higher 2005 average product margins was partly offset by the negative effects of hurricane-related costs and lower sales volumes.

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Derivatives

Revenues—Revenues of $4,150 million in the 2006 were 9% higher compared to revenues of $3,793 million in 2005. The increase in 2006 reflected the effects of higher average sales prices and 4% higher sales volumes.

Revenues of $3,793 million in 2005 increased 16% compared to $3,257 million in 2004. The increase reflected higher average sales prices, partially offset by lower sales volumes. Sales volumes of derivatives in 2005 were 9% lower than in 2004. The average benchmark price of HDPE increased 23% in 2005 compared to 2004.

Operating Income—Operating income for derivatives was $133 million in 2006 compared to $77 million in 2005. The increase in 2006 was primarily the result of higher product margins as higher average sales prices and sales volumes more than offset the unfavorable effects of higher raw material costs compared to 2005.

Operating income for derivatives was $77 million in 2005 compared to $18 million in 2004. The improvement of $59 million in 2005 was primarily the result of higher product margins, partially offset by lower sales volumes. Sales prices increased more than raw material costs compared to 2004.

FINANCIAL CONDITION

Operating Activities—Operating activities provided cash of $807 million in 2006, $1,047 million in 2005 and $215 million in 2004.

The $240 million decrease in 2006 compared to 2005 primarily reflected a net increase in the main components of working capital – accounts receivable and inventory, net of accounts payable – in 2006, which used cash of $231 million, compared to a net decrease in 2005, which provided cash of $32 million. In addition, while spending on maintenance turnarounds decreased $39 million, contributions to pension plans increased $33 million in 2006 compared to 2005.

The large net increase in the main components of working capital in 2006 compared to the net decrease in 2005 was primarily due to increases in accounts receivable and inventory in 2006.

Accounts receivable increased $243 million in 2006 compared to $96 million in 2005. The increase in 2006 primarily reflected the effect of a $200 million decrease in the outstanding amount of accounts receivable sold under the accounts receivable sales facility. There were no receivables sold under this facility at December 31, 2006 compared to $200 million at December 31, 2005. The increase in receivables in 2005 primarily reflected higher average sales prices in 2005 compared to 2004.

In addition, prior to January 2006, discounts were offered to certain customers for early payment for product. As a result, some receivable amounts were collected in December 2005 and 2004 that otherwise would have been expected to be collected in January 2006 and 2005, respectively. This included collections of $84 million and $66 million in December 2005 and 2004, respectively, related to receivables from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).

Inventory increased $156 million in 2006 compared to $69 million in 2005. A significant portion of the 2006 increase in inventory was due to higher volumes of water-borne cargos in transit at December 31, 2006 compared to December 31, 2005 due to the timing of the shipments.

The $832 million increase in cash provided by operating activities in 2005 compared to 2004 reflected the earnings improvement in 2005 and the net decrease in the main components of 2005 working capital. The main components of working capital provided cash of $32 million in 2005 and used cash of $360 million in 2004.

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Investing Activities—Investing activities used cash of $166 million, $150 million and $60 million in 2006, 2005 and 2004, respectively, reflecting higher capital expenditure levels in 2006 and 2005 and higher proceeds from asset sales in 2004.

Equistar’s capital expenditures were $168 million in 2006, $153 million in 2005 and $101 million in 2004. The expenditures in 2006 and 2005 reflected increased spending for regulatory and environmental compliance projects. See “Environmental Matters” below. Planned capital expenditures for 2007 are $192 million for base support, minor plant efficiency and profit enhancement projects as well as regulatory and environmental compliance projects.

Proceeds from asset sales in 2004 were $41 million, including $37 million from railcar sale-leaseback transactions.

Financing Activities—Financing activities used cash of $723 million, $721 million and $315 million in 2006, 2005 and 2004, respectively. Equistar made cash distributions of $575 million, $725 million and $315 million to its owners in 2006, 2005 and 2004. During 2006, Equistar also repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006.

In 2005, Equistar amended its $250 million inventory-based revolving credit facility and its $450 million accounts receivable sales facility, increasing the commitment to $400 million and $600 million, respectively, extending the maturities to November 2010 and reducing the interest rate on the revolving credit facility from LIBOR plus 2.25% to LIBOR plus 1.5%. In December 2006, Equistar amended its inventory-based revolving credit facility enabling it to sell certain receivables through new accounts receivable sales facilities.

Liquidity and Capital Resources—At December 31, 2006, Equistar’s long-term debt totaled $2.2 billion, or approximately 57% of its total capitalization, and there were no current maturities. At December 31, 2006, Equistar had cash on hand of $133 million and the total amount available under both the $400 million inventory-based revolving credit facility and the $600 million accounts receivable sales facility totaled approximately $938 million, after giving effect to the borrowing base net of a $50 million unused availability requirement, any outstanding amount of accounts receivable sold under the accounts receivable sales facility, of which there was none at December 31, 2006, and $12 million of outstanding letters of credit under the revolving credit facility as of December 31, 2006. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The revolving credit facility requires that the unused available amounts under that facility and the $600 million accounts receivable sales facility equal or exceed $50 million, or $100 million if the Interest Coverage Ratio, as defined, at the end of any period of four consecutive fiscal quarters is less than 2:1. There was no outstanding borrowing under the revolving credit facility at December 31, 2006.

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

In August 2006, Standard & Poors (“S&P”) removed Equistar’s ratings from CreditWatch and revised its outlook to stable, reflecting S&P’s belief that the intermediate-range benefits of the Houston Refining LP acquisition by Lyondell will outweigh the temporary increase in debt leverage. In September 2006, Moody’s Investors Service (“Moody’s”) confirmed the rating of Equistar and revised its outlook for Equistar to stable, reflecting Moody’s belief that the additional debt incurred in connection with the Houston Refining LP acquisition by Lyondell will be reduced over the next several years using anticipated increased refining cash flow.

Equistar’s inventory-based revolving credit facility, accounts receivable sales facility and indentures contain restrictive covenants. These covenants are described in Notes 6 and 12 to the Consolidated Financial Statements. The credit facility does not require the maintenance of specified financial ratios as long as certain conditions are met. Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when its Fixed Charge Coverage Ratio, as defined, is less than 1.75 to 1.

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A breach by Equistar of any of the covenants or other requirements in its debt instruments could (1) permit its note holders or lenders to declare the outstanding debt under the breached debt instrument due and payable, (2) permit its lenders under the credit facility to terminate future lending commitments and (3) permit acceleration of Equistar’s other debt instruments that contain cross-default or cross-acceleration provisions. The debt agreements of Equistar contain various event of default and cross-default provisions. If Equistar was unable to obtain sufficient funds to make these accelerated payments, Equistar’s lenders could proceed against any assets that secure their debt. Similarly, the breach by Equistar of covenants in its accounts receivable sales facility would permit the counterparty under the facility to terminate further purchases of interests in accounts receivable and to receive all collections from previously sold interests until they had collected on their interests in those receivables, thus reducing Equistar’s liquidity.

Off-Balance Sheet Arrangements—The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition of off-balance sheet arrangements. Equistar is a party to the following accounts receivable sales facility that has some of those characteristics.

Equistar has a $600 million accounts receivable sales facility, which matures in November 2010. Pursuant to the facility, Equistar sells, through a wholly-owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of domestic accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. The amount of interest in the pool of receivables permitted to be sold is determined by a formula. The $600 million accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the $400 million inventory-based revolving credit facility. See discussion of “Liquidity and Capital Resources” above and discussion of “Long-Term Debt” below. At December 31, 2006, there was no outstanding amount of receivables sold under the facility and, at December 31, 2005, the outstanding amount of receivables sold was $200 million. Accounts receivable in the consolidated balance sheets are reduced by the sales of interests in the pool.

The facility accelerates availability to the business of cash from product sales that otherwise would have been collected over the normal billing and collection cycle. The availability of the accounts receivable sales facility provides one element of Equistar’s ongoing sources of liquidity and capital resources. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold, but Equistar would in no event be required to repurchase such interest. In November 2005, Equistar’s accounts receivable sales facility was amended to increase the commitment to $600 million and to extend the maturity to November 2010. See Note 6 to the Consolidated Financial Statements for additional accounts receivable information.

Other obligations that do not give rise to liabilities that would be reflected in Equistar’s balance sheet are described below under “Purchase Obligations” and “Operating Leases.”

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Contractual and Other Obligations—The following table summarizes, as of December 31, 2006, Equistar’s minimum payments for long-term debt, and contractual and other obligations for the next five years and thereafter.

				Payments Due By Period
Millions of dollars	Total			2007		2008		2009		2010		2011		Thereafter
Long-term debt	$	2,160		$	—	$	700	$	600	$	3	$	707	$	150
Interest on long-term debt		768			209		184		92		86		36		161
Pension benefits:
PBO		275			16		16		18		19		19		187
Assets		(229	)		—		—		—		—		—		(229	)
Funded status		46
Other postretirement benefits		106			6		7		7		8		8		70
Advances from customers		175			29		15		14		14		13		90
Other		86			—		9		9		3		2		63
Other obligations:
Purchase obligations		4,230			307		306		300		299		295		2,723
Operating leases		703			88		76		67		60		50		362
Total	$	8,274		$	655	$	1,313	$	1,107	$	492	$	1,130	$	3,577

Long-Term Debt—Equistar’s long-term debt includes a credit facility and debt obligations. See Note 12 to the Consolidated Financial Statements for a discussion of covenant requirements under the credit facility and indentures and additional information regarding long-term debt.

Interest—The long-term debt agreements contain provisions for the payment of either monthly or semi-annual interest at a stated rate of interest over the term of the debt. These payment obligations are reflected in the table above.

Pension Benefits—Equistar maintains several defined benefit pension plans, as described in Note 15 to the Consolidated Financial Statements. At December 31, 2006, the projected benefit obligation for Equistar’s pension plans exceeded the fair value of plan assets by $46 million. Subject to future actuarial gains and losses, as well as actual asset earnings, Equistar will be required to fund the $46 million. Equistar’s pension contributions were $50 million, $17 million and $16 million in the years 2006, 2005 and 2004, respectively, and are expected to be less than $1 million in 2007. Estimates of pension benefit payments through 2011 are included in the table above.

Other Postretirement Benefits—Equistar provides other postretirement benefits, primarily medical benefits to eligible participants, as described in Note 15 to the Consolidated Financial Statements. Other postretirement benefits are unfunded and are paid by Equistar as incurred. Estimates of other postretirement benefit payments through 2011 are included in the table above.

Advances from Customers—Equistar receives advances from customers in connection with long-term sales agreements under which Equistar is obligated to deliver product primarily at cost-based prices. These advances are treated as deferred revenue and will be amortized to earnings as the product is delivered over the remaining terms of the respective contracts, which range from 5 to 12 years. The unamortized portion of such advances totaled $175 million and $171 million as of December 31, 2006 and 2005, respectively. See Note 11 to the Consolidated Financial Statements.

Other—Other primarily consists of deferred compensation arrangements other than pension and postretirement benefits.

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Purchase Obligations—Equistar is a party to various obligations to purchase products and services, principally for utilities and industrial gases. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See “Commitments” section of Note 16 to the Consolidated Financial Statements for a description of Equistar’s commitments and contingencies, including these purchase obligations.

Operating Leases—Equistar leases various facilities and equipment, including railcars, under noncancelable operating lease arrangements for various periods. See Note 13 to the Consolidated Financial Statements for related lease disclosures.

CURRENT BUSINESS OUTLOOK

Thus far in 2007, underlying business fundamentals continue to be sound. Equistar’s product sales prices that were under pressure during the fourth quarter 2006 have generally stabilized, and are expected to rebound. Raw material costs continue to be volatile and producer inventories have been reduced. Sales volumes have strengthened from fourth quarter 2006 levels. For 2007, fundamental supply and demand conditions for Equistar’s products should be relatively unchanged from the favorable conditions experienced in 2006.

RELATED PARTY TRANSACTIONS

Equistar makes significant sales of product to Lyondell, Millennium, Occidental and Houston Refining. Equistar also makes significant purchases of raw materials and products from Houston Refining and receives significant administrative services from Lyondell.

As of December 31, 2006 and giving effect to Occidental’s January 26, 2007 exercise of a warrant to purchase Lyondell common stock, Occidental owned 8.5% of Lyondell common stock and had one representative on Lyondell’s Board of Directors. In view of Occidental’s relationship with Lyondell, which indirectly owns 100% of Equistar as a result of the acquisition of Millennium by Lyondell on November 30, 2004, Occidental’s transactions with Equistar are reported as related party transactions in Equistar’s Consolidated Financial Statements.

Equistar believes that such transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s-length basis. See Note 5 to the Consolidated Financial Statements for further discussion of related party transactions.

CRITICAL ACCOUNTING POLICIES

Equistar applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. Equistar’s more critical accounting policies include those related to long-lived assets, including the costs of major maintenance turnarounds and repairs, and accruals for long-term employee benefit costs such as pension and other postretirement costs. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. These critical accounting policies have been discussed with the Equistar Partnership Governance Committee. Equistar’s significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements.

Long-Lived Assets—With respect to long-lived assets, key assumptions include the estimates of useful asset lives and the recoverability of the carrying values of fixed assets and other intangible assets, as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the U.S. and world economies, the cyclical nature of the chemical industry, and uncertainties associated with governmental regulatory actions.

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To reflect economic and market conditions, from time to time Equistar may temporarily idle manufacturing facilities. Assets that are temporarily idled are reviewed for impairment at the time they are idled, and at least annually thereafter. Earnings for 2006 included a $135 million pretax charge for impairment of the net book value of Equistar’s ethylene facility in Lake Charles, Louisiana, which was idled in the first quarter of 2001, pending sustained improvement in market conditions. In 2006, Equistar undertook a study of the feasibility, cost and time required to restart the Lake Charles ethylene facility. As a result, management determined that restarting the facility would not be justified. Equistar had no other major idled facilities as of December 31, 2006.

The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $324 million in 2006. If the useful lives of the assets were found to be shorter than originally estimated, depreciation and amortization charges would be accelerated over the revised life.

Equistar defers the costs of major periodic maintenance and repair activities (“turnarounds”) in excess of $5 million, amortizing such costs over the period until the next expected major turnaround of the affected unit. During 2006, 2005 and 2004, cash expenditures of $12 million, $51 million and $55 million, respectively, were deferred and are being amortized, predominantly over 4 to 7 years. Amortization of previously deferred turnaround costs was $40 million in 2006 and $38 million in each of 2005 and 2004.

Additional information on long-lived assets, deferred turnaround costs and related depreciation and amortization appears in Note 8 to the Consolidated Financial Statements.

Long-Term Employee Benefit Costs—The costs to Equistar of long-term employee benefits, particularly pension and other postretirement medical and life insurance benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent its best estimates of the future effects of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.

The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Equistar’s assumed discount rate is based on average rates published by Moody’s and Merrill Lynch for high-quality (Aa rating) ten-year fixed income securities. For the purpose of measuring the benefit obligations at December 31, 2006, Equistar increased its assumed discount rate from 5.5% to 5.75%, reflecting market interest rates at December 31, 2006. The 5.75% rate also will be used to measure net periodic benefit cost during 2007. A further one percentage point reduction in the assumed discount rate for Equistar would increase Equistar’s benefit obligation for pensions and other postretirement benefits by approximately $51 million, and would reduce Equistar’s net income by approximately $8 million.

The benefit obligation and the periodic cost of postretirement medical benefits also are measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2006, the assumed rate of increase was 10% for 2007, decreasing 1% per year to 5% in 2012 and thereafter. A one percentage point change in the health care cost trend rate assumption would have no significant effect on either the benefit liability or the net periodic cost, due to limits on Equistar’s maximum contribution level under the medical plan.

The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected long-term rate of return on plan assets applied to a market-related value of plan assets which, for Equistar, is defined as the market value of assets. The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions.

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Equistar’s expected long-term rate of return on U.S. plan assets of 8% is based on the average level of earnings that its independent pension investment advisor had advised could be expected to be earned over time. The expectation is based on an asset allocation of 55% U.S. equity securities (9.5% expected return), 15% non-U.S. equity securities (9.5% expected return), and 30% fixed income securities (5.5% expected return) recommended by the advisor, and had been adopted for the plans. The actual return on plan assets in 2006 was 12%.

The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Based on the market value of plan assets at December 31, 2006, a one percentage point decrease in this assumption for Equistar would decrease Equistar’s net income by approximately $2 million.

Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. As a result of asset earnings significantly below the expected return on plan assets rate over the three-year period ended December 31, 2002, the level of unrecognized investment losses, together with the net actuarial gains and losses, is $46 million at December 31, 2006. This unrecognized amount, to the extent it exceeds ten percent of the projected benefit obligation for the respective plan, will be recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan. This annual amortization charge would be $2 million per year based on the December 31, 2006 unrecognized amount.

Additional information on the key assumptions underlying these benefit costs appears in Note 15 to the Consolidated Financial Statements.

ACCOUNTING AND REPORTING CHANGES

Effective December 31, 2006, Equistar adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-An Amendment of FASB Statements No. 87, 88, 106, and 132R, which primarily requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status through comprehensive income in the year in which changes occur. Equistar’s application of SFAS No. 158 as of December 31, 2006 resulted in increases of $6 million and $8 million in its current and long-term benefit liabilities, respectively, a decrease of $9 million in other assets and an increase of $23 million in accumulated other comprehensive loss in its consolidated balance sheet as of December 31, 2006. (See Note 15)

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. The new standard defines fair value, establishes a framework for its measurement and expands disclosures about such measurements. For Equistar, the standard will be effective beginning in 2008. Equistar does not expect the application of SFAS No. 157 to have a material effect on its consolidated financial statements.

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

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

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ENVIRONMENTAL AND OTHER MATTERS

Various environmental laws and regulations impose substantial requirements upon the operations of Equistar. Equistar’s policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) as amended, the Resource Conservation and Recovery Act (“RCRA”) and the Clean Air Act Amendments (“Clean Air Act”). Equistar does not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales.

Equistar’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $4 million as of December 31, 2006. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Equistar to reassess its potential exposure related to environmental matters. See the “Environmental Remediation” section of Note 16 for additional discussion of Equistar’s liabilities for environmental remediation.

Equistar also makes capital expenditures to comply with environmental regulations. Capital expenditures for regulatory compliance in 2006, 2005 and 2004 totaled approximately $60 million, $62 million and $44 million, respectively. Equistar currently estimates expenditures at existing facilities of $30 million in 2007 and $15 million in 2008. The high levels of capital expenditures in 2006, 2005 and 2004 reflected increased spending on projects related to air emission reductions and wastewater management, principally at Equistar’s Gulf Coast plants. Under the Clean Air Act, the eight-county Houston/Galveston region was designated a severe non-attainment area for ozone by the EPA. Emission reduction controls are being installed at each of Equistar’s six facilities in the Houston/Galveston region to comply prior to the November 2007 deadline.

The presence of MTBE in some water supplies in certain states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft led to public concern about the use of MTBE and resulted in U.S. federal and state governmental initiatives to reduce or ban the use of MTBE. Substantially all refiners and blenders have discontinued the use of MTBE in the U.S. See the “MTBE” section of Note 16 to the Consolidated Financial Statements for additional discussion regarding these U.S. federal and state initiatives and their potential impact on Equistar.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

See Note 14 to the Consolidated Financial Statements for discussion of Equistar’s management of commodity price risk and interest rate risk through its use of derivative instruments and hedging activities.

COMMODITY PRICE RISK

A substantial portion of Equistar’s products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of Equistar’s profitability tend to fluctuate with changes in the business cycle. Equistar tries to protect against such instability through various business strategies. These include entering into multi-year processing and sales agreements, moving downstream into derivatives products whose pricing is more stable, and utilization of the raw material flexibility of Equistar’s ethylene plants.

In addition, Equistar selectively enters into commodity swap, option, and futures contracts with various terms to manage the volatility related to purchases of natural gas and raw materials, as well as product sales. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are monitored by management. During 2006, 2005 and 2004, the derivative transactions were not significant compared to Equistar’s overall inventory purchases and product sales. At December 31, 2006 and 2005, the notional amount of outstanding derivatives and the related market risk were not material.

INTEREST RATE RISK

Equistar had no borrowing outstanding under its inventory-based revolving credit facility as of December 31, 2006 and 2005. Accordingly, Equistar’s exposure to variable interest rate risk was minimal at December 31, 2006 and 2005.

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Item 8. Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

	Page
EQUISTAR CHEMICALS, LP
Management’s Report on Internal Control Over Financial Reporting	37
Report of Independent Registered Public Accounting Firm	38
Consolidated Financial Statements:
Consolidated Statements of Income	40
Consolidated Balance Sheets	41
Consolidated Statements of Cash Flows	42
Consolidated Statements of Partners’ Capital	43
Notes to the Consolidated Financial Statements	44

36

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Equistar is responsible for establishing and maintaining adequate internal control over financial reporting. Equistar’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting in accordance with generally accepted accounting principles.

Equistar management assessed the effectiveness of Equistar’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on its assessment, Equistar’s management has concluded that Equistar’s internal control over financial reporting was effective as of December 31, 2006 based on those criteria.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has audited management’s assessment of the effectiveness of Equistar’s internal control over financial reporting as of December 31, 2006, as stated in their report that appears on the following page.

37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partnership Governance Committee and Partners

of Equistar Chemicals, LP

We have completed integrated audits of Equistar Chemicals, LP’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the “Partnership”) and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

As discussed in Note 2 to the consolidated financial statements, effective December 31, 2006, the Partnership changed its method of accounting for defined benefit pension and other postretirement plans.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Partnership maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Partnership’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance

38

with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Houston, Texas

February 28, 2007

39

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
Millions of dollars	2006			2005			2004
Sales and other operating revenues
Trade	$	9,636		$	8,732		$	6,952
Related parties		3,129			2,954			2,364
		12,765			11,686			9,316
Operating costs and expenses
Cost of sales		11,562			10,487			8,583
Asset impairment		135			—			—
Selling, general and administrative expenses		210			198			205
Research and development expenses		34			33			34
		11,941			10,718			8,822
Operating income		824			968			494
Interest expense		(217	)		(227	)		(227	)
Interest income		7			9			7
Other income (expense), net		—			(2	)		2
Net income	$	614		$	748		$	276

See Notes to the Consolidated Financial Statements.

40

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

	December 31,
Millions of dollars	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	133		$	215
Accounts receivable:
Trade, net		890			685
Related parties		277			239
Inventories		809			657
Prepaid expenses and other current assets		49			53
Total current assets		2,158			1,849
Property, plant and equipment, net		2,846			3,063
Investments		59			58
Other assets, net		296			350
Total assets	$	5,359		$	5,320
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Current maturities of long-term debt	$	—		$	150
Accounts payable:
Trade		731			622
Related parties		174			113
Accrued liabilities		312			275
Total current liabilities		1,217			1,160
Long-term debt		2,160			2,161
Other liabilities and deferred revenues		378			416
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,642			1,603
Accumulated other comprehensive loss		(38	)		(20	)
Total partners’ capital		1,604			1,583
Total liabilities and partners’ capital	$	5,359		$	5,320

See Notes to the Consolidated Financial Statements.

41

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
Millions of dollars	2006			2005			2004
Cash flows from operating activities:
Net income	$	614		$	748		$	276
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		324			322			313
Asset impairment		135			—			—
Deferred maintenance turnaround expenditures		(12	)		(51	)		(55	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(243	)		(96	)		(216	)
Inventories		(156	)		(69	)		(174	)
Accounts payable		168			197			30
Other, net		(23	)		(4	)		41
Net cash provided by operating activities		807			1,047			215
Cash flows from investing activities:
Expenditures for property, plant and equipment		(168	)		(153	)		(101	)
Proceeds from sales of assets		2			3			41
Net cash used in investing activities		(166	)		(150	)		(60	)
Cash flows from financing activities:
Distributions to owners		(575	)		(725	)		(315	)
Repayment of long-term debt		(150	)		(1	)		—
Other		2			5			—
Net cash used in financing activities		(723	)		(721	)		(315	)
Increase (decrease) in cash and cash equivalents		(82	)		176			(160	)
Cash and cash equivalents at beginning of period		215			39			199
Cash and cash equivalents at end of period	$	133		$	215		$	39

See Notes to the Consolidated Financial Statements.

42

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

Millions of dollars	Lyondell			Millennium			Total			Accumulated Other Comprehensive Income (Loss)			Net Partners’ Capital			Comprehensive Income (Loss)
Balance at January 1, 2004	$	669		$	950		$	1,619		$	(18	)	$	1,601
Net income		195			81			276			—			276		$	276
Other comprehensive income:
Minimum pension liability		—			—			—			(1	)		(1	)		(1	)
Distributions to partners		(222	)		(93	)		(315	)		—			(315	)
Comprehensive income																$	275
Balance at December 31, 2004	$	642		$	938		$	1,580		$	(19	)	$	1,561
Net income		527			221			748			—			748		$	748
Other comprehensive income:
Minimum pension liability		—			—			—			1			1			1
Derivative instruments		—			—			—			(2	)		(2	)		(2	)
Distributions to partners		(511	)		(214	)		(725	)		—			(725	)
Comprehensive income																$	747
Balance at December 31, 2005	$	658		$	945		$	1,603		$	(20	)	$	1,583
Net income		433			181			614			—			614		$	614
Other comprehensive income:
Minimum pension liability		—			—			—			5			5			5
Change in accounting for pension and other postretirement benefits		—			—			—			(23	)		(23	)		—
Distributions to partners		(405	)		(170	)		(575	)		—			(575	)
Comprehensive income																$	619
Balance at December 31, 2006	$	686		$	956		$	1,642		$	(38	)	$	1,604

See Notes to the Consolidated Financial Statements.

43

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

		Page
1.	Formation of the Partnership and Operations	45
2.	Summary of Significant Accounting Policies	45
3.	Asset Impairment	47
4.	Hurricane Effects	48
5.	Related Party Transactions	48
6.	Accounts Receivable	50
7.	Inventories	51
8.	Property, Plant and Equipment and Other Assets	52
9.	Accounts Payable	53
10.	Accrued Liabilities	53
11.	Deferred Revenues	53
12.	Long-Term Debt	54
13.	Lease Commitments	55
14.	Financial Instruments and Derivatives	55
15.	Pension and Other Postretirement Benefits	56
16.	Commitments and Contingencies	60
17.	Supplemental Cash Flow Information	62
18.	Segment and Related Information	62
19.	Accumulated Other Comprehensive Loss	64

44

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Formation of the Partnership and Operations

Equistar Chemicals, LP together with its consolidated subsidiaries (collectively, “Equistar” or “the Partnership”), a Delaware limited partnership which commenced operations on December 1, 1997, was formed by Lyondell Chemical Company and subsidiaries (“Lyondell”) and Millennium Chemicals Inc. and subsidiaries (“Millennium”). On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation and subsidiaries (“Occidental”). Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell purchased Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%. Equistar became a wholly-owned subsidiary of Lyondell as a result of Lyondell’s acquisition of Millennium on November 30, 2004. The consolidated financial statements of Equistar reflect its historical cost basis, and, accordingly, do not reflect any purchase accounting adjustments related to the acquisition by Lyondell of Millennium and Millennium’s interest in Equistar or of Occidental’s interest in Equistar.

Equistar manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics. Equistar also manufactures and markets fuel products and ethylene derivatives, primarily ethylene oxide, ethylene glycol and polyethylene.

2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Equistar and its subsidiaries.

Revenue Recognition—Revenue from product sales is recognized at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if Equistar retains the risk of loss during shipment. For products that are shipped on a consignment basis, revenue is recognized when the customer uses the product. Costs incurred in shipping products sold are included in cost of sales. Billings to customers for shipping costs are included in sales revenue.

Cash and Cash Equivalents—Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Equistar’s policy is to invest cash in conservative, highly rated instruments and to limit the amount of credit exposure to any one institution.

Equistar has no requirements for compensating balances in a specific amount at a specific point in time. Equistar 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.

Allowance for Doubtful Accounts—Equistar establishes provisions for doubtful accounts receivable based on management’s estimates of amounts that it believes are unlikely to be collected. Collectability of receivables is reviewed and the allowance for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers.

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for substantially all inventories, except for materials and supplies, which are valued using the average cost method.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies – (Continued)

Inventory exchange transactions, which involve fungible commodities 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 LIFO valuation policy.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 5 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information systems equipment. Upon retirement or sale, Equistar 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. Equistar’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.

Long-Lived Asset Impairment—Equistar evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value.

Investments—Equistar’s investments primarily consist of a 50% interest in a joint venture that owns an ethylene glycol facility in Beaumont, Texas (“PD Glycol”). The investment in PD Glycol is accounted for using the equity method.

Identifiable Intangible Assets—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 10 years.

Costs of maintenance and repairs exceeding $5 million incurred as part of turnarounds of major units at Equistar’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, predominantly 4 to 7 years. These costs are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Other intangible assets are carried at cost or amortized cost and primarily consist of deferred debt issuance costs, patents and license costs, capacity reservation fees and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or over the term of the related agreement, if shorter.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include current and former plant sites and other remediation sites, are accrued when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Only ongoing operating and monitoring costs, the timing of which can be determined with reasonable certainty, are discounted to present value. Future legal costs associated with such matters, which generally are not estimable, are not included in these liabilities.

Legal Costs—Equistar expenses legal costs, including those incurred in connection with loss contingencies, as incurred.

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.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies – (Continued)

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 amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2006.

Accounting and Reporting Changes—Effective December 31, 2006, Equistar adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-An Amendment of FASB Statements No. 87, 88, 106, and 132R, which primarily requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status through comprehensive income in the year in which changes occur. Equistar’s application of SFAS No. 158 as of December 31, 2006 resulted in increases of $6 million and $8 million in its current and long-term benefit liabilities, respectively, a decrease of $9 million in other assets and an increase of $23 million in accumulated other comprehensive loss in its consolidated balance sheet as of December 31, 2006. (See Note 15)

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. The new standard defines fair value, establishes a framework for its measurement and expands disclosures about such measurements. For Equistar, the standard will be effective beginning in 2008. Equistar does not expect the application of SFAS No. 157 to have a material effect on its consolidated financial statements.

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

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

3. Asset Impairment

Equistar’s 2006 earnings reflect a charge of $135 million for impairment of the net book value of its idled Lake Charles, Louisiana ethylene facility. In the third quarter of 2006, Equistar undertook a study of the feasibility, cost and time required to restart the Lake Charles ethylene facility. As a result, management determined that restarting the facility would not be justified. The remaining net book value of the related assets of $10 million represents an estimate, based on probabilities, of alternative-use value. Equistar does not expect to incur any significant future costs with respect to the facility.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Hurricane Effects

During 2005, two major hurricanes impacted the chemical and related industries in the coastal and off-shore regions of the Gulf of Mexico. Net income in 2005 reflected charges totaling $28 million representing Equistar’s exposure to industry losses expected to be underwritten by industry insurance consortia, primarily resulting from hurricane damages.

As a result of Hurricane Rita, Equistar also incurred various costs that are subject to insurance reimbursements. Such costs include those incurred in conjunction with suspending operations at substantially all of its Gulf Coast plants, minor damage to facilities, and costs to restore operations. Net income in 2005 included $19 million of such costs incurred by Equistar, of which all but a $5 million deductible under the relevant insurance policies are subject to reimbursement through insurance. In 2006, Equistar recognized a $1 million benefit from insurance reimbursements related to its plants. No benefits were recognized in 2005.

5. Related Party Transactions

Equistar is a wholly-owned subsidiary of Lyondell. As of December 31, 2006 and giving effect to Occidental’s January 26, 2007 exercise of its warrant to purchase Lyondell common stock, Occidental owned 8.5% of Lyondell, and had one representative on the Lyondell Board of Directors. Lyondell owns 100% of Houston Refining LP (formerly known as LYONDELL-CITGO Refining LP) and Millennium. All of the above companies are considered related parties of Equistar. In the discussion of related party transactions below, Lyondell refers to Lyondell Chemical Company and its wholly-owned subsidiaries other than Houston Refining, Millennium and Equistar and their respective subsidiaries.

Product Transactions with Lyondell—Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of one pre-existing third-party product supply agreement expiring in 2015, Lyondell is required, under the agreements, to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. Lyondell licenses methyl tertiary butyl ether (“MTBE”) technology to Equistar, and purchases MTBE produced by Equistar at market-related prices.

Through December 31, 2004, Equistar acted as sales agent for the methanol products of Lyondell. Equistar also provided operating and other services for Lyondell including the lease to Lyondell by Equistar of the real property on which the methanol plant was located. Pursuant to the terms of the agreement, Lyondell paid Equistar a management fee and reimbursed certain expenses of Equistar at cost.

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 from Equistar. The initial term of the contract expired December 31, 2000 and it continues thereafter for one-year periods unless either party serves notice of termination twelve months in advance.

Equistar is required to purchase 100% of its vinyl acetate monomer raw material requirements at market-related prices from Millennium for the production of ethylene vinyl acetate products at its LaPorte, Texas; Clinton, Iowa and Morris, Illinois plants, and 100% of its glacial acetic acid requirements at market-related prices from Millennium for the production of glycol ether acetate at its Bayport, Texas plant. The initial terms of these agreements expired December 31, 2005 and continue year to year thereafter unless terminated by either party.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Related Party Transactions – (Continued)

Product Transactions with Occidental—Equistar and Occidental entered into an ethylene sales agreement on May 15, 1998, which was amended effective April 1, 2004, pursuant to which Occidental agreed to purchase a substantial amount of its ethylene raw material requirements from Equistar. Either party has the option to “phase down” volumes over time. However, a “phase down” cannot begin until January 1, 2014 and the annual minimum requirements cannot decline to zero prior to December 31, 2018, unless certain specified force majeure events occur. In addition to the sales of ethylene, from time to time Equistar has made sales of ethers and glycols to Occidental, and Equistar has purchased various other products from Occidental, all at market-related prices.

Product Transactions with Houston Refining LP—Equistar has product sales and raw material purchase agreements with Houston Refining, a wholly-owned subsidiary of Lyondell as of August 16, 2006. Certain ethylene co-products are sold by Equistar to Houston Refining for processing into gasoline and certain refined products are sold by Houston Refining to Equistar as raw materials. Equistar also has processing and storage arrangements with Houston Refining and provides certain marketing services for Houston Refining. All of the agreements between Houston Refining and Equistar are on terms generally representative of prevailing market prices. Subsequent to August 16, 2006, transactions between Equistar and Houston Refining are reported as related party transactions of Lyondell.

Shared Services Agreement with Lyondell—Under a shared services agreement, Lyondell provides office space and various services to Equistar, including information technology, sales and marketing, supply chain, and other administrative and support services. Lyondell charges Equistar for Equistar’s share of the cost of such services. Direct costs, incurred exclusively for Equistar, also are charged to Equistar. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar on behalf of Lyondell. In such cases, Equistar charges Lyondell for its share of such costs.

Shared Services and Shared-Site Agreements with Millennium—Equistar and Millennium provide operating services, utilities and raw materials to each other at common locations. Millennium and Equistar have various operating, manufacturing and technical service agreements under which, Millennium bills Equistar for certain operational services, including utilities, plant-related transportation and other services, and Equistar bills Millennium for utilities and fuel streams.

Lease Agreements with Occidental—Equistar subleases certain railcars from Occidental and leases its Lake Charles ethylene facility and the land related thereto from Occidental. See Note 3 for additional information related to the Lake Charles ethylene facility.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Related Party Transactions – (Continued)

Related party transactions are summarized as follows:

	For the year ended December 31,
Millions of dollars	2006		2005		2004
Equistar billed related parties for:
Sales of products and processing services:
Lyondell	$	1,467	$	1,202	$	931
Houston Refining		842		944		747
Occidental		780		755		634
Millennium		40		53		52
Shared services and shared site agreements:
Millennium		16		27		19
Houston Refining		5		4		4
Lyondell		24		20		22
Natural gas purchased for Lyondell		—		—		81
Related parties billed Equistar for:
Purchases of products:
Houston Refining	$	928	$	394	$	425
Lyondell		352		307		54
Millennium		9		8		10
Occidental		33		20		3
Shared services, transition and lease agreements:
Lyondell		209		183		182
Millennium		1		1		2
Occidental		7		7		9
Houston Refining		1		1		1

6. Accounts Receivable

Equistar sells its products primarily to other chemical manufacturers in the petrochemical industry. Equistar performs ongoing credit evaluations of its customers’ financial condition and, in certain circumstances, requires letters of credit from them. Equistar’s allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $5 million and $7 million at December 31, 2006 and 2005, respectively. The Consolidated Statements of Income included provisions for doubtful accounts of less than $1 million in each of 2006 and 2004. There were no provisions for doubtful accounts receivable in 2005.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Accounts Receivable – (Continued)

In November 2005, Equistar amended its $450 million accounts receivable sales facility, increasing the commitment to $600 million and extending the maturity to November 2010. Pursuant to this facility, Equistar sells, through a wholly-owned bankruptcy-remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of domestic accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. The $600 million accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the $400 million inventory-based revolving credit facility, which also is secured by a pledge of accounts receivable (see Note 12).

The amount of the interest in the pool of receivables permitted to be sold is determined by a formula. Accounts receivable in the Consolidated Balance Sheets are reduced by the sales of interests in the pool. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interests sold. Increases and decreases in the amount sold are reflected in operating cash flows in the Consolidated Statements of Cash Flows, representing collections of sales revenue. Fees related to the sales are included in “Selling, general and administrative expenses” in the Consolidated Statements of Income. The outstanding amount of receivables sold under the facility was $200 million as of December 31, 2005 and there was none outstanding as of December 31, 2006.

Prior to January 2006, discounts were offered to certain customers for early payment for product. As a result, some receivable amounts were collected in December 2005 and 2004, respectively, that otherwise would have been expected to be collected in January 2006 and 2005, respectively. This included collections of $84 million and $66 million in December 2005 and 2004, respectively, related to receivables from Occidental.

7. Inventories

Inventories consisted of the following components at December 31:

Millions of dollars	2006		2005
Finished goods	$	452	$	400
Work-in-process		14		11
Raw materials		225		132
Materials and supplies		118		114
Total inventories	$	809	$	657

At December 31, 2006, approximately 89% of Equistar’s inventories, excluding materials and supplies and in-transit inventory, were valued using the LIFO method.

The excess of the current replacement cost over book value of those inventories that are carried at cost using the LIFO method was approximately $381 million and $465 million at December 31, 2006 and 2005, respectively.

Equistar’s inventory-based revolving credit facility was amended in November 2005, increasing the availability from $250 million to $400 million and extending the maturity to November 2010. This facility was undrawn at December 31, 2006 and 2005 (see Note 12).

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Property, Plant an d Equipment and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

Millions of dollars	2006			2005
Land	$	85		$	78
Manufacturing facilities and equipment		6,093			6,184
Construction in progress		141			98
Total property, plant and equipment		6,319			6,360
Less accumulated depreciation		(3,473	)		(3,297	)
Property, plant and equipment, net	$	2,846		$	3,063

Maintenance and repair expenses were $287 million, $261 million and $246 million for the years ended December 31, 2006, 2005 and 2004, respectively. No interest was capitalized to property, plant and equipment during the three-year period.

In 2004, Equistar sold certain railcars for $37 million and leased the railcars from the buyer under an operating lease agreement. The sale resulted in a gain of $7 million that is being recognized over the 10 year term of the lease as a reduction of lease rent expense.

The components of other assets, at cost, and the related accumulated amortization were as follows at December 31:

	2006							2005
Millions of dollars	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Identifiable intangible assets:
Turnaround costs	$	324	$	(157	)	$	167	$	337	$	(142	)	$	195
Software costs		100		(68	)		32		97		(53	)		44
Debt issuance costs		46		(28	)		18		46		(22	)		24
Catalyst costs		44		(31	)		13		39		(25	)		14
Other		79		(24	)		55		72		(20	)		52
Total intangible assets	$	593	$	(308	)		285	$	591	$	(262	)		329
Pension asset							6							15
Other							5							6
Total other assets, net						$	296						$	350

Amortization of these identifiable intangible assets for the next five years is expected to be $69 million in 2007, $56 million in 2008, $40 million in 2009, $30 million in 2010 and $22 million in 2011.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Property, Plant and Equipment and Other Assets – (Continued)

Depreciation and amortization expense is summarized as follows for the years ended December 31:

Millions of dollars	2006		2005		2004
Property, plant and equipment	$	254	$	254	$	248
Turnaround costs		40		38		38
Software costs		17		18		16
Other		13		12		11
Total depreciation and amortization	$	324	$	322	$	313

In addition to the depreciation and amortization expense shown above, amortization of debt issuance costs of $5 million in each of 2006 and 2005 and $6 million in 2004 is included in interest expense in the Consolidated Statements of Income.

9. Accounts Payable

Accounts payable at December 31, 2006 and 2005 included liabilities in the amounts of $7 million and $6 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.

10. Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

Millions of dollars	2006		2005
Payroll and benefits	$	92	$	75
Pension and other postretirement benefits		7		—
Taxes other than income taxes		68		68
Interest		60		64
Product sales rebates		28		36
Deferred revenues		36		28
Other		21		4
Total accrued liabilities	$	312	$	275

11. Def erred Revenues

Deferred revenues at December 31, 2006 and 2005 of $175 million and $171 million, respectively, represent advances from customers as partial prepayments for products to be delivered under long-term product supply contracts. Equistar is recognizing this deferred revenue as the associated product is delivered. Trade sales and other operating revenues included $13 million, $22 million and $17 million in 2006, 2005 and 2004, respectively, of such previously deferred revenues.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Long-Term Debt

Long-term debt consisted of the following at December 31:

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

Aggregate maturities of all long-term debt during the next five years are $700 million in 2008, $600 million in 2009, $3 million in 2010, $707 million in 2011 and $150 million thereafter.

Equistar may currently redeem its 10.125% Senior Notes due 2008, 10.625% Senior Notes due 2011 and 8.75% Notes due 2009 upon payment of the present value of future interest and principal amounts, using a specified discount rate. Alternatively, Equistar may redeem the 10.625% Senior Notes due 2011 beginning in 2007, at a price of 105.313% of the principal amount with the price declining annually to 100% at maturity.

During 2006, Equistar repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006.

During 2005, Equistar amended its $250 million inventory-based revolving credit facility, increasing the availability to $400 million, extending the maturity to November 2010 and reducing the interest rate from LIBOR plus 2.25% to LIBOR plus 1.5%. The total amount available at December 31, 2006 under both the $400 million inventory-based revolving credit facility and the $600 million accounts receivable sales facility (see Note 6) was $938 million, which gave effect to the borrowing base less a $50 million unused availability requirement and any outstanding amount of accounts receivable sold under the accounts receivable facility, of which there was none at December 31, 2006, and $12 million of outstanding letters of credit under the revolving credit facility as of December 31, 2006. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The revolving credit facility requires that the unused available amounts under that facility and the $600 million accounts receivable sales facility equal or exceed $50 million, or $100 million if the Interest Coverage Ratio (as defined) at the end of any period of four consecutive fiscal quarters is less than 2:1. The revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable. There was no borrowing under the revolving credit facility at December 31, 2006.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Long-Term Debt – (Continued)

The $400 million revolving credit facility and the indentures contain covenants that, subject to exceptions, restrict, among other things, lien incurrence, debt incurrence, dividends, sales of assets, investments, accounts receivable securitizations, purchase of equity, payments on indebtedness, affiliate transactions, sale and leaseback transactions and mergers. The credit facility does not require the maintenance of specified financial ratios as long as certain conditions are met. In addition, some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when its Fixed Charge Coverage Ratio (as defined) is less than 1.75 to 1.

Lyondell is a guarantor of Equistar’s 7.55% Debentures due 2026. 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, 2006.

13. Lease Commitments

Equistar leases various facilities and equipment under noncancelable operating lease arrangements for varying periods. Operating leases include leases of railcars used in the distribution of products in Equistar’s business. As of December 31, 2006, future minimum lease payments for the next five years and thereafter, relating to all noncancelable operating leases with lease terms in excess of one year were as follows:

Millions of dollars
2007	$	88
2008		76
2009		67
2010		60
2011		50
Thereafter		362
Total minimum lease payments	$	703

Net rental expense for 2006, 2005 and 2004 was $106 million, $103 million and $94 million, respectively.

14. Financial Instruments and Derivatives

The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable and accounts payable, 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 $2,255 million and $2,456 million at December 31, 2006 and 2005, respectively.

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EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Pension and Other Postretirement Benefits

All full-time regular employees are covered by defined benefit pension plans sponsored by Equistar. Retirement benefits are generally based upon years of service and the employee’s highest compensation for any consecutive 36 month period during the last 120 months of service or other compensation measures as defined under the respective plan provisions. Equistar funds the plans through contributions to pension trust funds, generally subject to minimum funding requirements as provided by applicable law. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the U.S. tax-qualified plans’ limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions, which provide medical and life insurance benefits. The postretirement medical plans are contributory, while the life insurance plans are generally non contributory. The life insurance benefits are provided to employees who retired before July 1, 2002.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Pension and Other Postretirement Benefits – (Continued)

The following table provides a reconciliation of projected benefit obligations, plan assets and the funded status of these plans:

	Pension Benefits						Other Postretirement Benefits
Millions of dollars	2006			2005			2006			2005
Change in benefit obligation:
Benefit obligation, January 1	$	256		$	223		$	110		$	117
Service cost		23			21			3			3
Interest cost		14			13			5			6
Actuarial (gain) loss		(8	)		9			(7	)		(1	)
Plan amendments		—			—			—			(10	)
Benefits paid		(10	)		(10	)		(5	)		(5	)
Benefit obligation, December 31		275			256			106			110
Change in plan assets:
Fair value of plan assets, January 1		169			152
Actual return on plan assets		20			10
Partnership contributions		50			17
Benefits paid		(10	)		(10	)
Fair value of plan assets, December 31		229			169
Funded status, December 31		(46	)		(87	)		(106	)		(110	)
Amounts not recognized in benefit costs:
Actuarial and investment (gain) loss		46			66			(5	)		3
Prior service benefit		(1	)		(2	)		(2	)		(3	)
Net amount recognized in benefit costs	$	(1	)	$	(23	)	$	(113	)	$	(110	)
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost	$	5		$	15		$	—		$	—
Accrued benefit liability, current		—			—			(6	)		—
Accrued benefit liability, long-term		(51	)		(58	)		(100	)		(110	)
Funded status, December 31, 2006		(46	)					(106	)
Accumulated other comprehensive (income) loss		45			20			(7	)		—
Net amount recognized in benefit costs	$	(1	)	$	(23	)	$	(113	)	$	(110	)
Additional Information:
Accumulated benefit obligation for defined benefit plans, December 31	$	224		$	209
Decrease in minimum liability, prior to application of SFAS No. 158, included in other comprehensive income		(5	)		(1	)

57

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Pension and Other Postretirement Benefits – (Continued)

The 2005 decrease in the benefit obligation and increase in unrecognized prior service benefit reflect the amendment of the Equistar postretirement medical plan, effective January 1, 2006, that reduced retiree medical benefits.

Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

Millions of dollars	2006		2005
Projected benefit obligation	$	257	$	237
Fair value of assets		205		146

Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

Millions of dollars	2006		2005
Accumulated benefit obligation	$	61	$	190
Fair value of assets		48		146

The following table provides the components of periodic pension and other postretirement benefit costs for the year ended December 31:

	Pension Benefits									Other Postretirement Benefits
Millions of dollars	2006			2005			2004			2006		2005		2004
Net periodic benefit cost:
Service cost	$	23		$	21		$	18		$	3	$	3	$	3
Interest cost		14			13			12			5		6		7
Actual return on plan assets		(20	)		(10	)		(15	)		—		—		—
Less-return in excess of (less than) expected return		6			(2	)		5			—		—		—
Expected return on plan assets		(14	)		(12	)		(10	)		—		—		—
Prior service cost amortization		—			—			—			—		2		2
Actuarial and investment loss amortization		5			6			5			—		—		—
Net periodic benefit cost	$	28		$	28		$	25		$	8	$	11	$	12

Estimated amortization of the defined benefit pension plans actuarial loss and prior service cost components of accumulated other comprehensive income (“AOCI”) to be included in 2007 net periodic pension cost is $2 million and less than $1 million, respectively. Estimated amortization of the defined benefit postretirement plans prior service cost component of AOCI to be included in 2007 net periodic benefit cost is less than $1 million.

58

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Pension and Other Postretirement Benefits – (Continued)

The assumptions used in determining the net benefit liability were as follows at December 31:

	Pension Benefits				Other Postretirement Benefits
	2006		2005		2006		2005
Weighted-average assumptions as of December 31:
Discount rate	5.75	%	5.50	%	5.75	%	5.50	%
Rate of compensation increase	4.50	%	4.50	%

The assumptions used in determining net benefit cost were as follows for the year ended December 31:

	Pension Benefits						Other Postretirement Benefits
	2006		2005		2004		2006		2005		2004
Weighted-average assumptions for the year:
Discount rate	5.50	%	5.75	%	6.25	%	5.50	%	5.75	%	6.25	%
Expected return on plan assets	8.00	%	8.00	%	8.00	%
Rate of compensation increase	4.50	%	4.50	%	4.50	%

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2006 was 10% for 2007, decreasing 1% per year to 5% in 2012 and thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Equistar’s maximum contribution level to the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated other postretirement benefit liability as of December 31, 2006 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic other postretirement benefit cost for the year then ended.

Management’s goal is to manage pension investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Targeted asset allocations of 55% U.S. equity securities, 15% non-U.S. equity securities, and 30% fixed income securities are based on recommendations by Equistar’s independent pension investment advisor. Equistar’s expected long-term rate of return on plan assets of 8% is based on the average level of earnings that its independent pension investment advisor has advised could be expected to be earned over time on such allocation. Investment policies prohibit investments in securities issued by Equistar or an affiliate, such as Lyondell or Millennium, or investment in speculative derivative instruments. The investments are marketable securities that provide sufficient liquidity to meet expected benefit obligation payments.

59

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Pension and Other Postretirement Benefits – (Continued)

Equistar’s pension plan weighted-average asset allocations by asset category were as follows at December 31:

	2006 Policy	2006		2005
Asset Category:
U.S. equity securities	55%	56	%	54	%
Non-U.S. equity securities	15%	17	%	16	%
Fixed income securities	30%	27	%	30	%
Total	100%	100	%	100	%

Equistar expects to contribute less than $1 million to its pension plans in 2007.

As of December 31, 2006, future expected benefit payments, which reflect expected future service, as appropriate, were as follows:

Millions of dollars	Pension Benefits		Other Benefits
2007	$	16	$	6
2008		16		7
2009		18		7
2010		19		8
2011		19		8
2012 through 2016		115		41

Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $13 million in 2006 and $12 million in each of 2005 and 2004.

16. Commitments and Contingencies

Commitments—Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for its businesses and at prevailing market prices. Equistar is also a party to various obligations to purchase products and services, principally for utilities and industrial gases. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See also Note 5, describing related party transactions. At December 31, 2006, future minimum payments under those contracts with noncancelable contract terms in excess of one year and fixed minimum payments were as follows:

Millions of dollars
2007	$	307
2008		306
2009		300
2010		299
2011		295
Thereafter through 2023		2,723
Total minimum contract payments	$	4,230

60

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Commitments and Contingencies – (Continued)

Equistar’s total purchases under these agreements were $416 million, $494 million and $378 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Asset Retirement Obligation—Equistar believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Equistar continually reviews the optimal future alternatives for its facilities. In many cases, the amount and timing of costs, if any, that may be incurred as a result of such reviews are not known, and no decisions have been reached, but if a decision were reached to retire one or more facilities in the foreseeable future, the asset retirement costs could range from $0 to $30 million, depending upon the scope of the required work and other factors. At December 31, 2006, the balance of the liability that had been recognized for all asset retirement obligations was $12 million. In addition, any decision to retire a facility would result in other costs, including employment related costs.

Environmental Remediation—Equistar’s accrued liability for future environmental remediation costs totaled $4 million and $1 million as of December 31, 2006 and 2005, respectively. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liability recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Equistar to reassess its potential exposure related to environmental matters.

MTBE—The presence of MTBE in some water supplies in certain U.S. states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft led to public concern about the use of MTBE and resulted in U.S. federal and state governmental initiatives to reduce or ban the use of MTBE. Substantially all refiners and blenders have discontinued the use of MTBE in the U.S.

Accordingly, Equistar’s MTBE is sold for use outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Should it become necessary or desirable to significantly reduce MTBE production, Equistar may make capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene (also know as “di-isobutylene”) or ethyl tertiary butyl ether (“ETBE”), at its MTBE plant. Conversion and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to iso-octane or iso-octene may be lower than that historically realized on MTBE.

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

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

61

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the years ended December 31:

Millions of dollars	2006		2005		2004
Cash paid for interest	$	216	$	221	$	220

18. Segment and Related Information

Equistar operates in one reportable segment, ethylene, co-products and derivatives (“EC&D”), which includes: the ethylene and co-products product group, including primarily manufacturing and marketing of ethylene, its co-products, including propylene, butadiene and aromatics; and the derivatives product group, including primarily manufacturing and marketing of ethylene oxide, ethylene glycol and polyethylene (see Note 1).

The accounting policies of the segment are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). Transfers of product from the ethylene and co-products product group to the derivatives product group are made at prices approximating prevailing market prices. No trade customer accounted for 10% or more of Equistar’s consolidated sales during any year in the three-year period ended December 31, 2006; however, sales to Lyondell were approximately 11% in 2006 and 10% in each of 2005 and 2004.

62

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Segment and Related Information – (Continued)

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

Millions of dollars	Ethylene & co-products		Derivatives		Other		Eliminations			Consolidated
2006
Sales and other operating revenues
Customers	$	8,615	$	4,150	$	—	$	—		$	12,765
Inter-product group		2,704		—		—		(2,704	)		—
		11,319		4,150		—		(2,704	)		12,765
Operating income		691		133		—		—			824
Total assets		3,289		1,819		251		—			5,359
Capital expenditures		101		66		1		—			168
Depreciation and amortization expense		228		96		—		—			324
2005
Sales and other operating revenues
Customers	$	7,893	$	3,793	$	—	$	—		$	11,686
Inter-product group		2,451		—		—		(2,451	)		—
		10,344		3,793		—		(2,451	)		11,686
Operating income		891		77		—		—			968
Total assets		3,198		1,803		319		—			5,320
Capital expenditures		109		43		1		—			153
Depreciation and amortization expense		224		98		—		—			322
2004
Sales and other operating revenues
Customers	$	6,059	$	3,257	$	—	$	—		$	9,316
Inter-product group		2,077		—		—		(2,077	)		—
		8,136		3,257		—		(2,077	)		9,316
Operating income		476		18		—		—			494
Total assets		3,095		1,808		171		—			5,074
Capital expenditures		79		22		—		—			101
Depreciation and amortization expense		225		88		—		—			313

63

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Segment and Related Information – (Continued)

The following table presents the details of “Total assets” as presented above in the “Other” column as of December 31, for the years indicated:

Millions of dollars	2006		2005		2004
Cash and cash equivalents	$	133	$	215	$	39
Accounts receivable—trade and related parties		9		2		11
Prepaid expenses and other current assets		7		12		7
Property, plant and equipment, net		48		6		9
Other assets, net		54		84		105
Total assets	$	251	$	319	$	171

19. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows at December 31:

Millions of dollars	2006			2005
Minimum pension liability	$	—		$	(20	)
Pension and postretirement benefit liabilities after application of SFAS No. 158		(38	)		—
Total accumulated other comprehensive loss	$	(38	)	$	(20	)

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Equistar performed an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer (principal executive officer) and the Senior Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of Equistar’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2006. Based upon that evaluation, the Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that Equistar’s disclosure controls and procedures are effective.

There were no changes in Equistar’s internal control over financial reporting that occurred during Equistar’s last fiscal quarter (the fourth quarter 2006) that have materially affected, or are reasonably likely to materially affect, Equistar’s internal control over financial reporting.

Equistar’s management’s report on internal control over financial reporting appears on page 37 of this Annual Report on Form 10-K. In addition, PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has audited management’s assessment of the effectiveness of Equistar’s internal control over financial reporting, as of December 31, 2006, as stated in their report that appears on page 38 of this Annual Report on Form 10-K.

Item 9B. Other Information

None.

65

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Omitted pursuant to General Instruction I of Form 10-K. See “Additional Information Available” for information regarding Equistar’s code of ethics.

Item 11. Executive Compensation

Omitted pursuant to General Instruction I of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Omitted pursuant to General Instruction I of Form 10-K.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Omitted pursuant to General Instruction I of Form 10-K.

Item 14. Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table presents fees for audit services rendered by PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) for the audit of Equistar’s annual financial statements for the years ended December 31, 2006 and 2005, and fees billed or expected to be billed for audit-related, tax and all other services rendered by PricewaterhouseCoopers during those periods.

Thousands of dollars	2006		2005
Audit fees (a)	$	1,512	$	1,350
Audit-related fees (b)		270		297
Tax fees		—		—
All other fees		—		—
Total	$	1,782	$	1,647

(a) Audit fees consist of the aggregate fees and expenses billed or expected to be billed for professional services rendered by PricewaterhouseCoopers for the audit of Equistar’s annual financial statements, the review of financial statements included in Equistar’s Form 10-Qs or for services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. Of the 2005 audit fees shown in the table, $500,000 represents fees and expenses billed in 2006 related to 2005 audit services. Of the 2006 audit fees shown in the table, $300,000 represents fees and expenses expected to be billed in 2007 related to 2006 audit services.

(b) Audit-related fees consist of the aggregate fees billed for assurance and related services by PricewaterhouseCoopers that are reasonably related to the performance of the audit or review of Equistar’s financial statements. This category includes fees related to: the performance of audits of Equistar’s benefit plans; agreed-upon or expanded audit procedures relating to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and consultations as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by regulatory or standard setting bodies. Of the 2005 audit-related fees shown in the table, $152,000 represents fees billed in 2006 for 2005 audit-related services. Of the 2006

66

audit-related fees shown in the table, $65,000 represents fees expected to be billed in 2007 for 2006 audit-related services.

Pre-Approval Policy

Generally, the Partnership Governance Committee of Equistar serves as Equistar’s Audit Committee, and is directly responsible for overseeing the work of the independent registered public accounting firm. However, as a result of Lyondell’s November 30, 2004 acquisition of Millennium, Equistar and Millennium became consolidated subsidiaries of Lyondell. Therefore, to protect the independence of Equistar’s independent registered public accounting firm and to ensure that services provided by the independent registered public accounting firm are pre-approved by an independent governing body, on December 1, 2004, Equistar’s Partnership Governance Committee revised its pre-approval policy. Under the revised pre-approval policy, Equistar’s Partnership Governance Committee has delegated to Lyondell’s Audit Committee, which consists entirely of independent directors, the responsibility for reviewing and pre-approving all audit and non-audit services to be provided for Equistar by Equistar’s independent registered public accounting firm (including affiliates or related member firms).

Under the revised policy, a centralized service request procedure is used for all requests for the independent registered public accounting firm to provide services to Equistar. Under this procedure, all requests for the independent registered public accounting firm to provide services to Equistar initially are submitted to Lyondell’s Vice President and Controller. Each such request must include a detailed description of the services to be rendered. If the proposed services have not already been pre-approved by Lyondell’s Audit Committee, Lyondell’s Vice President and Controller will submit the request and a detailed description of the proposed services to Lyondell’s Audit Committee. Requests to provide services that require pre-approval by Lyondell’s Audit Committee also must include a statement as to whether, in the view of Lyondell’s Vice President and Controller, the request is consistent with the SEC’s rules on independent registered public accounting firm independence.

Pursuant to the revised policy, the Partnership Governance Committee has designated Lyondell’s Senior Vice President and Chief Financial Officer to review compliance with the pre-approval policy. Lyondell’s Senior Vice President and Chief Financial Officer will report to Lyondell’s Audit Committee periodically on the results of the monitoring.

67

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following exhibits are filed as a part of this report:

Exhibit Number.	Description of Document
3.1	Certificate of Limited Partnership of the Registrant dated as of October 17, 1997 (13)
3.1(a)	Certificate of Amendment to the Certificate of Limited Partnership of the Registrant dated as of May 15, 1998 (13)
3.1(b)	Certificate of Amendment to the Certificate of Limited Partnership of the Registrant dated as of October 31, 2002 (13)
3.1(c)	Certificate of Amendment to the Certificate of Limited Partnership of the Registrant dated as of November 30, 2004 (13)
3.2	Amended and Restated Limited Partnership Agreement of the Registrant dated as of November 29, 2004 (11)
3.2(a)	Amendment to Amended and Restated Limited Partnership Agreement of the Registrant effective as of June 30, 2006 (14)
4.1	Indenture among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of January 15, 1999 (1)
4.1(a)	First Supplemental Indenture among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee (1)
4.1(b)	Note (attached as Exhibit A to the First Supplemental Indenture among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.1(a)) (1)
4.1(c)	Second Supplemental Indenture among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee (1)
4.1(d)	Note (attached as Exhibit A to the Second Supplemental Indenture among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.1(c)) (1)
4.2	Credit Agreement dated as of December 17, 2003 among the Registrant, the subsidiaries of the Registrant party thereto, the lenders party thereto and Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Bank of America, N.A. and Citicorp USA, Inc. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent (8)
4.2(a)	Amendment No. 1 dated as of June 25, 2004 to Credit Agreement dated as of December 17, 2003 among the Registrant, the subsidiaries of the Registrant party thereto, the lenders party thereto and Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Bank of America, N.A. and Citicorp USA, Inc. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent (9)
4.2(b)	Amendment No. 2 dated as of November 2, 2005 to Credit Agreement dated as of December 17, 2003 among the Registrant, the subsidiaries of the Registrant party thereto, the lenders party thereto, Credit Suisse First Boston, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association as Co-Documentations Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent (12)
4.2(c)	Amendment No. 3 dated as of December 6, 2006 to Credit Agreement dated as of December 17, 2003 among the Registrant, the subsidiaries of the Registrant parties thereto, the lenders party thereto, Credit Suisse First Boston, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association as co-documentations agents, Citicorp USA, Inc. and Bank of America, N.A. as co-collateral agents, and Citicorp USA, Inc. as administrative agent (15)
4.3	Indenture between Lyondell Petrochemical Company and Texas Commerce Bank National Association, as Trustee, dated as of January 29, 1996 (1)
4.3(a)	First Supplemental Indenture dated as of February 15, 1996, between Lyondell Petrochemical Company and Texas Commerce Bank National Association, as Trustee, to the Indenture dated as of January 29, 1996 (1)
4.3(b)	Second Supplemental Indenture dated as of December 1, 1997, among Lyondell Petrochemical Company, the Registrant and Texas Commerce Bank National Association, as Trustee, to the Indenture dated as of January 29, 1996 (1)

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4.3(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, the Registrant and The Chase Manhattan Bank, as Trustee, to the Indenture dated as of January 29, 1996 (3)
4.3(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, the Registrant and The Chase Manhattan Bank, as Trustee, to the Indenture dated as of January 29, 1996 (3)
4.4	Indenture dated as of August 24, 2001 among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee (2)
4.4(a)	Note dated as of August 24, 2001 (attached as Exhibit A to the Indenture dated as of August 24, 2001 among Equistar Chemical, LP, Equistar Funding and The Bank of New York, as Trustee, filed herewith as Exhibit 4.4) (2)
4.5	Indenture dated as of April 22, 2003 among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee (6)
4.5(a)	Note dated as of April 22, 2003 (attached as Exhibit A to the Indenture dated as of April 22, 2003 among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.5) (6)
4.5(b)	First Supplemental Indenture dated as of November 21, 2003 among the Registrant, Equistar Funding Corporation and The Bank of New York, as Trustee, to the Indenture dated as of April 22, 2003 (7)
4.6	Security Agreement dated as of December 17, 2003 among the Registrant, the other borrowers and guarantors party thereto, and Citicorp USA, Inc. as Administrative Agent (8)
4.7	Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, the Registrant as the servicer, the banks and other financial institutions party thereto as purchasers, Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Asset Agents, Citicorp USA, Inc., as Administrative Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Bookrunners (8)
4.7(a)	Amendment No. 1 dated as of June 25, 2004 to Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, the Registrant as the servicer, the banks and other financial institutions party thereto as purchasers, Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Asset Agents, Citicorp USA, Inc., as Administrative Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Bookrunners (9)
4.7(b)	Amendment No. 2 dated as of November 2, 2005 to Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, the Registrant as the servicer, the banks and other financial institutions party thereto as purchasers, Citicorp USA, Inc as Co-Asset Agent and Administrative Agent for the purchasers, Credit Suisse First Boston, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association as Co-Documentations Agents, Bank of America, N.A. as Co-Asset Agents (12)
4.7(c)	Amendment No. 3 dated as of August 3, 2006 to Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, the Registrant as the servicer, the banks and other financial institutions party thereto as purchasers, Citicorp USA, Inc as Co-Asset Agent and Administrative Agent for the purchasers, Credit Suisse First Boston, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association as Co-Documentations Agents, Bank of America, N.A. as Co-Asset Agents
4.7(d)	Amendment No. 4 dated as of September 25, 2006 to Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, the Registrant as the servicer, the banks and other financial institutions party thereto as purchasers, Citicorp USA, Inc as Co-Asset Agent and Administrative Agent for the purchasers, Credit Suisse First Boston, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association as Co-Documentations Agents, Bank of America, N.A. as Co-Asset Agents
4.8	Undertaking Agreement dated as of December 17, 2003 by the Registrant (8)
4.8(a)	Amendment No. 1 dated as of June 25, 2004 to Undertaking Agreement dated as of December 17, 2003 by the Registrant (9)

69

4.8(b)     Amendment No. 2 dated as of November 2, 2005 to Undertaking Agreement dated as of December 17, 2003 by the Registrant (12)

The Registrant is a party to several long-term debt instruments under which the total amount of long-term debt securities authorized does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, the Registrant agrees to furnish a copy of such instruments to the Commission upon request.

10.1	Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemical LP and the Registrant dated as of December 1, 1997 (1)
10.1(a)	First Amendment, dated as of May 15, 1998, to the Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemicals LP and the Registrant dated as of December 1, 1997 (1)
10.1(b)	Second Amendment to Lyondell Asset Contribution Agreement, dated as of September 30, 2001, among Lyondell Chemical Company, Lyondell Petrochemical LP Inc. and the Registrant (4)
10.2	Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and the Registrant dated as of December 1, 1997 (1)
10.2(a)	First Amendment, dated as of May 15, 1998, to the Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and the Registrant dated as of December 1, 1997 (1)
10.2(b)	Second Amendment to Millennium Asset Contribution Agreement, dated as of September 30, 2001, among Millennium Petrochemicals Inc., Millennium Petrochemicals LP LLC and the Registrant (4)
10.3	Agreement and Plan of Merger and Asset Contribution among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and the Registrant dated as of May 15, 1998 (1)
10.3(a)	First Amendment to Occidental Asset Contribution Agreement, dated as of September 30, 2001, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc., Occidental Petrochem Partner GP, Inc. and the Registrant (4)
10.4	Amended and Restated Parent Agreement dated as of November 6, 2002 (5)
10.5	Amended and Restated Ethylene Sales Agreement between the Registrant and Occidental Chemical Corporation dated as of August 20, 2004 (10)

The Registrant is party to several compensatory plans, contracts or arrangements that the Registrant has not included herein based on paragraph 10(iii)(C)(6) of Item 601(b) of Regulation S-K since the Registrant is a wholly-owned subsidiary of Lyondell Chemical Company, a company that has a class of securities registered pursuant to section 12 or files reports pursuant to section 15(d) of the Exchange Act and is filing a report on Form 10-K.

12	Statement Setting Forth Detail for Computation of Ratio of Earnings to Fixed Charges
31.1	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Executive Officer
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certification of Principal Executive Officer
32.2	Section 1350 Certification of Principal Financial Officer
99.1	Consolidated Financial Statements of Lyondell Chemical Company

_________

(1) Filed as an exhibit to the Registrant’s Registration Statement on Form S-4 (No. 333-76473) and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant’s Registration Statement on Form S-4 (No. 333-70048) and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.

(4) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.

(5) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.

70

(6) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

(7) Filed as an exhibit to the Registrant’s Registration Statement on Form S-4 (No. 333-111134) and incorporated herein by reference.

(8) Filed as an exhibit to the Registrant’s Current Report on Form 8-K dated December 17, 2003 and incorporated herein by reference.

(9) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.

(10) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.

(11) Filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of November 30, 2004 and incorporated herein by reference.

(12) Filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of November 2, 2005 and incorporated herein by reference.

(13) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.

(14) Filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of June 30, 2006 and incorporated herein by reference.

(15) Filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of December 6, 2006 and incorporated herein by reference.

(b) Consolidated Financial Statements and Financial Statement Schedules

(1) Consolidated Financial Statements

Consolidated Financial Statements filed as part of this Annual Report on Form 10-K are listed in the Index to Financial Statements on page 36.

(2) Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto.

71

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 28th day of February, 2007.

EQUISTAR CHEMICALS, LP, by its General Partner
MILLENNIUM PETROCHEMICALS GP LLC By: Millennium Petrochemicals Inc.
By:	/s/ MORRIS GELB
	Morris Gelb President

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2007.

Name	Title (Millennium Petrochemicals Inc.)
/s/ MORRIS GELB Morris Gelb (Principal Executive Officer)	President and Director
/s/ KAREN A. TWITCHELL Karen A. Twitchell (Principal Financial and Accounting Officer)	Vice President and Treasurer
/s/ T. KEVIN DENICOLA T. Kevin DeNicola	Director
/s/ EDWARD J. DINEEN Edward J. Dineen	Director

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 28th day of February, 2007.

Name	Title
/s/ DAN F. SMITH Dan F. Smith (Principal Executive Officer)	Chief Executive Officer Member, Partnership Governance Committee
/s/ T. KEVIN DENICOLA T. Kevin DeNicola (Principal Financial Officer)	Senior Vice President and Chief Financial Officer Member, Partnership Governance Committee
/s/ CHARLES L. HALL Charles L. Hall (Principal Accounting Officer)	Vice President, Controller and Chief Accounting Officer
/s/ C. BART DE JONG C. Bart de Jong	Member, Partnership Governance Committee
/s/ MORRIS GELB Morris Gelb	Member, Partnership Governance Committee

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED

PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED

SECURITIES PURSUANT TO SECTION 12 OF THE ACT

Neither an annual report covering the Registrant’s last fiscal year nor proxy materials with respect to any annual or other meeting of security holders have been sent to security holders.

EX-4.7(C)

Exhibit 4.7(c)

AMENDMENT NO. 3 TO RECEIVABLES PURCHASE AGREEMENT

AMENDMENT dated as of August 3, 2006 to the RECEIVABLES PURCHASE AGREEMENT dated as of December 17, 2003 (as amended, the “Agreement”) among EQUISTAR RECEIVABLES II, LLC, a Delaware limited liability company (the “Seller”), EQUISTAR CHEMICALS, LP, a Delaware limited partnership (the “Servicer”), the PURCHASERS from time to time party thereto, CITICORP USA, INC., as co-asset agent and administrative agent for the Purchasers (the “Agent”), CREDIT SUISSE FIRST BOSTON, and JPMORGAN CHASE BANK, N.A. and WACHOVIA BANK, NATIONAL ASSOCIATION as co-documentations agents, and BANK OF AMERICA, N.A., as co-asset agent.

The parties hereto agree as follows:

SECTION 1. Defined Terms. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement has the meaning assigned to such term in the Agreement.

SECTION 2. Amendments. (a) The following defined term in Section 1.1 of the Agreement is amended to read in its entirety as follows:

“Receivables Pool” means at any time the aggregation of all then outstanding Receivables sold or otherwise transferred by the Originators to the Seller.

(b) The reference to “Receivables” in the definition of Credit and Collection Policy is changed to “Pool Receivables”.

SECTION 3. Limited Waiver and Consent. The Purchasers hereby:

(a) waive the provisions of Section 5.3(o) of the Agreement to the extent necessary to permit execution and delivery of Amendment No. 1 to the Receivables Sale Agreement in substantially in the form of Exhibit A hereto, and authorize and direct the Agent to consent thereto;

(b) authorize and consent to the Agent’s consent to instruments tendered to it for its consent by the parties to the Receivables Sale Agreement as contemplated by said Amendment No. 1 so long as the Agent shall have received evidence satisfactory to it in its sole discretion that the Receivables to be thereby excluded from “Seller Receivables” (as defined in the Receivables Sale Agreement) would not be Eligible Receivables at such time under the Agreement; and

(c) authorize and consent to Agent’s execution and delivery of such further documents and instruments as may be requested of it and it may deem reasonably necessary or appropriate to confirm such exclusion of Receivables from Seller Receivables.

SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

SECTION 6. Effectiveness. This Amendment shall become effective on the first date on which the Agent shall have received counterparts hereof signed by each of the Required Purchasers, the Seller and the Servicer (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party).

2

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

CITICORP USA, INC., as Agent
By:	/s/ David Jaffe
Name:	David Jaffe
Title:	Director Vice President

EQUISTAR RECEIVABLES II, LLC, as Seller
By:	/s/ Charles L. Hall
Name:	Charles L. Hall
Title:	Vice President and Controller

EQUISTAR CHEMICALS, LP, as Servicer
By:	/s/ Charles L. Hall
Name:	Charles L. Hall
Title:	Vice President, Controller and Chief Accounting Officer

ALLIED IRISH BANKS P.L.C.
By:	/s/ John F. Farrace
Name:	John F. Farrace
Title:	Co-Head Leverage Finance
By:	/s/ Derrick Lynch
Name:	Derrick Lynch
Title:	Vice President

Amsouth Bank
By:	/s/ Bruce Kasper
Name:	Bruce Kasper
Title:	Attorney in Fact

Bank of America, N.A.
By:	/s/ Stephen King
Name:	Stephen King
Title:	Vice President

Calyon New York Branch
By:	/s/ Page Dillehunt
Name:	Page Dillehunt
Title:	Managing Director
By:	/s/ Michael Willis
Name:	Michael Willis
Title:	Director

F-1

Commerzbank AG, New York and Grand Cayman Branches.
By:	/s/ Andrew Campbell
Name:	Andrew Campbell
Title:	Senior Vice President
By:	/s/Andrew Kjoller
Name:	Andrew Kjoller
Title:	Vice President

GENERAL ELECTRIC CAPITAL CORPORATION
By:	/s/ Dwayne L. Coker
Name:	Dwayne L. Coker
Title:	Duly Authorized Signatory

GMAC COMMERCIAL FINANCE LLC
By:	/s/ Robert F. McIntyre
Name:	Robert F. McIntyre
Title:	Director

JPMorgan Chase Bank, N.A..
By:	/s/ Stacey Haimes
Name:	Stacey L. Haimes
Title:	Vice President

F-2

LASALLE BUSINESS CREDIT, LLC
By:	/s/ Jason T. Sylvester
Name:	Jason T. Sylvester
Title:	Vice President

NATIONAL CITY BUSINESS CREDIT, INC. (formerly known as National City Commercial Finance, Inc.)
By:	/s/ Anthony Alexander
Name:	Anthony Alexander
Title:	Vice President

RZB Finance LLC
By:	/s/ John A. Valiska
Name:	John A. Valiska
Title:	First Vice President
By:	/s/ Christoph Hoedl
Name:	Christoph Hoedl
Title:	Group Vice President

UBS LOAN FINANCE LLC
By:	/s/ Richard L. Tavrow
Name:	Richard L. Tavrow
Title:	Director
By:	/s/ Irja R. Otsa
Name:	Irja R. Otsa
Title:	Associate Director

F-3

UPS CAPITAL CORPORATION
By:	/s/ John P. Holloway
Name:	John P. Holloway
Title:	Director of Portfolio Management

WACHOVIA CAPITAL FINANCE
By:	/s/ M. Galovic Jr.
Name:	M. Galovic, Jr.
Title:	Vice President

WELLS FARGO FOOTHILL LLC
By:	/s/ Patrick McCormack
Name:	Patrick McCormack
Title:	Assistant Vice President

F-4

EX-4.7(D)

Exhibit 4.7(d)

AMENDMENT NO. 4

AMENDMENT dated as of September 25, 2006 to the RECEIVABLES PURCHASE AGREEMENT dated as of December 17, 2003 (as amended, the “Agreement”) among EQUISTAR RECEIVABLES II, LLC, a Delaware limited liability company (the “Seller”), EQUISTAR CHEMICALS, LP, a Delaware limited partnership (the “Servicer”), the PURCHASERS from time to time party thereto, CITICORP USA, INC., as co-asset agent and administrative agent for the Purchasers (the “Agent”), CREDIT SUISSE FIRST BOSTON, and JPMORGAN CHASE BANK, N.A. and WACHOVIA BANK, NATIONAL ASSOCIATION as co-documentations agents, and BANK OF AMERICA, N.A., as co-asset agent.

The parties hereto agree as follows:

SECTION 1. Defined Terms. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement has the meaning assigned to such term in the Agreement.

SECTION 2. Amended Definition. The definition of “Eligible Receivable” is hereby amended by (i) deleting the words “or, to the extent such Person is an Affiliate of any Originator, to LYONDELL-CITGO Refining LP or any of its subsidiaries” in the first paragraph thereof and (ii) deleting paragraph (c) thereof and inserting the word “[reserved;]” in the place thereof.

SECTION 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 4. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

SECTION 5. Effectiveness. This Amendment shall become effective on the first date on which the Agent shall have received counterparts hereof signed by each of the Purchasers, the Seller and the Servicer (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party).

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

CITICORP USA, INC., as Agent
By:	/s/ David Jaffe
Name:	David Jaffe
Title:	Director / Vice President
EQUISTAR RECEIVABLES II, LLC, as Seller
By:	/s/ Karen A. Twitchell
Name:	Karen A. Twitchell
Title:	Vice President and Treasurer
EQUISTAR CHEMICALS, LP, as Servicer
By:	/s/ Karen A. Twitchell
Name:	Karen A. Twitchell
Title:	Vice President and Treasurer
ALLIED IRISH BANKS PLC
By:	/s/ Martin S. Chin
Name:	Martin S. Chin
Title:	SVP

F-1

AmSouth Bank
By:	/s/ Bruce Kasper
Name:	Bruce Kasper
Title:	Attorney in Fact

BANK OF AMERICA, N.A.
By:	/s/ Stephen King
Name:	Stephen King
Title:	Vice President

THE BANK OF NEW YORK
By:	/s/ David Sunderwirth
Name:	David Sunderwirth
Title:	Vice President

Calyon New York Branch
By:	/s/ Dennis E. Petito
Name:	Dennis E. Petito
Title:	Managing Director
By:	/s/ Page Dillehunt
Name:	Page Dillehunt
Title:	Managing Director

Commerzbank AG, New York and Grand Cayman Branches
By:	/s/ Andrew Kjoller
Name:	Andrew Kjoller
Title:	Vice President
By:	/s/ Janet Lee
Name:	Janet Lee
Title:	Assistant Treasurer

F-2

Credit Suisse, Cayman Island Branch
By:	/s/ Thomas R. Cantello
Name:	Thomas R. Cantello
Title:	Vice President
By:	/s/ Brian T. Caldwell
Name:	Brian T. Caldwell
Title:	Director

GENERAL ELECTRIC CAPITAL CORPORATION
By:	/s/ Dwayne L. Coker
Name:	Dwayne L. Coker
Title:	Duly Authorized Signatory

GMAC COMMERCIAL FINANCE LLP
By:	/s/ Robert F. McIntrye
Name:	Robert F. McIntrye
Title:	Director

JPMORGAN CHASE BANK, N.A.
By:	/s/ Stacey Haimes
Name:	Stacey Haimes
Title:	Vice President

LaSalle Business Credit, LLC
By:	/s/ Jason T. Sylvester
Name:	Jason T. Sylvester
Title:	Vice President

F-3

Signed as a Deed by the undernoted Attorney of Lloyds TSB Commercial Finance Limited
By:	/s/ James Richard Grundy
Name:	James Richard Grundy
Title:	Credit Director
MERRILL LYNCH CAPITAL, a Division of Merrill Lynch Business Financial Services Inc.
By:	/s/ James Betz
Name:	James Betz
Title:	VP
National City Business Credit, Inc.
By:	/s/ Jeffrey W. Swartz
Name:	Jeffrey W. Swartz
Title:	Vice President
RZB Finance LLC
By:	/s/ John A. Valiska
Name:	John A. Valiska
Title:	First Vice President
By:	/s/ Christoph Hoedl
Name:	Christoph Hoedl
Title:	Group Vice President
Siemens Financial Services, Inc.
By:	/s/ Craig L. Johnson
Name:	Craig L. Johnson
Title:	VP. Credit & Operations, Risk Mgt.

F-4

UBS AG, STAMFORD BRANCH
By:	/s/ Richard L. Tavrow
Name:	Richard L. Tavrow
Title:	Director
By:	/s/ Irja R. Otsa
Name:	Irja R. Otsa
Title:	Associate Director

UPS CAPITAL CORPORATION
By:	/s/ Michael O’Neal
Name:	Michael O’Neal
Title:	Senior Credit Officer

Wachovia Capital Finance
By:	/s/ M. Galovic, Jr.
Name:	M. Galovic, Jr.
Title:	V.P.

Webster Business Credit Corporation
By:	/s/ Gordon Massave
Name:	Gordon Massave
Title:	AVP

Wells Fargo Foothill, LLC
By:	/s/ Patrick McCormack
Name:	Patrick McCormack
Title:	Vice President

F-5

EX-12

Exhibit 12

EQUISTAR CHEMICALS, LP

STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF

RATIO OF EARNINGS TO FIXED CHARGES

	Year Ended December 31,
Millions of dollars, except ratio data	2006		2005		2004		2003			2002
Income (loss) from continuing operations before income taxes	$	614	$	748	$	276	$	(339	)	$	(246	)
Fixed charges:
Interest expense, gross		217		227		227		215			205
Portion of rentals representative of interest		35		34		31		35			42
Total fixed charges before capitalized interest		252		261		258		250			247
Capitalized interest		—		—		—		—			—
Total fixed charges including capitalized interest		252		261		258		250			247
Earnings (losses)	$	866	$	1,009	$	534	$	(89	)	$	1
Ratio of earnings (losses) to fixed charges (a)		3.4		3.9		2.1		—			—

(a) In 2003 and 2002, earnings were insufficient to cover fixed charges by $339 million and $246 million, respectively.

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify that:

1. I have reviewed this annual report on Form 10-K of Equistar Chemicals, LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

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

Date: February 28, 2007	/s/ Dan F. Smith
	Dan F. Smith
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, T. Kevin DeNicola, Senior Vice President and Chief Financial Officer of Equistar Chemicals, LP, certify that:

1. I have reviewed this annual report on Form 10-K of Equistar Chemicals, LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

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

Date: February 28, 2007	/s/ T. Kevin DeNicola
	T. Kevin DeNicola
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2006 (the “Periodic Report”), I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: February 28, 2007	/s/ Dan F. Smith
	Dan F. Smith
	Chief Executive Officer

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

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2006 (the “Periodic Report”), I, T. Kevin DeNicola, Senior Vice President and Chief Financial Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: February 28, 2007	/s/ T. Kevin DeNicola
	T. Kevin DeNicola
	Senior Vice President and Chief Financial Officer

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

EX-99.1

Exhibit 99.1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Lyondell Chemical Company is responsible for establishing and maintaining adequate internal control over financial reporting. Lyondell’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Lyondell management assessed the effectiveness of Lyondell’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on its assessment, Lyondell’s management has concluded that Lyondell’s internal control over financial reporting was effective as of December 31, 2006 based on those criteria.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has audited management’s assessment of the effectiveness of Lyondell’s internal control over financial reporting as of December 31, 2006, as stated in their report that appears on the following page.

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Lyondell Chemical Company:

We have completed integrated audits of Lyondell Chemical Company’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Lyondell Chemical Company and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

As discussed in Note 2 to the consolidated financial statements, effective December 31, 2006, the Company changed its method of accounting for defined benefit pension and other postretirement plans.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

2

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Houston, Texas

February 28, 2007

3

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
Millions of dollars, except per share data	2006			2005			2004
Sales and other operating revenues:
Trade	$	20,894		$	16,907		$	5,821
Related parties		1,334			1,699			125
		22,228			18,606			5,946
Operating costs and expenses:
Cost of sales		19,772			16,494			5,464
Asset impairments		673			210			4
Selling, general and administrative expenses		620			543			287
Research and development expenses		94			91			41
Purchased in-process research and development		—			—			64
		21,159			17,338			5,860
Operating income		1,069			1,268			86
Interest expense		(631	)		(649	)		(463	)
Interest income		41			46			14
Other income (expense), net		36			(39	)		(11	)
Income (loss) before equity investments and income taxes		515			626			(374	)
Income from equity investments:
Houston Refining LP		73			123			303
Equistar Chemicals, LP		—			—			141
Other		5			1			7
		78			124			451
Income before income taxes		593			750			77
Provision for income taxes		407			219			23
Net income	$	186		$	531		$	54
Earnings per share:
Basic	$	0.75		$	2.16		$	0.29
Diluted	$	0.72		$	2.04		$	0.29

See Notes to the Consolidated Financial Statements.

4

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31,
Millions, except shares and par value data	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	446		$	593
Accounts receivable:
Trade, net		2,073			1,563
Related parties		95			114
Inventories		2,259			1,657
Prepaid expenses and other current assets		164			176
Deferred tax assets		109			203
Total current assets		5,146			4,306
Property, plant and equipment, net		9,147			6,530
Investments and long-term receivables:
Investment in PO joint ventures		778			776
Investment in and receivable from Houston Refining LP		—			186
Other		118			114
Goodwill, net		1,648			2,295
Other assets, net		1,009			882
Total assets	$	17,846		$	15,089
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	22		$	319
Accounts payable:
Trade		2,013			1,352
Related parties		83			101
Accrued liabilities		1,089			798
Total current liabilities		3,207			2,570
Long-term debt		8,018			5,974
Other liabilities		1,661			1,786
Deferred income taxes		1,598			1,571
Commitments and contingencies
Minority interests		174			180
Stockholders’ equity:
Common stock, $1.00 par value, 340,000,000 shares authorized, 249,764,306 and 247,876,385 shares issued, respectively		250			248
Additional paid-in capital		3,248			3,211
Retained (deficit)		(330	)		(292	)
Accumulated other comprehensive income (loss)		42			(136	)
Treasury stock, at cost, 793,736 and 826,151 shares, respectively		(22	)		(23	)
Total stockholders’ equity		3,188			3,008
Total liabilities and stockholders’ equity	$	17,846		$	15,089

See Notes to the Consolidated Financial Statements.

5

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
Millions of dollars	2006			2005			2004
Cash flows from operating activities:
Net income	$	186		$	531		$	54
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		805			729			289
Asset impairments		673			210			4
Equity investments –
Amounts included in net income		(78	)		(124	)		(451	)
Distributions of earnings		73			123			424
Deferred income taxes		42			142			19
Purchased in-process research and development		—			—			64
Debt prepayment premiums and charges		40			45			18
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(95	)		(156	)		42
Inventories		(236	)		(94	)		(137	)
Accounts payable		(53	)		292			(4	)
Other, net		(135	)		(104	)		32
Net cash provided by operating activities		1,222			1,594			354
Cash flows from investing activities:
Expenditures for property, plant and equipment		(400	)		(249	)		(70	)
Acquisition of Houston Refining LP and related payments, net of cash acquired		(2,505	)		—			—
Distributions from affiliates in excess of earnings		117			183			95
Contributions and advances to affiliates		(86	)		(148	)		(53	)
Cash received in acquisition of Millennium Chemicals Inc. and Equistar Chemicals, LP		—			—			452
Other		6			3			—
Net cash provided by (used in) investing activities		(2,868	)		(211	)		424
Cash flows from financing activities:
Issuance of long-term debt		4,357			100			4
Repayment of long-term debt		(2,677	)		(1,512	)		(319	)
Dividends paid		(223	)		(222	)		(127	)
Proceeds from stock option exercises		27			48			25
Other, net		7			6			1
Net cash provided by (used in) financing activities		1,491			(1,580	)		(416	)
Effect of exchange rate changes on cash		8			(14	)		4
Increase (decrease) in cash and cash equivalents		(147	)		(211	)		366
Cash and cash equivalents at beginning of period		593			804			438
Cash and cash equivalents at end of period	$	446		$	593		$	804

See Notes to the Consolidated Financial Statements.

6

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Millions, except shares	Common Stock					Series B Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Net Stockholders’ Equity			Comprehensive Income (Loss)
	Issued		Treasury
Balance, January 1, 2004	$	142	$	(66	)	$	37		$	1,571	$	(474	)	$	(54	)	$	1,156
Net income		—		—			—			—		54			—			54		$	54
Cash dividends ($0.90 per share)		—		—			—			—		(127	)		—			(127	)		—
Series B stock dividends, 1,784,439 shares		—		—			2			32		(34	)		—			—			—
Foreign currency translation, net of tax of $36		—		—			—			—		—			110			110			110
Minimum pension liability		—		—			—			—		—			1			1			1
Reissuance of 1,506,094 treasury shares under benefit plans		—		42			—			—		(19	)		—			23			—
Issuance of 477,677 shares of common stock under benefit plans		1		—			—			6		—			—			7			—
Acquisition of Millennium		63		—			—			1,524		—			—			1,587			—
Non-qualified stock option grants net of tax of $3		—		—			—			5		—			—			5			—
Conversion of Series B stock to common stock, 38,607,860 shares		39		—			(39	)		—		—			—			—			—
Derivative instruments		—		—			—			—		—			(1	)		(1	)		(1	)
Other		—		(4	)		—			5		—			—			1			—
Comprehensive income																				$	164
Balance, December 31, 2004	$	245	$	(28	)	$	—		$	3,143	$	(600	)	$	56		$	2,816
Net income		—		—			—			—		531			—			531		$	531
Cash dividends ($0.90 per share)		—		—			—			—		(222	)		—			(222	)		—
Foreign currency translation, net of tax of $17		—		—			—			—		—			(191	)		(191	)		(191	)
Reissuance of 30,764 treasury shares under benefit plans		—		1			—			—		—			—			1			—
Issuance of 3,334,472 shares of common stock under benefit plans including tax benefit of $19		3		—			—			64		—			—			67			—
Non-qualified stock option grants, net of tax of $1		—		—			—			3		—			—			3			—
Derivative instruments		—		—			—			—		—			(1	)		(1	)		(1	)
Other		—		4			—			1		(1	)		—			4			—
Comprehensive income																				$	339
Balance, December 31, 2005	$	248	$	(23	)	$	—		$	3,211	$	(292	)	$	(136	)	$	3,008
Net income		—		—			—			—		186			—			186		$	186
Cash dividends ($0.90 per share)		—		—			—			—		(223	)		—			(223	)		—
Foreign currency translation, net of tax of $19		—		—			—			—		—			172			172			172
Reissuance of 32,415 treasury shares under benefit plans		—		1			—			—		—			—			1			—
Issuance of 1,887,921 shares of common stock under benefit plan including tax benefit of $7		2		—			—			32		—			—			34			—
Non-qualified stock option grants, net of tax of $2		—		—			—			5		—			—			5			—
Minimum pension liability, net of tax of $23		—		—			—			—		—			60			60			60
Change in accounting for pension and other postretirement benefits, net of tax of $15		—		—			—			—		—			(54	)		(54	)		—
Other		—		—			—			—		(1	)		—			(1	)		—
Comprehensive income																				$	418
Balance, December 31, 2006	$	250	$	(22	)	$	—		$	3,248	$	(330	)	$	42		$	3,188

See Notes to the Consolidated Financial Statements.

7

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

		Page
1.	Description of the Company and Operations	91
2.	Summary of Significant Accounting Policies	91
3.	Business Acquisitions	94
4.	Goodwill and Other Asset Impairments	99
5.	Hurricane Effects	100
6.	Related Party Transactions	100
7.	Investment in PO Joint Ventures	102
8.	Investment in Equistar Chemicals, LP	103
9.	Investment in Houston Refining LP	105
10.	Accounts Receivable	106
11.	Inventories	107
12.	Property, Plant and Equipment, Goodwill and Other Assets	108
13.	Accounts Payable	110
14.	Accrued Liabilities	110
15.	Long-Term Debt	110
16.	Lease Commitments	116
17.	Financial Instruments and Derivatives	116
18.	Pension and Other Postretirement Benefits	118
19.	Income Taxes	123
20.	Commitments and Contingencies	127
21.	Stockholders’ Equity	131
22.	Per Share Data	134
23.	Share-Based Compensation	134
24.	Supplemental Cash Flow Information	137
25.	Segment and Related Information	137
26.	Subsequent Event	140
27.	Unaudited Quarterly Results	141
28.	Supplemental Guarantor Information	142

8

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Description of the Company and Operations

Lyondell Chemical Company, together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), is a global manufacturer of chemicals and plastics, a refiner of heavy, high-sulfur crude oil and a significant producer of fuel products. As a result of Lyondell’s purchase of its partner’s 41.25% equity interest in Houston Refining LP (formerly known as LYONDELL-CITGO Refining LP or “LCR”) and Lyondell’s resulting 100% ownership of Houston Refining LP (“Houston Refining”), the operations of Houston Refining are consolidated prospectively from August 16, 2006. Prior to August 16, 2006, Lyondell accounted for its investment in Houston Refining using the equity method (see Notes 3 and 9 for additional information). As a result of Lyondell’s acquisition of Millennium Chemicals Inc. (together with its consolidated subsidiaries, “Millennium”) and Lyondell’s resulting 100% ownership of Millennium and Equistar Chemicals, LP (together with its consolidated subsidiaries, “Equistar”) (see Note 3), the operations of Millennium and Equistar are consolidated prospectively from December 1, 2004.

The ethylene, co-products and derivatives (“EC&D”) segment includes: ethylene; co-products, such as propylene, butadiene and aromatics; and ethylene derivatives, including the ethylene oxide, ethylene glycol and polyethylene businesses of Equistar; and the Millennium acetyls business, including vinyl acetate monomer (“VAM”), acetic acid and methanol.

Through November 30, 2004, Lyondell’s EC&D operations, excluding acetyls, were conducted through its 70.5% ownership interest in Equistar, which was accounted for using the equity method (see Note 8). After November 30, 2004, Equistar became a wholly-owned subsidiary of Lyondell.

The propylene oxide and related products (“PO&RP”) segment includes: propylene oxide (“PO”); its co-products, styrene monomer (“SM” or “styrene”), and tertiary butyl alcohol (“TBA”), together with its derivatives, methyl tertiary butyl ether (“MTBE”), ethyl tertiary butyl ether (“ETBE”) and isobutylene; PO derivatives, including propylene glycol (“PG”), propylene glycol ethers (“PGE”) and butanediol (“BDO”); and toluene diisocyanate (“TDI”).

Through August 15, 2006, Lyondell’s refining segment operations were conducted through its joint venture ownership interest in Houston Refining (see Note 9). Lyondell accounted for its investment in Houston Refining using the equity method. Houston Refining produces refined petroleum products, including gasoline, jet fuel, ultra low sulfur diesel, aromatics and lubricants.

The inorganic chemicals segment includes Millennium’s titanium dioxide (“TiO₂”) and related products business. On February 26, 2007, Lyondell announced that it has signed an agreement for a proposed sale of Lyondell’s worldwide inorganic chemicals business (see Note 26).

2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Lyondell Chemical Company and its consolidated subsidiaries. Investments in joint ventures where Lyondell exerts a certain level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method. Under those circumstances, the equity method is used even though Lyondell’s ownership percentage may exceed 50%.

9

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies – (Continued)

Revenue Recognition—Revenue from product sales is recognized at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if Lyondell retains the risk of loss during shipment. For products that are shipped on a consignment basis, revenue is recognized when the customer uses the product. Costs incurred in shipping products sold are included in cost of sales. Billings to customers for shipping costs are included in sales revenue.

Cash and Cash Equivalents—Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Lyondell’s policy is to invest cash in conservative, highly rated instruments and to limit the amount of credit exposure to any one institution.

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.

Allowance for Doubtful Accounts—Lyondell establishes provisions for doubtful accounts receivable based on management’s estimates of amounts that it believes are unlikely to be collected. Collectability of receivables is reviewed and the allowance for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers.

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for substantially all inventories, except for materials and supplies, which are valued using the average cost method.

Inventory exchange transactions, which involve fungible commodities 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 LIFO valuation policy.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 5 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information system equipment. 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.

Long-Lived Asset Impairment—Lyondell evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value.

Goodwill—Goodwill represents the excess of purchase price paid over the fair value assigned to the net tangible and identifiable intangible assets of acquired businesses. Goodwill is reviewed for impairment at least annually.

Identifiable Intangible Assets—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 10 years.

10

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies – (Continued)

Costs of maintenance and repairs exceeding $5 million incurred as part of turnarounds of major units at Lyondell’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, predominantly 4 to 7 years. These costs are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Other intangible assets are carried at cost or amortized cost and primarily consist of deferred debt issuance costs, patents and license costs, capacity reservation fees and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or over the term of the related agreement, if shorter.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include current and former plant sites and other remediation sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Only ongoing operating and monitoring costs, the timing of which can be determined with reasonable certainty, are discounted to present value. Future legal costs associated with such matters, which generally are not estimable, are not included in these liabilities.

Legal Costs—Lyondell expenses legal costs, including those incurred in connection with loss contingencies, as incurred.

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, as well as the net tax effects of net operating loss carryforwards. 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.

Minority Interests—Minority interests primarily represent the interests of unaffiliated investors in a partnership that owns Lyondell’s PO/SM II plant at the Channelview, Texas complex, a partnership that owns the LaPorte Methanol Company plant in LaPorte, Texas, and in Lyondell’s TiO₂ operations in Brazil. The minority interests share of the partnerships’ income or loss is reported in “Other income, net” in the Consolidated Statements of Income.

Foreign Currency Translation—Lyondell operates primarily in three functional currencies: the euro for operations in Europe, the real for operations in Brazil, and the U.S. dollar for the U.S. and other locations, including manufacturing and marketing operations in Australia, product sales of which are generally in U.S. dollars.

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 periods. Actual results could differ from those estimates.

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2006.

11

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Summary of Significant Accounting Policies—(Continued)

Accounting and Reporting Changes—Effective December 31, 2006, Lyondell adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and 132R, which primarily requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status through comprehensive income in the year in which changes occur. Lyondell’s application of SFAS No. 158 as of December 31, 2006 resulted in increases of $22 million and $50 million in its current and long-term benefit liabilities, respectively, an increase of $3 million in other assets, a decrease of $15 million in deferred tax liabilities and an increase of $54 million in accumulated other comprehensive loss in its consolidated balance sheet as of December 31, 2006. (See Note 18.)

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. The new standard defines fair value, establishes a framework for its measurement and expands disclosures about such measurements. For Lyondell, the standard will be effective beginning in 2008. Lyondell does not expect the application of SFAS No. 157 to have a material effect on its consolidated financial statements.

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, to clarify the accounting for uncertain income tax positions. FIN No. 48 prescribes, among other things, a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position. The provisions of FIN No. 48 will apply to Lyondell beginning in 2007. Lyondell does not expect the application of FIN No. 48 to have a material effect on its consolidated financial statements.

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

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

3. Business Acquisitions

Acquisition of Houston Refining LP—On August 16, 2006, Lyondell purchased CITGO Petroleum Corporation’s (“CITGO”) 41.25% ownership interest in Houston Refining to, among other things, take advantage of market conditions in refining and Houston Refining’s cash flows. Prior to the acquisition, Lyondell held a 58.75% equity-basis investment in Houston Refining (see Note 9) and, as a result of the acquisition, Houston Refining became a wholly-owned, consolidated subsidiary of Lyondell from August 16, 2006. Houston Refining owns and operates a full conversion refinery located in Houston, Texas, which has the ability to process approximately 268,000 barrels per day of lower cost, heavy, high sulfur crude oil.

12

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Business Acquisitions – (Continued)

Lyondell’s acquisition of CITGO’s 41.25% interest was financed using $2,601 million of the proceeds of a $2.65 billion seven-year term loan (see Note 15). The $2,601 million consisted of $43 million of debt issue costs and $2,558 million of cash payments consisting of: $1,629 million for acquisition of the 41.25% interest in Houston Refining, the acquisition of working capital of $145 million, $445 million to repay and terminate Houston Refining’s $450 million term loan facility, including accrued interest of $4 million, $39 million to repay a loan payable to CITGO, including $4 million of accrued interest, and $300 million related to the termination of the previous crude supply agreement. As part of the transaction, Houston Refining and PDVSA Petróleo, S.A. (“PDVSA Oil”) terminated the previous crude supply agreement and entered into a new crude oil contract for 230,000 barrels per day of heavy crude oil, which runs through 2011 and year to year thereafter (see Note 20).

The unaudited pro forma combined historical results of Lyondell and Houston Refining for the years ended December 31, 2006 and 2005, giving effect to the purchase as though the transaction were consummated and the new crude oil contract had been in place as of the beginning of each period presented, are as follows:

Millions of dollars, except per share data	2006		2005
Sales and other operating revenues	$	26,977	$	24,004
Net income		430		664
Basic earnings per share		1.74		2.71
Diluted earnings per share		1.65		2.56

Pro forma results for all periods presented above include a pretax charge of $300 million, or $195 million after tax, for the cost of terminating the crude supply agreement. Lyondell’s actual results for the year ended December 31, 2006 include a pretax charge of $176 million, or $114 million after tax, representing Lyondell’s 58.75% share of the $300 million cost of terminating the crude supply agreement.

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

Lyondell’s acquisition of CITGO’s 41.25% interest in Houston Refining was accounted for as a step-acquisition. Therefore, 41.25% of each Houston Refining asset and liability was recorded at fair value as of August 16, 2006 and Lyondell’s previous 58.75% interest in each Houston Refining asset and liability was reflected at its historical carrying value.

The following table provides information regarding the components of the purchase price for acquisition of CITGO’s 41.25% interest in Houston Refining:

Millions of dollars
Base purchase price of 41.25% interest	$	1,629
Working capital acquired		145
Total cash purchase price of 41.25% interest		1,774
Estimated 2007 reimbursement of CITGO taxes		97
Purchase price of 41.25% interest	$	1,871

13

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Business Acquisitions – (Continued)

The components of the step acquisition of Houston Refining were as follows:

Millions of dollars
Historical carrying value of Lyondell’s previous net investment:
Investment in Houston Refining	$	(144	)
Receivable from Houston Refining and accrued interest		1,040
Purchase price of 41.25% interest		1,871
Total purchase price of Houston Refining	$	2,767

The total purchase price of Houston Refining was allocated to the assets and liabilities acquired as follows:

Millions of dollars
Cash and cash equivalents	$	53
Other current assets		647
Property, plant and equipment		2,767
Other assets		101
Current liabilities		(735	)
Other liabilities		(66	)
Total allocated purchase price of Houston Refining	$	2,767

The following represent the elements of cash flow in the year ended December 31, 2006 for the transactions related to the acquisition of Houston Refining:

Millions of dollars
Total cash purchase price of 41.25% interest	$	1,774
Related payments - advances to Houston Refining:
To fund termination of crude supply agreement		300
To fund repayment of bank loan and accrued interest		445
To fund repayment of CITGO partner loan and accrued interest		39
Total cash payments		2,558
Cash and cash equivalents acquired		(53	)
Acquisition of Houston Refining and related payments, net of cash acquired	$	2,505

In future periods, adjustments to the allocation may result from resolution of the estimated amount of the tax reimbursement. Management does not expect the finalization of the purchase price allocation to have a material effect.

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

14

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Business Acquisitions – (Continued)

The results of operations of Millennium and Equistar are included in Lyondell’s Consolidated Statements of Income prospectively from December 1, 2004. Prior to December 1, 2004, Lyondell’s interest in Equistar was accounted for using the equity method of accounting (see Note 8). The aggregate purchase price was $1,469 million, including the 63.1 million shares of Lyondell common stock valued at $1,438 million, payment of transaction costs of $20 million and the fair value of employee stock options of approximately $11 million. The value of the 63.1 million shares of Lyondell common stock issued was determined based on a Lyondell common stock share price of $22.78, which was computed using the average closing price of Lyondell common stock for the period commencing two trading days prior to and ending two trading days after October 5, 2004, the date on which the exchange ratio became fixed without subsequent revision.

The unaudited pro forma combined historical results of Lyondell, Millennium and Equistar for the year ended December 31, 2004, giving effect to the acquisition, assuming the transaction was consummated as of the beginning of 2004 are as follows:

Millions of dollars, except per share data
Sales and other operating revenues	$	15,170
Net income		127
Basic earnings per share		0.53
Diluted earnings per share		0.52

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

The fair value of the Millennium assets and liabilities acquired at the date of the acquisition were as follows:

Millions of dollars
Cash and cash equivalents	$	367
Other current assets		862
Property, plant and equipment		901
Goodwill		1,079
Investment in Equistar		1,319
Other assets		113
Purchased in-process research and development		60
Current liabilities		(485	)
Long-term debt		(1,511	)
Other liabilities		(678	)
Deferred taxes		(378	)
Minority interests		(41	)
Convertible debentures – additional paid-in capital		(143	)
Investment in treasury stock		4
Total allocated purchase price	$	1,469

15

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Business Acquisitions – (Continued)

Based upon additional information received during 2005, the fair values of the assets and liabilities acquired were adjusted, with corresponding adjustment to goodwill as summarized in Note 12. Any changes to the estimates of fair value that would result from information obtained subsequent to 2005, other than information relating to settlement of preacquisition income tax contingencies, would not result in adjustment of the accounting for Lyondell’s acquisition of Millennium and, therefore, would be included in Lyondell’s results of operations. No goodwill that would be deductible for income tax purposes was created by the acquisition.

As a result of the acquisition of Millennium, Lyondell owns 100% of Equistar prospectively from December 1, 2004. The acquisition of Equistar through Lyondell’s contribution of assets for its original 41% ownership interest, acquisition of a 29.5% interest from Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) on August 22, 2002, and acquisition of the remaining 29.5% interest through Lyondell’s acquisition of Millennium, was accounted for as a step-acquisition. As a result, 29.5% of each Equistar asset and liability was recorded at fair value as of the date the acquisition was completed, 29.5% of each Equistar asset and liability was recorded at an adjusted book value as of the date the acquisition was completed, based on fair value as of August 22, 2002, and the remaining 41% interest was reflected at its historical carrying value.

The following table provides information regarding the Equistar purchase price and the fair value of the Equistar assets and liabilities acquired at the date of the acquisition:

Millions of dollars
Historical carrying value of Lyondell’s original asset contribution	$	339
Carrying value of Lyondell’s 29.5% interest in Equistar purchased from Occidental		646
Fair value of Millennium’s 29.5% interest in Equistar		1,319
Total purchase price	$	2,304
Cash	$	85
Other current assets		1,660
Property, plant and equipment, net		3,709
Goodwill		95
Investments		60
Other assets		337
Purchased in-process research and development		4
Current liabilities		(853	)
Long-term debt		(2,359	)
Other liabilities		(434	)
Total allocated purchase price	$	2,304

The fair value of Millennium’s 29.5% interest in Equistar as of November 30, 2004 was calculated based on the equity consideration issued for the interest acquired from Occidental on August 22, 2002, adjusted for changes in the Lyondell common stock price at that date through November 30, 2004, deferred tax liabilities of $260 million, and a premium proportionate to the premium paid in Lyondell’s purchase of Millennium. Lyondell determined that the August 22, 2002 transaction, representing an observable transaction in the marketplace, was the best available evidence to determine the fair value of Millennium’s investment in Equistar. Lyondell considered all available information, including market multiples and discounted cash flow analyses, to verify the appropriateness of Lyondell’s estimate of the fair value of Millennium’s 29.5% interest in Equistar based on the August 22, 2002 transaction.

16

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Business Acquisitions – (Continued)

Approximately $64 million, or less than 5% of the Millennium purchase price, was allocated to purchased in-process research and development (“IPR&D”) of Millennium and Equistar. The estimated fair value of IPR&D was developed using probable discounted cash flows on a project-by-project basis. The activities represented by these projects will be continued by Lyondell, and have no alternative future use. Accordingly, Lyondell’s results of operations for 2004 included a charge of $64 million for the value of the acquired IPR&D.

4. Goodwill and Other Asset Impairments

Lyondell’s evaluation of strategic alternatives for its worldwide inorganic chemicals business, which resulted in the signing of an agreement for the proposed sale of the inorganic chemicals business on February 23, 2007 (see Note 26), indicated that the carrying values of goodwill and certain software costs associated with the inorganic chemicals business segment were impaired at December 31, 2006, based on the proposed sale and the value to be received for the business. Accordingly, Lyondell’s 2006 earnings reflected a charge of $545 million to recognize impairment of the carrying value of the goodwill and $7 million to recognize the impairment of the carrying value of the software costs. The impairment of goodwill has no tax effect.

Lyondell’s 2006 earnings reflect a pretax charge of $106 million for impairment of the net book value of its idled Lake Charles, Louisiana ethylene facility. In the third quarter of 2006, Lyondell undertook a study of the feasibility, cost and time required to restart the Lake Charles ethylene facility. As a result, management determined that restarting the facility would not be justified. The remaining net book value of the related assets of $10 million represents an estimate, based on probabilities, of alternative-use value. Lyondell does not expect to incur any significant future costs with respect to the facility.

Lyondell’s 2005 earnings reflect a pretax charge of $195 million for impairment of the net book value of its Lake Charles, Louisiana TDI plant and related assets. The following table summarizes estimates of additional charges related to the Lake Charles TDI facility that Lyondell has recognized or expects to recognize subsequent to September 30, 2005 as well as actual costs incurred through December 31, 2006.

Millions of dollars	Facility Costs			Employee Termination Benefits			Other Costs			Total
Estimates of charges to be recognized subsequent to September 30, 2005	$	22		$	14		$	8		$	44
Amounts settled during the years ended December 31:
2005		(6	)		—			(3	)		(9	)
2006		(4	)		(13	)		(1	)		(18	)
Accrued liabilities as of December 31, 2006		—			(1	)		—			(1	)
Estimate as of December 31, 2006 of remaining future charges	$	12		$	—		$	4		$	16

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

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

17

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Goodwill and Other Asset Impairments – (Continued)

In Lyondell’s accounting for the acquisition of Millennium in 2004, no value was assigned to the property, plant and equipment at Millennium’s Le Havre, France TiO₂ manufacturing plant. Capital expenditures at this plant of $15 million, $15 million and $4 million for the years 2006, 2005 and 2004, respectively, were reflected in impairment charges. At December 31, 2006, the carrying value of the property, plant and equipment at the Le Havre manufacturing plant was zero.

5. Hurricane Effects

During 2005, two major hurricanes impacted the chemical and related industries in the coastal and off-shore regions of the Gulf of Mexico. Net income in 2005 reflected charges totaling $58 million, before tax, representing Lyondell’s exposure to industry losses expected to be underwritten by industry insurance consortia, primarily resulting from hurricane damages.

As a result of Hurricane Rita, Lyondell and Houston Refining also incurred various costs that are subject to insurance reimbursements. Such costs include those incurred in conjunction with suspending operations at substantially all of Lyondell’s Gulf Coast plants and at the refinery, minor damage to facilities, and costs to restore operations. Net income in 2005 included $24 million of such costs incurred by Lyondell, of which all but a $5 million deductible under the relevant insurance policies are subject to reimbursement through insurance. For Houston Refining, similar costs totaled $18 million, of which Lyondell’s proportionate share was $11 million. Houston Refining experienced problems in restarting a major production unit that was shut down in connection with the hurricane, resulting in a significant reduction in crude oil processing rates during the fourth quarter 2005 until the unit was restored to normal operations in December 2005. Houston Refining’s hurricane-related costs and business interruption claims are subject to a deductible of $50 million per incident under the relevant insurance policies. During 2006, Lyondell recognized a benefit of $14 million for insurance reimbursements of $20 million representing a partial settlement of outstanding claims of Houston Refining, net of amounts paid to CITGO. In addition, in 2006, Lyondell recognized a $1 million benefit from insurance reimbursements related to Lyondell’s plants. No benefits were recognized in 2005. Lyondell’s benefit from any future insurance recoveries by Houston Refining related to these events will represent its previous 58.78% share of Houston Refining.

6. Related Party Transactions

Lyondell conducts transactions with Occidental, which is considered a related party. As of December 31, 2006, and giving effect to Occidental’s January 26, 2007 exercise of its warrant to purchase Lyondell common stock, Occidental owned 8.5% of Lyondell, and had one representative on Lyondell’s Board of Directors.

Lyondell also conducts transactions with Houston Refining which, prior to Lyondell’s August 16, 2006 purchase of its partner’s 41.25% interest in Houston Refining (see Notes 3 and 9), represented an equity investment.

18

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Related Party Transactions – (Continued)

Prior to the November 30, 2004 acquisition of Millennium and Equistar, Lyondell conducted transactions with Equistar, and Equistar conducted transactions with Millennium. These transactions are continuing; however, subsequent to November 30, 2004, these transactions are eliminated in the Consolidated Financial Statements of Lyondell. Occidental makes significant purchases of raw materials from Equistar, and Equistar leases its Lake Charles ethylene facility and the land related thereto and certain railcars from Occidental. In addition, Equistar, Millennium and Houston Refining make purchases of product from Occidental. Subsequent to November 30, 2004, transactions between Equistar, Millennium and Occidental are reported as Lyondell related party transactions. Subsequent to August 16, 2006, transactions between Houston Refining and Occidental are reported as Lyondell related party transactions.

Product Transactions with Houston Refining—Lyondell has various service and cost sharing arrangements with Houston Refining. Lyondell’s subsidiary, Equistar, has product sales and raw material purchase agreements with Houston Refining. Certain ethylene co-products are sold by Equistar to Houston Refining for processing into gasoline and certain refined products are sold by Houston Refining to Equistar as raw materials. Equistar also has processing and storage arrangements with Houston Refining and provides certain marketing services for Houston Refining. All of these agreements are on terms generally representative of prevailing market prices.

Product Transactions with Occidental—Lyondell’s subsidiary, Equistar, and Occidental entered into an ethylene sales agreement on May 15, 1998, which was amended effective April 1, 2004, pursuant to which Occidental agreed to purchase a substantial amount of its ethylene raw material requirements from Equistar. Either party has the option to “phase down” volumes over time. However, a “phase down” cannot begin until January 1, 2014 and the annual minimum requirements cannot decline to zero prior to December 31, 2018, unless certain specified force majeure events occur. In addition to the sales of ethylene, from time to time Equistar has made sales of ethers and glycols to Occidental, and Equistar has purchased various other products from Occidental, all at market-related prices. Lyondell’s subsidiary, Millennium, also purchases sodium silicate and chlorine, and Houston Refining purchases caustic soda from Occidental. All of these agreements are on terms generally representative of prevailing market prices.

See Notes 8 and 9 for additional discussion of related party transactions.

19

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Related Party Transactions – (Continued)

Related party transactions are summarized as follows:

	For the year ended December 31,
Millions of dollars	2006		2005		2004
Lyondell billed related parties for:
Sales of products and processing services–
Houston Refining	$	552	$	944	$	82
Occidental		782		755		73
Equistar		—		—		48
Shared services and shared site agreements–
Equistar		—		—		158
Houston Refining		7		6		3
Lyondell was billed by related parties for:
Purchases of products and processing services–
Houston Refining	$	514	$	394	$	46
Occidental		59		27		1
Equistar		—		—		907
Shared services, transition and lease agreements–
Occidental		7		7		1
Equistar		—		—		18
Houston Refining		1		—		—

The fluctuations in the activity levels during the three-year period in the above table are due primarily to the consolidation of Houston Refining beginning August 16, 2006 and the consolidation of Millennium and Equistar beginning December 1, 2004.

7. Investment in PO Joint Ventures

In March 2000, Lyondell, together with Bayer AG and Bayer Corporation (collectively “Bayer”), entered into a U.S. PO manufacturing joint venture (the “U.S. PO Joint Venture”) and a separate joint venture for certain related PO technology (the “PO Technology Joint Venture”). Lyondell contributed approximately $1.2 billion of assets at historical book value to the joint ventures, and allocated $522 million of that book value to the partnership interest sold to Bayer. Bayer’s ownership interest represents ownership of an in-kind portion of the PO production of the U.S. PO Joint Venture. Bayer’s 2006 share of PO production was 1.6 billion pounds. Lyondell takes in kind the remaining PO production and all co-product (SM and TBA) production from the U.S. PO Joint Venture.

In December 2000, Lyondell and Bayer formed a separate joint venture (the “European PO Joint Venture”), for the construction of a world-scale PO/SM plant at Maasvlakte near Rotterdam, The Netherlands. Lyondell and Bayer each have a 50% interest and bore 50% of the plant construction costs. The Maasvlakte PO/SM plant began production in the fourth quarter 2003. Lyondell and Bayer each are entitled to 50% of the PO and SM production of the European PO Joint Venture.

20

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. Investment in PO Joint Ventures – (Continued)

Lyondell and Bayer do not share marketing or product sales under either the U.S. PO Joint Venture or European PO Joint Venture (collectively, the “PO Joint Ventures”). Lyondell operates the PO Joint Ventures’ plants and arranges and coordinates the logistics of product delivery. The partners share in the cost of production and logistics 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 statements of cash flows. Lyondell’s investment in the PO Joint Ventures 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 Ventures. Lyondell’s contributions to the PO Joint Ventures are reported as “Contributions and advances to affiliates” in the consolidated statements of cash flows. Total assets of the PO Joint Ventures, primarily property, plant and equipment, were $1.7 billion at both December 31, 2006 and 2005, respectively. Changes in Lyondell’s investment in 2006 and 2005 are summarized as follows:

	U.S. PO Joint Venture			European PO Joint Venture			Total PO Joint Ventures
Investment in PO joint ventures – January 1, 2005	$	541		$	297		$	838
Cash contributions, net		10			10			20
Depreciation and amortization		(33	)		(12	)		(45	)
Effect of exchange rate changes		—			(37	)		(37	)
Investment in PO joint ventures – December 31, 2005		518			258			776
Cash contributions, net		22			—			22
Depreciation and amortization		(36	)		(13	)		(49	)
Effect of exchange rate changes		—			29			29
Investment in PO joint ventures – December 31, 2006	$	504		$	274		$	778

8. Investment in Equistar Chemicals, LP

As a result of Lyondell’s acquisition of Millennium, Equistar became a wholly-owned subsidiary of Lyondell as of December 1, 2004. Prior to December 1, 2004, Lyondell accounted for its 70.5% interest in Equistar using the equity method of accounting because of Lyondell’s and Millennium’s joint control of certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of debt and the appointment of executive management of the partnership. As a partnership, Equistar is not subject to federal income taxes.

21

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Investment in Equistar Chemicals, LP – (Continued)

Summarized financial information for Equistar for the year ended December 31, 2004 follows:

Millions of dollars
STATEMENTS OF INCOME
Sales and other operating revenues	$	9,316
Cost of sales		8,583
Selling, general and administrative expenses		205
Research and development expense		34
Operating income		494
Interest expense, net		220
Other income, net		2
Net income	$	276

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

Prior to November 30, 2004, Lyondell and Equistar entered into various agreements expiring in 2013 and 2014 under which Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar. As a result of the acquisition of Millennium, from December 1, 2004, such transactions are eliminated in the consolidation of Lyondell and Equistar. Equistar’s sales to and purchases of product from Lyondell were approximately $1,004 million and $54 million, respectively, for the year ended December 31, 2004.

Through December 31, 2004, Equistar acted as sales agent for the methanol products of Lyondell. Equistar also provided operating and other services for Lyondell including the lease to Lyondell by Equistar of the real property on which the methanol plant was located for which Equistar billed Lyondell approximately $6 million in 2004.

Sales by Equistar to Houston Refining, primarily of certain ethylene co-products and MTBE and processing services, were approximately $751 million in the year ended December 31, 2004. Purchases by Equistar from Houston Refining, primarily of refined products, during the year ended December 31, 2004 totaled approximately $425 million.

Equistar and Occidental entered into an ethylene sales agreement on May 15, 1998 (see Note 6) under which Occidental agreed to purchase a substantial amount of its ethylene raw material requirements from Equistar. In addition to the sales of ethylene, from time to time Equistar has made sales of ethers and glycols to Occidental, and Equistar has purchased various other products from Occidental, all at market-related prices. Equistar’s sales to and purchases from Occidental were approximately $634 million and $3 million, respectively, in the year ended December 31, 2004. Equistar also paid Occidental approximately $8 million in 2004 for subleases of certain railcars (see Note 16). In addition, Equistar leases its Lake Charles ethylene facility and the land related thereto from Occidental (see Note 4).

22

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Investment in Equistar Chemicals, LP – (Continued)

Under a shared services agreement between Lyondell and Equistar, Lyondell provides office space and various services to Equistar, including information technology, sales and marketing, supply chain, and other administrative and support services. Lyondell charges Equistar for its share of the cost of such services. Direct costs, incurred exclusively for Equistar, are also charged to Equistar. Billings by Lyondell to Equistar were approximately $182 million for the year ended December 31, 2004. Costs related to a limited number of shared services, primarily engineering, were formerly incurred by Equistar on behalf of Lyondell. In such cases, Equistar charged Lyondell for its share of such costs. Billings by Equistar to Lyondell were approximately $22 million for the year ended December 31, 2004.

9. Investment in Houston Refining LP

Through August 15, 2006, Lyondell’s refining operations were conducted through its 58.75% interest in Houston Refining. On August 16, 2006, Lyondell purchased CITGO’s 41.25% interest in Houston Refining, and, as a result, owns 100% of Houston Refining (see Note 3).

Because the partners jointly controlled certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of debt and the appointment of executive management of the partnership, Lyondell accounted for its investment in Houston Refining using the equity method through August 15, 2006.

Summarized financial information for Houston Refining follows:

Millions of dollars	December 31, 2005
BALANCE SHEETS
Total current assets	$	418
Property, plant and equipment, net		1,328
Other assets		86
Total assets	$	1,832
Current liabilities	$	805
Long-term debt		439
Loans payable to partners		264
Other liabilities		113
Partners’ capital		211
Total liabilities and partners’ capital	$	1,832

23

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Investment in Houston Refining LP – (Continued)

Millions of dollars	For the period January 1 through August 15, 2006			For the year ended December 31,
				2005			2004
STATEMENTS OF INCOME
Sales and other operating revenues	$	5,710		$	6,741		$	5,603
Cost of sales		5,223			6,458			5,028
Termination of crude supply agreement		300			—			—
Selling, general and administrative expenses		42			51			59
Operating income		145			232			516
Interest expense, net		(31	)		(38	)		(30	)
Other income		—			—			14
Net income	$	114		$	194		$	500

As a partnership, Houston Refining is not subject to federal income taxes. Houston Refining’s selling, general and administrative expenses for the period ended August 15, 2006 included an $8 million charge representing reimbursement to Lyondell of legal fees and expenses paid by Lyondell on behalf of Houston Refining in connection with the settlement discussed below.

Lyondell’s equity in earnings of Houston Refining for the year ended December 31, 2006 was reduced by a $176 million charge representing its 58.75% share of the $300 million cost to terminate Houston Refining’s previous crude supply agreement (See Note 3). For the year ended December 31, 2006, Lyondell’s income also included $74 million in “Other income, net” representing net payments received by Lyondell, including reimbursement of legal fees and expenses from Houston Refining, in settlement of all disputes among Lyondell, CITGO and Petróleos de Venezuela, S.A. (“PDVSA”) and their respective affiliates. See also the “Crude Supply Agreement” section of Note 20.

Lyondell’s income from its investment in Houston Refining prior to August 16, 2006 consisted of Lyondell’s share of Houston Refining’s net income and accretion of Lyondell’s investment in Houston Refining up to its underlying equity in Houston Refining’s net assets.

Sales from Houston Refining to Equistar, primarily of refined products, were approximately $425 million for the year ended December 31, 2004. Purchases by Houston Refining from Equistar, primarily of certain ethylene co-products and MTBE and processing services, during the year ended December 31, 2004 totaled approximately $751 million.

10. Accounts Receivable

Lyondell sells its products primarily to other industrial concerns in the petrochemicals, coatings 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 Sheets as a reduction of accounts receivable, totaled $11 million and $22 million at December 31, 2006 and 2005, respectively. The Consolidated Statements of Income included provisions for doubtful accounts of $3 million in 2006, $5 million in 2005 and $1 million in 2004.

24

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Accounts Receivable – (Continued)

Lyondell has two accounts receivable sales facilities totaling $750 million, which mature in November 2010, maintained by its wholly-owned subsidiary, Equistar, and by Lyondell Chemical Company. Pursuant to these facilities, Lyondell sells, through two wholly-owned, bankruptcy-remote subsidiaries, on an ongoing basis and without recourse, interests in pools of domestic accounts receivable to financial institutions participating in the facilities. Lyondell is responsible for servicing the receivables.

Lyondell amended its $150 million facility in 2004, increasing it from $100 million to $150 million; in November 2005, extending the maturity to November 2010; and in August 2006 and November 2006, primarily to exclude Millennium from certain events-of-default provisions, to address certain other changes and to conform the accounts receivable sales facility to Lyondell Chemical Company’s new credit facility. The facility currently permits the sale of up to $135 million of total interests in eligible domestic accounts receivable, which amount would decline by $35 million if Lyondell Chemical Company’s credit facility were fully drawn. The facility is subject to substantially the same covenants as the credit facility (see Note 15).

The facility maintained by Equistar also was amended in November 2005, increasing the commitment under the facility from $450 million to $600 million and extending the maturity to November 2010. The facility is subject to substantially the same minimum unused availability requirements and covenant requirements as Equistar’s $400 million inventory-based revolving credit facility, which also is secured by a pledge of accounts receivable (see Note 15).

The amount of the interests in the pools of receivables permitted to be sold is determined by formulae. Accounts receivable in the Consolidated Balance Sheets are reduced by the sales of interests in the pools. Upon termination of the facilities, cash collections related to accounts receivable then in the pools would first be applied to the respective outstanding interests sold. Increases and decreases in the amounts sold are reflected in operating cash flows in the Consolidated Statements of Cash Flows, representing collections of sales revenue. Fees related to the sales are included in “Selling, general and administrative expenses” in the Consolidated Statements of Income. The aggregate amounts of outstanding receivables sold under the facilities were $100 million and $275 million as of December 31, 2006 and 2005.

Prior to January 2006, discounts were offered to certain customers for early payment for product. As a result, some receivable amounts were collected in December 2005 and 2004, respectively, that otherwise would have been expected to be collected in January 2006 and 2005, respectively. This included collections of $84 million and $66 million in December 2005 and 2004, respectively, related to receivables from Occidental.

11. Inventories

Inventories consisted of the following components at December 31:

Millions of dollars	2006		2005
Finished goods	$	1,278	$	985
Work-in-process		191		118
Raw materials		547		338
Materials and supplies		243		216
Total inventories	$	2,259	$	1,657

The increase in inventories in 2006 reflects the consolidation of Houston Refining (see Note 3).

25

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Inventories – (Continued)

At December 31, 2006, approximately 92% of inventories, excluding materials and supplies, were valued using the LIFO method.

The excess of the current replacement cost over book value of those inventories that are carried at cost using the LIFO method was approximately $1,061 million and $709 million at December 31, 2006 and 2005, respectively.

During 2006, inventories carried under the LIFO method of inventory accounting were reduced, which resulted in a $19 million pretax benefit to income.

12. Property, Plant and Equipment, Goodwill and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

Millions of dollars	2006			2005
Land	$	137		$	125
Manufacturing facilities and equipment		12,797			9,119
Construction in progress		427			215
Total property, plant and equipment		13,361			9,459
Less accumulated depreciation		(4,214	)		(2,929	)
Property, plant and equipment, net	$	9,147		$	6,530

Maintenance and repair expenses were $648 million, $552 million and $149 million for the years ended December 31, 2006, 2005 and 2004, respectively. No interest was capitalized to property, plant and equipment during 2006, 2005 and 2004.

The following table summarizes the changes to Lyondell’s goodwill during 2005 and 2006 by reportable segment (see Notes 1 and 25).

Millions of dollars	EC&D			PO&RP			Inorganic Chemicals			Total
Goodwill at January 1, 2005	$	270		$	1,080		$	875		$	2,225
Adjustments to preliminary purchase price allocation related to November 30, 2004 acquisition of Millennium		11			—			68			79
Settlement of income tax issues related to 1998 acquisition of ARCO Chemical Company		—			(9	)		—			(9	)
Goodwill at December 31, 2005	$	281		$	1,071		$	943		$	2,295
Impairment		—			—			(545	)		(545	)
Settlement of income tax issues related to acquisitions of Millennium and ARCO Chemical Company		(5	)		(15	)		(82	)		(102	)
Goodwill at December 31, 2006	$	276		$	1,056		$	316		$	1,648

26

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Property, Plant and Equipment, Goodwill and Other Assets – (Continued)

Goodwill for the PO&RP segment is shown net of accumulated amortization of $11 million through December 31, 2002.

Goodwill for the Inorganic Chemicals and EC&D segments arose in the acquisition of Millennium as of November 30, 2004 (see Note 3). Based on information obtained during 2005, regarding environmental remediation liabilities of Millennium as of November 30, 2004, Lyondell increased its estimate of such liabilities by $53 million, resulting in an increase in goodwill, net of tax effects, of $35 million (see Notes 3 and 20). Lyondell also increased its estimate of Millennium’s liabilities for income taxes and related interest as of November 30, 2004 by $32 million, resulting in a net increase in goodwill of $27 million, based on information obtained during 2005. Other adjustments in 2005 primarily represent the write-off of certain fixed assets and increases in various liability accruals.

In conjunction with Lyondell’s proposed sale of its worldwide inorganic chemicals business (see Note 26), Lyondell determined that the carrying values of goodwill and certain software costs associated with the inorganic chemicals business segment were impaired at December 31, 2006, based on the proposed sale and the value to be received for the business. Accordingly, Lyondell’s 2006 earnings reflected a charge of $545 million to recognize impairment of the carrying value of the goodwill and $7 million to recognize the impairment of the carrying value of the software costs. The impairment of goodwill has no tax effect.

The components of other assets, at cost, and the related accumulated amortization were as follows at December 31:

	2006							2005
Millions of dollars	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Identifiable intangible assets:
Debt issuance costs	$	197	$	(97	)	$	100	$	101	$	(53	)	$	48
Patent and license costs		135		(79	)		56		124		(69	)		55
Software costs		285		(228	)		57		252		(175	)		77
Turnaround costs		581		(274	)		307		441		(191	)		250
Catalyst costs		68		(45	)		23		57		(33	)		24
Other		250		(107	)		143		215		(101	)		114
Total intangible assets	$	1,516	$	(830	)		686	$	1,190	$	(622	)		568
Company-owned life insurance							151							142
Deferred tax assets							79							54
Precious metals							44							41
Pension assets							36							60
Other							13							17
Total other assets, net						$	1,009						$	882

Amortization of these identifiable intangible assets for the next five years is expected to be $160 million in 2007, $134 million in 2008, $90 million in 2009, $72 million in 2010, and $55 million in 2011.

Depreciation and amortization expense is summarized as follows:

Millions of dollars	2006		2005		2004
Property, plant and equipment	$	608	$	541	$	202
Investment in PO joint ventures		49		45		44
Turnaround costs		71		63		16
Patent and license costs		10		2		10
Software costs		33		39		12
Other		34		39		5
Total depreciation and amortization	$	805	$	729	$	289

27

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Property, Plant and Equipment, Goodwill and Other Assets – (Continued)

In addition to the depreciation and amortization expense shown above, amortization of debt issuance costs of $16 million, $15 million and $18 million in 2006, 2005 and 2004, respectively, is included in interest expense in the Consolidated Statements of Income.

The increases in property, plant and equipment and accumulated depreciation as well as other assets in 2006 reflect the consolidation of Houston Refining. The increases in maintenance and repair expenses as well as depreciation and amortization expense in 2006 and 2005, respectively, reflect the consolidation of Houston Refining from August 16, 2006 and Millennium and Equistar from December 1, 2004 (see Note 3).

13. Accounts Payable

Accounts payable at December 31, 2006 and 2005 included liabilities in the amounts of $23 million and $16 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.

14. Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

Millions of dollars	2006		2005
Payroll and benefits	$	340	$	248
Interest		164		128
Taxes other than income taxes		150		114
Estimated 2007 CITGO tax reimbursement		97		—
Product sales rebates		86		89
Income taxes		71		78
Deferred revenues		47		42
Other		134		99
Total accrued liabilities	$	1,089	$	798

The increase in accrued liabilities in 2006 was primarily due to the consolidation of Houston Refining (see Note 3).

15. Long-Term Debt

Lyondell’s long-term debt includes credit facilities and debt obligations maintained by Lyondell’s wholly-owned subsidiaries, Equistar and Millennium, and by Lyondell Chemical Company without its consolidated subsidiaries (“LCC”). In some situations, such as references to financial ratios, the context may require that “LCC” refer to Lyondell Chemical Company and its consolidated subsidiaries other than Equistar and Millennium. LCC has not guaranteed the subsidiaries’ credit facilities or debt obligations, except for Equistar’s 7.55% Debentures due 2026 in the principal amount of $150 million.

28

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Long-Term Debt – (Continued)

Long-term debt consisted of the following at December 31:

Millions of dollars	2006			2005
Bank credit facilities:
LCC senior secured credit facility:
Term loan due 2013	$	1,771		$	—
$1,055 million revolving credit facility		—			—
Equistar $400 million inventory-based revolving credit facility		—			—
Millennium $150 million senior secured revolving credit facility		—			—
Millennium $100 million Australian senior secured term loan due 2010		70			99
Millennium €60 million U.K. asset-based revolving credit facility		—			—
LCC notes and debentures:
Senior Secured Notes, Series A due 2007, 9.625%		—			899
Senior Secured Notes due 2008, 9.5%		—			426
Senior Secured Notes due 2012, 11.125% ($1 million of discount)		277			277
Senior Secured Notes due 2013, 10.5%		325			325
Debentures due 2010, 10.25%		100			100
Debentures due 2020, 9.8% ($1 million of discount)		224			224
Senior Unsecured Notes due 2014, 8%		875			—
Senior Unsecured Notes due 2016, 8.25%		900			—
Senior Subordinated Notes due 2009, 10.875%		500			500
Equistar notes and debentures:
Senior Notes due 2008, 10.125% ($16 million of premium)		716			725
Senior Notes due 2011, 10.625% ($27 million of premium)		727			733
Debentures due 2026, 7.55% ($15 million of discount)		135			135
Notes due 2006, 6.5%		—			150
Notes due 2009, 8.75% ($1 million of discount)		599			599
Millennium notes and debentures:
Senior Notes due 2006, 7%		—			161
Senior Notes due 2008, 9.25% ($20 million of premium)		393			500
Senior Debentures due 2026, 7.625% ($3 million of premium)		249			252
Convertible Senior Debentures due 2023, 4% ($13 million of premium)		163			166
Other debt		16			22
Total		8,040			6,293
Less current maturities		(22	)		(319	)
Long-term debt	$	8,018		$	5,974

Aggregate maturities of all long-term debt during the next five years are $22 million in 2007, $1.1 billion in 2008, $1.1 billion in 2009, $194 million in 2010, $721 million in 2011 and $4.8 billion thereafter. Current maturities of long-term debt at December 31, 2006 included $18 million of LCC’s term loan due 2013 and other debt of $4 million. At December 31, 2005, current maturities of long-term debt included $150 million of Equistar’s 6.5% Notes, $158 million of Millennium’s 7% Senior Notes and other debt of $11 million.

29

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Long-Term Debt – (Continued)

Approximately 90% of LCC’s and Equistar’s long-term debt and 70% of Millennium’s long-term debt can be redeemed prior to maturity. The majority of this debt is currently redeemable upon payment of the present value of future interest and principal amounts, using a specified discount rate. The remainder of the debt is redeemable beginning in 2007, at prices ranging from 105.6% to 100% of the principal amount, with the price declining to 100% at maturity.

LCC long-term debt—LCC’s credit facility and its indentures generally limit investments by LCC in Equistar, Millennium and specified joint ventures unless certain conditions are satisfied. In addition, Millennium’s debt covenants restrict its ability to pay certain dividends to LCC. Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when its Fixed Charge Coverage Ratio, as defined, is less than 1.75 to 1.

On August 16, 2006, in connection with the acquisition of CITGO’s 41.25% ownership interest in Houston Refining (see Note 3), LCC entered into a new senior secured credit facility that included a $2.65 billion, seven-year term loan and an $800 million, five-year revolving credit facility. The $800 million revolving credit facility replaced LCC’s former $475 million revolving credit facility, which was scheduled to mature in December 2009, and Houston Refining’s former $150 million revolving credit facility. In September 2006, LCC increased the amount under the revolving credit facility from $800 million to $1,055 million and reduced the then current interest rate on the term loan from LIBOR plus 2% to LIBOR plus 1.75%.

During 2006, LCC completed a public offering of $1,775 million of Senior Unsecured Notes, using a portion of the proceeds to repay $875 million of the $2.65 billion term loan due 2013 and to purchase the remaining $899 million principal amount of its 9.625% Series A, Senior Secured Notes due 2007, paying a premium of $20 million; and prepaid the remaining $430 million of 9.5% Senior Secured Notes due 2008, paying a premium of $10 million.

LCC’s credit facility and indentures, which include substantially the same terms as the former credit facility, contain covenants that, subject to exceptions, restrict, among other things, sale and leaseback transactions, lien incurrence, debt incurrence, dividends, investments, purchase of equity, payments on indebtedness, affiliate transactions, accounts receivable securitizations, sales of assets and mergers. In addition, the credit facility contains covenants that require the maintenance of specified financial ratios: (1) the Interest Coverage Ratio (as defined) at the end of each fiscal quarter may not be less than 2.75 and (2) the ratio of Senior Secured Debt (as defined) at any date to Adjusted EBITDA (as defined) for the period of four consecutive fiscal quarters most recently ended on or prior to such date may not exceed 2.75.

During 2006, LCC amended its former senior secured revolving credit facility and amended its indentures to, among other things, provide for additional subsidiary guarantors and other collateral, limit the pledge of equity interests and other securities in certain circumstances and exclude Millennium from certain events-of-default provisions. LCC also amended the indenture governing its 9.625% Senior Secured Notes, Series A, due 2007 to eliminate substantially all of the restrictive covenants, certain events of default and other provisions.

Amounts available under LCC’s revolving credit facility, which was undrawn at December 31, 2006, are reduced to the extent of outstanding letters of credit provided under LCC’s credit facility, which totaled $91 million as of December 31, 2006. LCC’s revolving credit facility bears interest between LIBOR plus 1.75% and LIBOR plus 2.5%, based on a Total Leverage Ratio (as defined).

30

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Long-Term Debt – (Continued)

LCC’s credit facility and Senior Secured Notes are secured by liens on: all of LCC’s and certain subsidiary guarantors’ domestic personal property; mortgages on certain production facilities located in Pasadena and Channelview, Texas and Lake Charles, Louisiana and the refinery located in Houston, Texas; and, subject to certain limitations, equity interests in domestic subsidiaries, including Millennium and Equistar, and certain non-U.S. subsidiaries.

During 2005, LCC: prepaid $300 million of its 9.5% Senior Secured Notes due 2008 and the remaining $700 million of the 9.875% Senior Secured Notes, Series B, due 2007; paid an aggregate of $36 million in prepayment premiums; purchased $1 million of its 9.625% Senior Secured Notes, Series A, due 2007; and paid, at maturity, $100 million of its 9.375% Debentures due 2005. During 2004, LCC prepaid $300 million of the 9.875% Senior Secured Notes, Series B, which mature in 2007, and paid $15 million in prepayment premiums.

Equistar long-term debt—During 2005, Equistar amended its $250 million inventory-based revolving credit facility, increasing the availability to $400 million, extending the maturity to November 2010 and reducing the interest rate from LIBOR plus 2.25% to LIBOR plus 1.5%. The total amount available at December 31, 2006 under both the $400 million inventory-based revolving credit facility and the $600 million accounts receivable sales facility (see Note 10) was $938 million, which gave effect to the borrowing base less a $50 million unused availability requirement and any outstanding amount of accounts receivable sold under the accounts receivable facility, of which there were none at December 31, 2006, and $12 million of outstanding letters of credit under the revolving credit facility as of December 31, 2006. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The revolving credit facility requires that the unused available amounts under that facility and the $600 million accounts receivable sales facility equal or exceed $50 million, or $100 million if the Interest Coverage Ratio (as defined) at the end of any period of four consecutive fiscal quarters is less than 2:1. The revolving credit facility is secured by a lien on all Equistar inventory and certain Equistar personal property, including a pledge of accounts receivable. There was no borrowing under the revolving credit facility at December 31, 2006.

During 2006, Equistar repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006. Equistar’s $400 million revolving credit facility and its indentures contain covenants that, subject to exceptions, restrict, among other things, lien incurrence, debt incurrence, dividends, sales of assets, investments, accounts receivable securitizations, purchase of equity, payments on indebtedness, affiliate transactions, sale and leaseback transactions and mergers. The credit facility does not require the maintenance of specified financial ratios as long as certain conditions are met. In addition, some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when Equistar’s Fixed Charge Coverage Ratio (as defined), is less than 1.75 to 1.

Millennium long-term debt—During 2006, Millennium obtained an amendment to its $150 million senior secured revolving credit facility and to the indenture governing the 4% Convertible Senior Debentures primarily to exclude a subsidiary of Millennium, Millennium Holdings, LLC and its subsidiaries (collectively “Millennium Holdings”), from events-of-default provisions that could be triggered in connection with judgments against Millennium Holdings. See “Litigation” section of Note 20.

31

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Long-Term Debt – (Continued)

Also during 2006, a U.K. subsidiary of Millennium entered into a new €60 million, five-year, revolving credit facility, which, subject to permitted liens, is generally secured by the subsidiary’s inventory, accounts receivable and certain other assets. Availability under the U.K. facility, which was €46 million, or approximately $61 million, at December 31, 2006, gave effect to the borrowing base as determined using a formula applied to accounts receivable and inventory balances and was reduced to the extent of outstanding borrowing and letters of credit provided under the facility. At December 31, 2006, there was no outstanding borrowing, and there were no outstanding letters of credit under the facility. The U.K. facility bears interest at LIBOR plus 1.25%.

During 2006, Millennium purchased $158 million principal amount of its 7% Senior Notes due 2006, paying a premium of $2 million, and purchased $85 million principal amount of the 9.25% Senior Notes due 2008, paying a premium of $5 million. Millennium also repaid $29 million principal amount of its Australian term loan during 2006.

During 2005, Millennium purchased $342 million principal amount of its 7% Senior Notes due 2006, $13 million of the 9.25% Senior Notes due 2008 and $1 million of the 7.625% Senior Debentures due 2026, paying total premiums of $10 million.

Millennium amended and restated its $150 million senior secured credit facility in 2005, replacing it with a $125 million U.S. senior secured revolving credit facility, a $25 million Australian senior secured revolving credit facility, and a $100 million Australian senior secured term loan, all of which mature in August 2010. Availability under the revolving credit facilities is reduced to the extent of outstanding letters of credit provided under the facilities. There were $22 million of outstanding letters of credit under the U.S. revolving credit facility and none outstanding under the Australian revolving credit facility as of December 31, 2006. There was no outstanding borrowing under either revolving credit facility as of December 31, 2006. The U.S. revolving credit facility and the Australian term loan generally bear interest between LIBOR plus 1% and LIBOR plus 2%, as the case may be, based upon the Leverage Ratio (as defined), as of the most recent determination date. The Australian revolving credit facility generally bears interest based on the Australian Bank Bill Rate (as defined) plus between 1% and 2%, as the case may be, based upon the Leverage Ratio as of the most recent determination date.

Also in 2005, Millennium obtained an amendment to its previous $150 million senior secured credit facility to allow for the unrestricted repurchase of indebtedness in the form of bonds, debentures, notes or similar instruments. On February 2, 2005, as a result of certain adjustments and charges related to the February 2005 restatement of Millennium’s financial statements, Millennium entered into an amendment and waiver to its previous $150 million credit facility, which amended the credit facility definition of EBITDA and waived any and all defaults or events of default that may have occurred on or prior to the amendment and waiver.

Pursuant to the indenture governing the 9.25% Senior Notes, Millennium was required to purchase $4 million principal amount of its 9.25% Senior Notes and pay a 1% premium as a result of Lyondell’s acquisition of Millennium on November 30, 2004.

The obligations under the U.S. revolving credit facility, subject to permitted liens, are generally secured by Millennium’s equity interests in certain U.S. and non-U.S. subsidiaries, cash distributions made by Equistar, certain assets of Millennium and certain of its U.S. subsidiaries and guarantees by Millennium and certain U.S. subsidiaries.

The obligations under the Australian term loan and revolving credit facility, subject to permitted liens, are secured by Millennium’s equity interests in certain non-U.S. subsidiaries, substantially all of the assets of those subsidiaries, including cash and proceeds therefrom, and guarantees by Millennium and certain of its subsidiaries.

32

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Long-Term Debt – (Continued)

In addition to letters of credit outstanding under the U.S. revolving credit facility, Millennium had other outstanding letters of credit and bank guarantees under other arrangements of $8 million at December 31, 2006.

Millennium’s facilities and its indentures contain covenants that, subject to exceptions, restrict, among other things, dividends, debt incurrence, lien incurrence, investments, sale and leaseback transactions, sales of assets, affiliate transactions, mergers, accounts receivable securitization transactions, purchase of equity and payments on indebtedness. Pursuant to these provisions, Millennium is prohibited from making restricted payments, including paying certain dividends. Other than the U.K. facility, Millennium’s facilities also contain covenants that require the maintenance of specified financial ratios: (1) the Leverage Ratio (as defined) is required to be less than 4.50 to 1 and (2) the Interest Coverage Ratio (as defined) for any period of four consecutive fiscal quarters is required to be equal to or greater than 2.25 to 1. Millennium’s U.K. facility does not require the maintenance of specified financial ratios as long as certain conditions are met.

Millennium has outstanding $150 million aggregate principal amount of 4% Convertible Senior Debentures, which are due in 2023, unless earlier redeemed, converted or repurchased. As a result of Lyondell’s acquisition of Millennium, Millennium and Lyondell executed a supplemental indenture providing that the holders of the 4% Convertible Senior Debentures may convert their debentures into shares of Lyondell’s common stock (or, at Lyondell’s discretion, equivalent cash or a combination thereof). As of December 31, 2006, based on a quarterly test related to the price of Lyondell common stock, the Debentures were convertible at a conversion price of $13.38 per share, which is equivalent to a conversion rate of 74.758 Lyondell shares per one thousand dollar principal amount of the Debentures. As of December 31, 2006, the amount of Debentures converted into shares of Lyondell common stock was not significant.

The Debentures are redeemable at Millennium’s option beginning November 15, 2010 at a redemption price equal to 100% of their principal amount. On November 15 in each of 2010, 2013 and 2018, holders of the Debentures will have the right to require Millennium to repurchase all or some of the Debentures they own at a purchase price equal to 100% of their principal amount. Millennium may choose to pay the purchase price in cash or shares of Lyondell’s common stock or any combination thereof. In the event of a conversion request as a result of the long-term credit rating assigned to the Debentures being either Caa1 or lower, in the case of Moody’s Investors Service (“Moody’s”), or B- or lower in the case of Standard & Poor’s (“S&P”) rating service, or if both rating agencies discontinue, withdraw or suspend their ratings, Millennium can deliver cash, or a combination of cash and shares of Lyondell common stock, in lieu of shares of Lyondell common stock. The Debentures are currently rated B1 by Moody’s and B+ by S&P. Holders of the Debentures also have the right to require Millennium to repurchase all or some of the Debentures at a cash purchase price equal to 100% of their principal amount, upon the occurrence of certain events constituting a Fundamental Change, as defined in the indenture. Lyondell’s acquisition of Millennium was not considered a Fundamental Change.

Millennium’s revolving credit facility is guaranteed by Millennium and Millennium America Inc. (“Millennium America”), a subsidiary of Millennium; Millennium’s 7.625% Senior Debentures and 9.25% Senior Notes were issued by Millennium America and are fully and unconditionally guaranteed by Millennium; and Millennium’s 4% Convertible Senior Debentures were issued by Millennium and are guaranteed fully and unconditionally by Millennium America.

33

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Lease Commitments

Lyondell leases various facilities and equipment under noncancelable operating lease arrangements for varying periods. Operating leases include leases of railcars used in the distribution of products in Lyondell’s business. As of December 31, 2006, 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
2007	$	235
2008		188
2009		147
2010		132
2011		111
Thereafter		611
Total minimum lease payments	$	1,424

Net rental expense for 2006, 2005 and 2004 was $226 million, $196 million and $77 million, respectively. The increases in net rental expenses in 2006 and 2005 were primarily due to the consolidation of Houston Refining from August 16, 2006 and Millennium and Equistar from December 31, 2004 (see Note 3).

17. Financial Instruments and Derivatives

Lyondell is exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, Lyondell selectively enters into derivative transactions pursuant to Lyondell’s policies. Designation of the derivatives as fair-value or cash-flow hedges is performed on a specific exposure basis. Hedge accounting may not be elected with respect to certain short-term exposures. 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.

Commodity Price Risk Management—Lyondell is exposed to commodity price volatility related to anticipated purchases of natural gas, crude oil and other raw materials and sales of its products. Lyondell selectively uses commodity swap, option, and futures contracts with various terms to manage the volatility related to these risks. Such contracts are generally limited to durations of one year or less. Cash-flow hedge accounting is normally elected for these derivative transactions; however, in some cases, when the duration of a derivative is short, hedge accounting is not elected. When hedge accounting is not elected, the changes in fair value of these instruments are recorded in earnings. When hedge accounting is elected, gains and losses on these instruments are deferred in accumulated other comprehensive income (“AOCI”) until the underlying transaction is recognized in earnings.

During 2006, Lyondell entered into futures contracts, with respect to purchases of crude oil and sales of gasoline and heating oil. These futures transactions were not designated as hedges, and the changes in the fair value of the futures contracts were recognized in earnings. During 2006, Lyondell settled futures positions of 38 million gallons of gasoline and heating oil, which resulted in net gains of $1 million.

At December 31, 2006, futures contracts for 12 million gallons of gasoline in the notional amount of $20 million and 900 thousand barrels of crude oil in the notional amount of $56 million, maturing in February and March 2007, were outstanding. The fair value, based on quoted market prices, resulted in a net payable of $3 million at December 31, 2006.

34

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Financial Instruments and Derivatives – (Continued)

Net losses of $1 million, $5 million and $1 million were included in earnings in 2006, 2005 and 2004, respectively. As of December 31, 2005, the notional amounts of outstanding commodity derivative instruments were not material. The deferred amounts in AOCI at December 31, 2006 or 2005 were less than $1 million.

Foreign Currency Exposure Management—Lyondell manufactures and markets its products in a number of countries throughout the world and, as a result, is exposed to changes in currency exchange rates. Costs in some countries are incurred, in part, in currencies other than the applicable functional currency. Lyondell selectively utilizes forward, swap and option derivative contracts with terms normally lasting less than three months to protect against the adverse effect that currency exchange rate fluctuations may have on foreign currency denominated trade receivables and trade payables. These derivatives generally are not designated as hedges for accounting purposes. There were no outstanding foreign currency forward, swap or option contracts at December 31, 2006 and 2005.

In addition, Lyondell selectively utilizes currency forward and swap contracts that qualify as cash-flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted or committed sales and purchases. Gains and losses on these instruments are deferred in AOCI until the underlying transaction is recognized in earnings. The gains or losses are reported either in sales and other operating revenues or cost of sales to match the underlying transaction being hedged. There were no amounts related to foreign exchange cash-flow hedges deferred in AOCI at December 31, 2006 and 2005.

As a result of foreign currency transactions, Lyondell had net losses of $8 million, $7 million and $5 million, respectively, in 2006, 2005 and 2004.

Interest Rate Risk Management—Lyondell selectively uses derivative instruments to manage the ratio of fixed-to variable-rate debt at Millennium. At December 31, 2006, there were outstanding interest rate swap agreements in the notional amount of $175 million, which were designated as fair-value hedges of underlying fixed-rate obligations. The fair value of these interest rate swap agreements was an obligation of $3 million and $4 million at December 31, 2006 and 2005, respectively, resulting in a decrease in the carrying value of long-term debt and the recognition of a corresponding liability. The net gains and losses resulting from adjustment of both the interest rate swaps and the hedged portion of the underlying debt to fair value are recorded in interest expense.

The carrying value and the estimated fair value of Lyondell’s non-current, non-derivative financial instruments as of December 31, 2006 and 2005 are shown in the table below:

	2006				2005
Millions of dollars	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current maturities	$	8,040	$	8,388	$	6,293	$	6,584

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 except that, for the 4% Convertible Senior Debentures, quoted market values were used. The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable and accounts payable, approximated their carrying value due to their short maturity.

35

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits

Lyondell has defined benefit pension plans which cover employees in the United States and a number of other countries. Retirement benefits are generally based on years of service and the employee’s highest compensation for any consecutive 36-month period during the last 120 months of service or other compensation measures as defined under the respective plan provisions. Lyondell funds the plans through contributions to pension trust funds, generally subject to minimum funding requirements as provided by applicable law. Lyondell also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the U.S. tax-qualified plans’ limits. In addition, Lyondell sponsors unfunded postretirement benefit plans other than pensions for U.S. employees, which provide medical and life insurance benefits. The postretirement medical plans are contributory, while the life insurance plans are generally noncontributory. The life insurance benefits under certain plans are provided to employees who retired before July 1, 2002.

36

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits – (Continued)

The following table provides a reconciliation of projected benefit obligations, plan assets and the funded status of Lyondell’s U.S. and non-U.S. pension plans, including the pension plans of Houston Refining as a result of Lyondell’s August 16, 2006 acquisition of CITGO’s 41.25% interest in Houston Refining (see Note 3):

	2006						2005
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Change in benefit obligation:
Benefit obligation, January 1	$	1,606		$	474		$	1,545		$	452
Acquisition of Houston Refining		169			—			—			—
Service cost		52			19			46			17
Interest cost		88			23			85			21
Actuarial (gain) loss		(80	)		(27	)		48			47
Benefits paid		(111	)		(16	)		(118	)		(14	)
Foreign exchange effects		—			58			—			(49	)
Other		—			3			—			—
Benefit obligation, December 31		1,724			534			1,606			474
Change in plan assets:
Fair value of plan assets, January 1		1,055			344			998			315
Acquisition of Houston Refining		93			—			—			—
Actual return on plan assets		136			26			71			50
Company contributions		174			36			104			27
Benefits paid		(111	)		(16	)		(118	)		(14	)
Foreign exchange effects		—			44			—			(33	)
Other		—			3			—			(1	)
Fair value of plan assets, December 31		1,347			437			1,055			344
Funded status, December 31	$	(377	)	$	(97	)	$	(551	)	$	(131	)
Amounts not recognized in benefit costs:
Actuarial and investment loss		182			47			307			73
Prior service cost (benefit)		(7	)		1			(10	)		1
Transition obligation		—			—			—			2
Net amount recognized in benefit costs	$	(202	)	$	(49	)	$	(254	)	$	(55	)
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost	$	29		$	7		$	28		$	32
Accrued benefit liability, current		(6	)		—
Accrued benefit liability, long-term		(400	)		(104	)		(463	)		(99	)
Funded status, December 31, 2006		(377	)		(97	)
Accumulated other comprehensive loss - pretax		175			48			181			12
Net amount recognized in benefit costs	$	(202	)	$	(49	)	$	(254	)	$	(55	)
Additional Information:
Accumulated benefit obligation for defined benefit plans, December 31	$	1,481		$	428		$	1,386		$	373
Increase (decrease) in minimum liability, prior to application of SFAS No. 158, included in other comprehensive loss		(85	)		2			3			(4	)

37

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits – (Continued)

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of Lyondell’s other postretirement benefit plans, which are provided for U.S. employees:

Millions of dollars	2006			2005
Change in benefit obligation:
Benefit obligation, January 1	$	229		$	239
Acquisition of Houston Refining		57			—
Service cost		5			5
Interest cost		13			13
Plan amendments		(10	)		(19	)
Actuarial (gain) loss		(11	)		4
Benefits paid		(13	)		(13	)
Benefit obligation, December 31		270			229
Funded status, December 31		(270	)		(229	)
Amounts not recognized in benefit costs:
Actuarial loss		(1	)		3
Prior service benefit		31			(25	)
Net amount recognized in benefit costs	$	(240	)	$	(251	)
Amounts recognized in the Consolidated Balance Sheets consist of:
Accrued benefit liability, current	$	(16	)	$	—
Accrued benefit liability, long-term		(254	)		(251	)
Funded status, December 31, 2006		(270	)
Accumulated other comprehensive income - pretax		30			—
Net amount recognized in benefit costs	$	(240	)	$	(251	)

Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2006				2005
Millions of dollars	U.S.		Non-U.S.		U.S.		Non-U.S.
Projected benefit obligations	$	1,690	$	495	$	1,571	$	449
Fair value of assets		1,284		392		997		308

Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2006				2005
Millions of dollars	U.S.		Non-U.S.		U.S.		Non-U.S.
Accumulated benefit obligations	$	1,301	$	220	$	1,351	$	188
Fair value of assets		1,127		178		997		136

38

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits – (Continued)

The following table provides the components of net periodic pension costs for the years ended December 31:

	2006						2005						2004
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Net Periodic Pension Cost:
Service cost	$	52		$	19		$	46		$	17		$	17		$	10
Interest cost		88			23			85			21			35			10
Actual return on plan assets		(136	)		(26	)		(71	)		(50	)		(47	)		(18	)
Less - return in excess of (less than) expected return		52			5			(6	)		31			25			4
Expected return on plan assets		(84	)		(21	)		(77	)		(19	)		(22	)		(14	)
Prior service cost (benefit) amortization		(1	)		1			(2	)		—			(2	)		—
Actuarial and investment loss amortization		24			3			23			4			20			8
Net periodic benefit cost	$	79		$	25		$	75		$	23		$	48		$	14

Amortization of the defined benefit pension plans actuarial loss and prior service cost (benefit) components of AOCI estimated to be included in 2007 net periodic pension cost is $15 million and $1 million, respectively.

The following table provides the components of net periodic other postretirement benefit costs for the years ended December 31:

Millions of dollars	2006			2005		2004
Net periodic other postretirement benefit costs:
Service cost	$	5		$	5	$	2
Interest cost		13			13		7
Prior service benefit amortization		(4	)		—		(1	)
Recognized actuarial loss		1			—		—
Net periodic benefit cost	$	15		$	18	$	8

Amortization of the defined benefit postretirement plans prior service benefit component of AOCI estimated to be included in 2007 net periodic benefit cost is $7 million.

The above net periodic pension and other postretirement benefit costs include Houston Refining prospectively from August 16, 2006 and Millennium and Equistar prospectively from December 1, 2004. The assumptions used in determining the net benefit liabilities for Lyondell’s pension and other postretirement benefit plans were as follows at December 31:

	2006				2005
	U.S.		Non-U.S.		U.S.		Non-U.S.
Weighted-average assumptions as of December 31:
Discount rate	5.75	%	4.99	%	5.50	%	4.59	%
Rate of compensation increase	4.50	%	4.39	%	4.50	%	4.28	%

39

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits – (Continued)

The assumptions used in determining net benefit costs for Lyondell’s pension and other postretirement benefit plans were as follows for the year ended December 31:

	2006				2005				2004
	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Weighted-average assumptions for the year:
Discount rate	5.50	%	4.59	%	5.75	%	5.09	%	6.25	%	5.15	%
Expected return on plan assets	8.00	%	5.82	%	8.00	%	6.43	%	8.00	%	6.28	%
Rate of compensation increase	4.50	%	4.28	%	4.50	%	4.33	%	4.50	%	4.45	%

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2006 was 10% for 2007, decreasing 1% per year to 5% in 2012 and thereafter. At December 31, 2005, similar cost escalation assumptions were used. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Lyondell’s maximum contribution level to the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated other postretirement benefit liability as of December 31, 2006 by less than $2 million and would not have a material effect on the aggregate service and interest cost components of the net periodic other postretirement benefit cost for the year then ended.

Management’s goal is to manage pension investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Lyondell’s targeted asset allocations for the U.S. plans of 55% U.S. equity securities, 15% non-U.S. equity securities, and 30% fixed income securities are based on recommendations by Lyondell’s independent pension investment advisor. Lyondell’s expected long-term rate of return on plan assets of 8% is based on the average level of earnings that its independent pension investment advisor has advised could be expected to be earned over time on such allocation. Investment policies prohibit investments in securities issued by Lyondell or investment in speculative derivative instruments. The investments are marketable securities that provide sufficient liquidity to meet expected benefit obligation payments.

Lyondell’s pension plan weighted-average asset allocations by asset category for its U.S. pension plans generally are as follows at December 31:

	2006 Policy	2006		2005
Asset Category:
U.S. equity securities	55%	56	%	54	%
Non-U.S. equity securities	15%	17	%	16	%
Fixed income securities	30%	27	%	30	%
Total	100%	100	%	100	%

Required contributions to Lyondell’s pension plans are expected to be approximately $60 million in 2007.

40

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Pension and Other Postretirement Benefits – (Continued)

As of December 31, 2006, future expected benefit payments by the plans, which reflect expected future service, as appropriate, were as follows:

Millions of dollars	Pension Benefits		Other Benefits
2007	$	133	$	19
2008		138		19
2009		141		20
2010		144		21
2011		150		21
2012 through 2016		816		103

Lyondell also maintains voluntary defined contribution savings plans for eligible employees. Contributions to these plans by Lyondell were $29 million in 2006, $26 million in 2005 and $11 million in 2004. Houston Refining’s plans are included prospectively from August 16, 2006 and Millennium’s and Equistar’s plans are included prospectively from December 1, 2004.

19. Income Taxes

The significant components of the provision for income taxes were as follows for the years ended December 31:

Millions of dollars	2006			2005			2004
Current:
Federal	$	296		$	32		$	(4	)
Non-U.S.		61			50			4
State		8			(5	)		4
Total current		365			77			4
Deferred:
Federal		88			138			56
Non-U.S.		(52	)		21			(31	)
State		6			(17	)		(6	)
Total deferred		42			142			19
Provision for income taxes before tax effects of other comprehensive income		407			219			23
Tax effects of elements of other comprehensive income:
Cumulative translation adjustment		19			(17	)		36
Minimum pension liability		8			—			—
Total income tax expense in comprehensive income	$	434		$	202		$	59

41

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Income Taxes – (Continued)

Lyondell’s current provisions for U.S. federal income tax expense for 2004, 2005 and a portion of 2006 were substantially offset by the benefit of net operating loss carryforwards. In each period, the resulting reduction in the current tax provision was offset by an increase in the deferred tax provision. The 2005 current U.S. tax provision represented the portion of the Alternative Minimum Tax liability that cannot be offset by net operating loss carryforwards plus the required tax payable with respect to the repatriation of funds under the American Jobs Creation Act of 2004 as discussed below.

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, as well as the net tax effects of operating loss carryforwards. Significant components of Lyondell’s deferred tax liabilities and assets were as follows as of December 31:

Millions of dollars	2006			2005
Deferred tax liabilities:
Accelerated tax depreciation	$	1,832		$	1,711
Investments in joint venture partnerships		306			500
Goodwill and other intangible assets		103			59
Inventory		86			—
Accrual for potential income tax assessments		—			78
Other		35			(13	)
Total deferred tax liabilities		2,362			2,335
Deferred tax assets:
Net operating loss carryforwards		211			307
Employee benefit plans		352			361
AMT credits		89			145
Fair value of debt acquired		19			21
U.S. tax benefit of deferred non-U.S. taxes		61			55
Deferred charges and revenues		181			33
Environmental remediation liabilities		71			78
Book depreciation in excess of tax depreciation		64			58
Other		101			133
Total deferred tax assets		1,149			1,191
Deferred tax asset valuation allowances		(207	)		(171	)
Net deferred tax assets		942			1,020
Net deferred tax liabilities	$	1,420		$	1,315
Balance sheet classifications:
Deferred tax assets	$	109		$	203
Other assets, net		79			54
Accrued liabilities		10			1
Deferred income taxes		1,598			1,571
Net deferred tax liabilities	$	1,420		$	1,315

42

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Income Taxes – (Continued)

During 2006, Lyondell completely utilized its U.S. federal tax net operating loss carryforward benefits. Lyondell has net operating loss carryforward benefits of $26 million in the Netherlands, which under legislation enacted in 2006 will begin to expire in 2014. The remaining net operating loss carryforwards in various jurisdictions have long or indefinite expiration periods. The deferred tax benefit related to these loss carryforwards of $211 million as of December 31, 2006 was reduced by a valuation allowance of $155 million related to certain French tax loss carryforwards, which management believes are more likely than not to expire unutilized. The federal AMT credits of $89 million have no expiration date. Provisions of $28 million in 2006 and $33 million in 2005 increased the valuation allowance, primarily for net operating loss carryforwards. Other changes in the valuation allowance reflected the effects of foreign currency translation. The valuation allowance was $157 million as of December 31, 2004.

Certain income tax returns of Lyondell’s U.S. and non-U.S. subsidiaries are currently under examination by the Internal Revenue Service (“IRS”) and various other non-U.S. and state tax authorities. In many cases, these audits may result in proposed assessments by the tax authorities. Lyondell believes that its tax positions comply with applicable tax law and intends to defend its positions through appropriate administrative and judicial processes. Lyondell believes it has adequately provided for any probable outcomes related to these matters.

The American Jobs Creation Act of 2004 (the “Act”) provides a tax deduction for qualified domestic production activities. During 2005, Lyondell utilized its federal tax loss carryforwards and, as a result, did not benefit from these provisions. As a result of the full utilization of all available federal tax loss carryforwards during 2006, Lyondell recognized a benefit of $9 million during 2006 related to qualified production activities for a portion of 2006.

The Act also provided tax benefits with respect to the repatriation of foreign earnings that can result in a significant reduction in the effective tax rate on certain foreign earnings repatriated during a one-year period. Lyondell elected to repatriate, during 2005, certain non-U.S. earnings that had previously been identified as likely to be repatriated as well as additional earnings previously expected to be indefinitely invested. In connection with the acquisition of Millennium on November 30, 2004, Lyondell recorded a net deferred tax liability of $11 million with respect to the expected 2005 repatriation of $161 million of non-U.S. preacquisition earnings. During 2005, $297 million, including non-U.S. Millennium earnings and returns of investment, was repatriated, resulting in an additional tax provision of $3 million.

43

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Income Taxes – (Continued)

Lyondell has determined that the undistributed earnings of foreign subsidiaries will be permanently reinvested. The undistributed earnings of foreign subsidiaries aggregated $144 million at December 31, 2006. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.

The domestic and non-U.S. components of income (loss) before income taxes and a reconciliation of the income tax provision (benefit) to theoretical income tax computed by applying the U.S. federal statutory tax rate are as follows:

Millions of dollars	2006			2005			2004
Income (loss) before income taxes:
Domestic	$	553		$	615		$	80
Non-U.S.		40			135			(3	)
Total	$	593		$	750		$	77
Theoretical income tax at U.S. statutory rate	$	208		$	263		$	27
Increase (reduction) resulting from:
Goodwill impairment		191			—			—
Purchased in-process R&D		—			—			23
Decrease in statutory non-U.S. tax rates		(19	)		(5	)		(23	)
Other effects of non-U.S. operations		22			26			(3	)
Changes in estimates for prior year items		(12	)		(61	)		—
Non-U.S. valuation allowances		17			16			2
State income taxes, net of federal		9			(14	)		(4	)
Domestic manufacturing deduction		(9	)		—			—
Other, net		—			(6	)		1
Income tax provision	$	407		$	219		$	23
Effective income tax rate		68.6	%		29.2	%		29.9	%

During 2006 and 2005, Lyondell recorded net interest income of $4 million and net interest expense of $9 million, respectively, related to various income tax exposures.

44

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Commitments and Contingencies

Commitments—Lyondell has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for its businesses and at prevailing market prices. Lyondell is also a party to various obligations to purchase products and services, principally for utilities and industrial gases and ore that is used in the production of TiO₂. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. Also included in purchase obligations is a commitment to reimburse Rhodia for the costs of operating the TDI facility at Pont de Claix, France, through March 2016. The Rhodia obligations, denominated in euros, include fixed and variable components. The actual future obligation will vary with fluctuations in foreign currency exchange rates, market prices of raw materials and other variable cost components such as utility costs. Approximately 12% to 16% of the annual payments shown in the table below are subject to such variability.

At December 31, 2006, estimated future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:

Millions of dollars
2007	$	1,066
2008		912
2009		862
2010		817
2011		783
Thereafter through 2023		5,184
Total minimum contract payments	$	9,624

Lyondell’s total purchases under these agreements were $1,547 million, $1,644 million and $615 million in 2006, 2005 and 2004, respectively. The increase in 2005 compared to 2004 primarily reflects the effect of including Equistar’s and Millennium’s purchases under such contracts for the full year in 2005.

Crude Supply Agreement—Prior to August 1, 2006, PDVSA Oil and Houston Refining were parties to a Crude Supply Agreement (“CSA”). Under the CSA, generally, PDVSA Oil was required to sell and Houston Refining was required to purchase 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of Houston Refining’s refining capacity of 268,000 barrels per day of crude oil. From 1998 through 2002, PDVSA Oil, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. In February 2002, Houston Refining filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations. On April 6, 2006, the parties announced the settlement of these disputes and other disputes among the parties and their respective affiliates, and, on April 10, 2006, the lawsuits were dismissed.

On August 16, 2006, Lyondell purchased CITGO’s 41.25% ownership interest in Houston Refining. As part of the transaction, Houston Refining made a $300 million payment to terminate the CSA (see Note 3) and the parties entered into a new crude oil contract, effective August 1, 2006, which provides for the purchase and supply of 230,000 barrels per day of heavy, high sulfur crude oil and extends through 2011, and year to year thereafter. The contract contains market-based pricing, which is determined using a formula reflecting published market indices. The pricing is designed to be consistent with published prices for similar grades of crude oil.

45

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Commitments and Contingencies – (Continued)

Asset Retirement Obligation—Lyondell believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Lyondell continually reviews the optimal future alternatives for its facilities. In many cases, the amount and timing of costs, if any, that may be incurred as a result of such reviews are not known and no decisions have been reached, but if a decision were reached, in accordance with local laws and customs, to retire one or more facilities in the foreseeable future, the asset retirement costs could range from $0 to $30 million, depending upon the scope of the required work and other factors. At December 31, 2006, the balance of the liability that had been recognized for all asset retirement obligations, including scheduled closure of certain landfills, was $24 million. In addition, any decision to retire a facility would result in other costs, including employment related costs.

Environmental Remediation—Lyondell’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $200 million and $194 million as of December 31, 2006 and 2005, respectively. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

The following table summarizes the activity in Lyondell’s accrued environmental liability for the years ended December 31:

Millions of dollars	2006			2005
Balance at January 1	$	194		$	147
Additional provisions		20			10
Amounts paid		(14	)		(11	)
Adjustments to purchase price allocation		—			53
Other		—			(5	)
Balance at December 31	$	200		$	194

The 2004 provision for estimated environmental remediation costs was $12 million. The liabilities for individual sites range from less than $1 million to $106 million. The $106 million liability relates to the Kalamazoo River Superfund Site.

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

46

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Commitments and Contingencies – (Continued)

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

As of December 31, 2006, the probable future remediation spending associated with the river cannot be determined with certainty. Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome. However, in 2004, Lyondell recognized a liability representing Millennium’s interim allocation of 55% of the $73 million total of estimated cost of riverbank stabilization, recommended as the preferred remedy in 2000 by the KRSG study, and of certain other costs. At December 31, 2006, the balance of this liability was $58 million.

In addition, in 2004, Lyondell recognized a liability primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. At December 31, 2006, the balance of the liability was $48 million. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

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

The balance at December 31, 2006 of Millennium remediation liabilities related to Millennium sites other than the Kalamazoo River Superfund Site was $66 million.

MTBE—The presence of MTBE in some water supplies in certain U.S. states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft led to public concern about the use of MTBE and resulted in U.S. federal and state governmental initiatives to reduce or ban the use of MTBE. Substantially all refiners and blenders have discontinued the use of MTBE in the U.S.

Accordingly, Lyondell is marketing its U.S.-produced MTBE for use outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Lyondell’s U.S.-based and European-based MTBE plants generally have the flexibility to produce either MTBE or ethyl tertiary butyl ether (“ETBE”) to accommodate market needs. Lyondell produces and sells ETBE in Europe to address Europe’s growing demand for biofuels. In addition, during the fourth quarter of 2006, Lyondell installed equipment at its Channelview, Texas facility to provide Lyondell with the flexibility to produce an alternative gasoline blending component known as iso-octene (also known as “di-isobutylene” or “DIB”) or either MTBE or ETBE at that facility in the future. The facility began producing iso-octene during the fourth quarter of 2006, but experienced equipment limitations that negatively affected operability and reliability. As a result, the facility has returned to MTBE production while the modifications necessary to ensure reliable iso-octene production are defined. Any decision to return to iso-octene production will depend on timing and cost of the required modifications, and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to iso-octene may be lower than that historically realized on MTBE. In addition, iso-octene is a new product without an established history.

47

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Commitments and Contingencies – (Continued)

Litigation—On April 12, 2005, BASF Corporation (“BASF”) filed a lawsuit in New Jersey against Lyondell asserting various claims relating to alleged breaches of a PO sales contract and seeking damages in excess of $100 million. A trial date of June 18, 2007 has been set. Management believes that it has valid defenses to all claims and is vigorously defending them. Management does not expect the resolution of the claims to result in any material adverse effect on the financial position, liquidity or results of operations of Lyondell.

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

One legal proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, the judge in that case declared a mistrial after the jury declared itself deadlocked. The sole issue before the jury was whether lead pigment in paint in and on Rhode Island buildings constituted a “public nuisance.” The re-trial of this case began on November 1, 2005. On February 22, 2006, a jury returned a verdict in favor of the State of Rhode Island finding that the cumulative presence of lead pigments in paints and coatings on buildings in the state constitutes a public nuisance; that a Millennium subsidiary, Millennium Holdings LLC, and other defendants either caused or substantially contributed to the creation of the public nuisance; and that those defendants, including the Millennium subsidiary, should be ordered to abate the public nuisance. On February 28, 2006, the judge held that the state could not proceed with its claim for punitive damages. As a result, the jury was discharged. The court has not entered a final judgment on the jury’s verdict; however, on February 26, 2007, the court issued its decision denying the post-verdict motions of the defendants, including Millennium, for a mistrial or a new trial. The court concluded that it would enter an order of abatement and appoint a special master to assist the court in determining the scope of the abatement remedy.

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

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

48

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Commitments and Contingencies – (Continued)

Indemnification—Lyondell and its joint ventures are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. For example, Lyondell entered into indemnification arrangements in connection with the transfer of assets and liabilities from Atlantic Richfield Company to Lyondell prior to Lyondell’s initial public offering and in connection with Lyondell’s acquisition of the outstanding shares of ARCO Chemical Company; Equistar and its owner companies (including Lyondell and Millennium) entered into indemnification arrangements in connection with the formation of Equistar; and Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc. Pursuant to these arrangements, Lyondell and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of December 31, 2006, Lyondell has not accrued any significant amounts for such indemnification obligations except for an estimated $97 million accrued for reimbursement of CITGO taxes in connection with the acquisition of Houston Refining, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Lyondell. Lyondell cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

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

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

21. Stockholders’ Equity

Preferred Stock—Lyondell has authorized 80 million shares of $.01 par value preferred stock. As of December 31, 2006, none was outstanding.

Common Stock—Pursuant to the acquisition of Millennium on November 30, 2004, Lyondell issued 63.1 million shares of common stock to the former Millennium shareholders. Millennium shareholders received 0.95 shares of Lyondell common stock for each share of Millennium common stock. See Note 3 for a discussion of the determination of the fair value of the 63.1 million shares of Lyondell common stock issued.

49

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. Stockholders’ Equity – (Continued)

Series B Common Stock, Warrant and Right—As a result of certain August 22, 2002 transactions, Occidental Chemical Holding Corporation, a subsidiary of Occidental (“OCHC”) held an equity interest in Lyondell, including:

• 34 million shares of Lyondell Series B common stock. The Series B common stock paid a dividend at the same rate as the common stock but, at Lyondell’s option, the dividend was paid in additional shares of Series B common stock through December 31, 2004;

• a five-year warrant to acquire five million shares of Lyondell common stock at $25 per share; and

• a now-expired right to receive contingent payments equivalent in value to 7.38% of Equistar’s 2002 and 2003 distributions.

In December 2004, Lyondell elected to convert the 38.6 million shares of outstanding Series B common stock to Lyondell common stock. The conversion did not change the total number of outstanding shares. Dividends on the newly converted shares were paid in cash, beginning in 2005, and no shares of Series B common stock remain outstanding.

As a result of these transactions and subsequent public offerings by Lyondell for OCHC to sell some of its shares of Lyondell common stock, and giving effect to Occidental’s January 26, 2007 exercise of the warrant, OCHC owns a remaining equity interest of 8.5% in Lyondell. In connection with the August 2002 transactions with OCHC, Lyondell agreed to provide registration rights to OCHC and its permitted transferees with respect to shares of Lyondell’s common stock issued to OCHC (1) as a dividend, (2) upon conversion of the Series B common stock (which conversion occurred on December 31, 2004) or (3) upon exercise of the warrant referenced above (which was exercised in January 2007).

Accumulated Other Comprehensive Income (Loss)—The components of accumulated other comprehensive income (loss) were as follows at December 31:

Millions of dollars	2006			2005
Foreign currency translation	$	171		$	(1	)
Minimum pension liability		—			(135	)
Pension and postretirement liabilities after application of SFAS No. 158		(129	)		—
Total accumulated other comprehensive income (loss)	$	42		$	(136	)

Rights to Purchase Common Stock—On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right for each outstanding share of Lyondell’s common stock to stockholders of record on December 20, 1995 pursuant to a Rights Agreement, as amended. 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. Each right entitles the holder to purchase from the Company one share of common stock at a specified purchase price. The rights expire at the close of business on December 8, 2015.

50

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. Stockholders’ Equity – (Continued)

In connection with the sale of securities to OCHC described above under “Series B Common Stock, Warrant and Right,” and in connection with Lyondell’s October 2003 common stock offering, Lyondell’s Board of Directors adopted resolutions exempting Occidental from certain definitions used in the agreement pertaining to these rights. These resolutions authorized Occidental to acquire, without triggering the exercisability of the rights, beneficial ownership of any securities contemplated by the transaction documents related to the sale of securities described above under “Series B Common Stock, Warrant and Right” and a specified amount of common stock in the October 2003 common stock offering, as long as their aggregate direct and indirect beneficial ownership does not exceed 40% of Lyondell’s issued and outstanding common stock.

Convertible Debentures—As a result of Lyondell’s acquisition of Millennium, the holders of Millennium’s 4% Convertible Senior Debentures may convert their Debentures into shares of Lyondell’s common stock (or, at Lyondell’s discretion, equivalent cash or a combination thereof) at a conversion price as of December 31, 2006, subject to adjustment upon certain events, of $13.38 per share, which is equivalent to a conversion rate of 74.758 Lyondell shares per one thousand dollar principal amount of the Debentures. As of December 31, 2006, the principal amount of the 4% Convertible Senior Debentures that had been converted into shares of Lyondell common stock was not significant. Additional paid-in capital includes $143 million representing conversion value of these Debentures.

51

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

22. Per Share Data

Basic earnings per share for the periods presented is based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share also include the effect of outstanding stock options, warrants and restricted stock. Additionally, diluted earnings per share for 2006, 2005 and 2004 include the effect of the assumed conversion of Millennium’s 4% Convertible Debentures into Lyondell common stock.

Earnings per share data and dividends declared per share of common stock were as follows for the year ended December 31:

In millions	2006		2005			2004
Net income	$	186	$	531		$	54
After-tax interest expense on 4% Convertible Senior Debentures		2		(1	)		—
Net income assuming conversion of 4% Convertible Senior Debentures	$	188	$	530		$	54
In millions of shares
Basic weighted average shares		247.6		245.9			183.2
Effect of dilutive securities:
4% Convertible Senior Debentures		11.0		10.6			0.9
Stock options, warrants and restricted stock		1.7		3.4			1.9
Dilutive potential shares		260.3		259.9			186.0
Earnings per share:
Basic	$	0.75	$	2.16		$	0.29
Diluted	$	0.72	$	2.04		$	0.29
Antidilutive stock options and warrants in millions		4.8		0.5			—
Dividends declared per share of common stock	$	0.90	$	0.90		$	0.90

See Note 21 for discussion of common stock issued during 2004.

23. Share-Based Compensation

Under Lyondell’s Amended and Restated 1999 Incentive Plan (the “Incentive Plan”), Lyondell has granted awards of performance units, restricted stock and stock options to certain employees. Restricted stock, restricted stock units and stock option awards are also made to directors under other incentive plans. In addition, Lyondell issues phantom restricted stock, phantom stock options and performance units to certain other employees under other incentive plans. The Incentive Plan authorized total shares available for grant under the plan of 26 million shares of common stock. As of December 31, 2006, 12,052,536 shares remained available for grant with 6,002,005 shares available for future awards of restricted stock or performance units, to the extent settled in shares of common stock, and 1 million shares available for incentive stock option grants.

52

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23. Share-Based Compensation – (Continued)

These awards resulted in compensation expense of $54 million, $72 million and $156 million for 2006, 2005 and 2004, respectively. The after-tax amounts were $35 million, $47 million and $101 million, respectively, for 2006, 2005 and 2004. The compensation expense reflects awards vesting during the periods and changes in valuation of previously vested awards other than stock options.

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

The following table summarizes performance unit activity for the year ended December 31, 2006 in thousands of units:

	Number of Units
Outstanding at beginning of year	3,288
Granted	906
Paid	(1,412	)
Forfeited	(44	)
Outstanding at December 31, 2006	2,738

At December 31, 2006, the value of the liability related to the outstanding units was $65 million based on the December 31, 2006 market price of Lyondell common stock and the relative performance percentages of target awards outstanding. Cash payments of $68 million, $79 million and $15 million were distributed to participants during 2006, 2005 and 2004.

Stock Options—Stock options are granted with an exercise price of at least 100% of market value, have a contractual term of ten years and vest at a rate of one-third per year over three years, with accelerated vesting upon death, disability, retirement or change of control. However, all then-outstanding options of Lyondell, including Millennium options converted to Lyondell options upon Lyondell’s acquisition of Millennium, became immediately exercisable upon the closing, on November 30, 2004, of Lyondell’s acquisition of Millennium.

53

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23. Share-Based Compensation – (Continued)

The following table summarizes activity, in thousands of shares and the weighted average exercise price per share, relating to stock options.

	2006			2005				2004
	Shares		Price	Shares		Price		Shares		Price
Outstanding at beginning of year	8,336		15.66	11,186		$	14.93	11,336		$	14.60
Granted	665		24.52	454			28.56	494			17.55
Conversion of Millennium options to Lyondell options	—		—	—			—	1,278			16.01
Exercised	(1,801	)	14.37	(3,279	)		14.91	(1,873	)		14.48
Cancelled	(28	)	19.71	(25	)		19.52	(49	)		14.50
Outstanding at end of year	7,172		16.80	8,336			15.66	11,186			14.93
Exercisable at end of year	6,204		15.39	7,882			14.92	11,186			14.93

The following table summarizes the weighted average remaining term and the aggregate intrinsic value of options outstanding and options exercisable at December 31, 2006:

Millions of dollars	Weighted Average Remaining Term	Aggregate Intrinsic Value
Outstanding at December 31, 2006	5 years	$	65
Exercisable at December 31, 2006	5 years		64

The total intrinsic value of options exercised during the year ended December 31, 2006, was $20 million and the related tax benefit was $7 million.

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

	2006			2005			2004
Fair value per share of options granted	$	6.23		$	9.64		$	3.38
Fair value assumptions:
Dividend yield		3.43	%		3.11	%		6.38	%
Expected volatility		39.80	%		35	%		35	%
Risk-free interest rate		4.53	%		4.24	%		4.58	%
Expected term, in years		6			10			10

54

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23. Share-Based Compensation – (Continued)

Stock options are accounted for as equity instruments, and compensation cost is recognized using graded vesting over the three-year vesting period. As of December 31, 2006, the unrecognized compensation cost related to stock options was $2 million, which is expected to be recognized over a weighted-average period of 2 years.

Restricted Stock—Lyondell’s restricted stock arrangements under the Incentive Plan are divided equally into a restricted stock grant and an associated deferred cash payment. These restricted stock arrangements typically vest at a rate of one-third per year over three years, with accelerated vesting upon death, disability, retirement or change in control. The associated deferred cash award, paid when the shares of restricted stock vest, is equal to the fair market value of the restricted stock issued on the vesting date. Restricted stock is accounted for as an equity award, while the deferred cash component is accounted for as a liability award. Compensation expense, based on the market price of Lyondell stock at the date of the grant for the restricted stock and, for the deferred cash components, the market price at the earlier of the vesting date or the balance sheet date, is recognized using graded-vesting over the three-year vesting period. At December 31, 2006, 222,275 unvested shares of restricted stock were outstanding.

Phantom Awards—At December 31, 2006, the equivalent of 2,799,031 shares were outstanding under the employee phantom award arrangements. These phantom awards are accounted for as liability awards and compensation cost is recognized using graded-vesting over the three-year vesting period.

24. Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the years ended December 31:

Millions of dollars	2006		2005		2004
Interest paid	$	587	$	676	$	443
Net income taxes paid (received)	$	255	$	43	$	(3	)

Interest and income tax cash activity includes Houston Refining prospectively from August 16, 2006 and Millennium and Equistar prospectively from December 1, 2004.

See Note 3 for the cash and noncash effects of Lyondell’s acquisition of Millennium and the resulting step acquisition of Equistar.

25. Segment and Related Information

Lyondell operates in four reportable segments:

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

• Propylene oxide and related products (“PO&RP”), including manufacturing and marketing of PO; co-products SM and TBA with its derivatives, MTBE, ETBE and isobutylene; PO derivatives, including PG, PGE and BDO; and TDI;

• Refining; and

• Inorganic chemicals, primarily manufacturing and marketing of TiO₂ and related products.

55

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

25. Segment and Related Information – (Continued)

At the time of the Millennium acquisition, Lyondell reassessed segment reporting based on the current management structure, including the impact of the integration of Millennium businesses into the Lyondell portfolio of existing businesses. Based on this analysis, Lyondell concluded that management is focused on the four segments listed previously. On February 26, 2007, Lyondell announced that it has signed an agreement for a proposed sale of Lyondell’s worldwide inorganic chemicals business (see Note 26).

Lyondell management evaluates the performance of the EC&D and PO&RP segments and allocates resources based on the integrated economics of ethylene, co-products and derivatives; and PO, co-products and derivatives of PO, respectively. TDI, like PO, is sold into polyurethanes markets and is included in the PO&RP segment.

Through August 15, 2006, the refining segment consisted of Lyondell’s equity investment in Houston Refining (see Note 9). The operations of Houston Refining are consolidated prospectively from August 16, 2006 (see Note 3), and include the effects of Lyondell’s acquisition from that date.

The inorganic chemicals segment resulted from the acquisition of Millennium on November 30, 2004. Operations of the inorganic chemicals segment are included in results prospectively from December 1, 2004. With the acquisition of Millennium, Equistar also became a consolidated subsidiary. Results of Equistar operations, in the EC&D segment, prior to December 2004 reflect Lyondell’s previous equity investment in Equistar (see Note 8).

The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). Sales between segments are made at prices approximating prevailing market prices. No customer accounted for 10% or more of Lyondell’s consolidated sales during any year in the three year period ended December 31, 2006. However, prior to August 16, 2006, under the terms of Houston Refining’s previous agreement with CITGO, CITGO purchased substantially all of the refined products of the refining segment.

56

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

25. Segment and Related Information – (Continued)

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

Millions of dollars	EC&D		PO&RP		Refining		Inorganic Chemicals			Other			Total
2006
Sales and other operating revenues:
Customers	$	11,384	$	6,655	$	2,721	$	1,354		$	114		$	22,228
Intersegment		1,863		364		427		—			(2,654	)		—
		13,247		7,019		3,148		1,354			(2,540	)		22,228
Operating income (loss)		867		403		383		(567	)		(17	)		1,069
Income (loss) from equity investments		—		5		73		—			—			78
Goodwill		276		1,056		—		316			—			1,648
Total assets		6,467		5,528		3,586		1,623			642			17,846
Capital expenditures		175		68		98		54			5			400
Depreciation and amortization expense		386		234		83		95			7			805
2005
Sales and other operating revenues:
Customers	$	10,890	$	6,261	$	—	$	1,360		$	95		$	18,606
Intersegment		1,301		307		—		—			(1,608	)		—
		12,191		6,568		—		1,360			(1,513	)		18,606
Operating income (loss)		950		316		—		18			(16	)		1,268
Income from equity investments		—		1		123		—			—			124
Goodwill		281		1,071		—		943			—			2,295
Total assets		6,312		5,245		186		2,348			998			15,089
Capital expenditures		155		36		—		53			5			249
Depreciation and amortization expense		388		235		—		98			8			729
2004
Sales and other operating revenues:
Customers	$	883	$	4,960	$	—	$	97		$	6		$	5,946
Intersegment		107		24		—		—			(131	)		—
		990		4,984		—		97			(125	)		5,946
Operating income (loss)		113		48		—		7			(82	)		86
Income from equity investments		141		7		303		—			—			451
Goodwill		270		1,080		—		875			—			2,225
Total assets		6,327		5,824		229		2,329			1,356			16,065
Capital expenditures		16		49		—		5			—			70
Depreciation and amortization expense		27		249		—		7			6			289

57

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

25. Segment and Related Information – (Continued)

Sales and other operating revenues and operating income (loss) in the “Other” column above include elimination of intersegment transactions and a business that is not a reportable segment in 2006, 2005 and 2004 and $64 million of purchased IPR&D charges in 2004.

In 2006, the operating income of the EC&D segment included a $106 million charge for impairment of the net book value of the Lake Charles, Louisiana ethylene facility; in the Refining segment, Lyondell had a loss from its equity investment in Houston Refining due to its 58.75% share, or $176 million, of the $300 million cost to terminate Houston Refining’s previous crude supply agreement; and in the inorganic chemicals segment, operating income included the goodwill and software impairment of $552 million. The operating income of the PO&RP segment for 2005 included a $195 million charge for impairment of the net book value of the Lake Charles, Louisiana, TDI plant (see Note 4).

The following table presents the details of “Total assets” as presented above in the “Other” column as of December 31, for the years indicated:

Millions of dollars	2006			2005			2004
Cash and cash equivalents	$	446		$	593		$	804
Company-owned life insurance		151			145			145
Deferred tax assets		188			197			276
Non-reportable segment assets		93			86			95
Other assets, net		259			232			240
Eliminations		(495	)		(255	)		(204	)
Total assets	$	642		$	998		$	1,356

The following geographic data for revenues are based upon the delivery location of the product and for long-lived assets, the location of the assets.

	Revenues
Millions of dollars	2006		2005		2004
United States	$	17,073	$	13,713	$	3,307
Non-U.S.		5,155		4,893		2,639
Total	$	22,228	$	18,606	$	5,946

	Long-Lived Assets
Millions of dollars	2006		2005		2004
United States	$	7,976	$	5,529	$	5,949
Non-U.S.:
The Netherlands		801		751		898
France		516		487		597
Other non-U.S.		632		539		609
Total non-U.S.		1,949		1,777		2,104
Total	$	9,925	$	7,306	$	8,053

26. Subsequent Event

On February 26, 2007, Lyondell announced that it has signed an agreement for a proposed sale of Lyondell’s worldwide inorganic chemicals business for $1.05 billion, in cash, plus the assumption of specified liabilities. The amount will be adjusted up or down depending on the change in value of net working capital, cash and specified indebtedness as of the closing date. Closing is anticipated to occur in the first half of 2007.

Beginning in the first quarter of 2007, the inorganic chemicals business segment will be reported as a discontinued operation, including comparative periods presented. As of December 31, 2006, the affected assets and liabilities of the inorganic chemicals business are summarized as follows:

Millions of dollars
Current assets	$	635
Property, plant and equipment		606
Goodwill		316
Other noncurrent assets		87
Total assets	$	1,644
Current liabilities		329
Noncurrent liabilities		225
Minority interest		40
Total liabilities	$	594

See also Note 4 for additional information about the impairment of goodwill and Note 25 for additional financial information related to the inorganic chemicals business segment.

58

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

27. Unaudited Quarterly Results

	For the quarter ended
Millions of dollars, except per share data	March 31		June 30		September 30			December 31
2006
Sales and other operating revenues (a)	$	4,757	$	5,072	$	6,154		$	6,245
Operating income (loss) (a) (b)		432		293		382			(38	)
Income (loss) from equity investments (a) (b)		90		89		(102	)		1
Net income (loss) (a) (b) (c)		290		160		57			(321	)
Earnings (loss) per share: (a) (b) (c) (e)
Basic		1.18		0.65		0.23			(1.29	)
Diluted		1.12		0.62		0.22			(1.29	)
2005
Sales and other operating revenues	$	4,440	$	4,376	$	4,790		$	5,000
Operating income (d)		501		339		65			363
Income (loss) from equity investments		68		18		55			(17	)
Net income (d)		254		126		10			141
Earnings per share:
Basic (d) (e)		1.04		0.51		0.04			0.57
Diluted (d) (e)		0.98		0.48		0.04			0.54

(a) The operations of Houston Refining are consolidated prospectively from August 16, 2006. Prior to August 16, 2006, Lyondell accounted for its investment in Houston Refining using the equity method (see Notes 3 and 9).

(b) The fourth quarter 2006 included a $552 million pretax charge, $549 million after-tax, or $2.10 per share, for impairment of the carrying value of goodwill and certain software costs related to the inorganic chemicals segment. The third quarter 2006 included a $106 million pretax charge, $69 million after tax, or $0.26 per share, for impairment of the net book value of the Lake Charles, Louisiana ethylene facility, and a loss from Lyondell’s equity investment in Houston Refining due to its 58.75% share, or $176 million pretax, $114 million after tax, or $0.44 per share, of the $300 million cost to terminate Houston Refining’s previous crude supply agreement.

(c) The first quarter 2006 included $74 million pretax, $48 million after tax, or $0.18 per share, representing net payments received by Lyondell, including reimbursement of legal fees and expenses from Houston Refining, in settlement of all disputes among Lyondell, CITGO and PDVSA and their respective affiliates.

(d) The third quarter 2005 included a $195 million pretax charge, $127 million after tax, or $0.49 per share, for impairment of the net book value of the Lake Charles, Louisiana, TDI facility.

(e) Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earnings per share). The sum of the quarters may not necessarily be equal to the full year earnings per share amount.

59

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

28. Supplemental Guarantor Information

Certain Lyondell entities are guarantors, jointly and severally, of the following LCC debt (see Note 15):-

• Senior Secured Notes due 2012, 11.125%

• Senior Secured Notes due 2013, 10.5%

• Senior Unsecured Notes due 2014, 8%

• Senior Unsecured Notes due 2016, 8.25%, and

• Senior Subordinated Notes due 2009, 10.875%.

Guarantors include certain Lyondell subsidiaries, which have direct and indirect investments in Lyondell’s chemical production facilities in the U.S., The Netherlands and France; certain Lyondell entities, which hold and license technology to other Lyondell affiliates and to third parties, make loans to other Lyondell affiliates or which own equity interests in Equistar and Houston Refining; and, from August 16, 2006, Houston Refining.

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

Equistar is the issuer of 7.55% Debentures due 2026, which are guaranteed by LCC. As a result of Lyondell’s November 30, 2004 acquisition of Millennium, Equistar became a wholly-owned subsidiary of Lyondell and is a subsidiary issuer.

As a result of Lyondell’s purchase of its partner’s 41.25% equity interest in Houston Refining and Lyondell’s resulting 100% ownership of Houston Refining, the operations of Houston Refining are consolidated prospectively from August 16, 2006. Prior to August 16, 2006, Lyondell accounted for its investment in Houston Refining using the equity method (see Notes 3 and 9 for additional information).

Lyondell’s wholly-owned subsidiary, Millennium, is currently prohibited from making restricted payments, including paying certain dividends, pursuant to the provisions of restrictive covenants in Millennium’s credit facilities and indentures. Millennium’s net assets at December 31, 2006 totaled $1,823 million. During each of 2006, 2005 and 2004, LCC’s cash dividends from its consolidated subsidiaries were less than $1 million. Aggregate maturities of LCC long-term debt during the next five years are $18 million in 2007, $18 million in 2008, $518 million in 2009, $118 million in 2010, $18 million in 2011 and $4.3 billion thereafter.

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

60

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of December 31, 2006

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors		Eliminations			Consolidated
Inventories	$	246	$	343	$	809	$	868	$	(7	)	$	2,259
Accounts receivable - affiliates		3,223		1,644		221		510		(5,598	)		—
Other current assets		308		337		1,128		1,114		—			2,887
Property, plant and equipment, net		573		2,805		2,846		2,923		—			9,147
Investments and long-term receivables		5,685		3,686		59		1,302		(9,836	)		896
Long-term receivables - affiliates		2,816		2,054		—		267		(5,137	)		—
Goodwill, net		699		142		—		807		—			1,648
Other assets, net		268		118		296		327		—			1,009
Total assets	$	13,818	$	11,129	$	5,359	$	8,118	$	(20,578	)	$	17,846
Current maturities of long-term debt	$	18	$	—	$	—	$	4	$	—		$	22
Accounts payable – affiliates		2,192		2,402		174		830		(5,598	)		—
Other current liabilities		663		587		1,043		892		—			3,185
Long-term debt		4,954		—		2,160		904		—			8,018
Long-term payables – affiliates		1,557		2,839		—		741		(5,137	)		—
Other liabilities		456		118		377		710		—			1,661
Deferred income taxes		790		—		—		808		—			1,598
Minority interests		—		—		1		173		—			174
Stockholders’ equity		3,188		5,183		1,604		3,056		(9,843	)		3,188
Total liabilities and stockholders’ equity	$	13,818	$	11,129	$	5,359	$	8,118	$	(20,578	)	$	17,846

61

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the year ended December 31, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non-Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	4,035		$	3,149		$	12,765		$	5,579		$	(3,300	)	$	22,228
Cost of sales		3,815			2,759			11,562			4,932			(3,296	)		19,772
Asset impairments		—			—			135			538			—			673
Selling, general and administrative expenses		165			13			210			232			—			620
Research and development expenses		39			(4	)		34			25			—			94
Operating income (loss)		16			381			824			(148	)		(4	)		1,069
Interest income (expense), net		(362	)		10			(210	)		(29	)		1			(590	)
Other income (expense), net		(47	)		71			—			12			—			36
Income from equity investments		512			880			—			150			(1,464	)		78
Intercompany income (expense)		(311	)		473			—			(162	)		—			—
(Provision for) benefit from income taxes		378			(654	)		—			(131	)		—			(407	)
Net income	$	186		$	1,161		$	614		$	(308	)	$	(1,467	)	$	186

62

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOW

For the year ended December 31, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(50	)	$	1,475		$	807		$	781		$	(1,791	)	$	1,222
Expenditures for property, plant and equipment		(42	)		(98	)		(168	)		(92	)		—			(400	)
Acquisition of Houston Refining LP and related payments, net of cash acquired		(2,558	)		53			—			—			—			(2,505	)
Distributions from affiliates in excess of earnings		117			—			—			—			—			117
Contributions and advances to affiliates		(87	)		—			—			—			1			(86	)
Loans to affiliates		—			(431	)		—			(293	)		724			—
Other		2			2			2			1			(1	)		6
Net cash used in investing activities		(2,568	)		(474	)		(166	)		(384	)		724			(2,868	)
Issuance of long-term debt		4,356			—			—			1			—			4,357
Repayment of long-term debt		(2,238	)		—			(150	)		(289	)		—			(2,677	)
Proceeds from notes payable to affiliates		724			—			—			—			(724	)		—
Dividends paid		(223	)		(333	)		—			(288	)		621			(223	)
Proceeds from stock option exercises		27			—			—			—			—			27
Distributions to owners		—			(595	)		(575	)		(1	)		1,171			—
Contributions from owners		—			1			—			—			(1	)		—
Other		1			6			2			(2	)		—			7
Net cash provided by (used in) financing activities		2,647			(921	)		(723	)		(579	)		1,067			1,491
Effect of exchange rate changes on cash		—			—			—			8			—			8
Increase (decrease) in cash and cash equivalents		29			80			(82	)		(174	)		—			(147	)
Cash and cash equivalents at beginning of period		63			—			215			315			—			593
Cash and cash equivalents at end of period	$	92		$	80		$	133		$	141		$	—		$	446

63

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of December 31, 2005

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors		Eliminations			Consolidated
Inventories	$	232	$	—	$	657	$	776	$	(8	)	$	1,657
Accounts receivable-affiliates		2,453		1,420		155		611		(4,639	)		—
Other current assets		405		—		1,037		1,207		—			2,649
Property, plant and equipment, net		574		—		3,063		2,893		—			6,530
Investments and long-term receivables		5,608		3,538		61		1,290		(9,421	)		1,076
Long-term receivables-affiliates		607		1,379		—		200		(2,186	)		—
Goodwill, net		713		142		—		1,440		—			2,295
Other assets, net		216		24		347		295		—			882
Total assets	$	10,808	$	6,503	$	5,320	$	8,712	$	(16,254	)	$	15,089
Current maturities of long-term debt	$	—	$	—	$	150	$	169	$	—		$	319
Accounts payable – affiliates		2,124		1,682		61		772		(4,639	)		—
Other current liabilities		555		—		949		747		—			2,251
Long-term debt		2,751		—		2,161		1,062		—			5,974
Long-term payables – affiliates		1,022		508		—		656		(2,186	)		—
Other liabilities		551		4		415		816		—			1,786
Deferred income taxes		797		—		—		774		—			1,571
Minority interests		—		—		1		179		—			180
Stockholders’ equity		3,008		4,309		1,583		3,537		(9,429	)		3,008
Total liabilities and stockholders’ equity	$	10,808	$	6,503	$	5,320	$	8,712	$	(16,254	)	$	15,089

64

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the year ended December 31, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non-Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	3,979		$	1		$	11,686		$	4,988		$	(2,048	)	$	18,606
Cost of sales		3,690			8			10,487			4,352			(2,043	)		16,494
Asset impairments		195			—			—			15			—			210
Selling, general and administrative expenses		147			1			198			197			—			543
Research and development expenses		34			—			33			24			—			91
Operating income (loss)		(87	)		(8	)		968			400			(5	)		1,268
Interest income (expense), net		(354	)		9			(218	)		(40	)		—			(603	)
Other income (expense), net		(45	)		(22	)		(1	)		29			—			(39	)
Income from equity investments		1,016			1,049			—			184			(2,125	)		124
Intercompany income (expense)		(350	)		495			—			(145	)		—			—
(Provision for) benefit from income taxes		351			(445	)		(1	)		(124	)		—			(219	)
Net income	$	531		$	1,078		$	748		$	304		$	(2,130	)	$	531

65

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOW

For the year ended December 31, 2005

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	539		$	1,030		$	1,047		$	933		$	(1,955	)	$	1,594
Expenditures for property, plant and equipment		(20	)		—			(153	)		(76	)		—			(249	)
Distributions from affiliates in excess of earnings		263			180			—			3			(263	)		183
Contributions and advances to affiliates		(148	)		—			—			(10	)		10			(148	)
Loans to affiliates		—			(15	)		—			(343	)		358			—
Other		—			—			3			—			—			3
Net cash provided by (used in) investing activities		95			165			(150	)		(426	)		105			(211	)
Repayment of long-term debt		(1,137	)		—			(1	)		(374	)		—			(1,512	)
Issuance of long-term debt		—			—			—			100			—			100
Proceeds from notes payable to affiliates		358			—			—			—			(358	)		—
Dividends paid		(222	)		(325	)		—			(274	)		599			(222	)
Proceeds from stock option exercises		48			—			—			—			—			48
Distributions to owners		—			(870	)		(725	)		(24	)		1,619			—
Contributions from owners		—			—			—			10			(10	)		—
Other		(1	)		—			5			2			—			6
Net cash used in financing activities		(954	)		(1,195	)		(721	)		(560	)		1,850			(1,580	)
Effect of exchange rate changes on cash		—			—			—			(14	)		—			(14	)
Increase (decrease) in cash and cash equivalents		(320	)		—			176			(67	)		—			(211	)
Cash and cash equivalents at beginning of period		383			—			39			382			—			804
Cash and cash equivalents at end of period	$	63		$	—		$	215		$	315		$	—		$	593

66

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the year ended December 31, 2004

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Sales and other operating revenues	$	3,003		$	2		$	944		$	2,692		$	(695	)	$	5,946
Cost of sales		2,879			8			797			2,471			(691	)		5,464
Asset impairments		—			—			—			4			—			4
Selling, general and administrative expenses		178			2			33			74			—			287
Research and development expenses		34			—			5			2			—			41
Purchased in-process research and development		—			—			—			64			—			64
Operating income (loss)		(88	)		(8	)		109			77			(4	)		86
Interest income (expense), net		(432	)		5			(19	)		(3	)		—			(449	)
Other income (expense), net		(21	)		2			—			8			—			(11	)
Income from equity investments		549			709			—			—			(807	)		451
Intercompany income (expense)		(238	)		347			—			(109	)		—			—
(Provision for) benefit from income taxes		284			(315	)		—			8			—			(23	)
Net income (loss)	$	54		$	740		$	90		$	(19	)	$	(811	)	$	54

67

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the year ended December 31, 2004

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by operating activities	$	87		$	684		$	115		$	523		$	(1,055	)	$	354
Expenditures for property, plant and equipment		(35	)		—			(16	)		(19	)		—			(70	)
Distributions from affiliates in excess of earnings		102			82			—			—			(89	)		95
Contributions and advances to affiliates		(113	)		—			—			—			60			(53	)
Cash received in acquisition of Millennium & Equistar		—			—			85			367			—			452
Loans to affiliates		—			(15	)		—			(353	)		368			—
Net cash provided by (used in) investing activities		(46	)		67			69			(5	)		339			424
Repayment of long-term debt		(315	)		—			—			(4	)		—			(319	)
Issuance of long-term debt		—			—			—			4			—			4
Proceeds from notes payable to affiliates		368			—			—			—			(368	)		—
Dividends paid		(127	)		(226	)		—			(170	)		396			(127	)
Distributions to owners		—			(525	)		(145	)		(78	)		748			—
Contributions from owners		—			—			—			60			(60	)		—
Proceeds from stock option exercises		25			—			—			—			—			25
Other, net		(1	)		—			—			2			—			1
Net cash used in financing activities		(50	)		(751	)		(145	)		(186	)		716			(416	)
Effect of exchange rate changes on cash		—			—			—			4			—			4
Increase (decrease) in cash and cash equivalents		(9	)		—			39			336			—			366
Cash and cash equivalents at beginning of period		392			—			—			46			—			438
Cash and cash equivalents at end of period	$	383		$	—		$	39		$	382		$	—		$	804

68