SEC Info - Lyondell Chemical Co - ‘10-Q’ for 9/30/07

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		Alternative Formats (Word, et al.) Accounting and Reporting Changes Accounts Payable Accounts Receivable Agreement and Plan of Merger Basis of Preparation Charges Related to Toluene Diisocyanate Plant and Asset Impairment Commitments and Contingencies Comprehensive Income Discontinued Operations Equity Interest and Acquisition of Houston Refining LP Income Taxes Inventories Investment in PO Joint Ventures Long-Term Debt Pension and Other Postretirement Benefits Per Share Data Property, Plant and Equipment and Goodwill Segment and Related Information Stockholders' Equity Supplemental Guarantor Information Table of Contents
1	1st Page - Filing Submission
"	Table of Contents
"	Basis of Preparation
"	Accounting and Reporting Changes
"	Agreement and Plan of Merger
"	Discontinued Operations
"	Equity Interest and Acquisition of Houston Refining LP
"	Charges Related to Toluene Diisocyanate Plant and Asset Impairment
"	Investment in PO Joint Ventures
"	Accounts Receivable
"	Inventories
"	Property, Plant and Equipment and Goodwill
"	Accounts Payable
"	Long-Term Debt
"	Pension and Other Postretirement Benefits
"	Income Taxes
"	Stockholders' Equity
"	Per Share Data
"	Commitments and Contingencies
"	Comprehensive Income
"	Segment and Related Information
"	Supplemental Guarantor Information

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ü]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from . . . . . . . . . . to . . . . . . . . . .

Commission file number 1-10145

LYONDELL CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware	95-4160558
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1221 McKinney Street,	77010
Suite 700, Houston, Texas	(Zip Code)
(Address of principal executive offices)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ü Accelerated filer __ Non-accelerated filer__

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

Number of shares of common stock outstanding as of September 30, 2007: 253,615,364

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the three months ended						For the nine months ended
	September 30,						September 30,
Millions of dollars, except per share data	2007			2006			2007			2006

Sales and other operating revenues:
Trade	$	7,135		$	5,495		$	20,057		$	13,780
Related parties		250			320			599			1,168
		7,385			5,815			20,656			14,948
Operating costs and expenses:
Cost of sales		6,736			5,172			18,853			13,321
Asset impairments		- -			106			- -			106
Selling, general and administrative expenses		188			132			527			376
Research and development expenses		18			17			55			54
		6,942			5,427			19,435			13,857

Operating income		443			388			1,221			1,091

Interest expense		(144	)		(164	)		(499	)		(459	)
Interest income		6			8			26			27
Other income (expense), net		24			(18	)		(16	)		60

Income from continuing operations before equity investments and income taxes		329			214			732			719


Income (loss) from equity investments:
Houston Refining LP		- -			(104	)		- -			73
Other		- -			2			2			4
		- -			(102	)		2			77

Income from continuing operations before income taxes		329			112			734			796

Provision for income taxes		123			51			251			320

Income from continuing operations		206			61			483			476

Income (loss) from discontinued operations, net of tax		- -			(4	)		(82	)		31

Net income	$	206		$	57		$	401		$	507

Earnings per share:
Income from continuing operations:
Basic	$	0.81		$	0.24		$	1.91		$	1.92
Diluted	$	0.78		$	0.23		$	1.83		$	1.84
Net income:
Basic	$	0.81		$	0.23		$	1.59		$	2.05
Diluted	$	0.78		$	0.22		$	1.52		$	1.96

See Notes to the Consolidated Financial Statements.

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LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

Millions, except shares and par value data	September 30, 2007			December 31, 2006

ASSETS
Current assets:
Cash and cash equivalents	$	303		$	401
Accounts receivable:
Trade, net		2,367			1,837
Related parties		118			95
Inventories		1,906			1,877
Prepaid expenses and other current assets		155			147
Deferred tax assets		50			102
Current assets held for sale		- -			687
Total current assets		4,899			5,146

Property, plant and equipment, net		8,491			8,542
Investments and long-term receivables:
Investment in PO joint ventures		799			778
Other		100			115
Goodwill, net		1,373			1,332
Other assets, net		878			864
Long-term assets held for sale		- -			1,069

Total assets	$	16,540		$	17,846

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	423		$	18
Accounts payable:
Trade		2,262			1,785
Related parties		77			83
Accrued liabilities		965			980
Current liabilities associated with assets held for sale		- -			341
Total current liabilities		3,727			3,207

Long-term debt		6,226			7,936
Other liabilities		1,258			1,453
Deferred income taxes		1,678			1,537
Long-term liabilities associated with assets held for sale		- -			391
Commitments and contingencies
Minority interests		121			134
Stockholders’ equity:
Common stock, $1.00 par value, 420,000,000 shares authorized, 254,354,550 and 249,764,306 shares issued, respectively		254			250
Additional paid-in capital		3,335			3,248
Retained deficit		(103	)		(330	)
Accumulated other comprehensive income		66			42
Treasury stock, at cost, 739,186 and 793,736 shares, respectively		(22	)		(22	)
Total stockholders’ equity		3,530			3,188

Total liabilities and stockholders’ equity	$	16,540		$	17,846

See Notes to the Consolidated Financial Statements.

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LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the nine months ended
	September 30,
Millions of dollars	2007			2006

Cash flows from operating activities:
Net income	$	401		$	507
Loss (income) from discontinued operations, net of tax		82			(31	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		662			495
Asset impairments		- -			106
Equity investments –
Amounts included in net income		(2	)		(77	)
Distributions of earnings		1			73
Deferred income taxes		184			115
Debt prepayment premiums and charges		47			21
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(489	)		(210	)
Inventories		(12	)		(175	)
Accounts payable		396			(120	)
Other, net		(424	)		(123	)
Net cash provided by operating activities – continuing operations		846			581
Net cash provided by (used in) operating activities – discontinued operations		(113	)		38
Net cash provided by operating activities		733			619
Cash flows from investing activities:
Expenditures for property, plant and equipment		(360	)		(197	)
Payments to discontinued operations		(97	)		(12	)
Acquisition of Houston Refining LP and related payments, net of cash acquired		(94	)		(2,413	)
Distributions from affiliates in excess of earnings		2			117
Contributions and advances to affiliates		(34	)		(82	)
Other		12			6
Net cash used in investing activities – continuing operations		(571	)		(2,581	)
Net proceeds from sale of discontinued operations before required repayment of debt		1,089			- -
Other net cash provided by (used in) investing activities – discontinued operations		82			(30	)
Net cash provided by (used in) investing activities		600			(2,611	)
Cash flows from financing activities:
Repayment of long-term debt		(1,831	)		(2,095	)
Issuance of long-term debt		510			4,356
Dividends paid		(171	)		(167	)
Proceeds from and tax benefits of stock option exercises		81			18
Other, net		7			(3	)
Net cash provided by (used in) financing activities – continuing operations		(1,404	)		2,109
Debt required to be repaid upon sale of discontinued operations		(99	)		- -
Other net cash provided by (used in) financing activities – discontinued operations		23			(13	)
Net cash provided by (used in) financing activities		(1,480	)		2,096
Effect of exchange rate changes on cash		4			4
Increase (decrease) in cash and cash equivalents		(143	)		108
Cash and cash equivalents at beginning of period		446			593
Cash and cash equivalents at end of period		303			701
Less: Cash and cash equivalents at end of period – discontinued operations		- -			45
Cash and cash equivalents at end of period – continuing operations	$	303		$	656

See Notes to the Consolidated Financial Statements

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

1.	Basis of Preparation	5
2.	Accounting and Reporting Changes	5
3.	Agreement and Plan of Merger	6
4.	Discontinued Operations	6
5.	Equity Interest and Acquisition of Houston Refining LP	8
6.	Charges Related to Toluene Diisocyanate Plant and Asset Impairment	9
7.	Investment in PO Joint Ventures	10
8.	Accounts Receivable	11
9.	Inventories	11
10.	Property, Plant and Equipment and Goodwill	11
11.	Accounts Payable	12
12.	Long-Term Debt	12
13.	Pension and Other Postretirement Benefits	14
14.	Income Taxes	15
15.	Commitments and Contingencies	16
16.	Stockholders’ Equity	20
17.	Per Share Data	20
18.	Comprehensive Income	22
19.	Segment and Related Information	22
20.	Supplemental Guarantor Information	24

Table of Contents

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Basis of Preparation

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, 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 Note 5 for additional information).

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and notes thereto included in the Lyondell Chemical Company Current Report on Form 8-K dated May 29, 2007.

Certain previously reported amounts have been reclassified to present Lyondell’s inorganic chemicals business operations as discontinued operations. Unless otherwise indicated, information presented in the notes to the financial statements relates only to Lyondell’s continuing operations. Information related to Lyondell’s discontinued operations is presented in Note 4.

2. Accounting and Reporting Changes

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115, which permits election of fair value to measure many financial instruments and certain other items. SFAS No. 159 is effective for Lyondell beginning in 2008. Lyondell is currently evaluating whether it will elect the fair value option for any of its eligible financial instruments and other items.

In September 2006, the 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.

Lyondell adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN No. 48, Lyondell recognized a $47 million increase in the liability related to uncertain income tax positions, which was accounted for as a $41 million increase in goodwill related to the acquisition of Millennium Chemicals, Inc. (together with its consolidated subsidiaries “Millennium”), a $4 million increase in deferred tax assets and a $2 million increase of the January 1, 2007 balance of retained deficit (see Note 14).

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Agreement and Plan of Merger

On July 16, 2007, Lyondell, Basell AF, a Luxembourg company (“Basell”), and BIL Acquisition Holdings Limited, a Delaware corporation and a wholly owned subsidiary of Basell (“Merger Sub”), entered into an agreement and plan of merger pursuant to which Merger Sub will be merged with and into Lyondell with Lyondell continuing as the surviving corporation and a wholly owned subsidiary of Basell. Pursuant to the merger, each outstanding share of Lyondell's common stock will be converted into the right to receive $48 per share in cash.

The proposed merger is subject to approval by Lyondell’s shareholders and other customary closing conditions. The antitrust approvals required by the merger agreement as a condition to closing have been received and/or any associated waiting periods have expired. A special meeting of Lyondell’s shareholders has been scheduled for November 20, 2007 to vote on the proposed merger, which is expected to close in the fourth quarter 2007.

The merger agreement restricts Lyondell’s ability to take specified actions without Basell’s approval including, among other things, making significant acquisitions, dispositions or investments, making certain significant capital expenditures not contemplated by Lyondell’s current capital plan, and entering into certain material contracts. The merger agreement also contains certain termination rights, and provides that, upon termination of the merger agreement under specified circumstances, Lyondell would be required to pay to Basell a termination fee of $385 million.

As a result of the proposed merger, the debt and accounts receivable sales facilities of Lyondell Chemical Company, Equistar and Millennium will be affected to varying degrees. If not amended, the credit facilities and accounts receivable sales facilities of Lyondell Chemical Company and Equistar would be terminated at the closing. The indentures governing all of Lyondell Chemical Company’s and Equistar’s debt, with the exception of Lyondell Chemical Company’s Debentures due 2010 and 2020 and Equistar’s Notes due 2009 and Debentures due 2026, contain put rights, which may be available to the debt holders as a result of the merger. Millennium’s Notes due 2026 do not contain a put right. Millennium’s 4% convertible debentures would be convertible at the conversion rate into the $48 cash per share merger consideration.

4. Discontinued Operations

On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business in a transaction valued at $1.3 billion, including the acquisition of working capital and assumption of certain liabilities directly related to the business.

The following represent the elements of cash flow for the nine months ended September 30, 2007 related to the sale of the inorganic chemicals business:

Millions of dollars
Gross sales proceeds	$	1,143
Cash and cash equivalents sold		(37	)
Costs related to the sale		(17	)
Net proceeds from sale of discontinued operations before required repayment of debt		1,089
Debt required to be repaid		(99	)
Net proceeds from sale of discontinued operations	$	990

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Discontinued Operations – (Continued)

The operations of the inorganic chemicals business are classified as discontinued operations in the consolidated statements of income and cash flows, and the assets and associated liabilities have been classified as held for sale in the consolidated balance sheets.

Amounts included in income from discontinued operations are summarized as follows:

	For the three months ended September 30,					For the nine months ended September 30,
Millions of dollars	2007		2006			2007			2006
Sales and other operating revenues	$	- -	$	339		$	514		$	1,035
Loss on sale of discontinued operations	$	- -	$	- -		$	(21	)	$	- -
Other income (loss) from discontinued operations		- -		(7	)		18			35
Provision for (benefit from) income taxes		- -		(3	)		79			4
Income (loss) from discontinued operations, net of tax	$	- -	$	(4	)	$	(82	)	$	31

The final amount that Lyondell will receive in compensation for working capital has not been determined. Unresolved amounts totaling less than $30 million are subject to possible arbitration proceedings.

The provision for income taxes in the nine months ended September 30, 2007 primarily reflects the unfavorable effect of nondeductible capital losses resulting from the sale. Income taxes payable related to the sale were $88 million.

The assets and liabilities of the inorganic chemicals business classified as held for sale are summarized as follows:

Millions of dollars	December 31, 2006
Cash	$	45
Inventories		381
Other current assets		261
Total current assets		687
Property, plant and equipment, net		604
Goodwill, net		316
Other noncurrent assets, net		149
Total long-term assets		1,069
Total assets	$	1,756
Current maturities of long-term debt	$	4
Other current liabilities		337
Total current liabilities		341
Long-term debt		82
Other noncurrent liabilities		269
Minority interest		40
Total long-term liabilities		391
Total liabilities	$	732

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Discontinued Operations – (Continued)

Additionally, stockholders’ equity at December 31, 2006 included accumulated other comprehensive income of $55 million associated with discontinued operations.

5. Equity Interest and Acquisition of Houston Refining LP

During the third quarter 2007, Houston Refining settled its remaining insurance claims related to business interruption from Hurricane Rita for $50 million and Lyondell recognized a benefit of $30 million for its 58.75% pro rata share of the settlement. The remainder was remitted to CITGO Petroleum Corporation (“CITGO”).

On August 16, 2006, Lyondell purchased CITGO’s 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 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.

Lyondell’s acquisition of CITGO’s 41.25% interest was financed using $2,509 million of the proceeds of a $2.65 billion seven-year term loan (see Note 12). The $2,509 million consisted of $43 million of debt issue costs and $2,466 million of cash payments at closing consisting of: $1,629 million for acquisition of the 41.25% interest in Houston Refining, the acquisition of estimated working capital of $53 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. 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. In the fourth quarter 2006, additional payments totaling $92 million, including accrued interest, were made to CITGO, representing adjustment of the estimated working capital.

The following represent the elements of cash flow in the nine months ended September 30, 2006 for the transactions related to the acquisition of Houston Refining:

Millions of dollars
Purchase of CITGO’s 41.25% interest in Houston Refining	$	1,629
Acquisition of estimated working capital		53
Total cash purchase price of 41.25% interest in Houston Refining		1,682
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
Cash payments at closing		2,466
Cash and cash equivalents acquired		(53	)
Acquisition of Houston Refining and related payments, net of cash acquired	$	2,413

During the nine months ended September 30, 2007, Lyondell reimbursed CITGO, as provided for in the transaction agreement, for $94 million of taxes, which Lyondell previously estimated at $97 million, resulting in a $3 million reduction to the purchase price allocated to property, plant and equipment.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Equity Interest and Acquisition of Houston Refining LP – (Continued)

Prior to the acquisition, Lyondell held a 58.75% equity-basis investment in Houston Refining and, 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.

Summarized financial information for Houston Refining follows for certain periods prior to the consolidation of Houston Refining:

Millions of dollars	For the period July 1 through August 15, 2006			For the period January 1 through August 15, 2006
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,205		$	5,710
Cost of sales		1,076			5,223
Termination of crude supply agreement		300			300
Selling, general and administrative expenses		9			42
Operating income (loss)		(180	)		145
Interest expense, net		(8	)		(31	)
Benefit from income taxes		(8	)		- -
Net income (loss)	$	(180	)	$	114

As a partnership, Houston Refining is not subject to federal income taxes. Houston Refining’s selling, general and administrative expenses for the nine months ended September 30, 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 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.

Lyondell’s results for the three and nine months ended September 30, 2006 were 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. For the nine months ended September 30, 2006, Lyondell’s income also included $74 million in “Other income (expense), net” representing the net payments received by Lyondell, including reimbursement of legal fees and expenses from Houston Refining referred to above, in settlement of all disputes among Lyondell, CITGO and Petróleos de Venezuela, S.A. and their respective affiliates.

6. Charges Related to Toluene Diisocyanate Plant and Asset Impairment

Lyondell ceased production of toluene diisocyanate (“TDI”) at the Lake Charles, Louisiana TDI plant in the third quarter of 2005. Results of operations in the first nine months of 2007 reflect charges totaling $64 million, relating to resolution of commercial arrangements associated with the facility under which payments will be made over the next four years. Any additional costs that may be incurred with respect to the facility are not expected to be material to Lyondell’s results of operations.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Charges Related to Toluene Diisocyanate Plant and Asset Impairment – (Continued)

Lyondell’s third quarter and first nine months 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.

7. Investment in PO Joint Ventures

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

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

Changes in Lyondell’s investment in the U.S. and European PO joint ventures for the nine-month periods ended September 30, 2006 and 2007 are summarized as follows:

Millions of dollars	U.S. PO Joint Venture			European PO Joint Venture			Total PO Joint Ventures
Investment in PO joint ventures – January 1, 2006	$	518		$	258		$	776
Cash contributions		12			6			18
Depreciation and amortization		(25	)		(10	)		(35	)
Effect of exchange rate changes		- -			18			18

Investment in PO joint ventures – September 30, 2006	$	505		$	272		$	777

Investment in PO joint ventures – January 1, 2007	$	504		$	274		$	778
Cash contributions		13			21			34
Depreciation and amortization		(25	)		(11	)		(36	)
Effect of exchange rate changes		- -			23			23

Investment in PO joint ventures – September 30, 2007	$	492		$	307		$	799

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Accounts Receivable

Lyondell has two accounts receivable sales facilities totaling $750 million, which mature in November 2010, maintained by its wholly owned subsidiary, Equistar Chemicals, LP (together with its consolidated subsidiaries, “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. As of September 30, 2007 and December 31, 2006, the aggregate amounts of outstanding receivables sold under the facilities were $40 million and $100 million, respectively.

9. Inventories

Inventories consisted of the following components:

Millions of dollars	September 30, 2007		December 31, 2006
Finished goods	$	1,075	$	1,093
Work-in-process		178		156
Raw materials		447		445
Materials and supplies		206		183
Total inventories	$	1,906	$	1,877

10. Property, Plant and Equipment and Goodwill

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

Millions of dollars	September 30, 2007			December 31, 2006
Land	$	103		$	104
Manufacturing facilities and equipment		12,579			12,124
Construction in progress		373			362
Total property, plant and equipment		13,055			12,590
Less accumulated depreciation		(4,564	)		(4,048	)
Property, plant and equipment, net	$	8,491		$	8,542

Depreciation and amortization expense is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2007		2006		2007		2006
Property, plant and equipment	$	170	$	135	$	509	$	365
Investment in PO joint ventures		12		12		36		35
Turnaround costs		24		16		64		44
Patent and license costs		1		1		4		5
Software costs		2		8		17		22
Other		14		10		32		24
Total depreciation and amortization	$	223	$	182	$	662	$	495

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Property, Plant and Equipment and Goodwill – (Continued)

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. Any decision to retire one or more facilities would result in an increase in the present value of such obligations. At September 30, 2007 and December 31, 2006, the liabilities that had been recognized for all asset retirement obligations were $16 million and $12 million, respectively.

Lyondell’s goodwill increased from $1,332 million at December 31, 2006 to $1,373 million at September 30, 2007 as a result of the adoption of FIN No. 48 (see Note 2).

11. Accounts Payable

Accounts payable at September 30, 2007 and December 31, 2006 included liabilities in the amounts of $17 million and $19 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.

12. 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.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Long-Term Debt – (Continued)

Long-term debt consisted of the following:

Millions of dollars	September 30, 2007			December 31, 2006
Bank credit facilities:
LCC senior secured credit facility:
Term loan due 2013	$	1,758		$	1,771
$1,055 million revolving credit facility		- -			- -
Equistar $400 million inventory-based revolving credit facility		- -			- -

LCC notes and debentures:
Senior Secured Notes due 2012, 11.125%		- -			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			875
Senior Unsecured Notes due 2016, 8.25%		900			900
Senior Unsecured Notes due 2017, 6.875%		510			- -
Senior Subordinated Notes due 2009, 10.875%		- -			500

Equistar notes and debentures:
Senior Notes due 2008, 10.125% ($5 million of premium)		405			716
Senior Notes due 2011, 10.625% ($12 million of premium)		412			727
Debentures due 2026, 7.55% ($14 million of discount)		136			135
Notes due 2009, 8.75%		600			599

Millennium notes and debentures:
Senior Notes due 2008, 9.25%		- -			393
Senior Debentures due 2026, 7.625% ($3 million of premium)		244			249
Convertible Senior Debentures due 2023, 4% ($10 million of premium)		160			163

Total		6,649			7,954
Less current maturities		(423	)		(18	)

Long-term debt	$	6,226		$	7,936

During the first nine months of 2007, Lyondell repaid the $278 million outstanding principal amount of LCC’s 11.125% Senior Secured Notes due 2012, paying premiums totaling $18 million. LCC also obtained consents to a proposed amendment of a restrictive provision of the indenture related to its 10.5% Senior Secured Notes due 2013, which required LCC to refinance subordinated debt with new subordinated debt. The amendment permits the refinancing of subordinated debt with senior debt. As a result, Lyondell issued $510 million of LCC 6.875% Senior Unsecured Notes due 2017, paying debt issuance costs of $8 million, and repaid, at par, the outstanding $500 million principal amount of LCC’s 10.875% Senior Subordinated Notes due 2009.

Also during the first nine months of 2007, LCC obtained an amendment to its senior secured credit facility reducing the then-current interest rate from LIBOR plus 1.75% to LIBOR plus 1.50% and removing the financial ratio maintenance covenants from the term loan. In addition, LCC repaid $13 million principal amount of its term loan due 2013 and Millennium repaid $4 million principal amount of its 7.625% Senior Debentures due 2026.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Long-Term Debt – (Continued)

During the first nine months of 2007, Equistar repaid $300 million of its 10.125% Senior Notes due 2008 and $300 million of its 10.625% Senior Notes due 2011, paying premiums totaling $32 million, and Millennium repaid the remaining $373 million of its 9.25% Senior Notes due 2008, paying a premium of $13 million. As a result of the repayment of the 9.25% Senior Notes, Millennium is no longer prohibited from making certain restricted payments, including cash dividends to Lyondell, nor is it required to maintain financial ratios.

As of September 30, 2007, based on a quarterly test related to the price of Lyondell common stock, Millennium’s 4% Convertible Senior Debentures were convertible into Lyondell common stock at a conversion rate of 75.763 Lyondell shares per one thousand dollar principal amount of the Debentures. The principal amount of Debentures that had been converted into shares of Lyondell common stock as of September 30, 2007 was not significant.

Current maturities of long-term debt at September 30, 2007 included $400 million principal amount of Equistar’s 10.125% Senior Notes due 2008 and $18 million of LCC’s term loan due 2013. At December 31, 2006, current maturities of long-term debt included $18 million of LCC’s term loan due 2013.

Amortization of debt premiums, including adjustments to fair values included in accounting for the acquisition of Millennium, debt discounts and debt issuance costs resulted in net expense of $1 million for the three months ended September 30, 2007, a net credit of $3 million for the three months ended September 30, 2006 and net credits of $6 million and $13 million for the nine months ended September 30, 2007 and 2006, respectively, that were included in interest expense in the Consolidated Statements of Income.

Foreign exchange gains on intercompany loans totaled $26 million and $24 million, respectively, in the three months and nine months ended September 30, 2007 and less than $1 million in each of the three and nine months ended September 30, 2006. The gains in 2007 reflected the significant increase in value of the euro compared to the U.S. dollar in the three months ended September 30, 2007 and the determination that certain outstanding intercompany debt will be repaid in the foreseeable future.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Pension and Other Postretirement Benefits

Net periodic pension benefits included the following cost components:

	For the three months ended September 30, 2007						For the nine months ended September 30, 2007
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	13		$	3		$	39		$	8
Interest cost		22			3			66			8
Recognized return on plan assets		(26	)		(4	)		(74	)		(10	)
Amortization		5			- -			10			1
Net periodic pension benefit cost	$	14		$	2		$	41		$	7

	For the three months ended September 30, 2006						For the nine months ended September 30, 2006
Millions of dollars	U.S.			Non-U.S.			U.S.			Non-U.S.
Service cost	$	11		$	4		$	33		$	11
Interest cost		20			3			59			9
Recognized return on plan assets		(19	)		(4	)		(56	)		(11	)
Amortization		6			1			17			3
Net periodic pension benefit cost	$	18		$	4		$	53		$	12

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

	For the three months ended September 30,						For the nine months ended September 30,
Millions of dollars	2007			2006			2007			2006
Service cost	$	1		$	1		$	4		$	3
Interest cost		4			3			11			9
Amortization		(1	)		(1	)		(5	)		(2	)
Net periodic other postretirement benefit cost	$	4		$	3		$	10		$	10

Lyondell made $147 million of voluntary and required contributions to its pension plans during the nine months ended September 30, 2007, and does not expect to make significant contributions during the last three months of 2007.

14. Income Taxes

Certain income tax returns of Lyondell and various of its subsidiaries are under examination by the Internal Revenue Service (“IRS”) and various non-U.S. and state tax authorities. In many cases, these audits may result in proposed adjustments 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.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Income Taxes – (Continued)

Tax benefits totaling $179 million relating to uncertain tax positions taken in prior years, including $44 million pertaining to discontinued operations, were unrecognized as of January 1, 2007 (see Note 2). As a result of the sale of the inorganic chemicals business, this amount decreased by the $44 million. There were no other material changes in the amount of unrecognized benefits during the nine months ended September 30, 2007.

A substantial portion of these uncertainties relate to passive foreign income for the years 1997 to 2001 and related capital loss benefits that were subsequently recognized. IRS audit examination and appeal of the matter has been completed, and it is now in the final stages of the administrative review process. It is reasonably possible that the matter may be settled in 2007 and result in a significant reduction of the amount of unrecognized tax benefits with a corresponding adjustment to goodwill. With the exception of the preceding issue, Lyondell is no longer subject to any significant income tax examinations by tax authorities for years prior to 2002.

Lyondell recognizes interest accrued related to uncertain income tax positions in interest expense. Lyondell’s accrued liability for interest as of January 1, 2007 was $86 million. The noncurrent portion of liabilities for uncertain income tax positions and related interest are classified as “Other liabilities” in the consolidated balance sheets.

The effective income tax rate for the first nine months of 2007 was 34% primarily due to a benefit from newly-enacted Texas state legislation, which allows the carryforward of certain tax losses for state income tax purposes. The estimated annual effective income tax rate for 2007, excluding the effect of the Texas state tax benefit, is 36%. The effective income tax rate used for the first nine months of 2006 was 40%, and was higher than the statutory rate primarily due to the effects of non-U.S. operations.

15. Commitments and Contingencies

Environmental Remediation—Lyondell’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $175 million and $176 million as of September 30, 2007 and December 31, 2006, 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 nine months ended September 30:

Millions of dollars	2007			2006
Balance at January 1	$	176		$	171
Additional provisions		12			10
Amounts paid		(13	)		(9	)
Balance at September 30	$	175		$	172

The liabilities for individual sites range from less than $1 million to $109 million. The $109 million liability relates to the Kalamazoo River Superfund Site.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

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.

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

As a result of these discussions, new information has been obtained about regulatory oversight costs and other remediation costs, including a proposed remedy to be applied to a specific portion of the river. As a result, Lyondell recognized $8 million in the first nine months of 2007 for additional estimated probable future remediation costs. As of September 30, 2007, the probable future remediation spending associated with the river cannot be determined with certainty. The activities related to the specific portion of the river are expected to be completed in 3 to 4 years and may provide Lyondell with a basis for estimating the probable future remediation cost of the Kalamazoo River. At September 30, 2007, the balance of this liability was $62 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 September 30, 2007, the balance of the liability was $47 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.

The balance, at September 30, 2007, of Lyondell remediation liabilities related to Millennium sites other than the Kalamazoo River Superfund Site was $39 million.

MTBE—The presence of methyl tertiary butyl ether (“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.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

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 the 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.

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. Lyondell denies it breached the contract. The trial started on June 18, 2007. Lyondell believes the maximum refund due to BASF is $22.5 million on such PO sales and has offered to pay such amount to BASF. On August 13, 2007, the jury returned a verdict in favor of BASF in the amount of approximately $170 million (which includes the above $22.5 million). On October 3, 2007, the judge determined that prejudgment interest on the verdict would be $36 million. Lyondell will appeal this verdict and will post a bond, which will be collateralized by a $200 million letter of credit. Lyondell does not expect the verdict to result in any material adverse effect on its business, financial position, liquidity or results of operations.

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. 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. On March 16, 2007, the court entered a final judgment on the jury’s verdict. On March 20, 2007, Millennium filed its notice of appeal with the Rhode Island Supreme Court.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

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.

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 September 30, 2007, Lyondell has not accrued any significant amounts for such indemnification obligations, 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.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Stockholders’ Equity

In January 2007, Occidental Chemical Holding Corporation, a subsidiary of Occidental (“OCHC”), notified Lyondell that it was exercising the warrant held by OCHC for the purchase of 5 million shares of Lyondell common stock for $25 per share. The terms of the warrant provided that Lyondell could elect to net settle the exercise by delivering that number of shares of Lyondell common stock having a market value equal to the difference between the exercise price and the market price. In February 2007, pursuant to the terms of the warrant, OCHC received a net payment of 682,210 shares of Lyondell common stock, having a value of $20 million. Subsequently, OCHC sold its remaining shares of Lyondell common stock.

The tax benefits of stock options exercised during the nine months ended September 30, 2007 and 2006 were $20 million and $4 million, respectively.

17. Per Share Data

Basic earnings per share for the periods presented is computed based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share also include the effect of outstanding stock options, warrants and restricted stock. Additionally, diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 include the effect of the assumed conversion of Millennium’s 4% Convertible Senior Debentures into Lyondell common stock.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Per Share Data – (Continued)

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

	For the three months ended September 30,					For the nine months ended September 30,
In millions	2007		2006			2007			2006
Income from continuing operations	$	206	$	61		$	483		$	476
After-tax interest expense on 4% Convertible Senior Debentures		- -		- -			1			1
Income from continuing operations, assuming conversion of 4% Convertible Senior Debentures		206		61			484			477
Income (loss) from discontinued operations, net of tax		- -		(4	)		(82	)		31
Net income assuming conversion of 4% Convertible Senior Debentures	$	206	$	57		$	402		$	508

In millions of shares
Basic weighted average shares		253.3		247.7			252.4			247.3
Effect of dilutive securities:
4% Convertible Senior Debentures		11.4		11.0			11.3			11.0
Stock options, warrants and restricted stock		1.6		1.8			1.5			1.7
Dilutive potential shares		266.3		260.5			265.2			260.0

Earnings per share:
Basic:
Continuing operations	$	0.81	$	0.24		$	1.91		$	1.92
Discontinued operations		- -		(0.01	)		(0.32	)		0.13
	$	0.81	$	0.23		$	1.59		$	2.05
Diluted:
Continuing operations	$	0.78	$	0.23		$	1.83		$	1.84
Discontinued operations		- -		(0.01	)		(0.31	)		0.12
	$	0.78	$	0.22		$	1.52		$	1.96

Antidilutive stock options and warrants in millions		- -		6.2			0.3			6.2

Dividends declared per share of common stock	$	0.225	$	0.225		$	0.675		$	0.675

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Comprehensive Income

The components of comprehensive income were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
Millions of dollars	2007		2006			2007			2006
Net income	$	206	$	57		$	401		$	507
Other comprehensive income (loss), net of tax:
Continuing operations:
Foreign currency translation		39		2			75			84
Amortization of actuarial and investment loss included in net periodic benefit cost		3		- -			4			- -

Discontinued operations:
Foreign currency translation		- -		(2	)		17			24
Sale of discontinued operations		- -		- -			(72	)		- -
Total other comprehensive income		42		- -			24			108
Comprehensive income	$	248	$	57		$	425		$	615

19. Segment and Related Information

Lyondell operates in three reportable segments:

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

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

Refining.

Through August 15, 2006, the refining segment consisted of Lyondell’s equity investment in Houston Refining (see Note 5). The operations of Houston Refining are consolidated prospectively from August 16, 2006, and include the effects of Lyondell’s acquisition from that date.

On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business (see Note 4).

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. 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			Other			Total

For the three months ended September 30, 2007:
Sales and other operating revenues:
Customer	$	2,786	$	2,031	$	2,539		$	29		$	7,385
Intersegment		782		100		260			(1,142	)		- -
		3,568		2,131		2,799			(1,113	)		7,385

Operating income (loss)		83		170		209			(19	)		443

For the three months ended September 30, 2006:
Sales and other operating revenues:
Customer	$	3,015	$	1,810	$	954		$	36		$	5,815
Intersegment		588		90		129			(807	)		- -
		3,603		1,900		1,083			(771	)		5,815

Operating income		173		133		81			1			388
Income (loss) from equity investments		- -		2		(104	)		- -			(102	)

For the nine months ended September 30, 2007:
Sales and other operating revenues:
Customer	$	8,034	$	5,756	$	6,777		$	89		$	20,656
Intersegment		2,190		302		699			(3,191	)		- -
		10,224		6,058		7,476			(3,102	)		20,656

Operating income (loss)		255		330		674			(38	)		1,221
Income from equity investments		- -		2		- -			- -			2

For the nine months ended September 30, 2006:
Sales and other operating revenues:
Customer	$	8,833	$	5,067	$	954		$	94		$	14,948
Intersegment		1,323		240		129			(1,692	)		- -
		10,156		5,307		1,083			(1,598	)		14,948

Operating income (loss)		653		358		81			(1	)		1,091
Income from equity investments		- -		4		73			- -			77

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Segment and Related Information – (Continued)

Sales and other operating revenues and operating income in the “Other” column above include elimination of intersegment transactions and businesses that are not reportable segments.

20. Supplemental Guarantor Information

Certain Lyondell entities are guarantors, jointly and severally, of the following LCC debt (see Note 12):

-	Senior Secured Notes due 2013, 10.5%

-	Senior Unsecured Notes due 2014, 8%

-	Senior Unsecured Notes due 2016, 8.25%, and

-	Senior Unsecured Notes due 2017, 6.875%.

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 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 Note 5 for additional information).

The following condensed consolidating financial information present supplemental information as of September 30, 2007 and December 31, 2006 and for the three- and nine-month periods ended September 30, 2007 and 2006. In this note, LCC refers to the parent company, Lyondell Chemical Company.

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET

As of September 30, 2007

Millions of dollars	LCC		Guarantors		Equistar		Non- Guarantors		Eliminations			Consolidated


Inventories	$	316	$	362	$	679	$	551	$	(2	)	$	1,906
Accounts receivable – affiliates		3,764		1,680		270		920		(6,634	)		- -
Other current assets		248		453		1,231		1,061		- -			2,993
Property, plant and equipment, net		571		2,790		2,814		2,316		- -			8,491
Investments and long-term receivables		5,509		4,122		51		2,141		(10,924	)		899
Long-term receivables – affiliates		2,936		2,297		- -		625		(5,858	)		- -
Goodwill, net		699		142		- -		532		- -			1,373
Other assets, net		256		146		273		203		- -			878
Total assets	$	14,299	$	11,992	$	5,318	$	8,349	$	(23,418	)	$	16,540

Current maturities of long-term debt	$	18	$	- -	$	400	$	5	$	- -		$	423
Accounts payable – affiliates		2,132		2,863		647		992		(6,634	)		- -
Other current liabilities		573		682		1,200		849		- -			3,304
Long-term debt		4,674		- -		1,153		399		- -			6,226
Long-term payables – affiliates		2,022		2,988		- -		848		(5,858	)		- -
Other liabilities		461		95		370		332		- -			1,258
Deferred income taxes		889		- -		- -		789		- -			1,678
Minority interests		- -		- -		1		120		- -			121
Stockholders’ equity		3,530		5,364		1,547		4,015		(10,926	)		3,530
Total liabilities and stockholders’ equity	$	14,299	$	11,992	$	5,318	$	8,349	$	(23,418	)	$	16,540

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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	$	486	$	(7	)	$	1,877
Accounts receivable – affiliates		3,223		1,644		221		510		(5,598	)		- -
Other current assets		308		337		1,128		809		- -			2,582
Current assets held for sale		- -		- -		- -		687		- -			687
Property, plant and equipment, net		573		2,805		2,846		2,318		- -			8,542
Investments and long-term receivables		5,685		3,686		59		1,299		(9,836	)		893
Long-term receivables – affiliates		2,816		2,054		- -		267		(5,137	)		- -
Goodwill, net		699		142		- -		491		- -			1,332
Other assets, net		268		118		296		182		- -			864
Long-term assets held for sale		- -		- -		- -		1,069		- -			1,069
Total assets	$	13,818	$	11,129	$	5,359	$	8,118	$	(20,578	)	$	17,846

Current maturities of long-term debt	$	18	$	- -	$	- -	$	- -	$	- -		$	18
Accounts payable – affiliates		2,192		2,402		174		830		(5,598	)		- -
Other current liabilities		663		587		1,043		555		- -			2,848
Current liabilities associated with assets held for sale		- -		- -		- -		341		- -			341
Long-term debt		4,954		- -		2,160		822		- -			7,936
Long-term payables – affiliates		1,557		2,839		- -		741		(5,137	)		- -
Other liabilities		456		118		377		502		- -			1,453
Deferred income taxes		790		- -		- -		747		- -			1,537
Long-term liabilities associated with assets held for sale		- -		- -		- -		391		- -			391
Minority interests		- -		- -		1		133		- -			134
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

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the Three Months Ended September 30, 2007

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated


Sales and other operating revenues	$	1,169		$	2,801		$	3,464		$	1,344		$	(1,393	)	$	7,385
Cost of sales		1,092			2,583			3,314			1,140			(1,393	)		6,736
Selling, general and administrative expenses		74			6			71			37			- -			188
Research and development expenses		8			- -			10			- -			- -			18
Operating income (loss)		(5	)		212			69			167			- -			443
Interest income (expense), net		(102	)		2			(37	)		(1	)		- -			(138	)
Other income (expense), net		(6	)		26			- -			4			- -			24
Income from equity investments		214			145			- -			7			(366	)		- -
Intercompany income (expense), net		12			57			(10	)		(59	)		- -			- -
(Provision for) benefit from income taxes		93			(171	)		- -			(45	)		- -			(123	)
Net income	$	206		$	271		$	22		$	73		$	(366	)	$	206

STATEMENT OF INCOME

For the Three Months Ended September 30, 2006

										Non-
Millions of dollars	LCC			Guarantors			Equistar			Guarantors			Eliminations			Consolidated


Sales and other operating revenues	$	1,128		$	1,083		$	3,480		$	1,152		$	(1,028	)	$	5,815
Cost of sales		1,055			997			3,151			997			(1,028	)		5,172
Asset impairments		- -			- -			135			(29	)		- -			106
Selling, general and administrative expenses		45			7			54			26			- -			132
Research and development expenses		10			(3	)		8			2			- -			17
Operating income		18			82			132			156			- -			388
Interest income (expense), net		(98	)		3			(55	)		(7	)		1			(156	)
Other income (expense), net		(22	)		(1	)		1			4			- -			(18	)
Income (loss) from equity investments		65			51			- -			25			(243	)		(102	)
Intercompany income (expense), net		20			23			- -			(43	)		- -			- -
(Provision for) benefit from income taxes		74			(71	)		- -			(54	)		- -			(51	)
Loss from discontinued operations, net of tax		- -			- -			- -			(4	)		- -			(4	)
Net income	$	57		$	87		$	78		$	77		$	(242	)	$	57

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME

For the Nine Months Ended September 30, 2007

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated


Sales and other operating revenues	$	3,309		$	7,480		$	9,867		$	3,978		$	(3,978	)	$	20,656
Cost of sales		3,206			6,782			9,414			3,429			(3,978	)		18,853
Selling, general and administrative expenses		195			18			202			112			- -			527
Research and development expenses		25			- -			28			2			- -			55
Operating income (loss)		(117	)		680			223			435			- -			1,221
Interest income (expense), net		(324	)		3			(140	)		(12	)		- -			(473	)
Other income (expense), net		(30	)		24			(32	)		22			- -			(16	)
Income from equity investments		595			371			1			14			(979	)		2
Intercompany income (expense), net		31			145			(10	)		(166	)		- -			- -
(Provision for) benefit from income taxes		268			(418	)		(1	)		(100	)		- -			(251	)
Loss from discontinued operations, net of tax		(22	)		- -			- -			(60	)		- -			(82	)
Net income	$	401		$	805		$	41		$	133		$	(979	)	$	401

STATEMENT OF INCOME

For the Nine Months Ended September 30, 2006

										Non-
Millions of dollars	LCC			Guarantors			Equistar			Guarantors			Eliminations			Consolidated


Sales and other operating revenues	$	3,125		$	1,083		$	9,794		$	3,120		$	(2,174	)	$	14,948
Cost of sales		2,892			1,001			8,849			2,749			(2,170	)		13,321
Asset impairments		- -			- -			135			(29	)		- -			106
Selling, general and administrative expenses		123			7			163			83			- -			376
Research and development expenses		29			(3	)		25			3			- -			54
Operating income		81			78			622			314			(4	)		1,091
Interest income (expense), net		(240	)		9			(160	)		(42	)		1			(432	)
Other income (expense), net		(27	)		75			- -			12			- -			60
Income from equity investments		540			653			- -			141			(1,257	)		77
Intercompany income (expense), net		(34	)		153			- -			(119	)		- -			- -
(Provision for) benefit from income taxes		187			(378	)		- -			(129	)		- -			(320	)
Income from discontinued operations, net of tax		- -			- -			- -			31			- -			31
Net income	$	507		$	590		$	462		$	208		$	(1,260	)	$	507

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2007

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities – continuing operations	$	(232	)	$	1,562		$	253		$	182		$	(919	)	$	846
Net cash used in operating activities – discontinued operations		- -			- -			- -			(113	)		- -			(113	)
Net cash provided by (used in) operating activities		(232	)		1,562			253			69			(919	)		733

Expenditures for property, plant and equipment		(35	)		(143	)		(152	)		(30	)		- -			(360	)
Payments to discontinued operations		- -			- -			- -			(97	)		- -			(97	)
Acquisition of Houston Refining LP and related payments, net of cash acquired		(94	)		- -			- -			- -			- -			(94	)
Distributions from affiliates in excess of earnings		297			- -			- -			18			(313	)		2
Contributions and advances to affiliates		(34	)		- -			- -			- -			- -			(34	)
Loans to affiliates		- -			(255	)		- -			(725	)		980			- -
Other		- -			1			8			3			- -			12
Net cash provided by (used in) investing activities – continuing operations		134			(397	)		(144	)		(831	)		667			(571	)
Net proceeds from sale of discontinued operations before required repayment of debt		- -			- -			- -			1,089			- -			1,089
Other net cash provided by investing activities – discontinued operations		- -			- -			- -			82			- -			82
Net cash provided by (used in) investing activities		134			(397	)		(144	)		340			667			600

Repayment of long-term debt		(809	)		- -			(632	)		(390	)		- -			(1,831	)
Issuance of long-term debt		510			- -			- -			- -			- -			510
Proceeds from notes payable to affiliates		465			- -			515			- -			(980	)		- -
Dividends paid		(171	)		(268	)		- -			(3	)		271			(171	)
Proceeds from and tax benefits of stock option exercises		81			- -			- -			- -			- -			81
Distributions to owners		- -			(861	)		(100	)		- -			961			- -
Other, net		8			(2	)		- -			1			- -			7
Net cash provided by (used in) financing activities – continuing operations		84			(1,131	)		(217	)		(392	)		252			(1,404	)
Debt required to be repaid upon sale of discontinued operations		- -			- -			- -			(99	)		- -			(99	)
Net cash provided by financing activities – discontinued operations		- -			- -			- -			23			- -			23
Net cash provided by (used in) financing activities		84			(1,131	)		(217	)		(468	)		252			(1,480	)

Effect of exchange rate changes on cash		- -			- -			- -			4			- -			4
Increase (decrease) in cash and cash equivalents		(14	)		34			(108	)		(55	)		- -			(143	)
Cash and cash equivalents at beginning of period		92			80			133			141			- -			446
Cash and cash equivalents at end of period – continuing operations	$	78		$	114		$	25		$	86		$	- -		$	303

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LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2006

Millions of dollars	LCC			Guarantors			Equistar			Non- Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities – continuing operations	$	(77	)	$	672		$	450		$	403		$	(867	)	$	581
Net cash provided by operating activities – discontinued operations		- -			- -			- -			38			- -			38
Net cash provided by (used in) operating activities		(77	)		672			450			441			(867	)		619

Expenditures for property, plant and equipment		(35	)		(29	)		(105	)		(28	)		- -			(197	)
Payments to discontinued operations		- -			- -			- -			(12	)		- -			(12	)
Acquisition of Houston Refining LP and related payments, net of cash acquired		(2,468	)		55			- -			- -			- -			(2,413	)
Distributions from affiliates in excess of earnings		117			- -			- -			- -			- -			117
Contributions and advances to affiliates		(82	)		- -			- -			(6	)		6			(82	)
Loans to affiliates		- -			(99	)		- -			(214	)		313			- -
Other		4			- -			2			1			(1	)		6
Net cash used in investing activities – continuing operations		(2,464	)		(73	)		(103	)		(259	)		318			(2,581	)
Other net cash used in investing activities – discontinued operations		- -			- -			- -			(30	)		- -			(30	)
Net cash used in investing activities		(2,464	)		(73	)		(103	)		(289	)		318			(2,611	)

Repayment of long-term debt		(1,705	)		- -			(150	)		(240	)		- -			(2,095	)
Issuance of long-term debt		4,356			- -			- -			- -			- -			4,356
Proceeds from notes payable to affiliates		313			- -			- -			- -			(313	)		- -
Dividends paid		(167	)		(38	)		- -			- -			38			(167	)
Proceeds from and tax benefits of stock option exercises		18			- -			- -			- -			- -			18
Distributions to owners		- -			(454	)		(375	)		(1	)		830			- -
Contributions from owners		- -			- -			- -			6			(6	)		- -
Other, net		(6	)		5			1			(3	)		- -			(3	)
Net cash provided by (used in) financing activities – continuing operations		2,809			(487	)		(524	)		(238	)		549			2,109
Other net cash used in financing activities – discontinued operations		- -			- -			- -			(13	)		- -			(13	)
Net cash provided by (used in) financing activities		2,809			(487	)		(524	)		(251	)		549			2,096

Effect of exchange rate changes on cash		- -			- -			- -			4			- -			4
Increase (decrease) in cash and cash equivalents		268			112			(177	)		(95	)		- -			108
Cash and cash equivalents at beginning of period		63			- -			215			315			- -			593
Cash and cash equivalents at end of period		331			112			38			220			- -			701
Less: Cash and cash equivalents at end of period – discontinued operations		- -			- -			- -			45			- -			45
Cash and cash equivalents at end of period – continuing operations	$	331		$	112		$	38		$	175		$	- -		$	656

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

This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements of Lyondell Chemical Company, together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), and the notes thereto. References to “LCC” are to Lyondell Chemical Company without its consolidated subsidiaries. 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 Chemicals, LP (together with its consolidated subsidiaries, “Equistar”) and Millennium Chemicals Inc. (together with its consolidated subsidiaries, “Millennium”).

In addition to comparisons of current operating results with the same period in the prior year, Lyondell has included, as additional disclosure, certain “trailing quarter” comparisons of third quarter 2007 operating results to second quarter 2007 operating results. Lyondell’s businesses are highly cyclical, in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into current business directions.

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, natural gas and naphtha benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

PROPOSED MERGER

In connection with entering into the merger agreement, Lyondell’s rights agreement (which imposes significant dilution upon any person or group that acquires 15% or more of Lyondell’s outstanding common equity without the prior approval of Lyondell’s board of directors) was amended to provide that none of the execution, delivery or performance of the merger agreement and the completion of the merger will trigger the provisions of the rights agreement.

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As a result of the proposed merger, the debt and accounts receivable sales facilities of LCC, Equistar and Millennium will be affected to varying degrees. If not amended, the credit facilities and accounts receivable sales facilities of LCC and Equistar would be terminated at the closing. The indentures governing all of LCC’s and Equistar’s debt, with the exception of LCC’s Debentures due 2010 and 2020 and Equistar’s Notes due 2009 and Debentures due 2026, contain put rights, which may be available to the debt holders as a result of the merger. Millennium’s Notes due 2026 do not contain a put right. Millennium’s 4% convertible debentures would be convertible at the conversion rate into the $48 cash per share merger consideration.

Basell intends to finance the merger consideration with borrowings and, as a result, Lyondell would become more levered, which would exacerbate the risks relating to Lyondell’s level of debt. In July 2007, Standard and Poor’s Rating Services placed its credit ratings for Lyondell, Equistar and Millennium debt on CreditWatch with negative implications and Moody’s Investor Service placed the ratings of Lyondell, Equistar and Millennium under review for possible downgrade, each as a result of the anticipated post-merger capital structure.

Lyondell provided a proxy statement to its shareholders in connection with the proposed merger. Investors and security holders are urged to read that document for more information about the proposed merger.

OVERVIEW

General—Lyondell is a leading global manufacturer of chemicals and plastics, a refiner of heavy, high sulfur crude oil and a significant producer of fuel products. Lyondell’s continuing operations primarily comprise the ethylene, co-products and derivatives (“EC&D”) segment, the propylene oxide and related products (“PO&RP”) segment and the refining segment.

On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business in a transaction valued at approximately $1.3 billion, including the acquisition of working capital and the assumption of certain liabilities directly related to the business (see Note 4 to the Consolidated Financial Statements). Substantially all of the inorganic chemicals business segment is being reported as a discontinued operation, including comparative periods presented. Unless otherwise indicated, the following discussion of Lyondell’s operating results relates only to Lyondell’s continuing operations.

The Refining segment consists of the operations of Houston Refining LP (“Houston Refining”), which is consolidated prospectively from August 16, 2006. Prior to Lyondell’s August 16, 2006 purchase of the 41.25% interest in Houston Refining held by its joint venture partner, CITGO Petroleum Corporation (“CITGO”), Lyondell accounted for its investment in Houston Refining using the equity method.

In the first nine months of 2007, compared to the same period in 2006, refining margins and margins for other fuel products benefited from stronger gasoline markets. However, continued escalation of crude oil prices and natural gas liquids during the first nine months of 2007 contributed to higher raw material costs for chemical producers that put pressure on chemical product margins.

Lyondell’s third quarter and first nine months of 2007 results primarily reflected increased ownership and higher profitability from the refining segment compared to the same periods in 2006, which included a $176 million pretax charge, representing Lyondell’s proportionate share of a crude supply contract termination cost related to the August 16, 2006 purchase of CITGO’s share in Houston Refining. The improvement in the refining segment was offset by lower operating results in the EC&D segment due to lower product margins in the 2007 periods.

Lyondell’s results for the third quarter and first nine months of 2007 also reflected increases in incentive compensation expense of $42 million and $123 million compared to $13 million and $6 million, respectively, in the same periods in 2006 attributable to increases in Lyondell’s common stock price. See the following discussion of “Income from Continuing Operations” for additional items which affected the periods’ results.

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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 the EC&D segment. Ethylene and its co-products are produced from two major raw material groups:

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

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

Lyondell has the ability to shift its ratio of raw materials used in the production of ethylene and co-products to take advantage of the relative costs of liquids and NGLs. Although the prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly.

For crude oil, the table below reflects the average quoted price for West Texas Intermediate (“WTI”) crude oil. During the first six months of 2007, the WTI crude oil price was lower relative to other benchmark crude oil prices, such as Brent crude oil, and, therefore, was not indicative of the rate of increase in crude oil-based raw material costs. As a result, the benchmark price of Northwest Europe (“NWE”) naphthas, which is representative of trends in certain market prices, is included in the table below. Prices for WTI crude oil realigned with other benchmark crude oil prices during the third quarter 2007. WTI crude oil prices have increased from $60.75 per barrel in early January 2007, to $82.33 per barrel at the end of September 2007.

Similarly, while natural gas prices have been relatively stable, ethane prices have risen significantly during the first nine months of 2007, reaching record levels late in the period. These increases are indicative of the pressure on the cost of Lyondell’s raw materials, both crude oil-based and NGL-based.

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

	Average Benchmark Price
	For the three months ended				For the nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Crude oil – dollars per barrel		75.40		70.37		66.09		68.04
Natural gas – dollars per million BTUs		6.19		6.14		6.67		6.71
NWE Naphtha – dollars per barrel		74.97		66.17		70.35		64.27
Weighted average cost of ethylene production – cents per pound		38.75		33.64		33.82		31.81
Ethylene – cents per pound		50.17		50.67		44.94		49.17
Propylene – cents per pound		50.83		49.67		47.96		47.11

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RESULTS OF OPERATIONS

Revenues—Lyondell’s revenues were $7,385 million in the third quarter 2007 compared to $5,815 million in the third quarter 2006 and $20,656 million in the first nine months of 2007 compared to $14,948 million in the first nine months of 2006. The consolidation of Houston Refining beginning August 16, 2006 added $2,245 million and $6,032 million to Lyondell’s revenues in the third quarter and first nine months of 2007, respectively, compared to $843 million in the third quarter and first nine months of 2006. The remaining increase of $168 million, or 3%, in the third quarter 2007 was primarily due to higher average product sales prices and sales volumes for refining and fuels products. The remaining increase of $519 million, or 4%, in the first nine months of 2007 was primarily due to the PO&RP segment, which experienced higher average product sales prices and higher fuel products sales volumes.

Cost of Sales—Lyondell’s cost of sales was $6,736 million in the third quarter 2007 compared to $5,172 million in the third quarter 2006 and $18,853 million for the first nine months of 2007 compared to $13,321 million for the first nine months of 2006. The consolidation of Houston Refining added $2,030 million and $5,341 million to Lyondell’s cost of sales in the third quarter and first nine months of 2007, respectively, compared to $756 million in the third quarter and first nine months of 2006. The third quarter and first nine months of 2007 also included net charges of $5 million and $77 million, respectively, related to commercial disputes, including amounts associated with the 2005 shutdown of Lyondell’s Lake Charles toluene diisocyanate (“TDI”) facility. The remaining increases in the third quarter and first nine months of 2007 of $285 million, or 6%, and $870 million, or 7%, respectively, were the result of higher costs, primarily higher average raw material costs, resulting from the effects of higher crude oil and NGL-based raw material prices and higher sales volumes.

Asset Impairments—Asset impairments in the third quarter and first nine months of 2006 included a charge of $106 million for impairment of the net book value of Lyondell’s ethylene facility in Lake Charles, Louisiana.

SG&A Expenses—Selling, general and administrative (“SG&A”) expenses were $188 million in the third quarter 2007 compared to $132 million in the third quarter 2006 and $527 million for the first nine months of 2007 compared to $376 million for the first nine months of 2006. The increases were primarily attributable to higher compensation expense, including higher incentive compensation expense related to Lyondell’s higher 2007 common stock price, as well as expenses related to the proposed merger and higher legal fees.

Operating Income—Lyondell had operating income of $443 million in the third quarter 2007 compared to $388 million in the third quarter 2006, and $1,221 million in the first nine months of 2007 compared to $1,091 million in the first nine months of 2006. Lyondell’s operating income included Houston Refining operating income of $209 million in the third quarter 2007 and $674 million in the first nine months of 2007, compared to $81 million in the third quarter and first nine months of 2006. Operating income also included proceeds from insurance settlements of $30 million in the third quarter and first nine months of 2007 and charges representing Lyondell’s exposure to industry losses expected to be underwritten by industry insurance consortia of $10 million and $15 million, respectively, in the third quarter and first nine months of 2006. Lower operating results for Lyondell’s EC&D segment primarily contributed to the remaining decreases in both 2007 periods. Operating results for each of Lyondell’s business segments are reviewed further in the “Segment Analysis” section below.

Interest Expense—Interest expense was $144 million in the third quarter 2007 compared to $164 million in the third quarter 2006, and $499 million in the first nine months of 2007 compared to $459 million in the first nine months of 2006. The decrease in interest expense in the third quarter 2007 was primarily due to lower levels of outstanding debt in the third quarter 2007 due to net repayments of $1.3 billion principal amount of debt during the second quarter 2007. The increase in interest expense in the first nine months of 2007 was primarily due to the effects of a net $2.6 billion increase in debt, primarily as a result of the August 16, 2006 purchase of CITGO’s 41.25% interest in Houston Refining, partly offset by the above-noted net repayments of $1.3 billion. See the “Financing Activities” section of “Financial Condition” below for a description of the debt issuance and repayments during the first nine months of 2007 and 2006.

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Other Income (Expense), Net—Lyondell had other income, net, of $24 million in the third quarter 2007 and other expense, net of $16 million in the first nine months of 2007. The third quarter 2007 included $26 million of foreign exchange gains on intercompany loans, while the first nine months of 2007 primarily reflected $24 million of foreign exchange gains offset by net charges of $47 million related to debt prepayments. The foreign exchange gains in 2007 reflected the significant increase in value of the euro compared to the U.S. dollar in the third quarter 2007 and the determination that certain outstanding intercompany debt will be repaid in the foreseeable future.

Lyondell had other expense, net, of $18 million in the third quarter of 2006 and other income, net of $60 million in the first nine months of 2006. The third quarter and first nine months of 2006 included charges of $21 million related to the prepayment of debt, while the first nine months of 2006 also included net payments of $74 million received by Lyondell in settlement of all disputes among Lyondell, CITGO and Petróleos de Venezuela, S.A. (“PDVSA”) and their respective affiliates.

Income from Equity Investment in Houston Refining—Prior to Lyondell’s August 16, 2006 purchase of CITGO’s 41.25% interest in Houston Refining, Lyondell’s equity investment in Houston Refining resulted in a loss of $104 million in the third quarter 2006 and income of $73 million in the first nine months of 2006. Houston Refining’s operating results for the first nine months of 2006 included a third quarter charge of $300 million related to termination of Houston Refining’s previous crude supply contract and an $8 million charge representing reimbursement of legal fees and expenses that had been paid by Lyondell on behalf of Houston Refining. Lyondell’s 58.75% share of these charges was $176 million and $5 million, respectively. The operations of Houston Refining are consolidated prospectively from August 16, 2006. Houston Refining’s operating results are further reviewed in the discussion of the refining segment below.

Income Tax—The effective income tax rate for the first nine months of 2007 was 34% primarily due to a benefit from newly-enacted Texas state legislation, which allows the carryforward of certain tax losses for state income tax purposes. The estimated annual effective income tax rate for 2007, excluding the effect of the Texas state tax benefit, is 36%. The effective income tax rate for the first nine months of 2006 was 40%, and was higher than the statutory rate primarily due to the effects of non-U.S. operations.

Income from Continuing Operations—Lyondell’s income from continuing operations was $206 million in the third quarter 2007 compared to $61 million in the third quarter 2006 and $483 million in the first nine months of 2007 compared to $476 million in the first nine months of 2006. The following table summarizes the major components contributing to income from continuing operations.

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Millions of dollars
Operating income (loss) of:
EC&D segment	$	83		$	173		$	255		$	653
PO&RP segment		170			133			330			358
Refining		209			81			674			81
Other		(19	)		1			(38	)		(1	)
Operating income		443			388			1,221			1,091
Income (loss) from equity investment in Houston Refining (prior to August 16, 2006)		- -			(104	)		- -			73
Interest expense, net		(138	)		(156	)		(473	)		(432	)
Other, net		24			(16	)		(14	)		64
Provision for income taxes		123			51			251			320
Income from continuing operations	$	206		$	61		$	483		$	476

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The changes in income from continuing operations in the third quarter and first nine months of 2007 compared to the same 2006 periods were primarily due to Lyondell’s increased ownership of Houston Refining and improved refining operating results compared to the same periods in 2006, which included a $176 million pretax charge, representing Lyondell’s proportionate share of a crude supply contract termination cost related to the August 16, 2006 purchase of CITGO’s share in Houston Refining. The improvement in the refining segment was offset by lower operating results for Lyondell’s EC&D business segment.

In addition, Lyondell’s income from continuing operations included the following items for the periods shown:

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Millions of dollars
Pretax charges (benefits)
Effect of stock price increases on incentive compensation expense	$	42		$	13		$	123		$	6
Foreign exchange gains on intercompany loans		(26	)		- -			(24	)		- -
Insurance settlement		(30	)		- -			(30	)		- -
Merger-related expenses		11			- -			11			- -
Net charges (benefits) related to commercial disputes		5			- -			77			(70	)
Debt retirement charges		4			21			47			21
Lake Charles ethylene facility impairment		- -			106			- -			106
Refining segment contract termination cost		- -			176			- -			176
Mutual insurance consortia losses		- -			10			- -			15
Total pretax income effect		6			326			204			254
Texas Margin Tax credit, net of federal income tax		- -			- -			(17	)		- -
Other tax effects of net charges		(13	)		(114	)		(83	)		(89	)
After-tax effect of net charges (benefits)	$	(7	)	$	212		$	104		$	165

Income (Loss) from Discontinued Operations, Net of Tax—Lyondell had a loss from discontinued operations, net of tax, in the first nine months 2007 of $82 million compared to income in the first nine months of 2006 of $31 million. The loss in 2007 was primarily due to the May 15, 2007 sale of the discontinued operations and reflected the unfavorable tax effect of nondeductible capital losses resulting from the sale.

Third Quarter 2007 versus Second Quarter 2007

Third quarter 2007 income from continuing operations of $206 million decreased from $271 million in the second quarter 2007, which included $28 million of after-tax charges as a result of the prepayment of $1.3 billion of debt. The decrease primarily reflected lower refining segment results due to a decrease in margins ahead of the normal seasonal pattern. In addition, second quarter 2007 refining results were particularly strong. The combined operating results for the EC&D and PO&RP segments increased moderately compared to the second quarter 2007. The operating results for each of Lyondell’s business segments are reviewed in the “Segment Analysis” section below.

The loss from discontinued operations, net of tax, of $95 million in the second quarter 2007 was primarily due to the May 15, 2007 sale of the discontinued operations and reflected the unfavorable tax effect of nondeductible capital losses resulting from the sale.

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Segment Analysis

Lyondell’s continuing operations are primarily in three reportable segments: EC&D, PO&RP, and refining. On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business. Substantially all of the inorganic chemicals business segment is being reported as a discontinued operation, including comparative periods presented. Prior to August 16, 2006, Lyondell’s refining operations were conducted through its interest in Houston Refining. The following tables reflect selected financial information for Lyondell’s reportable segments.

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Millions of dollars
Sales and other operating revenues:
EC&D segment	$	3,568		$	3,603		$	10,224		$	10,156
PO&RP segment		2,131			1,900			6,058			5,307
Refining segment		2,799			1,083			7,476			1,083
Other, including intersegment eliminations		(1,113	)		(771	)		(3,102	)		(1,598	)
Total	$	7,385		$	5,815		$	20,656		$	14,948

Operating income (loss):
EC&D segment	$	83		$	173		$	255		$	653
PO&RP segment		170			133			330			358
Refining segment		209			81			674			81
Other, including intersegment eliminations		(19	)		1			(38	)		(1	)
Total	$	443		$	388		$	1,221		$	1,091

Income from equity investment in Houston Refining	$	- -		$	(104	)	$	- -		$	73

Ethylene, Co-products and Derivatives Segment

Overview—In its EC&D segment, Lyondell manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene. Lyondell also manufactures and markets 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 as well as polypropylene. In the EC&D segment, Lyondell also manufactures and markets fuel products, such as methyl tertiary butyl ether (“MTBE”) and alkylate, as well as acetyls, such as vinyl acetate monomer (“VAM,” which also is a derivative of ethylene), acetic acid and methanol.

During the third quarter and first nine months of 2007 compared to the same periods in 2006, U.S. ethylene markets experienced lower profitability despite operating rates in the mid-90% range and stronger polyethylene demand in export markets. Ethylene and polyethylene sales prices decreased more than raw material costs late in 2006, and did not increase as rapidly as raw material costs during the first nine months of 2007. As discussed above, prices of both crude oil-based liquid raw materials and NGL-based raw materials averaged higher in the 2007 periods, with the latter approaching record levels late in the third quarter 2007.

U.S. market demand for ethylene in the third quarter and first nine months of 2007 increased an estimated 0.8% and 2.6%, respectively, compared to the same periods in 2006, while U.S. market demand for polyethylene increased an estimated 6.9% and 4.6%, respectively, in the third quarter and first nine months of 2007 compared to the same periods in 2006.

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The EC&D segment experienced lower profitability as higher average co-product sales prices were more than offset by the combined effect of higher average raw material and other costs, including higher incentive compensation expense, and lower average ethylene and polyethylene sales prices during the third quarter and first nine months of 2007. Results for the third quarter and first nine months of 2006 included a pretax charge of $106 million related to impairment of the net book value of the idled Lake Charles, Louisiana ethylene facility.

The following table sets forth the EC&D segment’s sales and other operating revenues, operating income and selected product sales volumes.

	For the three months ended				For the nine months ended
	September 30,				September 30,
Millions of dollars	2007		2006		2007		2006
Sales and other operating revenues	$	3,568	$	3,603	$	10,224	$	10,156
Operating income		83		173		255		653

Sales Volumes, in millions
Ethylene and derivatives (pounds)		2,944		2,836		8,985		8,637
Polyethylene volumes included above (pounds)		1,421		1,353		4,402		4,175
Co-products, non-aromatic (pounds)		1,951		2,171		5,985		6,291
Aromatics (gallons)		89		89		271		266

Revenues—Revenues of $3,603 million in the third quarter 2007 were comparable to revenues of $3,586 million in the third quarter 2006, and revenues of $10,224 million in the first nine months of 2007 were comparable to revenues of $10,156 million in the first nine months of 2006. Revenues in the third quarter and first nine months of 2007 reflected the effects of higher average sales prices for co-products, principally fuel products and benzene, and higher sales volumes, which were substantially offset by lower average sales prices for ethylene and polyethylene compared to the same periods in 2006. Ethylene and derivative sales volumes were 4% higher in both the third quarter and first nine months of 2007 compared to the 2006 periods.

The following table sets forth benchmark sales prices for selected EC&D segment products and the percentage changes from period to period.

	For the three months ended							For the nine months ended
	September 30,							September 30,
	2007		2006		Percent Change			2007		2006		Percent Change
Ethylene – cents per pound		50.17		50.67		(1	)%		44.94		49.17		(9	)%
Propylene – cents per pound		50.83		49.67		2	%		47.96		47.11		2	%
Benzene – cents per gallon		355.00		371.33		(4	)%		367.56		313.78		17	%
HDPE – cents per pound		76.00		75.67		--	%		69.89		73.56		(5	)%

Operating Income—The EC&D segment had operating income of $83 million in the third quarter 2007 compared to $173 million in the third quarter 2006, and operating income of $255 million in the first nine months of 2007 compared to $653 million in the first nine months of 2006. The third quarter and first nine months of 2006 included the $106 million impairment charge related to the Lake Charles, Louisiana ethylene facility. The decreases in the third quarter and first nine months of 2007 were primarily due to higher raw material and other costs, including higher compensation expense of $26 million and $75 million, respectively, compared to the third quarter and first nine months of 2006.

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Third Quarter 2007 versus Second Quarter 2007

The EC&D segment’s third quarter 2007 operating income was $83 million compared to operating income of $95 million in the second quarter 2007. The $12 million decrease in profitability was primarily due to the effects of 4% lower sales volumes in the third quarter 2007 compared to the second quarter 2007. The effects of higher costs, primarily due to higher liquid and NGL-based raw material prices, were substantially offset by higher average sales prices.

Propylene Oxide and Related Products Segment

Overview—The PO&RP segment manufactures and markets propylene oxide (“PO”); PO derivatives, such as propylene glycol (“PG”), propylene glycol ethers (“PGE”), and butanediol (“BDO”); TDI; styrene (“SM”), and tertiary butyl alcohol (“TBA”) and its derivatives, fuel products, such as MTBE and ethyl tertiary butyl ether (“ETBE”), and isobutylene. Styrene and TBA are co-products of Lyondell’s two major PO production processes, referred to as PO/SM and PO/TBA.

For the third quarter and first nine months of 2007 compared to the same periods in 2006, fuel product margins were higher as a result of tighter gasoline markets. Markets for PO and PO derivatives generally continued to experience favorable supply and demand conditions, while styrene markets continued to be oversupplied.

PO&RP segment operating results for the third quarter and first nine months of 2007 compared to the same periods in 2006 were negatively affected by higher incentive compensation expense and, for the first nine months of 2007, net charges related to commercial disputes. Underlying operating results primarily reflected the effects of higher product margins for fuel products and TDI. Operating results for PO and PO derivatives were negatively affected by higher average raw material and operating costs.

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

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Millions of dollars
Sales and other operating revenues	$	2,131	$	1,900	$	6,058	$	5,307
Operating income		170		133		330		358

Sales Volumes, in millions
PO and derivatives (pounds)		783		813		2,445		2,410
Co-products:
SM (pounds)		971		1,208		2,949		3,221
Fuel products and other TBA derivatives (gallons)		368		321		1,042		908

Average Benchmark Price
Propylene
United States – cents per pound		50.83		49.67		47.96		47.11
Europe – euros per metric ton		878		830		849		813

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Revenues—Revenues of $2,131 million in the third quarter 2007 were 12% higher compared to revenues of $1,900 million in the third quarter 2006, while revenues of $6,058 million in the first nine months of 2007 were 14% higher compared to revenues of $5,307 million in the first nine months of 2006. The increases in revenues in the third quarter and first nine months of 2007 were primarily due to the effect of higher average sales prices and the effect of higher sales volumes for TBA derivatives, primarily fuel products, partially offset by lower sales volumes for styrene, TDI and, in the third quarter 2007, PO and derivatives.

Operating Income—The PO&RP segment had operating income of $170 million in the third quarter 2007 compared to $133 million in the third quarter 2006, and $330 million in the first nine months of 2007 compared to $358 million in the first nine months of 2006. Operating results for the third quarter and first nine months of 2007 were negatively affected by $17 million and $55 million, respectively, of higher compensation expense primarily as a result of the increase in Lyondell’s common stock price compared to the respective 2006 periods and charges totaling $77 million, in the first nine months of 2007, related to commercial disputes, including amounts associated with the 2005 shutdown of the Lake Charles TDI facility. Profitability of the underlying operations of the PO&RP segment was higher in the third quarter and first nine months of 2007 in comparison to the same 2006 periods.

Underlying operating results for fuel products contributed approximately $40 million to third quarter 2007 results due to higher sales volumes and higher product margins. PO and derivative results decreased by approximately $10 million primarily due to higher raw material and operating costs which were only partly offset by the effects of higher average sales prices. TDI results increased by approximately $20 million due to higher product margins, while styrene results increased approximately $5 million. For the first nine months of 2007, the effect of higher average sales prices more than offset the effects of higher raw material costs, resulting in higher operating results of $80 million for fuel products and $30 million in the TDI business.

Third Quarter 2007 versus Second Quarter 2007

The PO&RP segment’s operating income was $170 million in the third quarter 2007 compared to $133 million in the second quarter 2007. TDI operating results, which were negatively impacted in the second quarter 2007 by maintenance turnarounds, improved by approximately $20 million in the third quarter 2007 as a result of higher product margins. Operating results in the third quarter 2007 for fuel products decreased approximately $5 million due to lower sales volumes primarily related to a scheduled catalyst change at Lyondell’s U.S. facilities. Operating results for PO and derivatives increased approximately $10 million and styrene results increased approximately $5 million.

Refining Segment

Overview—The following refining segment discussion is based on the operating results of Houston Refining on a 100% basis (see Note 5 to the Consolidated Financial Statements).

Houston Refining produces refined petroleum products, including gasoline, ultra low sulfur diesel, jet fuel, aromatics and lubricants. PDVSA Petróleo, S.A. (“PDVSA Oil”) supplies heavy, high sulfur Venezuelan crude oil to Houston Refining under a long-term contract. Under both the former crude supply agreement (“CSA”), which was in effect during the first seven months of 2006, and the current crude oil contract, the refining segment purchases 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of its rated crude oil refining capacity of 268,000 barrels per day. Houston Refining generally purchases the balance of its crude oil requirements on the spot market. Profit margins on spot market crude oil historically were more volatile and, in recent years, were higher than margins on CSA crude oil. The pricing under the new crude oil contract is market based.

Benchmark refining margins in the third quarter and first nine months of 2007 for WTI 2-1-1 and WTI-Maya combined were comparable to the same 2006 periods due to ongoing strength in transportation fuel markets.

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Refining segment operating results in the third quarter 2007 reflected the impact of a scheduled catalyst change. The third quarter 2006 was negatively affected by a $300 million charge related to the termination of the previous crude oil contract and the effect of operating under that contract during the month of July 2006. Refining segment margins were comparable between the two periods.

For the first nine months of 2007 compared to the first nine months of 2006, higher refining margins were partly offset by the negative effects of planned maintenance turnarounds at the refinery, including a major turnaround in the first quarter 2007 and planned maintenance in the other quarters, that resulted in higher costs and lower production.

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

	For the three months ended					For the nine months ended
	September 30,					September 30,
Millions of dollars	2007		2006			2007		2006
Sales and other operating revenues	$	2,799	$	2,288		$	7,476	$	6,793
Operating income		209		(98	)		674		227

Thousands of barrels per day
Refined products sales volumes:
Gasoline		149		112			122		114
Diesel and heating oil		85		84			82		90
Jet fuel		17		22			20		14
Aromatics		7		7			7		7
Other refined products		118		112			127		115
Total refined products sales volumes		376		337			358		340

Crude processing rates		271		270			259		268

Revenues—Revenues for Houston Refining of $2,799 million in the third quarter 2007 were 22% higher compared to revenues of $2,288 million in the third quarter 2006, while revenues of $7,476 million in the first nine months of 2007 were 10% higher compared to revenues of $6,793 million in the first nine months of 2006. The increases in revenues in the third quarter and first nine months of 2007 were due to the effects of higher sales volumes and higher average refined product sales prices driven largely by stronger transportation fuel markets. Sales volumes increased by 12% and 5%, respectively, in the third quarter and first nine months of 2007 compared to the corresponding periods in 2006. Total crude processing rates in the third quarter 2007 were comparable to the third quarter 2006, and decreased 3% in the first nine months of 2007, compared to the same 2006 period, as a result of the planned maintenance turnaround in the first quarter 2007.

Operating Income—Houston Refining had operating income of $209 million in the third quarter 2007 compared to an operating loss of $98 million in the third quarter 2006 and had operating income of $674 million in the first nine months of 2007 compared to $227 million in the first nine months of 2006. The third quarter and first nine months of 2006 included a charge of $300 million related to the termination of the previous crude supply agreement with PDVSA. Underlying operating results in the third quarters of 2007 and 2006 reflected comparable margins and crude processing rates, while operating results in the first nine months of 2007 reflected the benefit from higher margins realized under the new crude oil contract, which was partly offset by the $140 million estimated effect of the planned maintenance turnaround in the first quarter 2007. In addition operating results in the 2007 periods included a $30 million insurance settlement related to the 2005 Hurricane Rita claim.

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Third Quarter 2007 versus Second Quarter 2007

Houston Refining’s operating income was $209 million in the third quarter 2007 compared to $387 million in the second quarter 2007. Operating results decreased in the third quarter 2007 primarily due to approximately $175 million of lower margins. Margins decreased $8 per barrel in July 2007 ahead of the normal seasonal pattern. The $30 million effect of scheduled catalyst changes was offset by a $30 million insurance settlement of the 2005 Hurricane Rita claim. Operating results for the second quarter 2007 were negatively affected by approximately $25 million associated with maintenance on the fluid catalytic cracker. Third quarter 2007 total crude processing rates of 271,000 barrels per day were comparable to 273,000 barrels per day in the second quarter 2007.

FINANCIAL CONDITION

The following operating, investing and financing activities reflect the consolidation of Houston Refining prospectively from August 16, 2006.

Operating Activities—Operating activities of continuing operations provided cash of $846 million in the first nine months of 2007 and $581 million in the first nine months of 2006. The $265 million increase in the first nine months of 2007 compared to the first nine months of 2006 primarily reflected the net benefits from consolidating the operating cash flows of Houston Refining and from lower utilization of cash to fund the main components of working capital – accounts receivable and inventory, net of accounts payable, which were offset by the effects of higher cash payments as reflected in “Other, net.” Part of the increase in these cash payments, primarily for income taxes, interest, maintenance turnaround costs and pension funding, was attributable to consolidating Houston Refining as well as to the increase in debt related to the acquisition of Houston Refining.

Changes in the main components of working capital used cash of $105 million in the first nine months of 2007 compared to $505 million in the first nine months of 2006. In the first nine months of 2007, cash used by a $489 million increase in accounts receivable was substantially offset by cash provided from a $396 million increase in accounts payable. The increase in accounts receivable was due to higher sales prices and volumes in September 2007, primarily for refining and fuel products, compared to December 31, 2006 and a $60 million decrease in the outstanding amount of accounts receivable sold under the accounts receivable sales facilities. The increase in accounts payable was primarily due to higher purchase prices paid for crude oil and other raw materials in September 2007 compared to December 2006.

The main components of working capital used cash of $505 million in the first nine months of 2006. Accounts receivable increased $210 million primarily due to the effect of a $185 million decrease in the outstanding amount of accounts receivable sold under the accounts receivable sales facilities. 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 that otherwise would have been expected to be collected in January 2006. This included collections of $84 million in December 2005 related to receivables from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation. Inventories increased $175 million due to more use of heavy liquid raw materials in production. Accounts payable decreased $120 million due primarily to a 20% decrease in benchmark crude oil prices after the August 16, 2006 consolidation of Houston Refining.

Discontinued operations used cash of $113 million in the first nine months of 2007 and provided cash of $38 million in the first nine months of 2006. The change was primarily due to increases in working capital and lower operating results in the 2007 period.

Investing Activities—Investing activities of continuing operations used cash of $571 million in the first nine months of 2007 and $2,581 million in the first nine months of 2006. The use of cash in the first nine months of 2006 primarily reflected the acquisition of Houston Refining for $2,413 million.

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The use of cash in the first nine months of 2007 reflected higher capital expenditures of $163 million, including $143 million of capital expenditures of Houston Refining, $94 million of tax reimbursements to CITGO related to the August 16, 2006 acquisition of Houston Refining and $85 million of higher payments to discontinued operations primarily to fund working capital increases.

The following table summarizes capital expenditures and capital-related contributions to joint ventures as well as 2007 planned capital spending for continuing operations.

	Plan		For the nine months ended September 30,
Millions of dollars	2007		2007		2006
Capital expenditures by segment – Houston Refining on a 100% basis:
EC&D	$	205	$	159	$	110
PO&RP, including contributions to PO Joint Ventures		80		87		72
Refining		185		143		170
Other		10		5		4
Total capital expenditures by segment on a 100% basis		480		394		356
Less:
Houston Refining – through August 15, 2006		- -		- -		141
Contributions to PO Joint Ventures		14		34		18
Consolidated capital expenditures of Lyondell’s continuing operations	$	466	$	360	$	197

The 2007 planned capital expenditures include spending for environmental and regulatory requirements, base plant support, projects to improve manufacturing efficiency and projects directed toward profit enhancement, and include an increase of $35 million in July 2007 for environmental and regulatory projects at Houston Refining.

During the nine months ended September 30, 2006, Lyondell made cash contributions of $64 million to and received $117 million of cash distributions in excess of earnings from Houston Refining.

The first nine months of 2007 included the $1,089 million of net cash proceeds from the sale of Lyondell’s worldwide inorganic chemicals business, which were used to reduce debt. See Note 4 to the Consolidated Financial Statements and “Financing Activities” below.

Investing activities of discontinued operations provided cash of $82 million in the first nine months of 2007 and used cash of $30 million in the first nine months of 2006. During the 2007 period, advances of funds from continuing operations increased $85 million, while capital expenditures of discontinued operations decreased $27 million compared to the 2006 period.

Financing Activities—Financing activities of continuing operations used cash of $1,404 million in the first nine months of 2007 and provided cash of $2,109 million in the first nine months of 2006. The use of cash in 2007 primarily reflected net debt repayments. The cash provided in the 2006 period primarily reflected borrowing to finance Lyondell’s purchase of CITGO’s 41.25% interest in Houston Refining, partly offset by repayments of debt.

In the first nine months of 2007, Lyondell repaid $278 million principal amount of LCC’s 11.125% Senior Secured Notes due 2012, paying premiums totaling $18 million. Lyondell also obtained consents to a proposed amendment of a restrictive provision of the indenture related to its 10.5% Senior Secured Notes due 2013, which required Lyondell to refinance subordinated debt with new subordinated debt. The amendment permits the refinancing of subordinated debt with senior debt. As a result, Lyondell issued $510 million principal amount of LCC 6.875% Senior Unsecured Notes due 2017, paying debt issuance costs of $8 million, and repaid, at par, the outstanding $500 million principal amount of LCC’s 10.875% Senior Subordinated Notes due 2009. In addition, Lyondell repaid $13 million principal amount of the LCC term loan due 2013.

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In the first nine months of 2007, Lyondell also amended the LCC term loan to reduce the interest rate from LIBOR plus 1.75% to LIBOR plus 1.5% and to revise the financial covenants – see “Liquidity and Capital Resources – LCC Debt and Accounts Receivable Sales Facility” below.

In the first nine months of 2007, Equistar repaid $300 million principal amount of its 10.125% Senior Notes due 2008 and $300 million principal amount of its 10.625% Senior Notes due 2011, paying premiums totaling $32 million, and Millennium repaid the remaining $373 million principal amount of its 9.25% Senior Notes due 2008, paying a premium of $13 million. In addition, Millennium repaid $4 million principal amount of its 7.625% Senior Debentures due 2026.

During the first nine months of 2006, LCC entered into a new senior secured credit facility that included a $2.65 billion, seven-year term loan and a $1,055 million, five-year revolving credit facility, incurring transaction costs of $37 million. The purchase of CITGO’s 41.25% interest in Houston Refining was financed with $2,466 million of the proceeds of the term loan.

Also during the first nine months of 2006, LCC issued $875 million of 8% Senior Unsecured Notes due 2014 and $900 million of 8.25% Senior Unsecured Notes due 2016, incurring transaction costs of $36 million. Lyondell used the net proceeds to repay $875 million of the seven-year term loan and to purchase $760 million principal amount of LCC’s 9.625% Senior Secured Notes, Series A, due 2007, paying a premium of $18 million.

In the first nine months of 2006, Equistar repaid the $150 million of 6.5% Notes outstanding, which matured in February 2006, and Millennium purchased $149 million principal amount of its 7% Senior Notes due 2006, paying a premium of $2 million. In addition, Millennium purchased $85 million principal amount of 9.25% Senior Notes due 2008, paying a premium of $5 million, and LCC purchased $50 million principal amount of 9.625% Senior Secured Notes, Series A due 2007, paying a premium of $2 million. Other reductions of debt totaled $18 million in the nine-month period ended September 30, 2006.

In January 2007, Occidental Chemical Holding Corporation (“OCHC”), a subsidiary of Occidental Petroleum Corporation, notified Lyondell that it was exercising the warrant held by OCHC for the purchase of 5 million shares of Lyondell common stock for $25 per share. The terms of the warrant provided that Lyondell could elect to net settle the exercise by delivering that number of shares of Lyondell common stock having a market value equal to the difference between the exercise price and the market price. In February 2007, pursuant to the terms of the warrant, OCHC received a net payment of 682,210 shares of Lyondell common stock, having a value of $20 million. Subsequently, OCHC sold its remaining shares of Lyondell common stock.

Quarterly cash dividends of $0.225 per share of common stock were paid, totaling $171 million in the first nine months of 2007 and $167 million in the first nine months of 2006.

Proceeds and the related tax benefits from the exercise of stock options in the first nine months of 2007 and 2006 totaled $81 million and $18 million, respectively. The tax benefits of the options exercised during the first nine months of 2007 and 2006 were $20 million and $4 million, respectively.

The repayment of debt upon the May 15, 2007 sale of the discontinued operations used cash of $99 million. In connection with the sale, Millennium repaid and terminated its revolving credit facilities of $125 million in the U.S., $25 million in Australia, €60 million in the U.K. and the term loan in Australia. The outstanding balances under the Australian term loan and the credit facility in the U.K. were $50 million and $49 million, respectively, at May 15, 2007.

Financing activities of discontinued operations provided cash of $23 million in the first nine months of 2007 and used cash of $13 million in the first nine months of 2006. During the 2007 period and prior to the May 15, 2007 sale of the worldwide inorganic chemicals business, $49 million was drawn on the €60 million credit facility in the U.K., while repayments included $20 million of the term loan in Australia and $6 million of other debt.

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Liquidity and Capital Resources—Lyondell’s total debt, including current maturities, as of September 30, 2007 was $6.6 billion, or approximately 65% of total capitalization. The current maturities included $400 million principal amount of Equistar’s 10.125% Senior Notes due 2008. Lyondell has repaid more than $3.8 billion principal amount of debt from September 2004 through September 30, 2007. Scheduled maturities represented $273 million of the payments.

Lyondell’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, Lyondell believes that conditions will be such that cash balances, cash generated by operating activities, Lyondell’s ability to move cash among its wholly owned subsidiaries, and funds from lines of credit will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, necessary capital expenditures, ongoing operations and dividends.

In connection with the BASF Corporation lawsuit described in the “Litigation” section of Note 15 to the Consolidated Financial Statements, Lyondell will post a bond, which will be collateralized by a $200 million letter of credit issued under LCC’s credit facility.

In April 2006, Lyondell was granted an arbitration award related to a commercial dispute with Bayer AG and Bayer Corporation (collectively, “Bayer”). The award, which has not been reflected in either 2006 or 2007 earnings, pertains to several issues related to the U.S. PO and PO technology joint ventures and included declaratory judgment in Lyondell’s favor concerning interpretation of the contract provisions at issue. Lyondell was awarded $121 million through June 30, 2005, plus interest and costs of arbitration. Post-judgment interest on the award continues to accrue. In August 2006, Lyondell filed a motion in federal district court in Texas to enforce the award, and Bayer subsequently filed motions and other proceedings to vacate or otherwise attack the arbitration award. These motions and proceedings are still pending.

LCC has not guaranteed Equistar’s or Millennium’s credit facilities or debt obligations, except for $150 million of Equistar debt, consisting of the 7.55% Debentures due 2026. LCC’s credit facility generally limits investments by Lyondell in Equistar, Millennium and specified joint ventures unless certain conditions are satisfied. 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. The level of debt and the limitations imposed on LCC, Equistar and Millennium by their respective current or future debt agreements, including the restrictions on their ability to transfer cash among the entities as further discussed below could have significant consequences on Lyondell’s business and future prospects.

At September 30, 2007, Lyondell had cash on hand of $303 million, which included $29 million of cash held by Millennium and $25 million of cash held by Equistar. Lyondell’s total unused availability under various liquidity facilities was $1,958 million as of September 30, 2007 and included the following:

$959 million under LCC’s $1,055 million senior secured revolving credit facility, which matures in August 2011. Availability under the revolving credit facility is reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $96 million as of September 30, 2007. There was no outstanding borrowing under the revolving credit facility at September 30, 2007.

$135 million under LCC’s $150 million accounts receivable sales facility, which matures in November 2010. The agreement currently permits the sale of up to $135 million of total interest in domestic accounts receivable, which amount would decline by $35 million if LCC’s credit facility were fully drawn. There was no outstanding amount of accounts receivable sold under the accounts receivable sales facility at September 30, 2007.

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$899 million in total under Equistar’s $400 million inventory-based revolving credit facility and its $600 million accounts receivable sales facility, 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 $40 million at September 30, 2007, and $11 million of outstanding letters of credit under the revolving credit facility as of September 30, 2007. 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 September 30, 2007.

LCC Debt and Accounts Receivable Sales Facility—LCC’s senior secured credit facility, indentures and accounts receivable sales facility contain restrictive covenants and the credit facility also contains covenants that require the maintenance of specified financial ratios. These covenants, as well as debt guarantees, are described in Notes 11 and 16 to Lyondell’s Consolidated Financial Statements included in Lyondell’s Current Report on Form 8-K dated May 29, 2007. The potential impact of a breach of these covenants is discussed below in the “Effects of a Breach” section. There have been no changes in the terms of the covenants or the guarantees during the nine months ended September 30, 2007, except that, Lyondell amended the terms of the LCC senior secured credit facility such that the existing financial maintenance ratios will apply only to the revolving credit facility and no longer to the term loan.

Equistar Debt and Accounts Receivable Sales Facility—Equistar’s inventory-based revolving credit facility, accounts receivable sales facility and indentures contain restrictive covenants. These covenants are described in Notes 11 and 16 to Lyondell’s Consolidated Financial Statements included in Lyondell’s Current Report on Form 8-K dated May 29, 2007. The potential impact of a breach of these covenants is discussed below in the “Effects of a Breach” section. There have been no changes in the terms of the covenants during the nine months ended September 30, 2007. 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.

Millennium Debt—Millennium’s indentures contain covenants that, subject to exceptions, restrict, among other things, debt incurrence, lien incurrence, sale and leaseback transactions, sales of assets and mergers. The potential impact of a breach of these covenants is discussed below in the “Effects of a Breach” section. Millennium is no longer prohibited from making certain restricted payments, including dividends to Lyondell, nor is it required to maintain financial ratios as a result of the repayment of its 9.25% Senior Notes due 2008.

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, the Debentures are convertible into shares of Lyondell’s common stock or, at Lyondell’s discretion, equivalent cash or a combination thereof. The Debenture redemption terms are described in Note 16 to Lyondell’s Consolidated Financial Statements included in Lyondell’s Current Report on Form 8-K dated May 29, 2007. There were no changes in the redemption terms in the nine months ended September 30, 2007. As of September 30, 2007, based on a quarterly test related to the price of Lyondell common stock, the Debentures were convertible at a conversion rate of 75.763 Lyondell shares per one thousand dollar principal amount of the Debentures. As of September 30, 2007, the amount of Debentures that had been converted into shares of Lyondell common stock was not significant.

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Effects of a breach—A breach by LCC, Millennium or Equistar of any of the covenants or other requirements in their respective debt instruments could (1) permit that entity’s note holders or lenders to declare the outstanding debt under the breached debt instrument due and payable, (2) permit that entity’s lenders under that credit facility to terminate future lending commitments and (3) permit acceleration of that entity’s other debt instruments that contain cross-default or cross-acceleration provisions. The respective debt agreements of LCC, Millennium and Equistar contain various event of default and cross-default provisions. Furthermore, a default under Equistar’s debt instruments could constitute a cross-default under LCC’s credit facility, which, under specified circumstances, would then constitute a default under LCC’s indentures. It is not likely that LCC, Millennium or Equistar, as the case may be, would have, or be able to obtain, sufficient funds to make these accelerated payments. If LCC were unable to make its accelerated payments, LCC’s lenders could proceed against any assets that secure its debt. Similarly, the breach by LCC or Equistar of covenants in their respective accounts receivable sales facilities 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 the entity’s liquidity. In addition, if Lyondell were unable generally to pay its debts as they become due, PDVSA Oil would have the right to terminate the crude oil contract.

Off-Balance Sheet Arrangements—Lyondell’s off-balance sheet arrangements are described in the “Off-Balance Sheet Arrangements” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in its Current Report on Form 8-K dated May 29, 2007. Lyondell’s off-balance sheet arrangements did not change materially during the nine months ended September 30, 2007.

CURRENT BUSINESS OUTLOOK

Thus far in the fourth quarter 2007, both crude oil and NGLs price increases have accelerated, setting new highs. In the EC&D segment, record high raw material costs are offsetting the benefit of recent sales price increases, necessitating further pricing initiatives. Refining spreads are comparable to the third quarter 2007 average, but are expected to continue to be volatile going forward. In our PO&RP segment, oxygenated fuel (MTBE/ETBE) margins have declined, following typical seasonal patterns.

ACCOUNTING AND REPORTING CHANGES

Lyondell adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN No. 48, Lyondell recognized a $47 million increase in the liability related to uncertain income tax positions, which was accounted for as a $41 million increase in goodwill related to the acquisition of Millennium, a $4 million increase in deferred tax assets and a $2 million increase of the January 1, 2007 balance of retained deficit (see Note 14).

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ENVIRONMENTAL MATTERS

Various environmental laws and regulations impose substantial requirements upon the operations of Lyondell. Lyondell’s policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act as amended, the Resource Conservation and Recovery Act and the Clean Air Act Amendments. Lyondell 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.

Lyondell also makes capital expenditures to comply with environmental regulations.

Lyondell currently estimates that environmentally related capital expenditures at its facilities, including Equistar, Millennium and Houston Refining facilities, will be approximately $155 million in 2007 and $34 million in 2008, representing an increase of $69 million in 2007 due to rising costs associated with current projects and a decrease of $14 million in 2008 compared to amounts previously disclosed.

Item 3. Disclosure of Market Risk

Lyondell’s exposure to market risk is described in Item 7A of its Annual Report on Form 10-K for the year ended December 31, 2006. Lyondell’s exposure to market risk has not changed materially in the nine months ended September 30, 2007.

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Item 4. Controls and Procedures

Lyondell performed an evaluation, under the supervision and with the participation of its management, including the Chairman, President and Chief Executive Officer (principal executive officer) and the Senior Vice President and Chief Financial Officer (principal financial officer), of the effectiveness of the Lyondell disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2007. Based upon that evaluation, the Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that the Lyondell disclosure controls and procedures are effective.

There were no changes in Lyondell’s internal control over financial reporting that occurred during Lyondell’s last fiscal quarter (the third quarter 2007) that have materially affected, or are reasonably likely to materially affect, Lyondell’s internal control over financial reporting.

RATIO OF EARNINGS TO FIXED CHARGES

Lyondell’s computation of the ratios of earnings to fixed charges for the nine months ended September 30, 2007 and 2006 and for each of the five-years in the period ended December 31, 2006 is reflected in the table below.

	For the nine months ended September 30,				For the year ended December 31,
Millions of dollars, except ratio data	2007		2006		2006		2005		2004		2003			2002
Income (loss) from continuing operations before income taxes	$	734	$	796	$	1,146	$	734	$	152	$	(481	)	$	(214	)
Deduct income (loss) from equity investments		2		77		78		124		451		(103	)		14
Add distributions of earnings from equity investments		1		73		73		123		424		144			126
Earnings (losses) adjusted for equity investments		733		792		1,141		733		125		(234	)		(102	)
Fixed charges: (a)
Interest expense, gross		499		459		648		634		464		415			384
Portion of rentals representative of interest		67		51		69		59		25		22			23
Total fixed charges before capitalized interest		566		510		717		693		489		437			407
Capitalized interest		- -		- -		- -		- -		- -		19			10
Total fixed charges including capitalized interest		566		510		717		693		489		456			417
Earnings before fixed charges	$	1,299	$	1,302	$	1,858	$	1,426	$	614	$	203		$	305
Ratio of earnings to fixed charges (a)		2.3		2.6		2.6		2.1		1.3		- -			- -

_______

(a)	In 2003 and 2002, earnings were insufficient to cover fixed charges by $253 million and $112 million, respectively.

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FORWARD-LOOKING STATEMENTS

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

·	Lyondell’s ability to implement its business strategies, including the ability of Lyondell and Basell to complete the proposed merger,

·	failure to obtain shareholder approval or to satisfy other closing conditions with respect to the proposed merger, or the failure of the proposed merger to close for any other reason,

·	the occurrence of any event, change or circumstance that could give rise to the termination of the merger agreement or delays in completing the proposed merger,

·	uncertainty concerning the effects of the proposed merger, including the diversion of attention from the day-to-day business of Lyondell and the potential disruption to employees and relationships with customers, suppliers, distributors and business partners,

·	the amount of the costs, fees, expenses and charges relating to the proposed merger,

·	the failure by Basell and BIL Acquisition Holdings Limited, a wholly owned subsidiary of Basell, to obtain the expected debt financing arrangements set forth in their debt commitment letter or replacement debt financing,

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

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

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

·	legal, tax and environmental proceedings,

·	the cyclical nature of the chemical and refining industries,

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

·	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,

·	technological developments,

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

·	access to capital markets.

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

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All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section, elsewhere in this report and in Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2006 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. See “Item 1. Legal Proceedings,” “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See also the proxy statement Lyondell sent to its shareholders in connection with the proposed merger. These factors are not necessarily all of the important factors that could affect Lyondell and its joint ventures. Use caution and common sense when considering these forward-looking statements. Lyondell does not intend to update these statements unless securities laws require it to do so.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments with respect to Lyondell’s legal proceedings previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2006 and in the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, except as described below:

LCC—Two shareholder lawsuits styled as class actions have been filed against LCC and its directors. The lawsuits are entitled Plumbers and Pipefitters Local 51 Pension Fund, On Behalf of Itself and Others Similarly Situated v. Lyondell Chemical Company, et al. (filed July 23, 2007 in the District Court of Harris County, Texas) and Walter E. Ryan Jr., Individually and on Behalf of All Other Similarly Situated v. Lyondell Chemical Company, et al. (filed August 20, 2007 in the Court of Chancery of the State of Delaware). The Ryan case also named as defendants Basell and Merger Sub. On August 29, 2007, the Plumbers petition was amended to add as defendants Basell and Merger Sub. The complaints generally allege that (1) LCC’s board of directors breached their fiduciary duties in negotiating and approving the merger and by administering an unfair sale process that failed to maximize shareholder value, and engaged in self dealing by obtaining unspecified personal benefits in connection with the merger not shared equally by other shareholders; and (2) LCC, Basell and Merger Sub aided and abetted the LCC board of directors in breaching their fiduciary duties. In addition, the complaints allege that LCC and its board of directors failed to disclose in the preliminary proxy statement certain information regarding the merger and the process leading up to the merger. The plaintiffs in these lawsuits seek, among other things, to enjoin the merger and to rescind the merger agreement. Discovery has commenced. In the Delaware case, defendants have filed motions for summary judgment, for dismissal for failure to state a claim and for certification of the plaintiff class. In the Texas case, at the plaintiff’s request, the court has reserved November 9, 2007 for a hearing on a motion to be filed by plaintiff for a preliminary injunction against the merger. Lyondell believes that the lawsuits are without merit and that it has valid defenses to all claims and will vigorously defend this litigation.

On April 12, 2005, BASF Corporation (“BASF”) filed a lawsuit against LCC in the Superior Court of New Jersey, Morris County asserting various claims relating to alleged breaches of a propylene oxide sales contract and seeking damages in excess of $100 million. Lyondell denies it breached the contract. The trial started on June 18, 2007. LCC believes the maximum refund due to BASF is $22.5 million on such propylene oxide sales and has offered to pay such amount to BASF. On August 13, 2007, the jury returned a verdict in favor of BASF in the amount of approximately $170 million (which includes the above $22.5 million). On October 3, 2007, the judge determined that prejudgment interest on the verdict would be $36 million. LCC will appeal this verdict and will post a bond, which will be collateralized by a $200 million letter of credit. Lyondell does not expect the verdict to result in any material adverse effect on its business, financial position, liquidity or results of operations.

Equistar—In May 2007, the Texas Commission on Environmental Quality (the “TCEQ”) notified Equistar that it is seeking a civil penalty of $153,330 in connection with alleged noncompliance during 2005 and 2006 with various air pollution regulations at the Channelview facility. Also in May 2007, legislative changes were finalized that impacted the manner in which TCEQ assesses penalties and could result in a substantial reduction in the assessed penalty. In September 2007, the TCEQ staff issued a policy determination of the recent legislation which determination limits the potential reduction in the proposed penalty pursuant to such legislation. Equistar continues discussions with TCEQ.

In October 2007, the TCEQ notified Equistar that it is seeking a penalty of $129,400 in connection with alleged exceedances of permitted emissions at Equistar’s Chocolate Bayou plant.

Equistar does not believe that the ultimate resolution of these matters will have a material adverse effect on the business, financial position, liquidity or results of operation of Equistar.

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Millennium—Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging personal injury, property damage, and remediation costs allegedly associated with the use of these products. Millennium’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. Millennium has not accrued any liabilities for any lead-based paint and lead pigment litigation. Millennium has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. Millennium’s ability to collect under the indemnity coverage would depend upon, 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. As a result of insurance coverage litigation initiated by Millennium, an Ohio trial court issued a decision in 2002 effectively requiring certain insurance carriers to resume paying defense costs in the lead-based paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio court’s decision. On February 23, 2006, certain Lloyd’s, London insurance underwriters filed a declaratory judgment action in the Supreme Court of the State of New York (trial court) against several of their policyholders, including Millennium, contesting their responsibility to provide insurance coverage for all of the lead-based paint and lead pigment cases, including the Rhode Island case. On March 7, 2006, Millennium filed an amended complaint in the Ohio case referenced above that revived its Ohio state court litigation, seeking, among other relief, a declaratory judgment as to the responsibility of all of its insurance carriers for any judgments or settlements in connection with any lead-based paint and lead pigment litigation involving Millennium. On April 26, 2006, the judge in the Ohio case granted Millennium’s motion to amend the complaint to include all insurance carriers. On March 14, 2006, Millennium filed a motion to dismiss the New York case in favor of the pre-existing Ohio action, and on August 8, 2006, the Supreme Court of the State of New York dismissed the declaratory judgment action as to all carriers except those that asserted cross claims against Millennium, which cross claims were stayed. On or about October 5, 2006, Lloyd’s, London filed a notice of appeal of the New York trial court’s decision. This appeal was heard by the New York Supreme Court Appellate Division on October 3, 2007. On October 25, 2007, the Appellate Division upheld the trial court’s dismissal of Lloyd’s, London’s declaratory judgment action. The insurance carriers have in the past and may in the future attempt to deny indemnity coverage if there is ever a settlement or a final, non-appealable adverse judgment in any lead-based paint or lead pigment case.

Millennium is currently named a defendant in 55 cases arising from Glidden’s manufacture of lead pigments. These cases are in various stages of the litigation process. Ten cases have been dismissed, and the remainder of the cases are in various pre-trial stages. Of the 45 open and active cases, most seek damages for personal injury and are brought by individuals, and twelve of the cases seek damages and abatement remedies based on public nuisance and are brought by states, cities and/or counties in three states (California, Ohio and Rhode Island).

Item 1A. Risk Factors

There have been no material changes with respect to Lyondell’s risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2006 and in the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, except as described below:

Lyondell’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.

Lyondell 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. Lyondell 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 Lyondell’s chemical products are components of a variety of other end-use products, Lyondell, 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 Lyondell’s operations, a substantial increase in the success of these types of claims could result in the expenditure of a significant amount of cash by Lyondell to pay claims, and could reduce its operating results.

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Lyondell (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 Lyondell to meet specific financial responsibility requirements. Lyondell 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 Lyondell’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, Lyondell does not expect that it will be affected differently than the rest of the chemical and refining industries 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 Lyondell) may be required to bear all of such costs regardless of fault, the legality of the original disposal or ownership of the disposal site. In addition, similar environmental laws and regulations that have been or may be enacted in countries outside of the U.S. may impose similar liabilities and costs upon Lyondell.

Lyondell 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. Lyondell also has liabilities under the Resource Conservation and Recovery Act and various state and non-U.S. government regulations related to several current and former plant sites. Lyondell also is responsible for a portion of the remediation of certain off-site waste disposal facilities. Lyondell is contributing funds to the cleanup of several waste sites throughout the U.S. under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Superfund Amendments and Reauthorization Act of 1986, including the Kalamazoo River Superfund Site discussed below. Lyondell also has been named as a potentially responsible party at several other sites. Lyondell’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 Lyondell’s environmental matters and related accruals (including those discussed in this risk factor), and environmentally-related capital expenditures, see also “Item 1. Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters” and Note 15 to the Consolidated Financial Statements in Lyondell’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, Note 21 to the Consolidated Financial Statements in Lyondell’s Current Report on Form 8-K dated May 29, 2007 and “Item 3. Legal Proceedings—Environmental Matters” in Lyondell’s Annual Report on Form 10-K for the year ended December 31, 2006. If actual expenditures exceed the amounts accrued, that could have an adverse effect on Lyondell’s results of operations and financial position.

Kalamazoo River Superfund Site—Lyondell acquired Millennium on November 30, 2004. 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. Litigation concerning the matter commenced in December 1987 but was subsequently stayed and is being addressed under CERCLA. 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.

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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. Millennium’s ultimate liability for the Kalamazoo River Superfund Site is not affected by the sale of the inorganic chemicals business, which closed on May 15, 2007.

Other Regulatory Requirements—In addition to the matters described above, Lyondell is subject to other material regulatory requirements that could result in higher operating costs, such as regulatory requirements relating to the security of chemical and refining facilities, and the transportation, exportation or registration of products. Although Lyondell has compliance programs and other processes intended to ensure compliance with all such regulations, Lyondell 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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Item 6. Exhibits

2.1		Agreement and Plan of Merger among the Registrant, Basell AF and BIL Acquisition Holdings Limited dated as of July 16, 2007 (filed as an exhibit to the Registrant’s Current Report on Form 8-K dated as of July 16, 2007 and incorporated herein by reference)

4.3(e)		Amendment to Rights Agreement dated July 16, 2007 (filed as an exhibit to the Registrant’s Registration Statement on Form 8-A/A dated as of July 16, 2007 and incorporated herein by reference)

4.12(e)		Fourth Supplemental Indenture dated as of July 5, 2007 to the Indenture among the Registrant, the subsidiary guarantors party thereto, and The Bank of New York as Trustee, dated as of July 2, 2002, for 11 1/8% Senior Secured Notes due 2012

4.15(e)		Fourth Supplemental Indenture dated as of July 5, 2007 among the Registrant, the subsidiary guarantors party thereto, and The Bank of New York as Trustee, for 10 1/2% Senior Secured Notes due 2013

4.8(b)		Second Supplemental Indenture dated July 5, 2007 among the Registrant, and The Bank of New York as Trustee for 8% Senior Unsecured Notes due 2014

4.11(b)		Second Supplemental Indenture dated July 5, 2007 among the Registrant, and The Bank of New York as Trustee for 8.25% Senior Unsecured Notes due 2016

4.27(a)		First Supplemental Indenture dated as of July 5, 2007 among the Registrant, the Subsidiary Guarantors party thereto, and The Bank of New York as Trustee for 6.875% Senior Unsecured Notes due 2017

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

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

32.1		Section 1350 Certification of Principal Executive Officer

32.2		Section 1350 Certification of Principal Financial Officer

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SIGNATURES

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

		Lyondell Chemical Company


Dated: November 7, 2007		/s/ Charles L. Hall
		Charles L. Hall
		Vice President and Controller
		(Duly Authorized and
		Principal Accounting Officer)

This ‘10-Q’ Filing	Date	Other Filings

	11/20/07	4, 8-K
	11/9/07	4
Filed on:	11/7/07
	10/25/07	8-K, DEFA14A
	10/3/07	DEFA14A
For Period End:	9/30/07
	8/29/07
	8/20/07
	8/13/07
	7/23/07
	7/16/07	8-K, SC 13G
	7/5/07
	6/30/07	10-Q
	6/18/07
	5/29/07	8-K
	5/15/07	4, 8-K
	3/31/07	10-Q
	3/20/07
	3/16/07
	2/26/07	4, 8-K
	1/1/07	3
	12/31/06	10-K, 11-K
	10/5/06
	9/30/06	10-Q
	8/16/06	8-K, 8-K/A
	8/15/06
	8/8/06
	4/26/06
	3/14/06
	3/7/06
	2/28/06
	2/23/06	4, 8-K
	2/22/06
	1/1/06
	11/1/05
	6/30/05	10-Q
	4/12/05
	11/30/04	8-K, 8-K/A, S-8
	10/29/02
	7/2/02
		List all Filings

Lyondell Chemical Co – ‘10-Q’ for 9/30/07

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Lyondell Chemical Co – ‘10-Q’ for 9/30/07

On: Wednesday, 11/7/07, at 5:15pm ET · For: 9/30/07 · Accession #: 842635-7-100 · File #: 1-10145

Previous ‘10-Q’: ‘10-Q’ on 8/8/07 for 6/30/07 · Next: ‘10-Q’ on 5/15/08 for 3/31/08 · Latest: ‘10-Q’ on 11/13/08 for 9/30/08

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