LYONDELL CHEMICAL CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1999

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

Commission File No. 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. EMPLOYEE IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1221 MCKINNEY STREET,
SUITE 700, HOUSTON, TEXAS 77010
(Address of principal executive offices) (ZIP CODE)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock ($1.00 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

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

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

There were 117,559,003 shares of the registrant's common stock outstanding on
March 1, 2000. The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 1, 2000 based on the closing price on the
New York Stock Exchange composite tape on that date, was $1,039,058,366.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1999
(incorporated by reference under Part III).

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Lyondell Chemical Company ("Lyondell" or the "Company") is a global chemical
company with leading producer positions in all of its major products and low
cost operations. Lyondell is vertically integrated into its key raw materials
through its equity ownership in Equistar Chemicals, LP, LYONDELL-CITGO Refining
LP and Lyondell Methanol Company, L.P.

Lyondell manufactures and markets a variety of intermediate and performance
chemicals, including propylene oxide ("PO"), polyether polyols, propylene glycol
("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene
diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA")
and its derivative, methyl tertiary butyl ether ("MTBE"), which are collectively
known as the Company's intermediate chemicals and derivatives business.

The Company owns 41% of Equistar Chemicals, LP, a Delaware limited partnership
("Equistar"), which operates petrochemicals and polymers businesses. Equistar's
petrochemicals business manufactures and markets olefins, oxygenated chemicals,
aromatics and specialty products. Equistar's olefins are ethylene, propylene and
butadiene and its oxygenated chemicals include ethylene oxide ("EO"), ethylene
glycol ("EG"), ethanol and MTBE. Equistar's aromatics are benzene and toluene.
Equistar's polymers business manufactures and markets polyolefins, including
high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear
low density polyethylene ("LLDPE"), polypropylene and performance polymers.
Equistar's performance polymers include enhanced grades of polyethylene such as
wire and cable resins, and polymeric powders.

The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited
partnership ("LCR"), which produces refined petroleum products, including
gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils").
LCR sells its principal refined products primarily to CITGO Petroleum
Corporation ("CITGO").

In addition, the Company owns 75% of Lyondell Methanol Company, L.P., a Texas
limited partnership ("LMC"), which produces methanol.

DEVELOPMENT OF BUSINESS

Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition and strengthen its business
portfolio over the past several years.

In July 1993, the Company contributed to LCR the Company's refining business,
including its Houston, Texas refinery (the "Refinery"), its lube oil blending
and packaging plant in Birmingport, Alabama and working capital. The Company
retained an approximately 90% interest in LCR, while CITGO held the remaining
approximately 10% interest. Following completion of a major upgrade project at
the Refinery in the first quarter of 1997, the Company's interest in LCR was
reduced to 58.75%. On December 31, 1998, LCR converted from a Texas limited
liability company to a Delaware limited partnership.

In May 1995, the Company acquired Occidental Chemical Corporation's
("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this
acquisition included resin production facilities in Matagorda and Victoria,
Texas, related research and development activities and the rights to the
ALATHON(R) trademark.

In December 1996, the Company formed LMC with MCN Investment Corporation
("MCNIC"), a division of MCN Corporation, to own the Company's 248 million
gallons per year methanol plant. Under the terms of the agreement, MCNIC
purchased a 25% interest in the methanol plant. Lyondell retained a 75% interest
and serves as managing partner. Since December 1997, Equistar has served as the
operator of LMC.

In December 1997, following approval by the stockholders of each company,
Lyondell and Millennium Chemicals Inc. ("Millennium") combined most of their
petrochemicals and polymers businesses to form Equistar. Lyondell contributed
substantially all of the assets comprising its petrochemicals and polymers
business segments,

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as well as a $345 million note, in exchange for a 57% interest in Equistar.
Equistar also assumed $745 million of Lyondell's debt. Millennium contributed
substantially all of the assets composing its olefins, ethyl alcohol,
polyethylene, polypropylene and performance polymers businesses, which had been
held in Millennium Petrochemicals Inc. ("Millennium Petrochemicals"), a wholly
owned subsidiary of Millennium. In exchange, Millennium received a 43% interest
in Equistar, Equistar repaid $750 million of debt due to Millennium from its
contributed businesses and Millennium retained $250 million of its accounts
receivable.

In May 1998, Lyondell and Millennium expanded Equistar with the addition of
the ethylene, propylene, EO, EG and other EO derivatives businesses (the
"Occidental Contributed Business") of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition
included two olefins plants, a plant that produces EO and EO derivatives,
including EG, and Occidental's 50% interest in a joint venture with E.I. DuPont
de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental
also contributed more than 950 miles of owned and leased pipelines located on
the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana
olefins plant. Equistar assumed approximately $205 million of Occidental's debt.
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental's chlorovinyls business. In
June 1998, Equistar borrowed approximately $500 million of additional debt and
distributed cash of approximately $420 million to Occidental and $75 million to
Millennium. Following the May 1998 transaction, Lyondell owns 41% of Equistar,
and Millennium and Occidental each own 29.5%. Millennium has publicly announced
its intention to sell its interest in Equistar and is actively seeking qualified
buyers. There can be no assurance that any such sale will be consummated, but
the Company does not expect any such sale to affect Equistar's operations or
results.

In July 1998, Lyondell completed the acquisition (the "ARCO Chemical
Acquisition") of all the outstanding shares of ARCO Chemical Company ("ARCO
Chemical"), the world's largest producer of PO and a leading worldwide producer
of polyether polyols, PG, PGE, TDI, SM, and MTBE. The ARCO Chemical Acquisition
was financed through a bank credit agreement providing for aggregate borrowings
of up to $7 billion (the "Credit Facility"). The acquired business is referred
to as "ARCO Chemical" for actions or events prior to the ARCO Chemical
Acquisition.

In November 1999, Lyondell reached a definitive agreement to sell its
worldwide polyols business to Bayer AG of Germany ("Bayer") for $2.45 billion.
Bayer will also receive an ownership interest in certain of Lyondell's U.S. PO
operations through formation of a joint venture to produce PO. The Lyondell
Board of Directors and the Supervisory Board of Bayer have approved the
agreement, and the companies have received regulatory clearance in Europe and
the United States. Lyondell expects that the transaction will close on or about
April 1, 2000. In addition, as part of the transaction, Lyondell and Bayer
agreed to pursue a joint venture for the construction of PO-11, a previously
announced worldscale propylene oxide/styrene monomer plant in Europe.

Lyondell was incorporated under the laws of Delaware in 1985. Its principal
executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas
77010 (Telephone: (713) 652-7200).

STRATEGY

Lyondell's goal is to create maximum value for its shareholders. The Company
intends to achieve this goal by focusing on three key strategic drivers:
optimizing our business operations to attain first quartile profit margin
performance; reducing debt to regain the financial flexibility needed to pursue
growth and industry restructuring opportunities; and growing those businesses in
which we have sustainable competitive advantages.

OPTIMIZING BUSINESS OPERATIONS

Having accumulated a wide range of assets through acquisitions and
partnerships over the past three years, Lyondell is aggressively optimizing the
performance of its businesses in terms of cost structure, competitive advantage
and service to customers. The Company is taking actions to capture the cost
benefits resulting from economies of scale and vertical integration. We are
successfully reducing costs by completing the cost reduction programs in place
at Lyondell, Equistar and LCR. We are also realizing identified synergies and
revenue enhancements across Lyondell's business portfolio by optimizing
manufacturing operations, using more efficient

3

purchase and distribution practices and reducing overhead and staffing. These
opportunities have been enhanced by the agreement between Lyondell and Equistar
to utilize shared services over a broad range of manufacturing and supply chain
functions, as well as legal, finance, human resources and other corporate
functions. Lyondell's commitment to operational excellence and achievements in
meeting environmental, health and safety targets have also reduced costs through
improved plant reliability, reduced maintenance requirements and increased
employee productivity. Continual cost reduction is a fundamental philosophy that
the Company believes is a critical component of its success.

The Company's strategy is to invest only in businesses that are, or have the
potential to be, in the top quartile of profit margin performance per unit of
product sold. Assets that cannot achieve that criterion are candidates for
eventual consolidation or rationalization. Four polymer reactors at the La
Porte, Texas facility were mothballed in the first quarter of 2000, while a top
quartile production line at Matagorda was added in 1999. These actions, along
with the 1999 sale of the concentrates and compounds business, are examples of
Equistar's long-term asset optimization strategy.

With the acquisition of ARCO Chemical, Lyondell became one of the world's
largest producers of propylene oxide, with the leading low-cost technology.
One of the major markets for PO is the production of polyols. In November 1999,
Lyondell announced that it will sell its polyols business, together with an
ownership interest in its PO business, to Bayer AG, one of the world's premier
urethanes manufacturers. While this business could have met the Company's first
quartile profit margin performance criterion, the value that the Company is
receiving from Bayer is greater than what Lyondell could have achieved
participating separately in that business. Lyondell expects this strategic
move will strengthen its global PO position. The combination of Lyondell's
polyols business into Bayer's existing polyols business will accelerate the
growth of the overall polyols market due to Bayer's complementary businesses,
resulting in the optimal utilization of Lyondell's PO assets.

Lyondell believes that e-commerce will have an impact on the chemical industry
and is in the process of developing an e-commerce strategy that addresses the
Company's sales and procurement processes. Lyondell recently announced its
selection of an e-business provider to connect 150 of the Company's remote
inventory locations and establish online connections with several core motor
freight carriers, thus enabling traditional paper-based transactions to be
conducted electronically over the Internet. Lyondell expects its proposed
advances in this area will lower its costs and enable it to be more responsive
to customer needs and servicing.

FINANCIAL FLEXIBILITY

Lyondell's objective is to return to an investment grade credit rating as
soon as practical by continuing to reduce debt and improving the credit position
of the Company. The Company believes an investment grade rating will provide
the appropriate financial flexibility to timely pursue opportunities to increase
shareholder value. The Bayer transaction, expected to close on or about April
1, 2000, represents a significant step toward this goal. This transaction will
enable the Company to pay down more than $2 billion in debt and will be
accretive to earnings and cash flow in the first year.

The Company achieved another key step towards improving the balance sheet in
May 1999 with the successful $4.1 billion debt and equity offering. This
refinancing raised $736 million in new equity, paid down $690 million in debt,
extended remaining loan maturities and fixed interest rates on $2.4 billion of
long-term debt, thereby reducing the Company's exposure to rising interest
rates.

PROFITABLE GROWTH

Lyondell's strategy for growth is to invest only in those businesses where we
have sustainable competitive advantages based on proprietary technology, leading
market positions, leading product positions and cost advantages.

PO AND DERIVATIVES. Lyondell intends to maintain its leadership position in
PO and its key derivatives, including BDO, PG and PGE, through targeted
expansions and the continued development of new products. Construction of a new
BDO plant at the site of Lyondell's PO manufacturing facility at Botlek in the
Netherlands will begin in 2000 with start up scheduled for early 2002. Utilizing
Lyondell's proprietary PO-based technology, the

4

new facility, with expected annual BDO capacity of 280 million pounds,
represents an expansion of the use of PO in faster growth markets. Lyondell
believes that, integrated with its leading PO technology, this facility will be
one of the lowest cost BDO plants in the world. Additionally, Lyondell and Bayer
will jointly pursue the construction of PO-11, a worldscale propylene
oxide/styrene monomer plant in Europe, using Lyondell's leading, low-cost
technology.

PETROCHEMICALS. Equistar is one of the world's largest producers of olefins
with seven plants located in the U.S. Gulf Coast and Midwest regions and an
extensive pipeline distribution network system. Olefins, primarily ethylene and
propylene, are the key building block chemicals upon which many plastics and
synthetic materials are based. Equistar's strategy is to drive its plants
toward first quartile profit margin performance by, among other things,
exploiting its superior feedstock flexibility and optimizing co-product
recovery. Additionally, new technologies are being evaluated that could improve
margins through utilizing alternative feedstocks. Also, Equistar intends to
maintain its strong olefins merchant sales position. With its extensive
pipeline distribution system, large plant operations base and broad customer
base, Equistar intends to grow to meet the increasing market needs. Equistar
has been a leader in developing innovative supply options to meet these
requirements.

POLYMERS. Equistar is one of the largest North American producers of polymer
resins, which are used by its customers to make plastic films as well as blow
molded and extruded plastics of all kinds. Equistar's strategy is to focus its
resources and target expansion in high growth markets for polymer resins where
Equistar has a sustainable competitive advantage and leading market and
technology positions such as wire and cable resins and polyethylene films and
molded products. Equistar also intends to continue to improve its cost position
and efficiency by utilizing its large asset base to optimize production and
differentially grow in key markets. Equistar is actively pursuing new
technologies in its polymers business that would create opportunities for higher
margins. With its broad customer base and product line, excellent process
technology and product development capability, and emerging catalyst development
opportunities, Equistar intends to grow in its targeted areas to meet the
growing market needs.

REFINING. As a result of Lyondell's recent actions to reposition its business
portfolio, the strategic importance of LCR is reduced, although it continues to
be a significant source of cash flow. Lyondell's objectives with respect to its
interest in LCR are to maximize value from the business while accelerating cash
flows. LCR will continue to focus on improving the cost position and
reliability of the refinery by implementing further cost reduction and
reliability improvement programs. Two projects begun in 1999 - a centralized
control room and a cogeneration facility - should produce significant efficiency
improvements and cost reductions following their completion, scheduled for 2001.

SUMMARY

To achieve its strategic objectives, Lyondell has:

. Completed acquisitions, such as ARCO Chemical and the ALATHON(R) high density
polyethylene business, where the characteristics of the acquired business
give us long-term sustainable competitive advantages;

. Divested businesses that do not fit our core competencies and have greater
value to others, such as the polyols business and Equistar's concentrates and
compounds business; and

. Built alliances, such as Equistar and the transaction with Bayer, which can
effectively reduce costs, leverage scale efficiencies and provide unique
growth opportunities to the benefit of the owners.

Lyondell intends to continue to use these approaches and others to implement
its strategy with the goal of creating value for our shareholders.

SUMMARY DESCRIPTION OF BUSINESS SEGMENTS

For the year ended December 31, 1997, the Company reported its results of
operations in three segments: petrochemicals; polymers; and refining. Following
the ARCO Chemical Acquisition in July 1998, the Company added intermediate
chemicals and derivatives as a reportable segment, with the operations of the
acquired business

5

forming that segment. The Company's petrochemicals and polymers segments are
conducted through Equistar, and the Company's refining segment is conducted
through LCR. The methanol business conducted through LMC is not a reportable
segment for financial disclosure purposes.

THE COMPANY'S BUSINESS

The following chart shows the organization of Lyondell, as well as 1999 sales
revenues for Lyondell and each of its joint ventures. Sales revenue for
Lyondell and its subsidiaries represent the sales revenue of the businesses
acquired in the ARCO Chemical Acquisition.

[Chart Appears here showing: 1999 consolidated pro forma sales revenue
(excluding revenues of Equistar, LCR and Lyondell Methanol) of $3.7 billion for
Lyondell and Subsidiaries and the primary products of Lyondell's Intermediate
Chemicals and Derivatives Business: Lyondell's equity investments in each of
Equistar (41 percent), LCR (58.5 percent) and Lyondell Methanol (75 percent);
the 1999 sales revenues of each of Equistar, LCR and Lyondell Methanol, which
were $5.4 billion, $2.6 billion and $95 million, respectively; and the primary
products of each of the petrochemical, polymers, refining and methanol business]

Sales revenues shown above include sales to affiliates. For additional segment
information for each of the years in the three-year period ended December 31,
1999, see Notes 4, 5 and 22 of Notes to Consolidated Financial Statements.

6

INTERMEDIATE CHEMICALS AND DERIVATIVES

OVERVIEW

Lyondell is a leading global manufacturer and marketer of intermediate
chemicals and performance chemical products used in a broad range of consumer
goods. The segment's core product is PO, which is produced through two distinct
technologies based on indirect oxidation processes that yield co-products. One
process yields TBA as the co-product; the other yields SM as the co-product. The
two technologies are mutually exclusive, necessitating that a manufacturing
facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals
and derivatives segment also manufactures numerous derivatives of PO and TBA.
Among these are polyols, PG, PGE and BDO, derivatives of PO, and MTBE, a
principal derivative of TBA. This segment also manufactures and markets TDI.

In North America, the Company produces PO, TBA, PG and PGE at its Bayport,
Texas plants; PO, SM, MTBE, polyols and BDO at its Channelview, Texas plants
(one of the PO/SM plants, PO/SM II, being held through a joint venture, and the
other being wholly owned); polyols at its South Charleston and Institute, West
Virginia plants; and isocyanates at its Lake Charles, Louisiana plant. In
Europe, the Company produces PO, TBA, PG and MTBE at plants in Rotterdam, The
Netherlands, and Fos-sur-Mer, France; PGE at its Rotterdam plant; and polyols at
the Fos-sur-Mer plant and at a plant in Rieme, Belgium. In the Asia Pacific
region, the Company has a 50% interest in the joint venture Nihon Oxirane Co.,
Ltd. ("Nihon Oxirane"), which operates a PO/SM plant in Chiba, Japan. The
Company produces polyols at majority-owned plants in Kaohsiung, Taiwan and
Anyer, West Java, Indonesia. In Europe, the Company also obtains TDI through
tolling and market-based supply agreements with Rhodia. In December 1999, the
Company negotiated contracts for the construction of a new BDO facility in
Rotterdam, with a 280 million pound annual capacity and expected startup in
early 2002.

The Company estimates, based in part on published data, that worldwide demand
for PO was approximately 9.2 billion pounds in 1999. Approximately 90% of that
volume was consumed in the manufacture of three families of PO derivative
products: polyols, PG and PGE. The remainder is consumed in the manufacture of a
growing segment of performance products, including BDO and its derivatives. The
Company sells less than one billion pounds of its annual capacity of PO and
consumes the rest in the production of derivatives. PO that is not internally
consumed is sold in the merchant market.

Polyols and TDI are combined in the production of urethanes for products such
as automotive seating and home furnishings.

Styrene monomer is a commodity chemical produced and traded worldwide for
commodity and specialty polymer applications, such as polystyrene and polyester
resins, as well as various uses in the rubber industry. Based on published data,
worldwide demand in 1999 was approximately 43 billion pounds.

PG is principally used to produce unsaturated polyester resins. PG is also
used in certain food, cosmetic and pharmaceutical applications and in automotive
coolants and aircraft deicers. PGE are used as high performance solvents.

BDO and its derivatives are utilized in the production of engineering
plastics, pharmaceuticals, personal care products, fibers and high performance
coatings.

Lyondell converts most of its TBA to isobutylene, which is reacted with
methanol to produce MTBE, an oxygenated gasoline blending component that
increases octane and reduces automotive emissions. Worldwide demand for MTBE in
1999 was approximately 459,000 barrels per day, based on published data. This
demand had increased over the past several years as a result of the Clean Air
Act Amendments of 1990 (the "Clean Air Act Amendments"), state and local
regulations and the need for incremental octane in gasoline in the United States
and other countries. In the United States, the Clean Air Act Amendments set
minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not
meeting specified air quality standards. However, while studies by federal and
state agencies and other organizations have shown that MTBE is safe for use in
gasoline and is effective in reducing automotive emissions, the presence of MTBE
in some water supplies in California and other states due to gasoline

7

leaking from underground storage tanks and in surface water from recreational
water craft has led to public concern that MTBE may contaminate drinking water
supplies, and thereby result in a possible environmental risk.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, the State of California has initiated
action, pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by
December 31, 2002. Such action, to be effective, would require (i) a waiver of
the oxygenate mandate for California, (ii) Congressional action in the form of
an amendment to the Clean Air Act or (iii) California refiners to replace MTBE
with another oxygenate such as ethanol, a more costly and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999,
which recommended, among other things, reducing the use of MTBE in gasoline. The
EPA has recently announced its intent to seek legislative changes from Congress
to give EPA authority to ban MTBE over a three-year period. Such action would
only be granted through amendments to the Clean Air Act. Additionally, the EPA
is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic
Substance Control Act. It would take at least three years for such a rule to
issue. These initiatives or other governmental actions could result in a
significant reduction in Lyondell's MTBE sales. The Company has developed
technologies to convert TBA into alternate gasoline blending components should
it be necessary to reduce MTBE production in the future.

In addition, the Company has a take-or-pay MTBE sales contract with
Atlantic Richfield Company ("ARCO"), which contributes significant pre-tax
margin. If such legislative initiatives were enacted, ARCO has indicated that it
might attempt to invoke a force majeure provision in the ARCO contract in order
to reduce the contract quantities of MTBE it purchases or to terminate the
contract. The Company would vigorously dispute such action. The contract has an
initial term expiring December 31, 2002 and provides for formula-based prices
that are currently significantly above spot market prices for MTBE. A
significant reduction in the Company's sales under the ARCO contract could have
a negative impact on the Company's results of operations and cash flows.

In Europe, MTBE is expected to benefit from new legislation in the 15-nation
European Union. The so-called "Auto/Oil Legislation" aimed at reducing air
pollution from vehicle emissions was enacted in 1998, and refineries have
increased consumption of MTBE to meet the new blending requirements. Several
European authorities, most notably in Denmark, have investigated possible MTBE
contamination of groundwater and have determined that the primary issue is to
control leaking underground storage tanks. While these authorities are
continuing to monitor governmental findings and actions in the United States, no
restrictive action with respect to MTBE is currently planned.

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The following table outlines the intermediate chemicals and derivatives
segment's primary products, annual processing capacity as of January 1, 2000,
and the primary uses for such products. Unless otherwise specified, annual
processing capacity was calculated by estimating the number of days in a typical
year a production unit of a plant is expected to operate, after allowing
downtime for regular maintenance, and multiplying that number by an amount equal
to the unit's optimal daily output based on the design raw material mix. Because
the processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than capacities set forth below.
Capacities shown include 100% of the capacity of joint venture facilities.

PRODUCT ANNUAL CAPACITY Primary Uses
- ------------------------------------------ ----------------------- -------------------------------------------------------

Propylene Oxide (PO) 3.87 billion pounds PO is a key component of polyols, PG, PGE and BDO.

Polyols 1.47 billion pounds(a) Polyols are combined with isocyanates to produce
flexible foam for automotive seating and home
furnishings, coatings, adhesives, sealants and
elastomers.

Toluene Diisocyanate (TDI) 514 million pounds(b) TDI is combined with polyols to produce flexible foam
for automotive seating and home furnishings.

Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for
bathroom fixtures and boat hulls; lower toxicity
antifreeze, coolants and aircraft deicers; and
cosmetics and cleaners.

Propylene Glycol Ethers (PGE) 300 million pounds PGE are used as lower toxicity solvents for paints,
coatings and cleaners.

Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins,
films, personal care products, pharmaceuticals,
coatings, solvents and adhesives.
Methyl Tertiary Butyl 897 million gallons MTBE is a gasoline component for reducing emissions in
Ether (MTBE) (58,500 barrels/day) reformulated gasolines and enhancing octane value.

Styrene Monomer (SM) 3.65 billion pounds SM is used to produce plastics, such as expandable
polystyrene for packaging, foam cups and containers,
insulation products and durables and engineering
resins.

_________________
(a) Lyondell's polyols business will be sold to Bayer on or about April 1,
2000.

(b) Includes 264 million pounds processed by Rhodia at its plants in Lille and
Pont de Claix, France. Lyondell is entitled to 100% of this output
pursuant to the combination of a tolling agreement and a resale agreement
with Rhodia.

RAW MATERIALS

The principal hydrocarbon raw materials purchased by the intermediate
chemicals and derivatives segment are propylene, butanes, ethylene, benzene and
methanol. The market prices of these raw materials historically have been
related to the price of crude oil and its principal refinery derivatives and
natural gas liquids. These materials are available in bulk quantities via
pipeline or marine vessels. The segment's raw materials requirements are
purchased from numerous suppliers in the United States and Europe, with which
the Company has established contractual relationships, as well as in the spot
market.

The Company's raw material suppliers include Equistar, which is a leading
producer of propylene, ethylene and benzene and is expected to be the major
supplier of these raw materials to Lyondell's U.S. business in 2000. See Note 4
of Notes to Consolidated Financial Statements.

The intermediate chemicals and derivatives segment is a large volume consumer
of isobutane for chemical production. The Company has invested in facilities, or
entered into processing agreements with unrelated third

9

parties, to convert the widely available commodity, normal butane, to isobutane.
The Company is also a large consumer of oxygen for its PO/TBA plants at Bayport,
Texas, Rotterdam, The Netherlands, and Fos-sur-Mer, France.

In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company is a party to long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and other
utilities.

MARKETING AND SALES

In 1999, most of the segment's revenues were derived from sales to, or
processing agreements with, unrelated third parties. Over the past three years,
no single unrelated third party customer, nor any related party customer,
accounted for more than 10% of total revenues in any one year.

The intermediate chemicals and derivatives segment delivers products through
sales agreements, processing agreements and spot sales as well as product swaps.
It purchases SM and limited amounts of MTBE for resale to the extent that
customer demand for these co-products exceeds its production. Production levels
for co-products are based upon the demand for PO and the market economics of the
co-products.

The segment has a number of multi-year PO processing (or tolling) and sales
agreements. This reflects an effort to mitigate the adverse impact of
competitive factors and economic business cycles on demand for the segment's PO.
The segment is also a party to a number of multi-year SM sales and processing
agreements and MTBE sales agreements.

Lyondell sells most of its SM production into the United States merchant
market and to selected export markets through sales or tolling agreements. The
SM processing agreements also include long-term processing agreements providing
for the delivery of fixed annual quantities of SM. See "Joint Ventures and
Other Agreements." As of December 31, 1999, the Company had over 1.1 billion
pounds of SM capacity, or 30% of its worldwide capacity, covered by long-term
processing arrangements.

In addition to the ARCO contract, the Company also sells its MTBE production
under market-based sales agreements and in the spot market.

The majority of the segment's PO derivatives are sold through market-based
sales contracts under annual or multi-year arrangements.

The segment's sales are made through Company marketing and sales personnel and
through distributors and independent agents located in the Americas, Europe and
the Asia Pacific region. Through centralization of certain sales and order
fulfillment functions in regional customer service centers located in Houston,
Texas, Rotterdam, The Netherlands and Singapore, the Company has reduced its
sales office infrastructure for this segment around the world, while maintaining
service to its worldwide customer base. Lyondell also has long-term contracts
for distribution and logistics to insure reliable supply to its customers.

For data relating to foreign operations, see Note 22 of Notes to Consolidated
Financial Statements.

JOINT VENTURES AND OTHER AGREEMENTS

As part of the PO production joint venture with Bayer ("PO Joint Venture"),
Lyondell will contribute its Channelview, Texas PO/SM I plant and its Bayport,
Texas PO/TBA plant to the PO Joint Venture. Each of Lyondell and Bayer will
take its share of the PO produced. Bayer is expected to use its share of PO as
feedstock for its polyols business, including that to be acquired from Lyondell
in the pending sale. Under the terms of operating and logistics agreements,
Lyondell will operate the PO Joint Venture plants and will arrange and
coordinate the logistics of PO delivery on a worldwide basis.

10

Lyondell's PO/SM II plant at the Channelview, Texas complex that was completed
in 1992 is owned by the Company together with third-party equity investors.
The Company retains a majority interest in the PO/SM II plant and is the
operator of the plant. A portion of the SM output of the PO/SM II plant is
committed to the third-party investors under long-term processing agreements. As
of December 31, 1999, 1.1 billion pounds per year of the PO/SM II plant's
existing SM capacity was committed under such arrangements.

The Company has a 50% equity interest in Nihon Oxirane, a joint venture with
Sumitomo Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has
operated a PO/SM plant in Chiba, Japan.

In January 1995, ARCO Chemical entered into a tolling agreement and a resale
agreement with Rhodia covering the entire TDI output of Rhodia's two plants in
France, which have a combined annual capacity of approximately 264 million
pounds. This TDI is marketed principally in Europe, the Middle East, Africa and
Asia.

COMPETITION AND INDUSTRY CONDITIONS

Competition within the intermediate chemicals and derivatives segment of the
chemical industry is significant and is based on a variety of factors, including
quality, product price, reliability of supply, technical support, customer
service and potential substitute materials. Profitability in this segment is
affected by the worldwide level of demand along with vigorous price competition
which may intensify due to, among other things, new industry capacity. Demand is
a function of economic growth in the United States and elsewhere in the world,
which fluctuates. It is not possible to predict accurately the changes in raw
material costs, market conditions and other factors that will affect industry
margins in the future. Capacity share figures for the segment and its
competitors, discussed below, are based on completed production facilities and,
where appropriate, include the full capacity of joint-venture facilities and
certain long-term supply agreements.

The Company's major worldwide PO competitors are Dow Chemical Company
("Dow") and Shell Chemical Company ("Shell"). Dow's operations are based on
chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based on
published data relating to the PO market, the Company believes it has 35%, Dow
has 32% and Shell has 6% of the total worldwide capacity for PO.

As part of the Bayer transaction, Lyondell and Bayer agreed to pursue a joint
venture for the construction of PO-11 in Europe with an expected startup in
2003. Shell and BASF AG ("BASF"), through their joint venture, Basell,
commenced operation in October 1999 of a PO/SM plant in the Netherlands, using
Shell technology. Shell and BASF, as 50-50 partners, have also broken ground
for the construction of a PO/SM plant in Singapore, which is scheduled for start
up in the last half of 2002. In addition, Repsol Quimica, S.A. plans to start
up a PO/SM plant in Spain in 2000, using technology for the production of PO and
SM originally licensed from ARCO Chemical. Expansions by Erdoelchemie, a joint
venture between BP Amoco Chemical Company ("BP Amoco") and Bayer, in Europe and
SK Oxychemical in South Korea are also planned. As a result of these capacity
increases, the Company expects PO capacity in the near term to increase more
rapidly than PO demand, especially in Europe. The Company also expects
increasing integration to occur as current merchant-market buyers, such as Bayer
and BASF, establish their own sources of PO supply.

The Company competes with many polyols producers worldwide, including Dow,
Bayer, BASF and Shell. Based on published data, Dow is believed to have 25% of
worldwide polyols capacity while the Company is believed to have 16%.
Lyondell's polyols business will be sold to Bayer.

The Company both manufactures and has long-term tolling agreements for TDI.
The Company competes with many TDI producers worldwide, including Bayer and
BASF. Based on published data, Bayer is believed to have 21% of worldwide TDI
capacity while the Company is believed to have 15%.

The Company competes with many MTBE producers worldwide, the most significant
of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data,
SABIC is believed to have 12% of the total worldwide capacity for MTBE. The
Company believes it has 10% and that Equistar has an additional 3% of worldwide
MTBE capacity. MTBE also faces competition from substitute products such as
ethanol as well as other octane components.

11

The Company competes with several SM producers worldwide; among them are
Shell, Dow and BASF. Based on published data, Shell and the Company are each
believed to have 7% of total worldwide SM capacity.

PROPERTIES

The Company leases its corporate offices located in Houston, Texas. As part
of the ARCO Chemical Acquisition, Lyondell acquired ARCO Chemical's headquarters
office and research facility in Newtown Square, Pennsylvania, which is leased
from ARCO. The Company's European headquarters are located in leased facilities
in Maidenhead, England, and its Asia Pacific headquarters are located in leased
facilities in Hong Kong. The non-U.S. regional service centers are located in
leased facilities in Rotterdam, The Netherlands and Singapore.

Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, railcar, truck, barge or ship and
can deliver finished products in drums or by pipeline, railcar, truck, barge,
isotank or ship. The Company charters ships, owns and charters barges and leases
isotanks and railcars for the dedicated movement of products between plants,
products to customers or terminals, or raw materials to plants, as necessary.
The Company leases liquid and bulk storage and warehouse facilities at terminals
in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer
harbor area, the Company owns and operates an on-site butane storage tank,
propylene spheres, pipeline connections and a jetty that accommodates deep-draft
vessels.

The principal manufacturing facilities of the segment are set forth below. All
of these facilities are wholly-owned by Lyondell unless otherwise noted. The
polyols facilities are being sold to Bayer.

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

Bayport (Pasadena), Texas............................... PO, PG, PGE, TBA, isobutylene
Channelview, Texas(1)................................... PO, polyols, BDO, SM, MTBE
Lake Charles, Louisiana................................. TDI
Institute and South Charleston, West Virginia(2)........ polyols
Rieme, Belgium.......................................... polyols
Fos-sur-Mer, France..................................... PO, PG, polyols, TBA, MTBE
Botlek, Rotterdam, The Netherlands...................... PO, PG, PGE, TBA, MTBE,
isobutylene
Anyer, West Java, Indonesia............................. polyols
Chiba, Japan(3)......................................... PO, SM
Kaohsiung, Taiwan(4).................................... polyols

________
(1) Third-party investors hold a minority ownership interest in the PO/SM II
plant at the Channelview facility.

(2) The Company's plants in South Charleston and Institute, West Virginia are
situated on leased land.

(3) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint
venture in which the Company holds a 50% interest through a subsidiary.

(4) The Taiwan plant is owned by Lyondell Taiwan Co., Ltd., a Taiwan company in
which the Company, through a subsidiary, has a majority interest.

RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of its
plants, all of which are valuable to the intermediate chemicals and derivatives
segment. Lyondell has several patents and patent applications pending for
inventions resulting from its research relating to new PO processes for
producing propylene oxide without co-products. Lyondell believes that
implementation of this technology would reduce the cost of manufacturing PO and
eliminate the production of less valuable co-products.

The Company does not believe that the loss of any individual patent or trade
secret would have a material adverse effect on its intermediate chemicals and
derivatives business. The basic patents relating to the Company's PO/SM and
PO/TBA co-product technologies have expired. However, the technology is not
readily licensable, and Lyondell's experience and know-how in this area provide
it with a significant competitive advantage over others trying to replicate the
technology.

12

The principal research and development facility for the segment is located in
Newtown Square, Pennsylvania, with technical centers in South Charleston, West
Virginia, Villers Saint Paul, France, and Singapore. The Company's research and
development expenditures on a pro forma basis for the ARCO Chemical Acquisition
for 1999, 1998, and 1997 were $58 million, $65 million, and $82 million,
respectively.

EMPLOYEE RELATIONS

On December 31, 1999, Lyondell had approximately 3,700 full-time employees,
with approximately 16% of the domestic employees represented by labor unions.
Lyondell also uses the services of independent contractors in the routine
conduct of its business. In connection with a November 1999 agreement with
Equistar to expand the scope of shared administrative services ("Shared Services
Agreement"), approximately 460 persons who had been employed by Equistar in the
areas of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services, and legal
became employees of Lyondell effective January 1, 2000. The Company believes
its relations with its employees are good.

EQUISTAR CHEMICALS, LP

MANAGEMENT OF EQUISTAR

Equistar is a limited partnership organized under the laws of the State of
Delaware. Lyondell owns its interest in Equistar through two wholly owned
subsidiaries, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. Similarly, Millennium owns its interest in
Equistar through two wholly owned subsidiaries, one a general partner and one a
limited partner. Occidental owns its interest in Equistar through three wholly
owned subsidiaries, one a general partner and two limited partners. Lyondell
holds a 41% interest, and Millennium and Occidental each hold a 29.5% interest
in Equistar. The Amended and Restated Partnership Agreement of Equistar (the
"Equistar Partnership Agreement") governs, among other things, ownership, cash
distributions, capital contributions and management of Equistar. Millennium has
publicly announced its intention to sell its 29.5% interest in Equistar and is
actively seeking qualified buyers. There can be no assurance that any such sale
will be consummated, but the Company does not expect any such sale to affect
Equistar's operations or results.

The Equistar Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee, consisting of nine representatives, three
appointed by each general partner. Matters requiring unanimous agreement by the
representatives of Lyondell, Millennium and Occidental include changes in the
scope of Equistar's business, the five-year strategic plan (and annual updates
thereof), the sale or purchase of assets or capital expenditures of more than
$30 million not contemplated by the strategic plan, investments by Equistar's
partners over certain amounts, merging or combining with another business and
certain other matters. All decisions of the Partnership Governance Committee
that do not require unanimity among Lyondell, Millennium and Occidental may be
made by Lyondell's representatives alone. The day-to-day operations of Equistar
are managed by the executive officers of Equistar. Dan Smith, the Chief
Executive Officer of Lyondell, also serves as Chief Executive Officer of
Equistar.

AGREEMENTS BETWEEN LYONDELL AND EQUISTAR

Lyondell and Equistar entered into an agreement on December 1, 1997, providing
for the transfer of assets to Equistar. Among other things, such agreement sets
forth representations and warranties by Lyondell with respect to the transferred
assets and requires indemnification by Lyondell with respect thereto. Such
agreement also provides for the assumption by Equistar of, among other things,
third party claims that are related to certain pre-closing contingent
liabilities that are asserted prior to December 1, 2004, to the extent the
aggregate thereof does not exceed $7 million, third party claims related to pre-
closing contingent liabilities that are asserted for the first time after
December 1, 2004, certain obligations for indebtedness, liabilities for products
sold after December 1, 1997, regardless of when manufactured, and certain long
term liabilities. Millennium Petrochemicals and affiliates of Occidental (the
"Occidental Subsidiaries") entered into similar agreements with Equistar with
respect to the transfer of their respective assets and Equistar's assumption of
liabilities.

13

Also in connection with the formation of Equistar, Lyondell contributed a
promissory note for $345 million payable to Equistar, which Lyondell repaid with
proceeds of the Credit Facility in July 1998.

If Lyondell, Millennium or Occidental or any of their affiliates desire to
initiate or pursue an opportunity to undertake, engage in, acquire or invest in
a business or activity or operation within the scope of the business of
Equistar, such opportunity must first be offered to Equistar. Equistar has
certain options to participate in the opportunity, but if it determines not to
participate, the party offering the opportunity is free to pursue it on its own.
If the opportunity within Equistar's scope of business constitutes less than 25%
of an acquisition that is otherwise not within the scope of its business,
Lyondell, Millennium or Occidental, as the case may be, may make such
acquisition, provided that the portion within the scope of Equistar's business
is offered to Equistar pursuant to the foregoing provisions.

During 1998 and 1999, Lyondell had provided certain administrative services to
Equistar, including certain legal, risk management and treasury services, tax
services and employee benefit plan administration, and Equistar provided
services to Lyondell in the areas of health, safety and environmental, human
resources, information technology and legal. As a consequence of these services,
Equistar made a monthly payment to Lyondell as described in Note 4 of Notes to
Consolidated Financial Statements. In November 1999, Lyondell and Equistar
announced that they would utilize shared services over a broader range,
including information technology, human resources, materials management and raw
material supply, customer supply chain, health, safety and environmental,
engineering and research and development, facility services, legal, accounting,
treasury, internal audit, and tax. Effective January 1, 2000, employee-related
and indirect costs will be allocated between the two companies in the manner
prescribed in the Shared Services Agreement while direct third party costs,
incurred exclusively for either Lyondell or Equistar, would be charged directly
to that entity. Equistar and Millennium Petrochemicals are also parties to a
number of agreements for the provision of services, utilities and materials from
one party to the other at common locations, principally LaPorte, Texas and
Cincinnati, Ohio. Pursuant to a Transition Services Agreement that terminated
on June 1, 1999, an affiliate of Occidental also provided services to Equistar,
including services related to accounting, payroll, office administration,
marketing, transportation, purchasing and procurement, management, human
resources, customer service, technical services and others. Equistar is now
handling these functions directly or through the Shared Services Agreement with
Lyondell.

Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each
entered into a Master Intellectual Property Agreement with Equistar. The Master
Intellectual Property Agreements provide for (i) the transfer of certain
intellectual property of Lyondell, Millennium Petrochemicals and the Occidental
Subsidiaries related to the businesses each contributed to Equistar, (ii)
certain rights and licenses to Equistar with respect to intellectual property
retained by Lyondell, Millennium Petrochemicals or the Occidental Subsidiaries
that was not solely related to the business of Equistar but is useful in such
business and (iii) certain rights and licenses from Equistar to Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries, respectively, with
respect to intellectual property transferred to Equistar that Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries may use with respect
to their other businesses.

Lyondell, Millennium, Occidental and certain of its affiliates and Equistar
are parties to an Amended and Restated Parent Agreement dated as of May 15,
1998, which provides that, among other things, each of Lyondell, Millennium and
an Occidental affiliate guarantees the performance by their respective
subsidiaries under various agreements entered into in connection with the
formation of Equistar, including the Equistar Partnership Agreement and the
asset transfer agreements providing for the transfer of assets by Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries, respectively, to
Equistar.

PETROCHEMICALS

OVERVIEW

Petrochemicals are fundamental to many segments of the economy, including the
production of consumer products, housing components, automotive products and
other durable and nondurable goods. Equistar produces a variety of
petrochemicals, including olefins, oxygenated chemicals, aromatics and specialty
products, at twelve facilities located in six states. Olefins include ethylene,
propylene and butadiene. Oxygenated chemicals include EO,

14

EG, ethanol and MTBE. Aromatics produced are benzene and toluene. Equistar's
petrochemical products are used to manufacture polymers and intermediate
chemicals, which are used in a variety of consumer and industrial products.
Ethylene is the most significant petrochemical in terms of worldwide production
volume and is the key building block for polyethylene and a large number of
other chemicals, plastics and synthetics. With the strong growth of end-use
products derived from ethylene during the past several decades, especially as
plastics have developed into low-cost, high-performance substitutes for a wide
range of materials such as metals, paper and glass, U.S. ethylene consumption
has grown by an average annual rate of approximately 4%.

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

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

Equistar produces synthetic ethyl alcohol at its Tuscola, Illinois plant by a
direct hydration process that combines water and ethylene. Equistar also owns
and operates facilities in Newark, New Jersey and Anaheim, California for
denaturing ethyl alcohol by the addition of certain chemicals. In addition, it
produces small volumes of diethyl ether, a by-product of its ethyl alcohol
production, at Tuscola. These ethyl alcohol products are ingredients in various
consumer and industrial products as described more fully in the table below.

The following table outlines Equistar's primary petrochemical products, annual
processing capacity as of January 1, 2000, and the primary uses for such
products. Unless otherwise specified, annual processing capacity was calculated
by estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.
Capacities shown include 100% of the capacity of Equistar, of which the Company
owns 41%.

15

PRODUCT Annual Capacity Primary Uses
- --------- --------------- -------------

OLEFINS:
- -------

Ethylene 11.5 billion pounds Ethylene is used as a raw material to manufacture polyethylene,
EO, ethanol, ethylene dichloride and ethylbenzene.

Propylene 5.0 billion pounds (a) Propylene is used to produce polypropylene, acrylonitrile and
propylene oxide.

Butadiene 1.2 billion pounds Butadiene is used to manufacture styrene-butadiene rubber and
polybutadiene rubber, which are used in the manufacture of
tires, hoses, gaskets and other rubber products. Butadiene is
also used in the production of paints, adhesives, nylon
clothing, carpets and engineered plastics.

OXYGENATED PRODUCTS:
- --------------------

Ethylene Oxide (EO) 1.1 billion pounds ethylene EO is used to produce surfactants, industrial cleaners,
oxide; 400 million pounds are cosmetics, emulsifiers, paint, heat transfer fluids and ethylene
pure ethylene oxide glycol (polyester fibers and film, polyethylene terephthalate
("PET") resin and antifreeze).

Ethylene Glycol (EG) 1 billion pounds EG is used to produce polyester fibers and film, PET resin, heat
transfer fluids, paint and automobile antifreeze.

Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and coatings, polishes,
Derivatives solvents and chemical intermediates.

MTBE 284 million gallons MTBE is an octane enhancer and clean fuel additive in
(18,500 barrels/day)(b) reformulated gasoline.

AROMATICS:
- ---------

Benzene 300 million gallons Benzene is used to produce styrene, phenol and cyclohexane.
These products are used in the production of nylon, plastics,
rubber and polystyrene. Polystyrene is used in insulation,
packaging and drink cups.

Toluene 66 million gallons Toluene is used as an octane enhancer in gasoline, as a chemical
feedstock for benzene production, and a core ingredient in TDI,
a compound in urethane production.

SPECIALTY PRODUCTS:
- -------------------

Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for
(DCPD) molded parts such as tub and shower stalls and boat hulls.

Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and
other rubber products.

Resin Oil 150 million pounds Resin oil is used in the production of hot-melt-adhesives, inks,
sealants, paints and varnishes.

Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and
sealants.

Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas
in heavy crude oil.

Alkylate 337 million gallons(c) Alkylate is a premium blending component used by refiners to
meet Clean Air Act standards for reformulated gasoline.

Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production of solvents as well as
household, medicinal and personal care products.

Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and
diesel engine starting fluid, liniments, analgesics and
smokeless gunpowder.

__________
(a) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current annual processing capacity of one billion pounds per year of
propylene.

(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LCR.

(c) Includes up to 172 million gallons/year of capacity operated for the benefit
of LCR.

16

RAW MATERIALS AND ETHYLENE PURCHASES

The raw materials cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with the
flexibility to consume a wide range of raw materials are able to maintain higher
profitability during periods of changing energy and petrochemicals prices than
olefins plants that are restricted in their raw material processing capability,
assuming the co-products are recovered and sold. The primary raw materials used
in the production of olefins are Petroleum Liquids (also referred to as "heavy
raw materials") and NGLs (also referred to as "light raw materials").
Petroleum Liquids have had a historical cost advantage over NGLs such as ethane
and propane, assuming the co-products are recovered and sold. For example, using
Petroleum Liquids typically generates between one and four cents additional
margin per pound of ethylene produced compared to using ethane. Equistar has the
capability to realize this margin advantage at the Channelview, Corpus Christi
and Chocolate Bayou facilities. This cost advantage is expected to continue due
to the significantly higher capital cost for plants with the capability to
process both heavy raw materials (Petroleum Liquids) and their resulting co-
products in contrast to processing light raw materials (NGLs).

The Channelview facility is uniquely flexible in that it can process 100%
Petroleum Liquids or up to 80% NGLs. The Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs, subject to the availability of NGLs.
The Chocolate Bayou facility processes 100% Petroleum Liquids. Equistar's four
other olefins facilities currently process only NGLs. Equistar's LaPorte
facility can process heavier NGLs, such as butane and natural gasoline.

The majority of Equistar's Petroleum Liquids requirements are purchased via
contractual arrangement from a variety of third-party domestic and foreign
sources. Equistar also purchases a minimal amount of Petroleum Liquids on the
spot market from third-party domestic and foreign sources. Equistar purchases
NGLs from a wide variety of domestic sources. Equistar obtains a portion of its
olefins raw material requirements from LCR at market-related prices.

In addition to producing its own ethylene, Equistar assumed certain agreements
of an affiliate of Millennium for the purchase of ethylene from Gulf Coast
producers at market prices. Ethylene purchase obligations under the assumed
contracts will decline at the end of 2000, although Equistar currently intends
to continue purchasing ethylene from third party sources as needed to meet its
requirements.

MARKETING AND SALES

Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as raw material by the polymers operations at those sites. Ethylene and
propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake
Charles olefins plants are generally distributed by pipeline or via exchange
agreements to Equistar's Gulf Coast polymer and ethylene oxide glycol facilities
as well as to Equistar's affiliates and third parties. As of January 1, 2000,
approximately 80% of the ethylene produced by Equistar was consumed internally
or sold to Equistar's affiliates at market-related prices.

With respect to sales to third parties, Equistar sells a majority of its
olefins products to customers with whom Lyondell and Occidental have had long-
standing relationships. Sales to third parties generally are made under written
agreements that typically provide for: monthly negotiation of price; customer
purchase of a specified minimum quantity; and three- to six-year terms with
automatic one- or two-year term extension provisions. Some contracts may be
terminated early if deliveries have been suspended for several months. No single
unrelated third party customer accounted for more than 10% of total segment
revenues in 1999.

Ethylene oxide and ethylene glycol are sold under long-term contracts of three
to five years' duration to third-party customers, with pricing negotiated on a
quarterly basis to reflect market conditions. Glycol ethers are sold primarily
into the solvent and distributor markets under one-year contracts at market
prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to
third-party customers under one-year contracts at market prices.

17

Equistar licenses MTBE technology under a license from an affiliate of
Lyondell and sells a significant portion of MTBE produced at one of its two
Channelview units to Lyondell at market-related prices. The production from the
second unit is consumed by LCR for gasoline blending. MTBE produced at Chocolate
Bayou is sold to third parties at market-related prices.

Equistar sells most of its aromatics production under contracts that have
initial terms ranging from two to three years and that typically contain
automatic one-year term extension provisions. These contracts generally provide
for monthly or quarterly price adjustments based upon current market prices.
Aromatics produced by LCR, with the exception of benzene, are marketed by
Equistar for LCR under contracts with similar terms to Equistar's own. Benzene
produced by LCR is sold directly to Equistar at market-related prices.

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

COMPETITION AND INDUSTRY CONDITIONS

The basis for competition in Equistar's petrochemicals products is price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP Amoco,
Chevron Chemical Company ("Chevron"), Dow , Exxon Mobil Chemical Company ("Exxon
Mobil"), Huntsman Chemical Company, Phillips Petroleum Company ("Phillips"),
Shell and Union Carbide Corporation. Industry consolidation, including the
combination of British Petroleum and Amoco, Exxon and Mobil, the pending
combination of Union Carbide and Dow and the recently announced petrochemicals
combination by Chevron and Phillips, has concentrated the industry in fewer,
although larger and stronger, competitors.

The combined rated capacity of Equistar's olefins units at January 1, 2000 was
approximately 11.5 billion pounds of ethylene per year or approximately 17% of
total North American production capacity. Based on published rated production
capacities, Equistar believes it is the largest producer of ethylene in North
America. North American ethylene rated capacity at January 1, 2000 was
approximately 67 billion pounds per year. Of the total ethylene production
capacity in the United States, approximately 95% is located along the Gulf
Coast.

Petrochemicals profitability is affected by the level of demand for
petrochemicals and derivatives, along with vigorous price competition among
producers which may intensify due to, among other things, the addition of new
capacity. In general, demand is a function of economic growth in the United
States and elsewhere in the world, which fluctuates. Capacity additions in
excess of annual growth also put pressure on margins. It is not possible to
predict accurately the changes in raw material costs, market conditions and
other factors that will affect petrochemical industry margins in the future.

The petrochemicals industry historically has experienced significant
volatility in capacity utilization and profitability. Producers of olefins
primarily for merchant supply to unaffiliated customers typically experience
greater variations in their sales volumes and profitability when industry supply
and demand relationships are at extremes in comparison to more integrated
competitors, i.e., those with a higher proportion of captive demand for olefins
derivatives production. Equistar currently consumes or sells to its partners'
downstream derivatives facilities approximately 80% of its ethylene production,
which has the effect of reducing volatility.

Equistar's other major commodity chemical products also experience cyclical
market conditions similar to, although not necessarily coincident with, those of
ethylene.

18

POLYMERS

OVERVIEW

Through facilities located at ten plant sites in four states, Equistar's
polymers segment manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.

Equistar currently manufactures polyethylene using a variety of technologies
at six facilities in Texas and at its Morris, Illinois and Clinton, Iowa
facilities. The Morris and Clinton facilities are the only polyethylene
facilities located in the Midwest and enjoy a freight cost advantage over Gulf
Coast producers in delivering products to customers in the Midwest and on the
East Coast of the United States. Polyethylene is used in a wide variety of
consumer products, packaging materials and industrial applications.

Equistar produces performance polymer products, which include enhanced grades
of polyethylene and polypropylene, at several of its polymers facilities. The
Company believes that, over a business cycle, average selling prices and profit
margins for performance polymers tend to be higher than average selling prices
and profit margins for higher-volume commodity polyethylenes. Equistar also
produces wire and cable resins and compounds at Morris, Illinois, LaPorte,
Texas, Tuscola, Illinois and Fairport Harbor, Ohio. Wire and cable resins and
compounds are used to insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications. Equistar's Morris,
Illinois and Pasadena, Texas facilities manufacture polypropylene using
propylene produced as a co-product of Equistar's ethylene production as well as
propylene purchased from third parties. Polypropylene is sold for various
applications in the automotive, housewares and appliance industries. Equistar
sold its concentrates and compounds business, including its facilities in
Crockett, Texas and Heath, Ohio, in April 1999.

The following table outlines Equistar's polymers and performance polymers
products, annual processing capacity at January 1, 2000, and the primary uses
for such products. Unless otherwise specified, annual processing capacity was
calculated by estimating the number of days in a typical year that a production
unit of a plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.
Capacities shown include 100% of the capacity of Equistar, of which the Company
owns 41%.

19

PRODUCT Annual Capacity Primary Uses
- ------------------------------------------- ----------------------- -------------------------------------------------------------

High density polyethylene (HDPE) 3.6 billion pounds HDPE is used to manufacture grocery, merchandise and trash
(a) (b) bags; food containers for items from frozen desserts to
margarine; plastic caps and closures; liners for boxes of
cereal and crackers; plastic drink cups and toys; dairy
crates; bread trays and pails for items from paint to
fresh fruits and vegetables; safety equipment such as hard
hats; house wrap for insulation; bottles for
household/industrial chemicals and motor oil;
milk/water/juice bottles; and large (rotomolded) tanks for
storing liquids like agricultural and lawn care chemicals.

Low density polyethylene (LDPE) 1.7 billion pounds (b) LDPE is used to manufacture food packaging films; plastic
bottles for packaging food and personal care items; dry
cleaning bags; ice bags; pallet shrink wrap; heavy-duty
bags for mulch and potting soil; boil-in-bag bags;
coatings on flexible packaging products; and coatings on
paper board such as milk cartons. Specialized forms of
LDPE are Ethyl Methyl Acrylate ("EMA"), which provides
adhesion in a variety of applications, and Ethylene Vinyl
Acetate ("EVA"), which is used in foamed sheets,
bag-in-box bags, vacuum cleaner hoses, medical tubing,
clear sheet protectors and flexible binders.

Linear low density polyethylene (LLDPE) 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags;
housewares; lids for coffee cans and margarine tubs; and
large (rotomolded) toys like outdoor gym sets.

Polypropylene 680 million pounds Polypropylene is used to manufacture fibers for carpets,
rugs and upholstery; housewares; automotive battery cases;
automotive fascia, running boards and bumpers; grid-type
flooring for sports facilities; fishing tackle boxes; and
bottle caps and closures.

Wire and Cable (c) Wire and cable resins and compounds are used to insulate
Resins and Compounds copper and fiber optic wiring in power, telecommunication,
computer and automobile applications.

Polymeric Powders (c) Polymeric powders are component products in structural and
bulk molding compounds, parting agents and filters for
appliance, automotive and plastics processing industries.

Polymers for Adhesives, Sealants and (c) Polymers are components in hot-metal-adhesive formulations
Coatings for case, carton and beverage package sealing, glue
sticks, automotive sealants, carpet backing and adhesive
labels.

Reactive Polyolefins (c) Reactive polyolefins are functionalized polymers used to
bond non-polar and polar substrates in barrier food
packaging, wire and cable insulation and jacketing,
automotive gas tanks and metal coating applications.

Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel additive to inhibit
freezing.

_______________
(a) Includes a 480-million-pound HDPE resin expansion project at the Matagorda
facility which commenced operation in October 1999. Also includes the
impact of idling a single gas-phase reactor at the Port Arthur facility
effective March 31, 1999, which resulted in a decrease in capacity of 300
million pounds in 1999. Additionally, includes the impact of shutting down
two slurry reactors at the LaPorte, Texas facility effective April 30,
1999, resulting in a decrease of 100 million pounds in 1999.

(b) In the first quarter of 2000, Equistar idled two slurry reactors with a
total capacity of 300 million pounds per year of HDPE. Additionally two
autoclave reactors with annual capacity of 60 million pounds of LDPE were
idled. All of this capacity is at the LaPorte, Texas facility. These
actions are part of Equistar's asset optimization strategy.

20

(c) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.

RAW MATERIALS

With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefins pipeline system or from on-site production. The polyethylene plants at
Chocolate Bayou, LaPorte, Port Arthur and Pasadena, Texas are pipeline-connected
to third parties and can receive ethylene via exchanges or purchases. The
polypropylene facility at Morris, Illinois also receives propylene from a third
party.

MARKETING AND SALES

Equistar's polymers products are primarily sold to an extensive base of
established customers. Approximately 30% of these customers have term
contracts, typically having a duration of one to three years. The remainder is
generally sold without contractual term commitments. In either case, in most of
the continuous supply relationships, prices are subject to change upon mutual
agreement between Equistar and the customer. No single unrelated third party
customer accounted for more than 10% of total segment revenues in 1999.

Polymers are primarily distributed via railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 9,500 railcars for use
in its polymers business. Equistar sells its polymers products in the United
States and Canada primarily through its own sales organization. It generally
engages sales agents to market its products in the rest of the world.

COMPETITION AND INDUSTRY CONDITIONS

The basis for competition in Equistar's polymers products is price, product
performance, product quality, product deliverability and customer service.
Equistar competes with other large producers of polymers, including Chevron ,
Dow , Eastman Chemical Company, Exxon Mobil , Formosa Plastics, Huntsman
Chemical Company, Phillips , Solvay Polymers, Total Fina, Union Carbide
Corporation and Westlake Polymers. Industry consolidation, including the 1998
combination of British Petroleum and Amoco, the 1999 combinations of Exxon and
Mobil and of Total and Fina, and the pending combination of Union Carbide and
Dow, has concentrated the industry in fewer, although larger and stronger,
competitors. Polymers profitability is affected by the worldwide level of
demand for polymers, along with vigorous price competition which may intensify
due to, among other things, new domestic and foreign industry capacity. In
general, demand is a function of economic growth in the United States and
elsewhere in the world, which fluctuates. It is not possible to predict
accurately the changes in raw material costs, market conditions and other
factors which will affect polymers industry margins in the future.

Based on published rated industry capacities, Equistar is the second largest
producer of polyethylene in North America and is a leading domestic producer of
polyolefins powders, compounds, wire and cable resins, and polymers for
adhesives. The combined rated capacity of Equistar's polyethylene units as of
January 1, 2000 was approximately 6.45 billion pounds per year or approximately
17% of total industry capacity in North America. There are approximately 19
other North American producers of polyethylene, including Chevron Chemical
Company, Dow , Exxon Mobil, Phillips, Solvay Polymers and Union Carbide
Corporation. Equistar's polypropylene capacity, 680 million pounds per year as
of January 1, 2000, represents approximately 4.5% of the total North American
polypropylene capacity. There are approximately 14 other North American
competitors in the polypropylene business, including BP Amoco, Exxon Mobil,
Montell Polyolefins, BV and Total Fina.

21

PROPERTIES AND EMPLOYEE RELATIONS

Equistar's principal manufacturing facilities and principal products are set
forth below. All of these facilities are wholly owned by Equistar unless
otherwise noted.

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

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

_____________
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by E.I. DuPont de Nemours and Company.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol owns a methanol plant located within the Channelview facility on
property Lyondell Methanol leases from Equistar. A third party owns and
operates a facility on land leased from Equistar that is used to purify
hydrogen from Lyondell Methanol's methanol plant. Equistar also operates a
styrene maleic anhydride unit and a polybutadiene unit which are owned by a
third party and are located on property leased from Equistar within the
Channelview facility.
(c) Millennium and Occidental each contributed a facility located in Chocolate
Bayou. These facilities are not on contiguous property.
(d) The land is leased, and the facility is owned.
(e) A substantial portion of the HDPE capacity of the Port Arthur facility was
idled on March 31, 1999. Additional HDPE and LDPE capacity at the LaPorte
facility was idled in the first quarter of 2000.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar plans
to operate them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The facilities and land are leased.

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

Equistar uses an extensive olefins pipeline system, some of which it owns and
some of which it leases, extending from Corpus Christi to Mont Belvieu to Port
Arthur and around the Lake Charles area. Equistar owns other pipelines in
connection with its Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus
Christi and LaPorte

22

facilities. Equistar owns and leases several pipelines connecting the
Channelview facility, the Refinery and the Mont Belvieu storage facility; these
pipelines are used to transport feedstocks, butylenes, hydrogen, butane, MTBE
and unfinished gasolines. Equistar also owns a barge docking facility near the
Channelview facility capable of berthing eight barges and related terminal
equipment for loading and unloading raw materials and products. Equistar owns or
leases pursuant to long-term lease arrangements approximately 11,400 railcars
for use in its business.

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

As of December 31, 1999, Equistar employed approximately 4,500 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 280 hourly workers are covered by
collective bargaining agreements. In connection with the Shared Services
Agreement, approximately 460 persons who had been employed by Equistar in the
areas of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services, and legal
became employees of Lyondell effective January 1, 2000. Equistar believes that
its relations with its employees are good.

RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

Equistar maintains a significant research and development facility in
Cincinnati, Ohio. Equistar has additional research facilities in Morris,
Illinois, Matagorda, Texas and Plano, Texas. Equistar's research and development
expenditures for 1999, 1998, and the period December 1, 1997 (inception) through
December 31, 1997 were $42 million, $40 million, and $3 million, respectively.

The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Consistent with its strategy, Equistar is conducting a research project to
investigate alternative olefin feedstocks for use at the Channelview, Chocolate
Bayou and/or Corpus Christi facilities. These alternative olefin feedstocks
could significantly lower costs and provide an additional competitive advantage
at these facilities.

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

Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Significant licenses held by Equistar include the
BP Amoco fluid bed polyethylene process for the production of both LLDPE and
HDPE, the Unipol process for the production of LLDPE, and certain other licenses
for the production of EO, EG, polyethylene and polypropylene. Equistar is not
dependent on the retention of any particular license, and it believes that the
loss of any individual license would not have a material adverse effect on its
operations.

Equistar acquired rights to numerous recognized brand names from Lyondell and
Millennium Petrochemicals in connection with its formation, including
ALATHON(R), KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and
Microthene(R). Equistar's rights to use these trademarks are perpetual as long
as Equistar actively uses the trademarks. Equistar is not dependent upon any
particular trademark, and it believes the loss of any individual trademark would
not have a material adverse effect on its operations.

23

LYONDELL-CITGO REFINING LP

OVERVIEW

Lyondell participates in petroleum refining through an equity interest in LCR.
Lyondell holds a 58.75% interest and CITGO holds a 41.25% interest in LCR. LCR
owns and operates the Refinery which is located on the Houston Ship Channel in
Houston, Texas. The Refinery is a full conversion refinery designed to run extra
heavy (17 degree API), high sulfur crude oil which is less expensive than other
grades of crude. Processing extra heavy, high sulfur crude oil in significant
quantities requires a refinery with extensive coking, catalytic cracking,
hydrotreating and desulfurization capabilities, i.e., a "complex refinery."
The Refinery's complexity enables it to operate in full conversion mode
producing a slate of products that is approximately 95% high value, clean
products (most refineries produce 70% or less of high value, clean products such
as gasoline and diesel). In addition, the Refinery's complexity allows it to
produce most of these clean products as premium grades such as reformulated
gasoline, jet fuel, low sulfur diesel and aromatics chemicals. The Refinery's
products include conventional and reformulated gasoline, low sulfur diesel, jet
fuel, aromatics, lubricants (industrial lubricants, white oils and process
oils), carbon black oil, sulfur, residual fuel and petroleum coke. The aromatics
chemicals produced by the Refinery are benzene, toluene, orthoxylene and
paraxylene. These products are sold to intermediate chemicals and polyester
intermediate manufacturers and are ultimately used in clothing, soft drink
bottles and drink cups, audio and video tapes, and resins.

LCR was formed in 1993 to upgrade the Refinery's ability to process
substantial additional volumes of lower cost, extra heavy, higher margin crude
oil. An upgrade project completed in 1997 (the "Upgrade Project") increased
the extra heavy crude oil processing capability of the Refinery from 130,000
barrels per day of 22 degree API gravity crude oil to approximately 260,000
barrels per day of 17 degree API gravity crude oil. The 17 degree API gravity
crude oil is more viscous and dense than traditional crude oil and contains
higher concentrations of sulfur and heavy metals, making it more difficult to
refine into gasoline and other high value fuel products but less costly to
purchase. The Upgrade Project also included expansion of the Refinery's
reformulated gasoline and low sulfur diesel production capability.

The Upgrade Project, which cost approximately $1.1 billion, was funded through
a combination of approximately $485 million in capital contributions to LCR by
CITGO (including cash contributions for financing costs and reinvestment of
operating cash distributions), a $450 million construction loan credit facility
(the "Construction Facility") provided by a group of banks, and $166 million
and $16 million in subordinated loans to LCR from Lyondell and CITGO,
respectively.

In exchange for CITGO's Upgrade Project capital contributions, together with
an additional $130 million in equity contributions CITGO had previously made to
LCR, CITGO's participation interest in LCR increased effective April 1, 1997,
and is currently 41.25%. CITGO has a one-time option expiring September 30, 2000
to increase its participation interest in LCR up to 50% by making an additional
equity contribution.

The following table outlines LCR's primary products, annual rated capacity as
of January 1, 2000, and the primary uses for such products.

24

PRODUCT RATED CAPACITY (A) PRIMARY USES
- ------------------------------- ---------------------------- --------------------------------------------------------------

Gasoline (b).................. 120,000 barrels per day Automotive fuel
Diesel (#2 Distillate)(b)..... 75,000 barrels per day Fuel for diesel cars and trucks
Jet Fuel (b).................. 22,000 barrels per day Aviation fuel
Benzene(c).................... 50 million gallons per year Nylon for clothing and consumer items; polystyrene for
insulation, packaging and drink cups
Toluene (d)................... 37 million gallons per year Gasoline component and chemical feedstock for producing
benzene
Paraxylene (d)................ 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink
bottles and films for audio and video tapes
Orthoxylene (d)............... 270 million pounds per year Plasticizer in products such as rainwear, shower curtains,
toys and auto upholstery and an intermediate in paints and
fiberglass
Lube Oils (b)................. 4,000 barrels per day Automotive and industrial engine and lube oils, railroad
engine additives and white oils for food-grade applications

__________
(a) Unless otherwise specified, represents rated capacity at January 1, 2000.
The term "rated capacity," as used in this table, is calculated by
estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design feedstock mix. Because the rated
capacity of a production unit is an estimated amount, the actual production
volumes may be more or less than the rated capacity. Capacities shown
include 100 percent of the capacity of LCR, of which the Company owns 58.75
percent.
(b) Produced by LCR and sold to CITGO.
(c) Produced by LCR and sold to Equistar.
(d) Produced by LCR and marketed for LCR by Equistar.

MANAGEMENT OF LCR

LCR is a limited partnership organized under the laws of the state of
Delaware, following its conversion from a Texas limited liability company
effective December 31, 1998. Lyondell owns its interest in LCR through two
wholly owned subsidiaries, one of which serves as a general partner and one of
which serves as a limited partner. Similarly, CITGO, which is a wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Republic of Venezuela, owns its interest in LCR through two wholly owned
subsidiaries, a general partner and a limited partner.

LCR is governed by a Limited Partnership Agreement (the "LCR Partnership
Agreement"), which provides for, among other things, the ownership and cash
distribution rights of the partners. The LCR Partnership Agreement also provides
that LCR is managed by a Partnership Governance Committee, which is composed of
six representatives, three appointed by each general partner. Actions requiring
unanimous consent of the representatives include amendment of the LCR
Partnership Agreement, borrowing money, delegations of authority to committees,
certain purchase commitments and capital expenditures. The day-to-day operations
of the Refinery are managed by the executive officers of LCR as appointed by the
Partnership Governance Committee.

AGREEMENTS BETWEEN LYONDELL OR CITGO AND LCR

LCR is a party to a number of agreements with Lyondell and CITGO. Under the
terms of a long-term product sales agreement ("Products Agreement"), CITGO
purchases from LCR substantially all of the refined products produced at the
Refinery. Lyondell currently performs administrative services for LCR pursuant
to an Administrative Services Agreement, which is renegotiated annually. Under
the terms of sales agreements, CITGO purchases all of the lubricant products
manufactured by LCR. In conjunction therewith, CITGO operates LCR's Birmingport,
Alabama lubricants plant.

25

AGREEMENTS BETWEEN EQUISTAR AND LCR

Prior to the formation of Equistar, Lyondell was a party with LCR to multiple
agreements designed to preserve much of the synergies between the Refinery and
the Channelview petrochemicals facility. Such agreements were assumed by
Equistar from Lyondell effective December 1, 1997. Economic evaluations at the
Channelview facility and the Refinery are based on sending products to the
highest-value disposition, which may be local use, use at the other site, or
third party sales. Certain Refinery products (propane, butane, low-octane
naphthas, heating oils, and gas oils) can be used as raw materials for olefins
production, and certain Channelview facility olefins by-products can be
processed by the Refinery into gasoline. Butylenes from the Refinery are tolled
through the Channelview facility for the production of alkylate and MTBE for
gasoline blending. Hydrogen from the Channelview facility is used at the
Refinery for sulfur removal and product stabilization.

In accordance with a marketing service agreement, Equistar currently serves as
LCR's sole agent to market aromatics products produced by LCR. In addition,
under a long-term agreement, Equistar and LCR perform certain manufacturing
services for one another.

RAW MATERIALS

In 1993, LCR entered into a long-term crude supply agreement ("Crude Supply
Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA
Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by LCR
as a raw material for the Refinery is purchased under the Crude Supply
Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned
subsidiaries of PDVSA.

Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil, which
constitutes approximately 88% of the Refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce allocations of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced allocations of
crude oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in
that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in
the allocations of crude oil supplied under the Crude Supply Agreement to
184,000 barrels per day, effective May 1999. On several occasions since then,
PDVSA Oil has further reduced crude oil deliveries, although it has made
payments in partial compensation for such reductions.

The Crude Supply Agreement incorporates formula prices to be paid by LCR for
the crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Although the Company believes
that the Crude Supply Agreement reduces the volatility of LCR's earnings and
cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher
margins during periods when the market price of crude oil is low relative to
then current market prices for refined products. In addition, if the actual
yields, costs or volumes of the LCR refinery differ substantially from those
contemplated by the Crude Supply Agreement, the benefits of this agreement to
LCR could be substantially different, and could result in lower earnings and
cash flow for LCR. Furthermore, there may be periods during which LCR's costs
for crude oil under the Crude Supply Agreement may be higher than might
otherwise be available to LCR from other sources. A disparate increase in the
price of crude oil relative to the prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

The Crude Supply Agreement, which expires on December 31, 2017, provides that
Lyondell controls all of LCR's decisions and enforcement rights in connection
with the Crude Supply Agreement so long as PDVSA has a direct or indirect
ownership interest in LCR.

There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are affiliates of a foreign sovereign nation.
All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is
produced in the Republic of Venezuela, which has experienced economic
difficulties and attendant social and political changes in recent years. It is
impossible to predict how governmental policies may change under the current or
any subsequent Venezuelan government. In addition, there are risks associated
with enforcing

26

judgments of United States courts against entities whose assets are located
largely outside of the United States and whose management does not reside in the
United States. Although the parties have negotiated alternative arrangements in
the event of certain force majeure conditions, including Venezuelan governmental
or other actions restricting or otherwise limiting PDVSA Oil's ability to
perform its obligations, any such alternative arrangements may not be as
beneficial to LCR as the Crude Supply Agreement.

PDVSA has announced that it intends to renegotiate the crude supply agreements
that it has with all third parties, including LCR. In light of PDVSA's announced
intent, there can be no assurance that PDVSA Oil will continue to perform its
obligations under the Crude Supply Agreement. However, they have confirmed that
they expect to honor their commitments if a mutually acceptable restructuring of
the Crude Supply Agreement is not achieved. The Company and PDVSA have had
discussions covering both a restructuring of the Crude Supply Agreement and a
broader restructuring of the LCR partnership. These discussions are continuing,
although no assurance can be given that changes in either arrangement will
occur.

If the Crude Supply Agreement is modified or terminated or this source of
crude is otherwise interrupted, LCR could experience significantly lower
earnings and cash flows. Depending on then current market conditions, any
breach or termination of the Crude Supply Agreement could adversely affect LCR,
since LCR would have to purchase all of its crude oil feedstocks in the merchant
market, which could subject LCR to significant price fluctuations. There can be
no assurance that alternative crude oils with similar margins would be available
for purchase by LCR.

MARKETING AND SALES

The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics,
lubricants and certain industrial products. On a weekly basis, LCR evaluates and
determines the optimal product output mix for the Refinery, based on spot market
prices and conditions. Under the Products Agreement, CITGO is obligated to
purchase and LCR is required to sell 100% of the gasoline, jet fuel, heating
oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases
these products at prices based on industry benchmark indexes. For example, the
price for gasoline is based on prices published by Platts Oilgram, an industry
trade publication. The Products Agreement provides that Lyondell controls all of
LCR's material decisions and enforcement rights in connection with the Products
Agreement so long as CITGO has a direct or indirect ownership interest in LCR.
The Products Agreement expires on December 31, 2017.

COMPETITION AND INDUSTRY CONDITIONS

All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to
CITGO.

The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well as
by longer term issues such as energy conservation and alternative fuels.
Industry refined products supply is also dependent on industry operating
capabilities and on long-term refining capacity trends. However, management
believes that the combination of the Crude Supply Agreement and the Products
Agreement has the effect of stabilizing earnings and cash flows and reducing the
market-driven aspects of such volatility.

With a capacity of approximately 260,000 barrels per day, the Company believes
that the Refinery is North America's largest full conversion (i.e., non-asphalt
producing) refinery capable of processing 100% 17 API crude oil.

Among LCR's refining competitors are major integrated petroleum companies and
domestic refiners that are owned by or affiliated with major integrated oil
companies. Based on published industry data, as of January 1, 2000, there were
153 crude oil refineries in operation in the United States, and total domestic
refinery capacity was approximately 16.5 million barrels per day. During 1999,
LCR processed an average of 239,000 barrels per day of crude oil or over 1% of
domestic capacity.

27

PROPERTIES

LCR owns the real property, plant and equipment which comprise the Refinery,
located on approximately 700 acres in Houston, Texas. Units include a fluid
catalytic cracking unit, cokers, reformers, crude distillation units, sulfur
recovery plants and hydrodesulfurization units, as well as a lube oil
manufacturing plant and an aromatics recovery unit. LCR also owns the real
property, plant and equipment which comprise a lube oil blending and packaging
plant in Birmingport, Alabama. LCR owns a pipeline used to transport gasoline,
kerosene and heating oil from the Refinery to the GATX Terminal located in
Pasadena, Texas to interconnect with common carrier pipelines.

EMPLOYEE RELATIONS

At December 31, 1999, LCR employed approximately 1,100 full-time employees.
LCR also uses the services of independent contractors in the routine conduct of
its business. Approximately 650 hourly workers are covered by a collective
bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and
Energy Workers International Union (formerly the Oil, Chemical and Atomic
Workers Union), which expires in January 2002. LCR believes that relations with
its employees are good.

LYONDELL METHANOL COMPANY, L.P.

OVERVIEW

Lyondell produces methanol through its 75% interest in LMC, of which Lyondell
serves as the managing partner. The remaining 25% interest in LMC is held by
MCNIC. Effective December 1, 1997, Equistar began serving as the operator of LMC
pursuant to an operating agreement with LMC. LMC owns a methanol plant located
within the Channelview facility. The methanol plant is a heat-integrated plant,
which includes extraction capabilities for co-products such as hydrogen and fuel
oil.

Methanol is used to produce MTBE and a variety of chemical intermediates,
including formaldehyde, acetic acid and methyl methacrylate. These intermediates
are used to produce bonding adhesives for plywood as well as polyester fibers
and plastics. Other end uses include solvents and antifreeze applications. LMC
is advantageously located near its Gulf Coast customer base.

MANAGEMENT OF LYONDELL METHANOL

LMC is a limited partnership organized under the laws of the State of Texas.
Lyondell owns its interest in LMC through two wholly owned subsidiaries, one of
which serves as a general partner and the managing partner of LMC and one of
which serves as a limited partner. Similarly, MCNIC owns its interest in LMC
through two wholly owned subsidiaries, one a general partner and one a limited
partner.

AGREEMENTS BETWEEN EQUISTAR AND LYONDELL METHANOL

Certain agreements entered into by Lyondell and LMC were assigned to Equistar
effective December 1, 1997. Equistar acts as operator of LMC pursuant to an
operating agreement with LMC. In addition, Equistar sells natural gas to LMC and
markets LMC's product pursuant to agreements with LMC. LMC also leases from
Equistar the real property on which its methanol plant is located.

RAW MATERIALS

LMC's plant processes natural gas as its primary raw material. Equistar is
connected to a diverse natural gas supply network, and it purchases natural gas
for use as fuel at its Channelview facility and sells natural gas to LMC as a
raw material for the methanol plant.

28

MARKETING AND SALES

LMC sells all of its methanol output to Equistar, which then sells most of it
to third parties and Lyondell. The agreement between LMC and Equistar
concerning sales provides that LMC bears the market risk associated with
Equistar's re-sales to third parties. Equistar's sales agreements with third
parties for the methanol have initial terms ranging from two to three years and
typically contain automatic one year term extension provisions. These contracts
generally provide for monthly price adjustments based upon current market
prices. Methanol is distributed by pipeline, railcar, truck, barge or ocean-
going vessel.

COMPETITION AND INDUSTRY CONDITIONS

The basis for competition in the methanol business is product deliverability,
product quality and price. LMC competes with other large producers of methanol,
including Methanex, Borden Chemicals and Plastics and Terra Industries.

The rated capacity of LMC's processing unit at January 1, 2000 was 248 million
gallons. Based on published rated production capacities, the Company believes
that LMC is the third largest methanol producer in the United States.

Methanol profitability is affected by the level of demand for products in
which methanol is used, including MTBE and plywood (the production of which
involves the use of formaldehyde), demand for which in turn is driven by the
gasoline and housing markets, respectively. Methanol profitability is also
affected by the price of its feedstock, natural gas.

PROPERTIES

LMC's only property is the methanol plant it owns, which is located within
Equistar's Channelview complex on property leased from Equistar.

EMPLOYEE RELATIONS

LMC has no employees. Equistar serves as its operator and marketing agent.

INDUSTRY CYCLICALITY AND OVERCAPACITY

Lyondell's historical operating results reflect the cyclical nature of both
the chemical and refining industries. Both industries are mature and capital
intensive, and industry margins are sensitive to supply and demand balances,
which have historically been cyclical. The chemical industry has experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of substantial capacity additions, resulting in
oversupply and declining prices and profit margins. Due to the commodity nature
of most of the products of Lyondell and its joint ventures, Lyondell is not
necessarily able to protect market position by product differentiation or to
pass on cost increases to customers. Accordingly, increases in raw material and
other costs do not necessarily correlate with changes in product prices, either
in the direction of the price change or in magnitude. Moreover, a number of
participants in various segments of the chemical industry have announced plans
for expansion of plant capacity. There can be no assurance that future growth
in product demand will be sufficient to utilize this additional, or even
current, capacity. Excess industry capacity, to the extent it occurs, may
depress Lyondell's or its joint ventures' volumes and margins. As a result,
Lyondell's earnings may be subject to significant fluctuations.

External factors beyond Lyondell's control, such as general economic
conditions, competitor action, international events and circumstances and
governmental regulation in the United States and abroad, can cause volatility in
feedstock prices, as well as fluctuations in demand for products, product
prices, volumes and margins, and can magnify the impact of economic cycles on
Lyondell's business. A number of products of Lyondell and its joint ventures
are highly dependent on durable goods markets, such as housing and automotive,
that are particularly cyclical. With respect to Lyondell's refining business,
management believes that the combination of the Crude Supply Agreement and the
Products Agreement tends to stabilize earnings and to reduce market driven
volatility.

29

FOREIGN OPERATIONS AND COUNTRY RISKS

International operations and exports to foreign markets are subject to a
number of risks, including currency exchange rate fluctuations, trade barriers,
exchange controls, national and regional labor strikes, political risks and
risks of increases in duties and taxes, as well as changes in laws and policies
governing operations of foreign-based companies. In addition, earnings of
foreign subsidiaries and intercompany payments may be subject to foreign income
tax rules that may reduce cash flow available to meet required debt service and
other obligations of Lyondell.

As earlier discussed, LCR is party to a long-term crude supply agreement with
a wholly owned subsidiary of PDVSA. There are risks associated with enforcing
the provisions of contracts with companies that are affiliates of a foreign
sovereign nation, such as PDVSA. Additionally, all of the crude oil supplied
under the Crude Supply Agreement is produced in the Republic of Venezuela, which
has experienced economic difficulties and attendant social and political changes
in recent years.

JOINT VENTURE RISKS

With the exception of the businesses acquired in the ARCO Chemical
Acquisition, the Company's operations are conducted through joint ventures. The
Company shares control of these joint ventures with unaffiliated third parties.

The Company's forecasts and plans with respect to these joint ventures assume
that its joint venture partners will observe their obligations with respect to
the joint ventures. In the event that any of the Company's joint venture
partners do not observe their commitments, it is possible that the affected
joint venture would not be able to operate in accordance with its business plans
or that the Company would be required to increase its level of commitment in
order to give effect to such plans.

As with any such joint venture arrangements, differences in views among the
joint venture participants may result in delayed decisions or in failures to
agree on major matters, potentially adversely affecting the business and
operations of the joint ventures and in turn the business and operations of the
Company.

The other owners of the joint ventures may transfer control of their joint
venture interests, subject to the requirement in many instances to first offer
the other owners an opportunity to purchase the interest. Millennium has
publicly announced its intention to sell its 29.5% interest in Equistar and is
actively seeking qualified buyers. Lyondell cannot predict how the sale of
Millennium's interest in Equistar to a third party or the sale by any other
joint venture owner of its interest would ultimately affect the governance,
operations or business of the venture. However, the partnership agreement and
key agreements between Equistar and its partners would remain in place, and may
not be modified without the consent of all of the partners. Equistar's credit
facility provides that an event of default occurs if Lyondell, Millennium and
Occidental cease to collectively hold at least a majority interest. LCR's credit
facility provides that an event of default occurs if Lyondell and CITGO cease to
collectively hold at least a 35% interest.

OPERATING HAZARDS

The occurrence of material operating problems, including, but not limited to,
the events described below, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or on the
Company as a whole, during and after the period of such operational
difficulties. The Company's revenues are dependent on the continued operation of
its various production facilities (including the ability to complete
construction projects on schedule). The Company's operations are subject to the
usual hazards associated with chemical manufacturing and refining and the
related storage and transportation of raw materials, products and wastes,
including pipeline leaks and ruptures, explosions, fires, inclement weather and
natural disasters, mechanical failure, unscheduled downtime, labor difficulties,
transportation interruptions, remediation complications, chemical spills,
discharges or releases of toxic or hazardous substances or gases, storage tank
leaks and other environmental risks. These hazards can cause personal injury and
loss of life, severe damage to or destruction of property and equipment and
environmental damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. Furthermore, the Company is also
subject to present and future claims with respect to workplace

30

exposure, workers' compensation and other matters. The Company maintains
property, business interruption and casualty insurance which it believes is in
accordance with customary industry practices, but it is not fully insured
against all potential hazards incident to its business.

ENVIRONMENTAL MATTERS

The production facilities of Lyondell, Equistar, LCR and LMC are generally
required to have permits and licenses regulating air emissions, discharges to
water and storage, treatment and disposal of hazardous wastes. Companies such as
Lyondell, and its joint ventures that are permitted to treat, store or dispose
of hazardous waste and maintain underground storage tanks pursuant to the
Resource Conservation and Recovery Act ("RCRA") also are required to meet
certain financial responsibility requirements. The Company believes that it and
its joint ventures have all permits and licenses generally necessary to conduct
its business or, where necessary, are applying for additional, amended or
modified permits and that it meets applicable financial responsibility
requirements.

The policy of each of Lyondell, Equistar, LCR and LMC is to be in compliance
with all applicable environmental laws. Lyondell and Equistar also are each
committed to Responsible Care(R), a U.S. chemical industry initiative to enhance
the industry's responsible management of chemicals. The Company's subsidiaries
and joint ventures (together with the industries in which they operate) are
subject to extensive national, state and local environmental laws and
regulations concerning 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,
the Company cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, and inspection and enforcement
policies and compliance costs therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste. Some risk of environmental costs and liabilities is
inherent in particular operations and products of the Company, and its joint
ventures, 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 capital expenditures and risks described
above, the Company does not expect that it or its joint ventures will be
affected differentially from the rest of the chemicals and refining industry.

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 water. 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 the Company) may be required to bear all of such costs
regardless of fault, legality of the original disposal or ownership of the
disposed site.

In some cases, compliance with environmental, health and safety laws and
regulations can only be achieved by capital expenditures. In the years ended
December 31, 1999 and 1998, the Company, its subsidiaries and its joint ventures
spent, in the aggregate, approximately $21 million and $22 million,
respectively, for environmentally related capital expenditures at existing
facilities. In 2000, the Company currently estimates that environmentally
related capital expenditures at existing subsidiary and joint venture facilities
will be approximately $15 million and that the level of such expenditures in
2001 will not be materially different than in 2000. The timing and amount of
these expenditures are subject to regulatory and other uncertainties described
above as well as obtaining the necessary permits and approvals. For periods
beyond 2001, additional environmentally related capital expenditures will be
required, although the Company cannot accurately predict the levels of such
expenditures at this time.

The Refinery contains on-site solid-waste landfills which were used in the
past to dispose of waste generated at this facility. It is anticipated that
corrective measures will be necessary to comply with federal and state
requirements with respect to this facility. The Company is also subject to
certain assessment and remedial actions at the Refinery under RCRA. In addition,
the Company negotiated an order with the Texas Natural Resource Conservation
Commission ("TNRCC") for assessment and remediation of groundwater and soil
contamination at the Refinery. The Company is also responsible for a portion of
the remediation of certain off-site waste disposal

31

facilities. The Company'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 responsible parties
under applicable statutes. The Company, its subsidiaries and its joint ventures,
to the extent appropriate, have accrued amounts (without regard to potential
insurance recoveries or other third party reimbursements) believed to be
sufficient to cover current estimates of the cost for remedial measures at
manufacturing facilities and off-site waste disposal facilities based upon their
interpretation of current environmental standards. In the opinion of management,
there is no material range of loss in excess of the amount recorded. Based on
the establishment of such accruals, and the status of discussions with
regulatory agencies described in this paragraph, the Company does not anticipate
any material adverse effect upon its financial statements or competitive
position as a result of compliance with the laws and regulations described in
this or the preceding paragraphs. See also "Item 3--Legal Proceedings" and "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, a plan must be developed by
the TNRCC to reach and demonstrate compliance with the ozone standard by the
year 2007. Ozone is a product of the reaction between volatile organic
compounds (VOCs) and nitrogen oxides (NOx) in the presence of sunlight, and is a
principal component of smog. Because much has already been done to limit VOC
emissions, the basis of the proposed plans for meeting the ozone standard will
now focus on significant reductions in NOx emissions. It is expected that
drastic cuts in industrial sources of NOx will be required. These emission
reduction controls must be installed during the next several years, well in
advance of the 2007 deadline. This could result in increased capital investment
and higher operating costs for Equistar, Lyondell, and LCR. Lyondell is
actively involved with a number of organizations that are working with the TNRCC
to help solve the ozone problem in the most cost-effective manner.

The Clean Air Act specified certain emissions standards for vehicles beginning
in the 1994 model year and required the EPA to study whether further emissions
reductions from vehicles were necessary starting no earlier than the 2004 model
year. In 1998, the EPA concluded that more stringent vehicle emission standards
were needed and that additional controls on gasoline were necessary to meet
these emission standards. These new standards were finalized in 1999 and will
require refiners to produce a low sulfur gasoline by 2004 with some allowances
for a conditional phase-in period that could extend final compliance until 2006.
This rule could result in increased capital investment and higher operating
costs for LCR. Equistar's olefins fuel business may also be impacted.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION MATTERS

The Company and its joint ventures are, from time to time, defendants in
lawsuits, some of which are not covered by insurance. Many of these suits make
no specific claim for relief. Although final determination of legal liability
and the resulting financial impact with respect to any such litigation cannot be
ascertained with any degree of certainty, the Company does not believe that any
ultimate uninsured liability resulting from the legal proceedings in which it
currently is involved (directly or indirectly) will individually, or in the
aggregate, have a material adverse effect on the business or financial condition
of the Company. See Note 18 of Notes to Consolidated Financial Statements.

Although Lyondell, and its joint ventures are involved in numerous and varied
legal proceedings, a significant portion of its outstanding litigation arose in
four contexts: (1) claims for personal injury or death allegedly arising out of
exposure to the products produced by the respective entities; (2) claims for
personal injury or death, and/or property damage allegedly arising out of the
generation and disposal of chemical wastes at Superfund and other waste disposal
sites; (3) claims for personal injury and/or property damage and air, noise and
water pollution allegedly arising out of operations; and (4) employment related
claims.

32

ENVIRONMENTAL PROCEEDINGS

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

In connection with the transfer of assets and liabilities from ARCO to the
Company prior to its initial public offering in 1988, the Company agreed to
assume certain liabilities arising out of the operation of the Company's
integrated petrochemicals and refining business prior to July 1, 1988. The
Company and ARCO entered into an agreement, updated in 1997 (the "Revised
Cross-Indemnity Agreement"), whereby the Company agreed to defend and indemnify
ARCO against certain uninsured claims and liabilities which ARCO may incur
relating to the operation of the business of the Company prior to July 1, 1988,
including certain liabilities that may arise out of pending and future lawsuits.
For current and future cases related to Company products and Company operations,
ARCO and the Company bear a proportionate share of judgment and settlement costs
according to a formula that allocates responsibility based on years of ownership
during the relevant time period. Under the Revised Cross-Indemnity Agreement,
the Company assumed responsibility for its proportionate share of future costs
for waste site matters not covered by ARCO insurance. In connection with the
ARCO Chemical Acquisition, the Company is successor to a cross-indemnity
agreement between ARCO and ARCO Chemical relating to claims or liabilities that
ARCO may incur relating to its former ownership and operation of the oxygenates
and polystyrenics businesses of ARCO Chemical for periods after July 1, 1987.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of the matters pursuant to these indemnity agreements will not have a
material adverse effect upon the Consolidated Financial Statements of the
Company.

Lyondell's environmental liability totaled $37 million at December 31, 1999
based on the Company's latest assessment of potential future remediation costs.
This amount comprises liability for remediation responsibility retained by ARCO
Chemical in connection with the sale of a plant in 1996 and liability related to
several owned plant facilities, including the Channelview facility, and federal
Superfund sites for amounts ranging from less than $1 million to $13 million per
site. Lyondell is involved in administrative proceedings or lawsuits relating to
a minimal number of other Superfund sites. However, the Company estimates, based
on currently available information, that potential loss contingencies associated
with these sites, individually and in the aggregate, are not significant.
Substantially all amounts accrued are expected to be paid out over the next two
to seven years. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

33

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the executive officers of Registrant as of February 1,
2000. The By-Laws of the Company provide that each officer shall hold office
until the officer's successor is elected or appointed and qualified or until the
officer's death, resignation or removal by the Board of Directors.

NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
- ------------------------------------------ --------------------------------------------------------------------

Dan F. Smith, 53......................... Mr. Smith was named Chief Executive Officer and President in
Director, President and December 1996. Mr. Smith has been a Director since 1988. Mr. Smith
Chief Executive Officer served as President and Chief Operating Officer of the Company from
1994 to December 1996. Prior to 1994, Mr. Smith held various
positions including Executive Vice President, Chief Financial
Officer of the Company, Vice President, Corporate Planning of ARCO
and Senior Vice President in the areas of management,
manufacturing, control and administration for the Company and the
Lyondell Division of ARCO. Mr. Smith is a Director of Cooper
Industries and ChemFirst, Inc.

Eugene R. Allspach, 53.................. Mr. Allspach was appointed Executive Vice President of Lyondell on
Executive Vice President and December 2, 1999, and has served as President and Chief Operating
President Officer of Equistar since December 1997. Mr. Allspach served as
And Chief Operating Officer of Group Vice President, Manufacturing and Technology for Millennium
Equistar Petrochemicals from 1993 to 1997. Before 1993, Mr. Allspach held
various senior executive positions with Millennium, including Group
Vice President, Manufacturing and Manufacturing Services and Vice
President, Specialty Polymers and Business Development.
Mr. Allspach is not an employee of Lyondell.

Robert T. Blakely, 58.................... Mr. Blakely was appointed to his present position effective
Executive Vice President and Chief November 1, 1999. Prior thereto, he served as Executive Vice
Financial Officer President and Chief Financial Officer of Tenneco, Inc. from 1981 to
1999.

Morris Gelb, 53.......................... Mr. Gelb was appointed to his current position in December 1998.
Executive Vice President and Previous to this appointment, he served as Senior Vice President,
Chief Operating Officer Manufacturing, Process Development and Engineering of Lyondell from
July 1998. He was named Vice President for Research and Engineering
of ARCO Chemical in 1986 and Senior Vice President of ARCO Chemical
in July 1997.

Jeffrey R. Pendergraft, 51............... Mr. Pendergraft was named Executive Vice President and Chief
Executive Vice President and Administrative Officer in July 1998. Prior to this appointment, he
Chief Administrative Officer served as Senior Vice President of the Company since May 1993 and
as Vice President, General Counsel and Secretary of the Company
beginning in 1988.

Edward J. Dineen, 45..................... Mr. Dineen was appointed Senior Vice President, Urethanes and
Senior Vice President, Urethanes and Performance Chemicals in July 1998. Prior to this position, he
Performance Chemicals served as Vice President, Performance Products and Development for
ARCO Chemical beginning in June 1997. He served as Vice President,
Planning and Control for ARCO Chemical European Operations from
1993 until his appointment as Vice President, Worldwide CoProducts
and Raw Materials in 1995.

34

NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
- ------------------------------------------ --------------------------------------------------------------------

Debra L. Starnes, 47..................... Ms. Starnes has served in various engineering and managerial
Senior Vice President, positions with the Company since 1975. Before her most recent
Intermediate Chemicals appointment in July 1998, she served as Senior Vice President,
Polymers for Equistar since December 1997. Ms. Starnes served as
Lyondell's Vice President, Petrochemical Business Management and
Marketing from 1992 to 1994, Senior Vice President of the Company
from 1994 to 1995, and Senior Vice President, Polymers from 1995
until 1997.

T. Kevin DeNicola, 45.................... Mr. DeNicola has been Vice President Corporate Development since
Vice President, Corporate Development April 1998, overseeing strategic planning. From 1996 until April
1998, Mr. DeNicola was Director of Investor Relations of Lyondell.
Mr. DeNicola served as Ethylene Products Manager of Lyondell from
1993 until 1996. Mr. DeNicola also serves as a member of the
partners committees of both Equistar and LCR.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

35

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, $1.00 par value ("Common Stock") is listed on the
New York Stock Exchange. The reported high and low sale prices of the Common
Stock on the New York Stock Exchange (New York Stock Exchange Composite Tape)
for each quarter from January 1, 1998 through December 31, 1999, inclusive, were
as set forth below.

PERIOD High Low
- ----------------------------------------------- ------------- ------------
1998:
First Quarter.......................... 36 1/8 23 1/4
Second Quarter......................... 38 3/8 26 1/2
Third Quarter.......................... 30 15/16 19 1/2
Fourth Quarter......................... 22 7/16 15

1999:
First Quarter.......................... 18 1/4 12 11/16
Second Quarter......................... 22 3/8 11 7/8
Third Quarter.......................... 21 9/16 12 1/8
Fourth Quarter......................... 17 11 1/4

On March 24, 2000, the closing sale price of the Common Stock was $13 11/16,
and there were approximately 1,970 holders of record of the Common Stock.

During the last two years, Lyondell has declared $.225 per share quarterly
cash dividends (which were paid in the subsequent quarter). The declaration and
payment of dividends is at the discretion of the Board of Directors. The future
declaration and payout of dividends and the amount thereof will be dependent
upon the Company's results of operations, financial condition, cash position and
requirements, investment opportunities, future prospects, contractual
restrictions and other factors deemed relevant by the Board of Directors.
Subject to these considerations and to the legal considerations discussed in the
following paragraph, the Company currently intends to distribute to its
Stockholders cash dividends on its Common Stock at a quarterly rate of $.225 per
share. During 1999, the Company paid $97 million in dividends.

Certain debt instruments which were assumed by Equistar, but as to which
Lyondell remains an obligor provide that the holders of such debt may, under
certain limited circumstances, require the obligor to repurchase the debt ("Put
Rights"). Among other things, the Put Rights may be triggered by the making by
either of Lyondell or Equistar of certain unearned distributions to stockholders
or partners, respectively, other than regular dividends, which are followed by a
specified decline in public ratings on such debt. Regular dividends are those
quarterly cash dividends determined in good faith by the Board of Directors
(whose determination is conclusive) to be appropriate in light of the Company's
results of operations and capable of being sustained. Lyondell's credit
facilities and indentures also could limit the Company's ability to pay
dividends under certain circumstances, including if the Company's consolidated
net worth falls below certain specified minimum levels. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

36

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

For the year ended December 31
---------------------------------------------------------
Millions of dollars, except per share data 1999 1998(a) 1997(B) 1996 1995
- ------------------------------------------------------- -------- ---------- ---------- ------- -------

Results of Operations Data:
Sales and other operating revenues $3,693 $1,447 $2,878 $5,052 $4,936
Income from equity investments 76 235 108 - - - -
Net income (loss) (c) (115) 52 286 126 389
Basic and diluted earnings (loss) per share (c) (1.10) .67 3.58 1.58 4.86
Dividends per share .90 .90 .90 .90 .90
Balance Sheet Data:
Total assets 9,498 9,156 1,559 3,276 2,606
Long-term debt, less current maturities 6,046 5,391 345 1,194 807

_________

(a) The financial information for 1998 includes five months of operating results
for ARCO Chemical, acquired as of July 28, 1998 and accounted for using the
purchase method of accounting. It also includes twelve months of Equistar,
LCR and LMC; each accounted for as an equity investment.

(b) The financial information for 1997 includes twelve months of consolidated
operating results of Lyondell and LMC. It also includes twelve months of LCR
and one month of Equistar, each accounted for as an equity investment.

(c) The 1999 net loss included an extraordinary loss on early extinguishment of
debt, net of income taxes, of $35 million or $.33 per basic and diluted
share.

ITEM 7. 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 and the notes thereto.

OVERVIEW

GENERAL--Lyondell's 1999 and 1998 operating income includes the intermediate
chemicals and derivatives business segment, consisting of the business acquired
from ARCO Chemical, prospectively from August 1, 1998. Lyondell's activity in
the petrochemicals, polymers and refining business segments is conducted through
its interests in Equistar and LCR. The methanol business conducted through LMC
is not a reportable segment for financial disclosure purposes. Lyondell
accounts for its investments in Equistar, LCR and LMC using the equity method of
accounting. Lyondell's 1997 operating income includes eleven months of the
petrochemicals and polymers business segments contributed to Equistar on
December 1, 1997.

NET INCOME--The 1999 net loss of $115 million compares to net income of $52
million in 1998 and $286 million in 1997. All three years were affected by
unusual items at Lyondell as well as Lyondell's share of unusual items at
Equistar and LCR as follows:

IN MILLIONS 1999 1998 1997
- ----------- ---------- -------- --------
Net income (loss) $ (115) $ 52 $ 286
Add (deduct):
Extraordinary loss 35 - - - -
Unusual items 42 42 25
Gain on asset sale (10) - - - -
---------- -------- --------
Adjusted net income (loss) $ (48) $ 94 $ 311
========== ======== ========

37

The net loss for 1999 included a $35 million extraordinary loss on early
extinguishment of debt, an after-tax, LIFO-related charge of $10 million,
Lyondell's $32 million after-tax share of Equistar restructuring and LCR
renegotiated labor agreement charges, and Lyondell's $10 million after-tax share
of an Equistar gain on asset sale. Earnings for 1998 included unusual charges
of $42 million after tax, related to the ARCO Chemical Acquisition, the
renegotiated labor agreement at LCR and the formation of Equistar, while net
income for 1997 included unusual charges of $25 million after tax, related to
the formation of Equistar.

The $142 million decrease from adjusted net income of $94 million in 1998 to
the adjusted net loss of $48 million in 1999 was primarily due to higher
interest expense and lower equity income from LCR and, to a lesser extent,
Equistar. The increase in interest expense reflected a full year of interest on
debt related to the acquisition of ARCO Chemical on July 28, 1998. This was
only partly offset by the inclusion of a full year of operating income of the
acquired business, which was included prospectively from August 1, 1998. LCR
equity income decreased due to reduced allocations and a less favorable mix of
extra heavy crude oil from PDVSA Oil, lower margins on crude oil purchased on
the spot market and production unit outages in 1999. Equistar equity income
decreased primarily due to lower polymers margins, which reflected higher raw
material costs in 1999.

The $217 million decrease in adjusted net income to $94 million in 1998 from
$311 million in 1997 was primarily due to lower income from the petrochemicals
and polymers segments, due to lower product margins in 1998, and higher interest
expense on debt related to the ARCO Chemical Acquisition. These factors more
than offset increases in 1998 in operating income, resulting from the ARCO
Chemical Acquisition, and in equity income from LCR.

RESULTS OF OPERATIONS

LYONDELL CHEMICAL COMPANY

REVENUES, OPERATING COSTS AND EXPENSES--Lyondell's operating results for 1999
and 1998 include twelve months and five months, respectively, of the operating
results of the intermediate chemicals and derivatives business segment. This
segment consists of the business acquired from ARCO Chemical and is included
prospectively from August 1, 1998. Lyondell's operating income for 1997
includes eleven months of operating results of Lyondell's petrochemicals and
polymers segments, which were contributed to Equistar on December 1, 1997, and
the operating results of LMC, which was consolidated in 1997.

UNUSUAL CHARGES--Unusual charges, before tax, of $61 million in 1998 increased
versus $16 million in 1997 primarily due to the write-off of $57 million of
costs assigned to in-process research and development in connection with the
ARCO Chemical Acquisition.

INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity
investment in Equistar was $52 million in 1999 compared to $119 million in 1998
and $6 million in 1997. The decrease of $67 million from 1998 to 1999 reflected
Lyondell's pretax share of Equistar's restructuring and other unusual charges,
which were $39 million in 1999 compared to $6 million in 1998, as well as lower
polymers margins, higher general and administrative expenses, and higher
interest expense. These were only partly offset by higher petrochemicals sales
volumes and gains on asset sales. Equity income of $6 million in 1997
represented one month of Equistar activity.

INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's income from its equity
investment in LCR was $23 million in 1999, $110 million in 1998 and $102 million
in 1997. The decrease of $87 million from 1998 to 1999 was primarily due to
reduced allocations and a less favorable mix of extra heavy Venezuelan crude oil
under the Crude Supply Agreement, lower 1999 margins on the sale of products
refined from crude oil purchased in the spot market, and costs associated with
production unit outages in the second quarter 1999. The increase in 1998
compared to 1997 reflected the benefits of the Upgrade Project at LCR, which
resulted in higher average margins as greater volumes of extra heavy crude oil
were processed in the coking mode. The 1999 and 1998 periods included
Lyondell's share of pretax charges of $4 million and $6 million, respectively,
associated with LCR's renegotiated labor agreement.

38

INTEREST EXPENSE--Interest expense was $616 million in 1999, $287 million in
1998 and $75 million in 1997. The increase in interest expense in 1999 and 1998
compared to 1997 was primarily due to interest on debt related to the ARCO
Chemical Acquisition on July 28, 1998.

INCOME TAX--The effective tax rate for 1999, including the extraordinary item,
was a benefit of 27.0% compared to provisions of 41.5% in 1998 and 37.3% in
1997. Lyondell's effective tax rate changed from 1998 to 1999 as a result of
the federal income tax benefit from a domestic loss incurred in 1999, which was
partially offset by tax provisions in foreign jurisdictions. The effective tax
rate increased in 1998 compared to 1997 due to Lyondell's inability, in 1998, to
claim foreign tax credits and limitations on the use of net operating losses for
state tax purposes.

EXTRAORDINARY ITEM--The 1999 extraordinary loss on early extinguishment of
debt consisted of the write off of $54 million, or $35 million after tax, of
unamortized debt issuance costs and amendment fees related to debt that was
refinanced in May 1999.

FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999

For the fourth quarter 1999, Lyondell reported a net loss of $58 million,
which included unusual after-tax items of $42 million as noted above. The third
quarter 1999 net loss of $17 million included a $15 million unfavorable
adjustment of the 1999 income tax benefit. Excluding the unusual charges and
the tax adjustment, Lyondell's fourth quarter net loss of $16 million compared
to a net loss of $2 million in the third quarter 1999. The decrease in
profitability was primarily due to lower operating income and higher net
interest expense, partly offset by higher equity income from Equistar and LCR
versus the third quarter.

The intermediate chemicals and derivatives segment had lower operating income
as rising raw material costs reduced product margins for PO and PO derivatives.
This was partially offset by strong sales volumes for PO-based products. Higher
equity income from Equistar primarily reflected improved ethylene margins and
increased sales volumes in the petrochemicals segment. This was partially
offset by a decline in polymers segment results as raw material prices rose more
than product sales prices. Higher LCR equity income reflected LCR's $12 million
insurance recovery related to production unit outages in the second quarter of
the year. The increase in net interest expense compared to the third quarter is
due to a combination of lower interest income, higher amortization of debt
issuance costs as well as higher interest rates on variable rate debt.

INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT

The following is a discussion of historical operating results for the year
ended December 31, 1999 and of the operating results for the years ended
December 31, 1998 and 1997 included in the unaudited pro forma combined
historical results of Lyondell and ARCO Chemical (see Note 3 of Notes to
Consolidated Financial Statements). The unaudited pro forma combined historical
results give effect to the acquisition of ARCO Chemical.

VOLUMES, IN MILLIONS 1999 1998(A) 1997(A)
- -------------------- ---------------- ---------------- ----------------

PO, PO derivatives, isocyanates (pounds) 4,464 4,159 4,135
Co-products:
Styrene monomer (pounds) 3,129 2,912 2,577
TBA and derivatives (gallons) 1,071 995 1,054

MILLIONS OF DOLLARS
- -------------------
Sales and other operating revenues $3,693 $3,553 $3,995
Unusual charges -- 41 191
Operating income 404 396 161

_________
(a) Volumes and financial data are pro forma for the years ended December 31,
1998 and 1997.

39

REVENUES--Actual 1999 revenues increased 4% compared to pro forma 1998
revenues on higher volumes partly offset by lower average sales prices. PO, PO
derivatives and isocyanates volumes increased 7% compared to 1998 driven by U.S.
economic growth, particularly in the automotive, housing and construction
sectors, and continued improvements in Asian economies. Asia accounts for about
10% of Lyondell's total PO sales volumes. Styrene monomer volumes increased 7%
primarily due to higher exports to Europe and Asia as well as higher contractual
amounts under long-term SM processing arrangements. TBA and derivatives volumes
increased 8% due to higher global demand for MTBE. Average sales prices
decreased in 1999 for PO, PO derivatives and isocyanates, despite higher average
raw material costs. The decrease reflects heightened competition in the PO
industry as a result of significant new PO capacity coming on stream in late
1999 and early 2000. European sales prices were also negatively affected by the
foreign exchange effect of a stronger U.S. dollar.

Pro forma 1998 revenues decreased 11% compared to pro forma 1997 revenues.
The decrease was primarily due to lower average sales prices in 1998, reflecting
a combination of downward pressure from lower feedstock costs, ongoing
competition in PO derivatives and isocyanates markets, the negative effects of a
stronger U.S. dollar on foreign sales, and the effects of weaker Asian markets.
PO, PO derivatives and isocyanates volumes were essentially flat versus 1997 as
stronger demand for certain PO derivatives in the U.S. and Europe was offset by
lower volumes in Asian markets. Increased SM volumes in 1998 primarily reflect
higher contractual amounts under long-term SM processing arrangements. TBA and
derivatives volumes decreased 6% in 1998, mainly due to lower MTBE demand.

UNUSUAL CHARGES--The 1998 period included pro forma net unusual charges of $41
million, consisting of $57 million related to the write-off of in-process
research and development projects in connection with the ARCO Chemical
Acquisition, $4 million of Lyondell severance costs, and a $20 million reversal
by ARCO Chemical of its 1997 restructuring accrual. The 1997 period included
pro forma unusual charges of $191 million, consisting of $175 million of ARCO
Chemical restructuring and other costs and $16 million of Lyondell severance
costs.

OPERATING INCOME--Excluding unusual charges, actual 1999 operating income of
$404 million decreased $33 million or 8% compared to pro forma operating income
of $437 million in 1998. Operating income in 1999 was negatively affected by a
$15 million LIFO-related charge due to a reduction of inventory levels as part
of Lyondell's efforts to reduce working capital. The LIFO inventory valuation
reflects the fair market value assigned to inventory as part of the ARCO
Chemical Acquisition. Additionally, product margins decreased on lower sales
prices and higher raw material costs. The decrease in product margins was
partly offset by a $43 million decrease in selling, general and administrative
expenses, reflecting benefits of cost reduction efforts and a $13 million
reduction of estimated liabilities related to the ARCO Chemical Acquisition.

Excluding unusual charges, pro forma operating income of $437 million in 1998
increased $85 million compared to $352 million in 1997. The improved operating
income was primarily due to higher product margins and lower fixed costs.
Product margins for PO, PO derivatives and isocyanates, as a group, improved as
raw material costs decreased more than sales prices. The fixed cost decrease
reflected the benefits of the cost reduction program and lower maintenance
expense.

FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999

Operating income in the fourth quarter 1999 decreased 25% to $75 million from
$100 million in the third quarter 1999. The decrease primarily reflected the
$15 million LIFO-related charge and lower overall product margins. The benefit
from 6% higher volumes for PO, PO derivatives and isocyanates was offset by
lower co-product volumes. A rapid rise in raw material costs, primarily
propylene, put pressure on margins for many PO derivatives. Price increase
initiatives were generally unsuccessful in keeping pace with rising propylene
costs. The margin decreases for PO-based products were partly offset by higher
co-product margins. MTBE margins increased as prices rose strongly during the
quarter with rises in crude oil and gasoline prices, partially offset by higher
butane costs, a key MTBE raw material. SM margins increased about 50% compared
to the third quarter as prices rose more than raw material costs on stronger
global demand.

Overall PO, PO derivatives and isocyanates volumes increased 6% in the fourth
quarter 1999 compared to the third quarter, as higher propylene glycol sales,
driven by seasonally higher sales of aircraft deicers, and higher

40

polyols sales more than offset lower merchant PO sales volumes. PO merchant
volumes were adversely affected by the start-up of new industry PO capacity in
Europe. The fourth quarter saw a seasonal decline of 7% in MTBE sales volumes
compared to the third quarter. Styrene monomer volumes decreased primarily due
to the timing of December shipments and lower volumes of sales to equity
partners as a result of an unplanned production unit outage.

EQUISTAR CHEMICALS, LP

SELECTED PRICING INFORMATION--The following graphs present selected industry
pricing information for the periods shown.

Chart 1 - Month-end average spot price WTS low prices for Crude Oil as reported
by Platts Oilgram Price Report from January 1997 through December 1999. Chart
indicates decreasing prices in 1997 with an annual average of the month-end
prices of $19.35 per barrel. Prices declined steadily in 1998 with a low point
of $10.02 per barrel in December 1998 and an annual average of the month-end
prices of $12.94 per barrel. Prices rose rapidly in 1999, peaking at $24.82 per
barrel in December 1999 with an annual average of $17.04 per barrel. Selected
month-end prices are as follows: January 1997--$23.90 per barrel, December
1997--$17.13 per barrel, December 1998--$10.02 per barrel, December 1999--$24.82
per barrel.

Chart 2 - Month-end average net transaction contract prices for Ethlylene as
reported by CMAI Monomers Market Report from January 1997 through December 1999.
Chart indicates 1997 prices were relatively flat for the first six months and
slightly decreasing in the latter half of the year with an annual average of the
month-end prices of 24.70 cents per pound. 1998 prices declined steadily with an
annual average of the month-end prices of 17.81 cents per pound. Prices rose
rapidly in 1999, peaking at 27.00 cents per pound in December 1999 with an
annual average of the month-end prices of 22.03 cents per pound. Selected
month-end prices are as follows: January 1997--25.71 cents per pound, December
1997--22.67 cents per pound, December 1998--15.95 cents per pound, December
1999-27.00 cents per pound.

OVERVIEW

The following tables present selected financial and operating information for
Equistar for the years ended December 31, 1999 and 1998, and for the combined
businesses for the year ended December 31, 1997. The combined businesses
consist of the Lyondell contributed business and the Millennium contributed
business for the eleven months ended November 30, 1997 and Equistar for the one
month ended December 31, 1997. For comparative purposes, income taxes are
excluded from the combined 1997 data, since Equistar, as a partnership, is not
subject to federal income tax. These combined results for the year ended
December 31, 1997 are not intended to, and do not, represent pro forma results
of Equistar. The combined data in these tables do not necessarily reflect the
results of operations of Equistar that would have resulted had the businesses
been combined as of January 1, 1997. The operating results of the business
contributed by Occidental Chemical Corporation are included prospectively from
May 15, 1998.

Equistar
-------------------------------------- Combined
1999 1998 1997
---------------- --------------- -----------------

Millions of dollars
- ------------------
Sales and other operating revenues $5,436 $4,363 $4,866
Cost of sales 4,844 3,767 3,781
Other operating expenses 334 300 323
Restructuring and other unusual charges 96 14 42
---------------- ---------------- ----------------
Operating income 162 282 720
Interest expense, net (176) (139) (124)
Other income, net 46 -- --
---------------- ---------------- ----------------
Net income $ 32 $ 143 $ 596
================ ================ ================

41

NET INCOME--Equistar's net income of $32 million in 1999 decreased $111
million from net income of $143 million in 1998. The decrease was attributable
to restructuring and other unusual charges, which were $96 million in 1999
compared to $14 million in 1998, as well as lower polymers margins, higher
general and administrative expenses, and higher interest expense in 1999
compared with 1998. These were only partly offset by higher petrochemicals
sales volumes and gains on asset sales.

Equistar's net income of $143 million in 1998 decreased $453 million from
combined net income of $596 million in 1997. The decrease was primarily due to
lower prices and margins in both the petrochemicals and polymers segments. The
decline in prices and margins began in the fourth quarter 1997 and continued
throughout 1998. The decline was partially offset by increased sales volumes,
primarily as a result of the addition of the Occidental Contributed Business in
mid-May 1998.

FOURTH QUARTER 1999 COMPARED TO THIRD QUARTER 1999

Equistar reported a net loss of $51 million in the fourth quarter 1999.
Excluding $96 million of restructuring and other unusual charges, Equistar had
net income of $45 million compared to net income of $35 million in the third
quarter 1999. Operating results improved compared to the third quarter as
higher petrochemicals margins were only partly offset by lower polymers margins
and higher general and administrative expenses. Compared to the third quarter,
petrochemicals margins increased as higher selling prices for ethylene,
propylene and other co-products more than offset higher raw material costs.
Polymers margins decreased as increases in polymers sales prices did not keep
pace with increases in the cost of raw materials, primarily ethylene and
propylene. The $96 million of restructuring and other unusual charges in the
fourth quarter related to decisions to shut down polymer reactors at two sites
and to consolidate administrative functions between Lyondell and Equistar,
resulting in the write down of the related asset values and the incurrence of
employee severance costs.

42

SEGMENT DATA

The following tables reflect selected actual and combined sales volume data,
including intersegment sales volumes, and summarized financial information for
Equistar's business segments. The addition of the Occidental Contributed
Business is reflected prospectively from May 15, 1998.

EQUISTAR
--------------------- COMBINED
IN MILLIONS 1999 1998 1997
- ----------- --------- --------- ---------
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 18,574 16,716 9,429
Aromatics (gallons) 367 271 193
POLYMERS PRODUCTS (pounds) 6,388 6,488 6,132

MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $ 4,736 $ 3,463 $ 3,866
Polymers segment 2,024 2,058 2,513
Intersegment eliminations (1,324) (1,158) (1,513)
------- -------- -------
Total $ 5,436 $ 4,363 $ 4,866
======= ======= =======
COST OF SALES:
Petrochemicals segment $ 4,275 $ 3,132 $ 3,151
Polymers segment 1,893 1,793 2,143
Intersegment eliminations (1,324) (1,158) (1,513)
------- -------- -------
Total $ 4,844 $ 3,767 $ 3,781
======= ======= =======
OTHER OPERATING EXPENSES:
Petrochemicals segment $ 14 $ 12 $ 31
Polymers segment 80 88 137
Unallocated 240 200 155
------- ------- -------
Total $ 334 $ 300 $ 323
======= ======= =======
OPERATING INCOME:
Petrochemicals segment $ 447 $ 319 $ 684
Polymers segment 51 177 233
Unallocated (336) (214) (197)
------- ------- -------
Total $ 162 $ 282 $ 720
======= ======= =======

PETROCHEMICALS SEGMENT

REVENUES--Revenues of $4.7 billion in 1999 increased 37% from $3.5 billion in
1998. The increase was due to both higher average sales prices and higher sales
volumes during 1999. As a result of rapidly rising prices throughout 1999,
which reflected stronger demand as well as increases in the underlying cost of
raw materials, average sales prices for 1999 were about 20% higher than average
sales prices for 1998. Sales volumes increased about 13% during 1999,
reflecting a full year of the Occidental Contributed Business.

Revenues of $3.5 billion in 1998 decreased 10% from combined sales revenues of
$3.9 billion in 1997. The decrease was due to significantly lower sales prices,
partly offset by higher sales volumes. Average sales prices in 1998 were
approximately 50% lower than average 1997 sales prices primarily due to
increased industry capacity and downward pressure on sales prices as a result of
the lower cost of raw materials. Sales volumes increased about 73% primarily as
a result of the addition of the Occidental Contributed Business in mid-May 1998.

OPERATING INCOME--Operating income of $447 million in 1999 increased 40%
compared to $319 million in 1998, while gross margin as a percent of sales was
flat. The benefit from increased sales volumes was only partly offset by the
effects of production unit outages in 1999. During 1999, one of Equistar's two
Channelview olefins units,

43

with an annual ethylene capacity of 1.9 billion pounds, was shut down from April
1, 1999 to May 23, 1999 to repair a compressor. Gross margin percentages were
flat as higher sales prices kept pace with higher raw material costs. The 1999
increase in sales volumes was primarily due to inclusion of a full year of
operations of the Occidental Contributed Business, which was added in mid-May
1998.

Operating income of $319 million in 1998 decreased 53% from a combined $684
million in 1997, while gross margin as a % of sales decreased to 10% in 1998
from 18% in 1997. The decrease in operating income primarily reflected lower
margins partly offset by higher sales volumes. The lower margins were due to
lower sales prices, which decreased more than raw material costs, and slightly
higher fixed costs. The increased sales volumes primarily resulted from the
addition of the Occidental Contributed Business.

POLYMERS SEGMENT

REVENUES--Revenues of $2.0 billion in 1999 decreased slightly compared to
revenues of $2.1 billion in 1998 primarily due to lower sales volumes. Sales
volumes declined due to the shut down of less efficient HDPE and other polymer
product capacity, plant maintenance and the sale of the concentrates and
compounds business in 1999. Industry sales prices began decreasing during the
fourth quarter 1997, continued in a downward trend throughout 1998, and
increased rapidly during 1999 as raw material costs increased.

Revenues of $2.1 billion in 1998 decreased 18% from a combined $2.5 billion in
1997. The decrease was primarily the result of decreases in industry sales
prices due to excess industry supply and lower raw material costs, partly offset
by higher sales volumes.

OPERATING INCOME--Operating income of $51 million for 1999 decreased 71%
compared to $177 million in 1998. The decrease was primarily due to
substantially lower margins in 1999 compared to 1998 as raw material cost
increases outpaced sales price increases. Gross margin as a percent of sales
decreased to 6% in 1999 from 13% in 1998, reflecting the lower product margins.

Operating income of $177 million in 1998 decreased 24% from a combined $233
million in 1997. The decrease was a result of lower product margins in 1998.
Polymer sales prices decreased throughout 1998, but were partially offset by
lower raw material costs. Gross margin as a percent of sales decreased to 13%
in 1998 from 15% in 1997.

UNALLOCATED

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

OTHER OPERATING EXPENSES--This caption includes selling, general and
administrative expenses, research and development expense, and amortization of
goodwill and other intangibles. Unallocated expenses were $240 million in 1999,
$200 million in 1998 and a combined $155 million in 1997. The increase from
1997 to 1998 is offset by decreases in the expenses allocated to the segments.
The increase from 1998 to 1999 was primarily due to higher compensation and
employee benefit expenses and costs associated with Year 2000 preventive
measures.

RESTRUCTURING AND OTHER UNUSUAL CHARGES--Restructuring and other unusual
charges were $96 million in 1999, $14 million in 1998, and a combined $42
million in 1997. During the fourth quarter 1999, Equistar recorded a pretax
charge of $96 million associated with a decision to shut down certain polymer
reactors and severance costs related to these shutdowns and consolidation of
certain administrative functions between Lyondell and Equistar. In line with the
Company's strategy to invest only in businesses that have the potential to be in
the top quartile of profit margin performance, the decision to shut down the
polymer reactors was based on their high production cost, current market
conditions in the polyethylene industry and Equistar's flexibility to utilize
more efficient reactors to meet customer requirements. Approximately $72 million
of the total charge is an adjustment of the asset carrying values of the
reactors. The remaining $24 million represents severance and other employee-
related costs for approximately 500 employee positions that are being
eliminated. Equistar expects that the severance payments will be made in 2000.
The eliminated positions, primarily administrative functions, resulted from
opportunities to share such services between Lyondell and Equistar and, to a
lesser extent, positions associated with the shut down polymer reactors.
Equistar incurred restructuring charges related to the initial merger and
integration of the businesses contributed by Lyondell and Millennium upon the
formation of Equistar and with the
44

addition of the Occidental Contributed Business. Equistar recorded $42 million
of restructuring charges in December 1997 and $14 million in 1998.

INTEREST EXPENSE, NET AND OTHER INCOME, NET--Net interest expense was $176
million in 1999, $139 million in 1998 and a combined $124 million in 1997.
Interest expense increased from 1997 to 1998 and 1999 due to higher levels of
debt as a result of the addition of the Occidental Contributed Business in mid-
May 1998. Interest expense also increased from 1998 to 1999 due to the February
1999 refinancing of $900 million of bank debt with senior unsecured notes, which
carried a higher fixed rate of interest. Other income of $46 million in 1999
primarily consisted of net gains on asset sales, including the sale of the
concentrates and compounds business in April 1999.

LYONDELL-CITGO REFINING LP

REFINING SEGMENT

The following table sets forth, in thousands of barrels per day, sales volumes
for LCR's refined products and processing rates at the Refinery for the periods
indicated:

FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------

REFINED PRODUCTS SALES VOLUMES:
Gasoline 118 121 111
Diesel and heating oil 68 79 68
Jet fuel 18 17 17
Aromatics 10 10 11
Other refined products 104 103 93
------------------ ------------------ ------------------
Total refined products volumes 318 330 300
================== ================== ==================

Crude processing rates:
Crude Supply Agreement - coked 182 223 203
Other heavy crude oil - coked 14 19 7
Other crude oil 43 18 14
------------------ ------------------ ------------------
Total crude processing rates 239 260 224
================== ================== ==================

REVENUES--Revenues for LCR, including intersegment sales, were $2.6 billion in
1999, $2.1 billion in 1998 and $2.7 billion in 1997. The increase in 1999
compared to 1998 is due to higher prices partly offset by lower volumes. Prices
of refined products increased in 1999 as crude oil prices escalated. The lower
sales volumes and processing rates in 1999 primarily reflect lower allocations
and deliveries of extra heavy Venezuelan crude oil by PDVSA Oil and, to a lesser
extent, the effect of second quarter 1999 production unit outages. The decrease
in revenues in 1998 versus 1997 primarily resulted from lower refined products
prices, which declined as a result of lower crude oil prices. These decreases
were partially offset by higher sales volumes as production levels increased,
reflecting a full year's benefit from the Upgrade Project.

OPERATING INCOME--LCR's operating income was $67 million in 1999, $213 million
in 1998 and $181 million in 1997. The decrease in 1999 from 1998 primarily
reflected reduced processing of extra heavy crude oil as a result of lower
allocations and deliveries and a less favorable mix of extra heavy Venezuelan
crude oil received from PDVSA Oil, partially offset by increased processing of
spot crude. Margins on the crude oil purchased in the spot market were also
lower compared to 1998. The 1999 operating results were also negatively
affected by costs and lower operating rates related to outages of a coker unit
and a fluid catalytic cracker unit during the second quarter 1999. The 1999
and 1998 periods included pretax charges of $6 million and $10 million,
respectively, associated with LCR's renegotiated labor agreement. The increase
in 1998 versus 1997 reflected the benefits of the Upgrade Project, which
resulted in higher average margins as higher volumes of extra heavy crude oil
were processed in the coking mode. The Upgrade Project was completed in the
first quarter 1997 and, initially, higher costs were incurred due to normal
operational start-up activities, during which the Refinery did not operate at
peak rates. Cost savings

45

resulting from improved operational efficiency in 1998 were partly offset by
higher depreciation expense attributable to the Upgrade Project.

INTEREST EXPENSE--LCR's net interest expense was $44 million in 1999, $43
million in 1998, and $35 million in 1997. Interest expense on debt related to
the Upgrade Project was capitalized through its completion, including the first
quarter of 1997.

FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999

LCR had pretax income of $26 million in the fourth quarter 1999 compared to
$21 million in the third quarter 1999. The increase in earnings was due to a
$12 million insurance recovery partly offset by a $6 million unusual charge
related to the renegotiated labor agreement. The insurance recovery related to
the second quarter 1999 production unit outages. Improvement in lubes and
aromatics margins was offset by lower processing rates of extra heavy crude oil
under the Crude Supply Agreement with PDVSA Oil. LCR's total crude oil
processing rates averaged 259,000 barrels per day in the fourth quarter 1999,
compared to 241,000 barrels per day in the third quarter 1999. The increase in
total rates was due to higher volumes of crude oil purchased in the spot market.

FINANCIAL CONDITION

OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled
$300 million in 1999 compared to $263 million in 1998. Operating cash flow was
negatively affected in both 1999 and 1998 by an increase in working capital.
The 1999 increase was primarily due to a $124 million increase in receivables.
Receivables increased due to an $84 million decrease in the amount of
receivables sold in 1999 versus 1998 under a 1998 receivables purchase agreement
and a 14% increase in fourth quarter 1999 sales over fourth quarter 1998. The
fourth quarter 1999 sales increase reflected higher volumes as well as higher
co-product prices. Operating cash flow in 1999 benefited from customer advances
and tax refunds received. Higher working capital in the 1998 period reflected
the payment of accounts payable retained by Lyondell after the December 1997
formation of Equistar.

INVESTING ACTIVITIES--Lyondell's capital expenditures were $131 million in
1999, while joint venture capital expenditures were $157 million for Equistar,
$56 million for LCR and $16 million for LMC. Lyondell's pro rata share of the
joint ventures' capital expenditures was $109 million for a total of $240
million. This compares to $196 million in 1998, which included only five months
of the intermediate chemicals and derivatives business. The 2000 capital budget
is $207 million, consisting of $106 million for Lyondell and $101 million for
Lyondell's pro rata share of the joint ventures' budgeted capital expenditures.

Distributions from affiliates in excess of their earnings for 1999 were $134
million, including $52 million from Equistar and $78 million from LCR. Lyondell
loaned $35 million to LCR for capital, maintenance and environmental projects in
1999 and contributed $17 million to LMC to fund first quarter 1999 turnaround
expenditures and working capital requirements. Additionally, Lyondell converted
$46 million of its note receivable from LCR to an equity investment in LCR
effective December 31, 1999.

FINANCING ACTIVITIES--In May 1999, Lyondell amended its $7 billion Credit
Facility, which was put in place in July 1998 primarily to fund the ARCO
Chemical Acquisition. The Credit Facility amendments provided the lenders with
additional collateral, re-priced the existing loans to reflect then market rates
and revised certain financial covenants. Also in May 1999, Lyondell issued
40.25 million shares of common stock, receiving net proceeds of $736 million.
Lyondell also issued $500 million of 10.875% senior subordinated notes due 2009,
$1.0 billion of 9.875% senior secured notes due 2007, and $900 million of 9.625%
senior secured notes due 2007. Lyondell borrowed additional amounts under the
amended Credit Facility through its new $850 million, seven-year Term Loan E and
new $150 million Term Loan F, maturing December 31, 2003. Term Loan E bears
interest at LIBOR plus 3.875%, and Term Loan F bears interest at LIBOR plus
3.5%. Lyondell used the proceeds to retire the $1.25 billion principal amount
of Term Loan C, maturing June 30, 1999, and the $2 billion principal amount of
Term Loan D, maturing June 30, 2000, and to partially repay principal amounts
outstanding under Term Loans A and B under the Credit Facility maturing June 30,
2003 and June 30, 2005, respectively. Unamortized debt issuance costs and

46

amendment fees of $35 million after tax were written off and reported as an
extraordinary loss on early extinguishment of debt in 1999.

Lyondell paid regular quarterly dividends of $.225 per share of common stock
in 1999 for a total of $97 million.

In February 1999, Equistar completed an offering of senior unsecured notes in
the principal amount of $900 million. The proceeds were primarily used to
refinance existing indebtedness of Equistar.

LIQUIDITY AND CAPITAL RESOURCES--At December 31, 1999, Lyondell had cash on
hand of $307 million and $500 million available under its revolving Credit
Facility that extends until July 2003. Current maturities of long-term debt were
$225 million. Lyondell expects that net proceeds of approximately $2 billion
from the sale of assets to Bayer will be used to reduce Lyondell's variable-rate
bank debt of $3.2 billion outstanding at December 31, 1999. This reduction in
debt will strengthen Lyondell's balance sheet and reduce interest expense.
Aggregate maturities of long-term debt, without giving effect to the proposed
asset sale and debt retirement, are $225 million in 2000; $455 million in 2001;
$455 million in 2002; $583 million in 2003; and $461 million in 2004 and $4.1
billion thereafter. The amended Credit Facility and the indentures under which
the senior secured notes and the senior subordinated notes were issued contain
covenants relating to liens, sale and leaseback transactions, debt incurrence,
leverage and interest coverage ratios, dividends and investments, sales of
assets and mergers and consolidations. Lyondell was in compliance with all such
covenants as of December 31, 1999, however, given the poor current business
environment in the petrochemicals industry, Lyondell secured an amendment to
certain financial covenants in February 2000 that will increase its financial
and operating flexibility in the near term. Additionally, the amendment
eliminated a cross-default provision in the Credit Facility that could have been
triggered by a default on LCR's $450 million Construction Facility, which is
discussed below.

LCR has $450 million outstanding under a five-year Construction Facility,
which expires in May 2000. Lyondell and CITGO, as partners of LCR, have agreed
to pursue a refinancing of the indebtedness, although the final terms have not
been determined. Because a bank commitment has not yet been received, the
independent accountants of LCR have stated in their audit report that the lack
of such a commitment or new agreement raises substantial doubts concerning LCR's
ability to continue as a going concern. However, management expects that
LCR will be able to refinance or repay the indebtedness. In addition, as an
interim measure, LCR may seek to extend the maturity date of the existing
indebtedness.

Equistar had outstanding debt of $2.3 billion at December 31, 1999. Lyondell
remains liable on approximately $563 million of Equistar debt for which Equistar
assumed primary responsibility in connection with its formation. At December
31, 1999, Equistar, LCR and LMC had combined outstanding debt of $2.75 billion
and combined equity of approximately $4.3 billion. The ability of the joint
ventures to distribute cash to Lyondell is reduced by their respective debt
service obligations. Furthermore, a default under Equistar's debt instruments
involving more than $50 million of indebtedness would constitute a cross-default
under Lyondell's Credit Facility.

Lyondell believes that conditions will be such that cash balances, cash
generated from operating activities and the Bayer transaction (discussed below),
and funds from lines of credit will be adequate to meet anticipated future cash
requirements for scheduled debt repayments, necessary capital expenditures and
dividends.

RECENT DEVELOPMENTS

In November 1999, Lyondell reached a definitive agreement to sell its
worldwide polyols business to Bayer for $2.45 billion. Bayer will also receive
an ownership interest in certain of Lyondell's U.S. PO operations through
formation of a joint venture to produce PO. The Lyondell Board of Directors and
the Supervisory Board of Bayer have approved the agreement, and the companies
have received regulatory clearance in Europe and the United States. Lyondell
expects that the transaction will close on or about April 1, 2000. In addition,
as part of the transaction, Lyondell and Bayer agreed to pursue a joint venture
for the construction of PO-11, a previously announced worldscale propylene
oxide/styrene monomer plant in Europe.

The following summary balance sheet and income statement present the unaudited
pro forma consolidated financial position of Lyondell as of December 31, 1999
and the pro forma consolidated operating results for the year then ended as if
the Bayer transaction had occurred on December 31, 1999 for balance sheet
purposes and as of

47

January 1, 1999 for income statement purposes. The pro forma financial
statements assume that net proceeds of $2 billion were used to retire debt
in accordance with the provisions of Lyondell's credit facility and debt
covenants.

PRO FORMA
MILLIONS OF DOLLARS 1999
- ------------------- ----------
BALANCE SHEET
Total current assets $ 1,726
Property, plant and equipment, net 2,507
Investments and long-term receivables 1,746
Goodwill, net 1,195
Deferred charges and other assets 640
----------
Total assets $ 7,814
==========

Current maturities of long-term debt $ 211
Other current liabilities 1,134
Long-term debt, less current maturities 4,010
Other liabilities and deferred credits 393
Deferred income taxes 573
Minority interest 191
Stockholders' equity 1,302
----------
Total liabilities and stockholders' equity $ 7,814
==========

STATEMENT OF INCOME
Sales and other operating revenues $ 2,864
Operating income 308
Income from equity investments 76
Interest expense, net 394
Net loss from continuing operations (8)
Basic and diluted loss per share from continuing operations $ (.08)

The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Lyondell that would have occurred had such
transactions actually been consummated as of the indicated dates nor are they
necessarily indicative of future results. The pro forma financial statements
also make certain assumptions regarding the final agreements related to the
transaction, some of which have not been concluded to date. The final
agreements could yield data that differ from the financial information presented
above. However, such changes are not expected to be material.

CURRENT BUSINESS OUTLOOK

In the near term, Lyondell expects continued stable volume growth for the
intermediate chemicals and derivatives segment, as demand growth, aided by a
strong recovery in Asia, absorbs new industry PO capacity. However, the new
capacity will continue to put pressure on prices and margins. Strong
demand for products in the petrochemicals and polymers segments continues to
benefit Equistar's operations. A resurgence of raw material cost increases early
in 2000 has negatively affected product margins in all three business segments.
Meanwhile, both Lyondell and Equistar are taking aggressive actions to further
reduce costs and increase cash flow. Reduced allocations of extra heavy
Venezuelan crude oil to LCR are ongoing and are expected to continue to
negatively impact LCR's operating results. However, some relief is anticipated
in the second quarter 2000 when OPEC is expected to increase production quotas.

Over the longer term, Lyondell expects continued consolidation in the chemical
industry, creating fewer but stronger competitors. Industry forecasts project a
continuing difficult business environment due to industry capacity additions,
primarily in the petrochemicals and polymers segments. This new capacity is
expected to put pressure on product margins beginning in late 2000 until demand
growth absorbs the new capacity.

48

Lyondell has participated in the consolidation trend in the industry with the
formation of Equistar and the subsequent acquisition of ARCO Chemical.
Management's current priority is to pay down the acquisition-related debt, and
thus improve Lyondell's financial flexibility. To accomplish this, it will
focus on actively managing its current portfolio of assets and maximizing
earnings and cash flow. While Lyondell does not control raw material costs or
general market conditions, management plans to maximize earnings and cash flow
by focusing on the things that it can directly influence such as continuing to
reduce working capital, achieving cost reductions and employing a disciplined
capital program.

YEAR 2000

Lyondell did not experience any disruptions of its operations as a result of
either internal or third party Year 2000 problems. Year 2000 spending by
Lyondell, Equistar and LCR for the replacement of both business and
manufacturing systems is summarized as follows:

MILLIONS OF DOLLARS LYONDELL EQUISTAR LCR
- ------------------- -------- -------- --------

Total spending $ 12 $ 8 $ 3
======== ======== ========
Lyondell share of spending $ 12 $ 3 $ 2
======== ======== ========

Spending for all three organizations totaled $23 million, of which Lyondell's
share was $17 million. Spending was funded by cash generated from operations.
Approximately 13% of the total spending by all three organizations qualified for
capitalization.

EUROPEAN MONETARY UNION

On January 1, 1999, the euro became the official currency for the eleven
member countries of the European Union (Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) that
are participating in monetary union. On that date, the national currencies of
the participating countries ceased to exist as independent currencies and
continued only as denominations of the euro. The euro conversion rates for each
of the former national currencies were irrevocably fixed on January 1, 1999.
Euro banknotes and coins will be introduced on January 1, 2002 and the former
national currency banknotes and coins will be withdrawn by July 1, 2002 at the
latest.

While Lyondell converted its systems to invoice customers in euros beginning
January 1, 1999, due to Year 2000 and other priorities, the conversion of other
business and financial systems did not begin until the first quarter of 2000.
It is anticipated that the conversion of most of these other business and
financial systems to the euro will be completed by January 1, 2002, the deadline
for system conversion. Based upon the assessments completed to date, European
monetary union has not had, and is not expected to have, a material impact on
Lyondell's consolidated financial statements. Lyondell's European-based
revenues are approximately $1.0 billion on an annual basis.

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 ("CERCLA") as amended,
RCRA 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, its
subsidiaries and its joint ventures also make capital expenditures to comply
with environmental regulations. Such capital expenditures totaled, in the
aggregate, approximately $21 million, $22 million and $13 million for 1999, 1998
and 1997, respectively. Lyondell estimates that such capital expenditures will
total approximately $15 million in 2000. All such expenditures are funded by
cash generated from operations.

49

The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. This could result in increased capital
investment and higher operating costs for Equistar, Lyondell, and LCR during the
next several years. Additionally, the Clean Air Act specified certain emissions
standards for vehicles beginning in the 1994 model year and required the EPA to
study whether further emissions reduction standards for vehicles were necessary.
These new standards were finalized in 1999 and will require refiners to produce
a low sulfur gasoline by 2004 with some allowances for a conditional phase-in
period that could extend final compliance until 2006. This rule could result in
increased capital investment and higher operating costs for LCR. Equistar's
olefins fuel business may also be impacted.

Lyondell is also subject to certain assessment and remedial actions at its own
plant sites under RCRA and at CERCLA sites. The liability under RCRA and
various state and foreign government regulations primarily relates to the LCR
Refinery, six current Lyondell plant sites and two former plant sites. Under
CERCLA, the liability primarily relates to three federal sites. Lyondell is
also involved in administrative proceedings or lawsuits relating to a minimal
number of other CERCLA sites. Lyondell estimates, based upon currently
available information, that potential loss contingencies associated with the
latter CERCLA sites, individually and in the aggregate, are not significant. In
addition, Lyondell has negotiated an order with the TNRCC for assessment and
remediation of groundwater and soil contamination at the LCR Refinery.

As of December 31, 1999, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled $37
million. The liabilities per site range from less than $1 million to $13
million and are expected to be incurred over the next two to seven years.
Lyondell spent $8 million, $8 million and $1 million in 1999, 1998 and 1997,
respectively, relating to environmental remediation matters. Lyondell estimates
that expenditures will total approximately $8 million in 2000. In the opinion
of management, there is currently no material range of loss in excess of the
amount recorded for these sites. However, it is possible that new information
about the sites for which the accrual has been established, new technology or
future developments such as involvement in other CERCLA, RCRA, TNRCC or other
comparable state or foreign law investigations, could require Lyondell to
reassess its potential exposure related to environmental matters.

ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. Subsequently, the FASB delayed the
effective date by one year. The statement is effective for the Company's
calendar year 2001 with early adoption permitted. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending upon whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the hedged item. The ineffective
portion of all hedges will be recognized in current-period earnings. Lyondell,
Equistar and LCR are currently evaluating the effect SFAS No. 133 implementation
will have on their financial statements.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report, including those set forth
in "Item 1. Business and Properties", this Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations as well as those set
forth in "Item 7a. Disclosure of Market Risk," are "forward-looking statements"
within the meaning of the federal securities laws. Although Lyondell believes
the expectations reflected in such forward-looking statements are reasonable,
they do involve certain assumptions, risks and uncertainties, and Lyondell can
give no assurance that such expectations will prove to have been correct.
Lyondell's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including the
cyclical nature of the chemical and refining industries, uncertainties
associated with the United States and worldwide economies, current and potential
governmental regulatory actions in the United States and in other countries,
substantial chemical and refinery capacity additions resulting in oversupply and
declining prices and margins, raw material costs or supply arrangements,
Lyondell's ability to implement cost reductions, and operating interruptions
(including leaks,

50

explosions, fires, mechanical failure, unscheduled downtime, labor difficulties,
transportation interruptions, spills and releases and other environmental
risks). Many of such factors are beyond Lyondell's or its joint ventures'
ability to control or predict. Management cautions against putting undue
reliance on forward-looking statements or projecting any future results based on
such statements or present or prior earnings levels.

All forward-looking statements in this Form 10-K are qualified in their
entirety by the cautionary statements contained in this section and elsewhere in
this report.

ITEM 7A. DISCLOSURE OF MARKET RISK

COMMODITY PRICE RISK

A substantial portion of Lyondell's products and feedstocks, as well as those
of Equistar, LCR and Lyondell Methanol, are commodities whose prices fluctuate
as market supply/demand fundamentals change. Accordingly, product margins and
the level of Lyondell's profitability tend to fluctuate with changes in the
business cycle. Lyondell tries to protect against such instability through
various business strategies. These include increasing the olefins plants'
feedstock flexibility, entering into multi-year processing and sales agreements,
moving downstream into derivatives products whose pricing is more stable, and
the use of the "deemed margin" contract at LCR. Lyondell has not used
derivative instruments for commodity price hedging purposes.

During 1999, Equistar entered into over-the-counter "derivatives" and price
collar agreements for crude oil to help manage its exposure to commodity price
risk with respect to crude-oil related raw material purchases. As of December
31, 1999, the outstanding over-the-counter "derivatives" and collar agreements
covered 2.4 million and 1.5 million barrels, respectively, matured in January
2000, and covered approximately half of Equistar's crude-oil related raw
material requirements for that period. Equistar does not engage in any
derivatives trading activities. Assuming a hypothetical 15% decrease in crude
oil prices from those in effect at year end, the loss in earnings for the
combined derivatives contracts would not be significant. Sensitivity analysis
was used for this purpose. The quantitative information about market risk is
necessarily limited because it does not take into account the effects of the
underlying operating transactions.

FOREIGN EXCHANGE RISK

Foreign exchange exposures result from cash flows between U.S. and foreign
operations and transactions denominated in currencies other than the local
currency of a foreign operating entity. Lyondell uses foreign currency swap and
forward contracts to minimize the exposure related to net monetary exposures on
the balance sheet and anticipatory cash flows. Although Lyondell uses these
types of contracts to reduce foreign exchange exposures with respect to
revenues, capital commitments and other expenses denominated in foreign
currencies, there can be no assurance that such hedging techniques will protect
Lyondell's reported results against exchange rate fluctuations or that Lyondell
will not incur material losses on such contracts. At December 31, 1998, Lyondell
had foreign currency contracts outstanding in the notional amount of $205
million, principally swap contracts hedging the Netherlands guilder. At
December 31, 1999, Lyondell had one forward contract outstanding in the notional
amount of $3 million, hedging the euro. Assuming a hypothetical 10% unfavorable
change in the euro exchange rate from that in effect at year end, the increase
in foreign exchange loss on this contract was not material. Sensitivity
analysis was used for this purpose. The quantitative information about market
risk is necessarily limited because it does not take into account the effects of
the underlying operating transactions.

INTEREST RATE RISK

Lyondell is exposed to interest rate risk with respect to variable-rate debt.
In May 1999, Lyondell issued 40.25 million shares of common stock, receiving net
proceeds of $736 million. Lyondell also issued $2.4 billion of fixed-rate debt.
Lyondell used the proceeds to reduce variable-rate debt from $6.5 billion
outstanding at December 31, 1998 to $3.2 billion outstanding at December 31,
1999, thereby reducing its exposure to interest rate risk. Assuming a
hypothetical 10% increase in interest rates from those in effect at year end,
the increase in annual interest expense

51

on the variable-rate debt would be approximately $32 million. Sensitivity
analysis was used for the purpose of this analysis. Lyondell expects to receive
net proceeds of $2 billion from the sale of assets to Bayer in the first half of
2000, which will be used to further reduce its variable-rate bank debt.

At December 31, 1998, Lyondell had treasury-rate lock contracts outstanding in
the notional amount of $1 billion. These were entered into during 1998 to
mitigate interest rate exposure on Lyondell's anticipated future public debt
issuance. As a result of the May 1999 refinancing, Lyondell settled the
treasury-rate locks during the second quarter 1999 in the amount of $4 million.
This amount is being amortized to interest expense over the life of the related
debt.

At December 31,1999, Equistar and LCR had variable rate debt of $800 million
and $478 million, respectively, excluding the note payable by LCR to Lyondell.
Assuming a hypothetical 10% increase in interest rates from those in effect at
year end, Lyondell's share of the increase in annual interest expense on the
variable-rate debt would not be material.

REGULATORY RISK

Certain federal and state governmental initiatives in the U.S. have sought
either to rescind the oxygenate requirement for reformulated gasoline or to
restrict or ban the use of MTBE. Lyondell does not expect the recent proposals
to have a significant impact on MTBE margins and volumes in the near term. In
Europe, MTBE demand is benefiting from new legislation in the 15-nation European
Union, which may offset any potential decline in the U.S. Should it become
necessary to reduce MTBE production over the longer term, Lyondell would need to
make capital expenditures to convert its MTBE plants to production of alternate
gasoline blending components. The profit margins on such alternate gasoline
blending components could differ from those historically realized on MTBE.

52

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Page
----
LYONDELL CHEMICAL COMPANY

Report of Independent Accountants............................. 54

Consolidated Financial Statements:

Consolidated Statements of Income.......................... 55
Consolidated Balance Sheets................................ 56
Consolidated Statements of Cash Flows...................... 57
Consolidated Statements of Stockholders' Equity............ 58
Notes to Consolidated Financial Statements................. 59

EQUISTAR CHEMICALS, LP

Report of Independent Accountants.............................. 89

Consolidated Financial Statements:

Consolidated Statements of Income........................... 90
Consolidated Balance Sheets................................. 91
Consolidated Statements of Cash Flows....................... 92
Consolidated Statements of Partners' Capital................ 93
Notes to Consolidated Financial Statements.................. 94

LYONDELL-CITGO REFINING LP

Report of Independent Accountants.............................. 112
Independent Auditors' Report................................... 113

Financial Statements:

Statements of Income........................................ 114
Balance Sheets.............................................. 115
Statements of Cash Flows.................................... 116
Statements of Partners' Capital............................. 117
Notes to Financial Statements............................... 118

53

LYONDELL CHEMICAL COMPANY

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of Lyondell Chemical Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Lyondell
Chemical Company and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
February 18, 2000

54

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1999 1998 1997
- ----------------------------------------- ------------------ ------------------ ------------------

SALES AND OTHER OPERATING REVENUES:
Unrelated parties $3,693 $1,447 $2,346
Related parties -- -- 532
------------------ ------------------ ------------------
3,693 1,447 2,878
------------------ ------------------ ------------------
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 2,891 1,089 1,827
Related parties -- -- 423
Selling, general and administrative expenses 240 126 186
Research and development expense 58 26 --
Amortization of goodwill and other intangibles 100 41 --
Unusual charges -- 61 16
------------------ ------------------ ------------------
3,289 1,343 2,452
------------------ ------------------ ------------------
Operating income 404 104 426

Interest expense (616) (287) (75)
Interest income 27 25 14
Other income (expense), net 5 12 (17)
------------------ ------------------ ------------------
Income (loss) before equity investments,
income taxes and extraordinary item (180) (146) 348
------------------ ------------------ ------------------
INCOME FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP 52 119 6
LYONDELL-CITGO Refining LP 23 110 102
Other 1 6 --
------------------ ------------------ ------------------
76 235 108
------------------ ------------------ ------------------
Income (loss) before income
taxes and extraordinary item (104) 89 456

Provision for (benefit from) income taxes (24) 37 170
------------------ ------------------ ------------------
Income (loss) before extraordinary item (80) 52 286

Extraordinary loss on extinguishment
of debt, net of income taxes of $19 (35) - - - -
------------------ ------------------ ------------------
NET INCOME (LOSS) $ (115) $ 52 $ 286
================== ================== ==================

BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $(.77) $.67 $3.58
Extraordinary loss (.33) - - - -
------------------ ------------------ ------------------
Net income (loss) $(1.10) $.67 $3.58
================== ================== ==================

See Notes to Consolidated Financial Statements.

55

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31
-------------------------------------------
MILLIONS, EXCEPT SHARES AND PAR VALUE DATA 1999 1998
- ------------------------------------------ ------------------ ------------------

ASSETS
Current assets:
Cash and cash equivalents $ 307 $ 233
Accounts receivable:
Trade, net 554 473
Related parties 12 6
Inventories 519 550
Prepaid expenses and other current assets 114 64
Deferred tax assets 380 7
------------------ ------------------
Total current assets 1,886 1,333
Property, plant and equipment, net 4,291 4,511
Investments and long-term receivables:
Investment in Equistar Chemicals, LP 607 660
Receivable from LYONDELL-CITGO Refining LP 219 231
Investment in LYONDELL-CITGO Refining LP 52 84
Other investments and long-term receivables 137 103
Goodwill, net 1,545 1,430
Deferred charges and other assets 761 804
------------------ ------------------
Total assets $9,498 $9,156
================== ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 339 $ 309
Related parties 11 1
Current maturities of long-term debt 225 1,603
Other accrued liabilities 446 429
------------------ ------------------
Total current liabilities 1,021 2,342
Long-term debt, less current maturities 6,046 5,391
Other liabilities and deferred credits 331 294
Deferred income taxes 891 339
Commitments and contingencies
Minority interest 202 216
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding -- --
Common stock, $1.00 par value, 250,000,000 shares
authorized, 120,250,000 and 80,000,000 issued, respectively 120 80
Additional paid-in capital 854 158
Retained earnings 172 387
Accumulated other comprehensive income (loss) (64) 32
Treasury stock, at cost, 2,678,976 and 2,978,203 shares, respectively (75) (83)
------------------ ------------------
Total stockholders' equity 1,007 574
------------------ ------------------
Total liabilities and stockholders' equity $9,498 $9,156
================== ==================

See Notes to Consolidated Financial Statements.

56

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------- -------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (115) $ 52 $ 286
Adjustments to reconcile net income (loss) to net
cash provided by operating activities, net of the
effects of purchase accounting and deconsolidation
of affiliates:
Depreciation and amortization 330 138 84
Unusual charges -- 61 --
Extraordinary item 35 -- --
Deferred income taxes 36 76 43
(Increase) decrease in accounts receivable (124) 93 (64)
Decrease (increase) in inventories 15 (15) (37)
Increase (decrease) in accounts payable 52 (148) (44)
Net change in other working capital accounts (11) 24 (2)
Other, net 82 (18) 3
------------------ ------------------- -------------------
Net cash provided by operating activities 300 263 269
------------------ ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of ARCO Chemical Company, net of
cash acquired -- (5,869) --
Expenditures for property, plant and equipment (131) (64) (49)
Contributions and advances to affiliates (52) (35) (86)
Distributions from affiliates in excess of earnings 134 435 72
Deconsolidation of affiliates -- (11) (12)
Other 4 -- --
------------------ ------------------- -------------------
Net cash used in investing activities (45) (5,544) (75)
------------------ ------------------- -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,400 6,500 --
Payment of debt issuance costs (107) (130) --
Repayments of long-term debt (4,122) (715) (112)
Issuance of common stock 736 -- --
Net (decrease) increase in short-term debt -- (100) 50
Minority owners' distributions -- -- (16)
Repurchase of common stock -- (59) (26)
Dividends paid (97) (70) (72)
Other 8 -- --
------------------ ------------------- -------------------
Net cash (used in) provided by financing
activities (182) 5,426 (176)
------------------ ------------------- -------------------
Effect of exchange rate changes on cash 1 2 --
------------------ ------------------- -------------------
INCREASE IN CASH AND CASH EQUIVALENTS 74 147 18
Cash and cash equivalents at beginning of period 233 86 68
------------------ ------------------- -------------------
Cash and cash equivalents at end of period $ 307 $ 233 $ 86
================== =================== ===================

See Notes to Consolidated Financial Statements.

57

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
MILLIONS, EXCEPT SHARES AND --------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
PER SHARE DATA ISSUED TREASURY CAPITAL EARNINGS INCOME (LOSS) INCOME (LOSS)
- --------------------------- ------- -------- ------- -------- ------------- -------------

BALANCE, JANUARY 1, 1997
(80,000,000 SHARES ISSUED) $ 80 $ -- $158 $ 193 $ -- $ --
Net income -- -- -- 286 -- 286
Cash dividends
($.90 per share) -- -- -- (72) -- --
Purchase of 1,015,512
treasury shares -- (26) -- -- -- --
------- ------ ------ ------- ------ ------
Comprehensive income $ 286
======
BALANCE, DECEMBER 31, 1997
(80,000,000 SHARES ISSUED;
1,015,512 TREASURY SHARES) 80 (26) 158 407 -- $ --
Net income -- -- -- 52 -- 52
Cash dividends
($.90 per share) -- -- -- (70) -- --
Purchase of 2,051,539 -- (59) -- -- -- --
treasury shares
Reissuance of 88,848 treasury
shares under restricted stock plan -- 2 -- -- -- --
Foreign currency translation,
net of tax of $25 -- -- -- -- 32 32
Other -- -- -- (2) -- --
------- -------- ------ ------- ------ -----
Comprehensive income $ 84
=====
BALANCE, DECEMBER 31, 1998
(80,000,000 SHARES ISSUED;
2,978,203 TREASURY SHARES) 80 (83) 158 387 32 $ --
Net loss -- -- -- (115) -- (115)
Cash dividends
($.90 per share) -- -- -- (97) -- --
Issuance of common stock 40 -- 696 -- -- --
Reissuance of 299,227
treasury shares under restricted
stock plan -- 8 -- -- -- --
Foreign currency translation,
net of tax of $31 -- -- -- -- (96) (96)
Other -- -- -- (3) -- --
------- -------- ------ ------- ------ -----
Comprehensive loss $(211)
=====
BALANCE, DECEMBER 31, 1999
(120,250,000 SHARES ISSUED;
2,678,976 TREASURY SHARES) $120 $(75) $854 $ 172 $(64)
======= ======== ====== ======= ======

See Notes to Consolidated Financial Statements.

58

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Operations

Lyondell Chemical Company ("Lyondell") operates in the (i) intermediate
chemicals and derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining
and (v) methanol businesses through the operations of the former ARCO Chemical
Company ("ARCO Chemical") acquired by Lyondell as of July 28, 1998 (see Note 3),
and through Lyondell's joint venture ownership interests in Equistar Chemicals,
LP ("Equistar"), LYONDELL-CITGO Refining LP ("LCR") and Lyondell Methanol
Company, L.P. ("LMC").

Lyondell is the world's largest producer of propylene oxide ("PO") and a leading
worldwide producer and marketer of polyether polyols, propylene glycol,
propylene glycol ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM")
and methyl tertiary butyl ether ("MTBE"). These operations are reported as the
intermediate chemicals and derivatives segment.

Lyondell's operations in the petrochemicals and polymers segments are conducted
through its joint venture ownership interest in Equistar (see Note 4). Lyondell
accounts for its investment in Equistar using the equity method of accounting.
Prior to the formation of Equistar on December 1, 1997, Lyondell's assets and
operations of the petrochemicals and polymers businesses were fully consolidated
in the Lyondell Consolidated Financial Statements.

Equistar's petrochemicals segment produces olefins, including ethylene,
propylene, butadiene and specialty products; aromatics, including benzene and
toluene; oxygenated chemicals, including ethylene oxide and derivatives, MTBE,
ethyl alcohol and diethyl ether; and specialty chemicals, including refinery
blending stocks.

Equistar's polymers segment produces polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including wire and cable resins and compounds, adhesive resins, and fine
powders. Equistar's color concentrates and compounds business, which was part
of performance polymers products, was sold effective April 30, 1999.

Lyondell's refining segment operations are conducted through its joint venture
ownership interest in LCR (see Note 5). LCR's full-conversion Houston, Texas
refinery ("Refinery") produces refined petroleum products, include-ing
conventional and reformulated gasoline, low sulfur diesel and jet fuel;
aromatics, including benzene, toluene, paraxylene and orthoxylene; lubricants,
including industrial lubricants, white oils, process oils and base oils; carbon
black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and
crude oil resales. LCR sells its principal refined products to Lyondell's joint
venture partner in LCR, CITGO Petroleum Corporation ("CITGO").

Lyondell has additional operations conducted through its joint venture ownership
interest in LMC, which produces methanol. Effective January 1, 1998, Lyondell
began to account for its investment in LMC using the equity method of
accounting. Prior to 1998, LMC's assets and operations were fully consolidated
in the consolidated financial statements.

From its formation in 1985 through June 1988, Lyondell operated as a division of
Atlantic Richfield Company ("ARCO"). In July 1988, ARCO transferred the
division's assets and liabilities along with additional pipeline assets, to its
wholly owned subsidiary, Lyondell Petrochemical Company (subsequently renamed
Lyondell Chemical Company in 1998), a Delaware corporation. In January 1989,
ARCO completed an initial public offering of approximately 50.1% of Lyondell's
common stock. In August 1994, ARCO issued three-year debt securities
("Exchangeable Notes") which were exchangeable upon maturity on September 15,
1997 into Lyondell common stock or an equivalent cash value, at ARCO's option.
On September 15, 1997, ARCO delivered shares of Lyondell common stock to the
holders of the Exchangeable Notes. Lyondell purchased the remaining 383,312
shares of com-

59

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

mon stock held by ARCO after the conversion. As of December 31, 1999 and 1998,
ARCO owned no shares of Lyondell common stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated financial statements include the
accounts of Lyondell and its subsidiaries, including the results of the
operations of the business acquired from ARCO Chemical prospectively from August
1, 1998. All significant intercompany transactions have been eliminated in
consolidation. Lyondell's joint venture ownership interests in Equistar for
1999, 1998 and December 1997, in LCR for 1999, 1998 and 1997, and in LMC for
1999 and 1998 are accounted for using the equity method of accounting.
Additionally, Lyondell's investment in Nihon Oxirane, of which it owns 50%, is
accounted for using the equity method of accounting. LMC was fully consolidated
in 1997.

Equity Method of Accounting--Investments in joint ventures where Lyondell exerts
a certain minimum level of management control, but lacks full decision making
ability over all major issues, are accounted for using the equity method of
accounting. Under those circumstances, this accounting treatment is used even
though Lyondell's ownership percentage may exceed 50%.

Revenue Recognition--Revenue from product sales is recognized upon delivery of
products to the customer.

Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Lyondell's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. Lyondell performs periodic
evaluations of the relative credit standing of these financial institutions,
which are considered in Lyondell's investment strategy.

Lyondell has no requirements for compensating balances in a specific amount at a
specific point in time. Lyondell does maintain compensating balances for some
of its banking services and products. Such balances are maintained on an
average basis and are solely at Lyondell's discretion. As a result, none of
Lyondell's cash is restricted.

Accounts Receivable--Lyondell sells its products primarily to other industrial
concerns in the petrochemicals and refining industries. Lyondell performs
ongoing credit evaluations of its customers' financial condition, and, in
certain circumstances, requires letters of credit from them. Lyondell's
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $9
million and $11 million at December 31, 1999 and 1998, respectively.

Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of manufacturing facilities and equipment is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from 5 to 30 years. Upon retirement or sale, Lyondell removes the cost
of the asset and the related accumulated depreciation from the accounts and
reflects any resulting gain or loss in the Consolidated Statements of Income.
Lyondell's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.

Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at Lyondell's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method, until the next planned turnaround, generally four to
six years.

60

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

These costs are maintenance, repair and replacement costs that are necessary to
maintain, extend and improve the operating capacity and efficiency rates of the
production units. Lyondell amortized $7 million of deferred turnaround
maintenance and repair costs for the year ended December 31, 1999. None were
amortized in 1998.

Goodwill--Goodwill represents the excess of purchase price paid over the value
assigned to the net tangible and identifiable intangible assets of a business
acquired. Goodwill is amortized over 40 years, the estimated useful life, using
the straight-line method.

Deferred Charges--Deferred charges are carried at cost and consist primarily of
the value assigned to patents and licensed technology, capacity reservation fees
and other long-term processing rights and costs and deferred debt issuance
costs. These assets are amortized using the straight-line method over their
estimated useful lives or the term of the related agreement, if shorter.

Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.

Minority Interest--Minority interest in 1999 and 1998 primarily represents the
interest of third-party investors in a partnership that owns one of Lyondell's
two domestic PO/SM plants. Lyondell retains a majority interest in the
partnership. The minority interest share of the partnership's income and loss
is reported in "Other income (expense), net" in the Consolidated Statements of
Income.

Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.

Income Taxes--Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
Consolidated Balance Sheets in accordance with SFAS No. 109, Accounting for
Income Taxes. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full.

Foreign Currency Translation--Where the local currency is the functional
currency, the financial statements of international operations are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and the average exchange rate for each period for revenues,
expenses, gains and losses. Translation adjustments are recorded as a separate
component of "Accumulated other comprehensive income (loss)" in the
stockholders' equity section of the Consolidated Balance Sheets. Where the U.S.
dollar is the functional currency, remeasurement adjustments are recorded as
foreign exchange gains and losses in the Consolidated Statements of Income.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Lyondell reviews its long-lived assets, including goodwill, for impairment on an
exception basis whenever events or changes in circumstances indicate a potential
loss in utility. Impairment losses are recognized in the Consolidated
Statements of Income.

61

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Derivatives--Lyondell is currently evaluating the effect that implementing SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, will have
on the Consolidated Financial Statements. The statement is effective for
Lyondell's calendar year 2001.

Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1999.

3. PURCHASE OF ARCO CHEMICAL COMPANY

As of July 28, 1998, Lyondell completed its acquisition of ARCO Chemical. The
transaction was financed through a $7 billion Credit Facility (see Note 16).
This acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of the acquired business are included in
Lyondell's Consolidated Statements of Income prospectively from August 1, 1998.
The acquisition cost of approximately $5.9 billion has been allocated to the
assets acquired and liabilities assumed based upon the estimated fair value of
such assets and liabilities at the date of acquisition. In connection with the
acquisition, Lyondell accrued liabilities for costs associated with the delay of
construction of the PO-11 plant, vesting of certain key manager benefits
pursuant to change of control provisions, severance costs for the involuntary
termination of certain headquarters employees, and relocation costs for moving
personnel to Lyondell's Houston headquarters. The liability totaled $255
million at the date of acquisition. During the fourth quarter 1999, Lyondell
reduced the liability by $13 million due to an elimination of estimated costs to
settle certain obligations related to the PO-11 plant. These costs will not be
incurred as a result of the Bayer transaction (see Note 23), and therefore the
related liability was reversed and recorded as a reduction of "Selling, general
and administrative expenses." Through December 31, 1999, Lyondell had paid and
charged approximately $200 million against the liability.

Approximately $57 million, or less than 1% of the purchase price, was allocated
to purchased in-process research and development. This included three projects
valued at $29 million, $18 million and $10 million, respectively, representing
two new product applications and one new process technology. Lyondell will
continue the activities represented by these projects and the values assigned
represent intangibles with no alternative future use. Accordingly, Lyondell
wrote off the in-process research and development, recording a nonrecurring
charge of $57 million in the third quarter 1998 (see Note 6). The excess of
purchase price paid over the estimated fair value of net assets acquired was
allocated to goodwill. The amount allocated to goodwill was approximately
$1.4 billion.

The fair value of the assets acquired and liabilities assumed, net of cash
acquired, was as follows:

MILLIONS OF DOLLARS
- -------------------
Current assets, net of cash acquired $1,133
Property, plant and equipment 4,454
Purchased in-process research and development 57
Goodwill 1,445
Deferred charges and other assets 1,124
Current liabilities (599)
Long-term debt (952)
Other liabilities and deferred credits (793)
-----------
Purchase price, net of cash acquired $5,869
==========

During 1999, Lyondell obtained the additional information needed to complete its
review of the deferred tax effects of purchase accounting. This additional
information resulted in an increase in goodwill by $188 million, primarily due
to an increase in the long-term deferred income tax liability and a reduction of
long-term deferred tax assets.

62

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The unaudited pro forma combined historical results of Lyondell and ARCO
Chemical, giving effect to the acquisition, the Credit Facility drawdown, the
formation of Equistar, and the deconsolidation of LMC as of the beginning of
1998 and 1997, respectively, are as follows:

FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------
MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1998 1997
- ------------------------------------------ ------------------ ------------------

Sales and other operating revenues $3,553 $3,995
Unusual charges 41 191
Operating income 396 161
Income from equity investments 235 502
Net income 42 27
Basic and diluted earnings per share $.54 $.34

The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Lyondell that would have occurred had such
transactions actually been consummated as of the beginning of 1998 and 1997,
respectively, nor are they necessarily indicative of future results.

4. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP

Equistar was formed on December 1, 1997 as a joint venture between Lyondell and
Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses
contributed by the partners. Lyondell contributed substantially all of the
assets comprising its petrochemicals and polymers business segments, while
Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethyl alcohol
businesses, which had been held in Millennium Petrochemicals Inc., a wholly
owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and
ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed
to Equistar ("Occidental Contributed Business"). Equistar is operated as a
Delaware limited partnership owned by subsidiaries of Lyondell, Millennium and
Occidental ("Partners").

Lyondell currently has a 41% joint venture ownership interest, while Millennium
and Occidental each have 29.5%. Prior to the addition of Occidental as a
partner on May 15, 1998, Lyondell had a 57% joint venture ownership interest,
while Millennium had 43%.

Summarized financial information for Equistar is as follows:

DECEMBER 31
---------------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------ ------------------------ -------------------
BALANCE SHEETS

Total current assets $ 1,360 $ 1,127
Property, plant and equipment, net 3,926 4,075
Goodwill, net 1,119 1,151
Deferred charges and other assets 331 312
-------- -------
Total assets $ 6,736 $ 6,665
======== =======

Current maturities of long-term debt $ 92 $ 150
Other current liabilities 692 485
Capital lease obligations - - 205
Long-term debt, less current maturities 2,169 1,865
Other liabilities and deferred credits 121 75
Partners' capital 3,662 3,885
-------- -------
Total liabilities and partners' capital $ 6,736 $ 6,665
======== =======

63

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE ONE
FOR THE YEAR ENDED DECEMBER 31 MONTH ENDED
-------------------------------------------- DECEMBER 31
1999 1998 1997
------------------ ------------------ -------------------

STATEMENTS OF INCOME
Sales and other operating revenues $5,436 $4,363 $ 365
Cost of sales 4,844 3,767 286
Other operating costs and expenses 334 300 22
Restructuring and other unusual charges 96 14 42
------ ------ ------
Operating income 162 282 15
Interest expense, net 176 139 8
Other income, net (46) -- --
------ ------ ------
Net income $ 32 $ 143 $ 7
====== ====== ======
SELECTED CASH FLOW INFORMATION
- ------------------------------
Depreciation and amortization $ 300 $ 268 $ 19
Expenditures for property, plant and equipment 157 200 12

Lyondell's "Income from equity investments" in Equistar as presented in the
Consolidated Statements of Income consists of Lyondell's share of Equistar's net
income and the accretion of the difference between Lyondell's investment and its
underlying equity in Equistar's net assets. At the formation of Equistar and
adjusted for the addition of the Occidental Contributed Business on May 15,
1998, the difference between Lyondell's investment in Equistar and its
underlying equity in Equistar's net assets was approximately $900 million. This
difference is being accreted into Lyondell's income over 25 years using the
straight-line method.

Included in "Sales and other operating revenues" above are $242 million and $89
million in sales to Lyondell for the year ended December 31, 1999 and the five
months ended December 31, 1998, respectively. Sales to LCR included above were
$263 million, $238 million and $27 million for the years ended December 31, 1999
and 1998 and for the month of December 1997, respectively. In addition,
Equistar purchased $6 million and $2 million from Lyondell for the year ended
December 31, 1999 and for the five months ended December 31, 1998, respectively,
which are included in Equistar's "Cost of sales" above. Purchases from LCR
during the years ended December 31, 1999 and 1998 and for the month of December
1997, included in Equistar's "Cost of sales" totaled $190 million, $131 million
and $10 million, respectively.

Lyondell has various service and cost sharing arrangements with Equistar.
Billings by Lyondell to Equistar were approximately $9 million and $3 million
for the years ended December 31, 1999 and 1998, respectively. Billings from
Equistar to Lyondell were approximately $8 million and $1 million for the years
ended December 31, 1999 and 1998, respectively.

5. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP

In July 1993, LCR was formed to own and operate Lyondell's refining business.
LCR is structured as a Delaware limited partnership owned by subsidiaries of
Lyondell and CITGO. LCR completed a major upgrade project at the Refinery
during the first quarter of 1997, which enabled the facility to process
substantial additional volumes of extra heavy crude oil. As a result of the
completion of the upgrade project, effective April 1, 1997, the participation
interests changed to reflect CITGO's equity contribution to the upgrade project.
The participation interests changed from approximately 86% and 14% for Lyondell
and CITGO, respectively, and are currently 58.75% and 41.25% for Lyondell and
CITGO, respectively. Net income before depreciation expense for the period is
allocated to LCR's owners based upon participation interests. Depreciation
expense is allocated to the partners based upon contributed assets.

64

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Summarized financial information for LCR is as follows:

DECEMBER 31
------------------------------------------
Millions of dollars 1999 1998
- ------------------ ------------------ ------------------

BALANCE SHEETS
Total current assets $ 219 $ 197
Property, plant and equipment, net 1,350 1,370
Deferred charges and other assets 60 70
------ ------
Total assets $1,629 $1,637
====== ======

Current maturities of long-term debt $ 450 $ --
Other current liabilities 307 203
Long-term debt, less current maturities 247 717
Other liabilities and deferred credits 69 68
Partners' capital 556 649
------ ------
Total liabilities and partners' capital $1,629 $1,637
====== ======

FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------

STATEMENTS OF INCOME
Sales and other operating revenues $2,571 $2,055 $2,695
Cost of sales 2,432 1,754 2,442
Selling, general and administrative expenses 66 78 72
Unusual charges 6 10 - -
------ ------ ------
Operating income 67 213 181
Interest expense, net 44 43 35
State income taxes (benefit) (1) 1 1
------ ------ ------
Net income $ 24 $ 169 $ 145
====== ====== ======

SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 103 $ 100 $ 91
Expenditures for property, plant and equipment 56 61 85

Included in "Sales and other operating revenues" above are $181 million in sales
to Lyondell for the eleven months ended November 30, 1997 and sales to Equistar
of $190 million, $131 million and $10 million for the years ended December 31,
1999 and 1998 and for the month of December 1997, respectively. In addition,
LCR purchased $325 million, primarily product purchases, from Lyondell for the
eleven months ended November 30, 1997 which are included in LCR's cost of sales.
Purchases from Equistar during the years ended December 31, 1999 and 1998 and
for the month of December 1997, included in LCR's cost of sales, totaled $263
million, $238 million and $27 million, respectively.

Lyondell has various service and cost sharing arrangements with LCR. Billings
by Lyondell to LCR were approximately $3 million, $4 million and $7 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Billings from
LCR to Lyondell were approximately $1 million, $4 million and $5 million for the
years ended December 31, 1999, 1998 and 1997, respectively.

In addition, during 1999, 1998 and 1997, LCR made interest payments to Lyondell
of approximately $9 million, $9 million and $13 million, respectively, for
interest on loans related to the funding of a portion of the upgrade project and
certain other capital expenditures at the Refinery.

65

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

LCR has a long-term crude supply agreement ("Crude Supply Agreement") with
Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an
affiliate of CITGO (see Note 18, Commitments and Contingencies -Crude Supply
Agreement). The Crude Supply Agreement incorporates formula prices to be paid
by LCR for the crude oil supplied based on the market value of a slate of
refined products deemed to be produced from each particular crude oil or
feedstock, less: (i) certain deemed refining costs, adjustable for inflation and
energy costs; (ii) certain actual costs; and (iii) a deemed margin, which varies
according to the grade of crude oil or other feedstock delivered. Although the
Company believes that the Crude Supply Agreement reduces the volatility of LCR's
earnings and cash flows, the Crude Supply Agreement also limits LCR's ability to
enjoy higher margins during periods when the market price of crude oil is low
relative to then current market prices for refined products. In addition, if
the actual yields, costs or volumes of the LCR refinery differ substantially
from those contemplated by the Crude Supply Agreement, the benefits of this
agreement to LCR could be substantially different, and could result in lower
earnings and cash flow for LCR. Furthermore, there may be periods during which
LCR's costs for crude oil under the Crude Supply Agreement may be higher than
might otherwise be available to LCR from other sources. A disparate increase in
the price of crude oil relative to the prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

In addition, under the terms of a long-term product sales agreement ("Products
Agreement"), CITGO purchases substantially all of the refined products produced
at the Refinery. Both PDVSA Oil and CITGO are direct or indirect, wholly owned
subsidiaries of Petroleo de Venezuela, S.A., the national oil company of the
Republic of Venezuela.

Under the terms of the limited partnership agreement of LYONDELL-CITGO Refining
LP, CITGO has a one-time option to increase its participation interest in LCR up
to 50% by making an additional capital contribution after January 1, 2000, but
not later than September 30, 2000.

6. UNUSUAL CHARGES

During 1998, Lyondell wrote off $57 million of costs assigned to purchased in-
process research and development in connection with the ARCO Chemical
acquisition. Additionally, related to the formation of Equistar, Lyondell
incurred unusual charges in 1998 and 1997 related to the early termination of
incentive compensation plans and executive severance.

The unusual charges consisted of the following items for the years ended
December 31:

MILLIONS OF DOLLARS 1998 1997
- ------------------- ------------------- ------------------

Purchased in-process research and development $ 57 $ --
Lyondell incentive compensation and executive severance 4 16
------------------- -----------------
Total unusual charges $ 61 $ 16
=================== =================

66

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

7. INCOME TAXES

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

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------
Current

Federal $ (71) $ (44) $ 114
Foreign 6 6 - -
State 5 (1) 13
------------------ ------------------ ------------------
Total current (60) (39) 127
------------------ ------------------ ------------------
Deferred
Federal 38 69 43
Foreign 10 (1) - -
State (12) 8 - -
------------------ ------------------ ------------------
Total deferred 36 76 43
------------------ ------------------ ------------------
Total provision for (benefit from) income taxes $ (24) $ 37 $ 170
================== ================== ==================

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Significant components
of Lyondell's deferred tax liabilities and assets were as follows as of
December 31:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------
Deferred tax liabilities:

Tax over book depreciation and amortization $1,039 $ 452
Investments in partnerships 283 251
Other 55 30
------------------ ------------------
Total deferred tax liabilities 1,377 733
------------------ ------------------
Deferred tax assets:
Net operating loss carryforwards 419 - -
Provisions for benefit plans and estimated expenses 122 236
Federal benefit attributable to foreign taxes 65 100
Federal tax credit carryforwards 26 57
Other 263 30
------------------ ------------------
Total deferred tax assets 895 423
Deferred tax asset valuation allowance (29) (27)
------------------ ------------------
Net deferred tax assets 866 396
------------------ ------------------
Net deferred tax liabilities 511 337
Less current portion of:
Deferred tax asset (380) (7)
Deferred tax liability - - 5
------------------ ------------------
Long-term deferred income taxes $ 891 $ 339
================== ==================

Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
elected to step up the U.S. tax basis of the ARCO Chemical net assets purchased.
This has resulted in significantly increased depreciation and amortization
deductions for U.S. tax purposes.

The domestic and foreign components of income (loss) before income taxes and
extraordinary item and a reconciliation of income tax computed at the U.S.
federal statutory tax rate to Lyondell's effective tax rate on income (loss)
before extraordinary item are as follows:

67

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------- ------------------ ------------------
Income (loss) before income taxes:

Domestic $ (137) $ 103 $ 456
Foreign 33 (14) - -
------------------- ------------------ ------------------
Total $ (104) $ 89 $ 456
=================== ================== ==================

PERCENTAGES
- -----------
U.S. statutory income tax rate (35.0)% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Foreign and U.S. tax effects of foreign operations 7.4 6.9 - -
Goodwill and other permanent differences 4.4
State income taxes, net of federal (2.4) 4.9 1.8
Settlement of tax issues - - (5.1) - -
Officer compensation - - - - .9
Other, net 2.3 (.2) (.4)
------------------- ------------------ ------------------
Effective income tax rate (23.2)% 41.5% 37.3%
=================== ================== ==================

At December 31, 1999, Lyondell had state tax loss carryforwards of $1.3 billion,
federal tax loss carryforwards of $776 million and foreign tax loss
carryforwards of $307 million. These carryforwards begin expiring in 2003.

8. EXTRAORDINARY ITEM

During 1999, Lyondell retired debt in the principal amount of $4.1 billion prior
to maturity (see Note 16). Unamortized debt issuance costs and amendment fees
of $54 million, less a tax benefit of $19 million, were written off and reported
as an extraordinary loss on extinguishment of debt. Previously, these costs and
fees had been deferred and were being amortized to interest expense.

9. RELATED PARTY TRANSACTIONS

Atlantic Richfield Company--Lyondell purchased 383,312 shares of its common
stock held by ARCO after the conversion of the Exchangeable Notes on
September 15, 1997 at a price of $25.66 per share. After that transaction, ARCO
ceased to be a related party.

Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a related
party until September 1997, consisting of propylene, MTBE, benzene, ethylene,
methanol and other products and services, were $206 million during 1997.

10. ACCOUNTS RECEIVABLE

In December 1998, Lyondell entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, Lyondell agreed to sell on an ongoing basis
and without recourse, designated accounts receivable through December 2001. To
maintain the balance of the accounts receivable sold, Lyondell is obligated to
sell new receivables as existing receivables are collected. The agreement
currently permits the sale of up to $100 million of accounts receivable. The
amount of receivables permitted to be sold and actually sold is determined by a
formula, which takes into account, among other factors, Lyondell's credit
rating.

68

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

As of December 31, 1999 and 1998, Lyondell's gross accounts receivable that had
been sold to the purchasers aggregated $76 million and $160 million,
respectively. Increases and decreases in the amount sold have been reported as
operating cash flows in the Consolidated Statements of Cash Flows. Costs
related to the sale are included in "Other income (expense), net" in the
Consolidated Statements of Income.

11. INVENTORIES

Inventories are stated at the lower of cost or market. In 1999 and 1998,
approximately 93% and 94%, respectively, of inventories, excluding materials and
supplies, were determined by the last-in, first-out ("LIFO") method. Materials
and supplies and other non-LIFO inventories are valued using either the first-
in, first-out ("FIFO") or the average cost methods.

Inventories were as follows at December 31:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

Finished goods $ 405 $ 459
Work-in-process 31 18
Raw materials 44 34
Materials and supplies 39 39
------------------ ------------------
Total inventories $ 519 $ 550
================== ==================

12. PROPERTY, PLANT AND EQUIPMENT, NET

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

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

Land $ 35 $ 19
Manufacturing facilities and equipment 4,406 4,470
Construction projects in progress 114 98
------------------ ------------------
Total property, plant and equipment 4,555 4,587
Less accumulated depreciation 264 76
------------------ ------------------
Property, plant and equipment, net $4,291 $4,511
================== ==================

No interest was capitalized during 1999 and 1998. Depreciation expense for
1999, 1998 and 1997 was $199 million, $75 million and $71 million, respectively.

13. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets, net of accumulated amortization, were as
follows at December 31:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

Patents and licensed technology $ 204 $ 236
Company owned life insurance 130 184
Contractual rights 123 138
Debt issuance costs, net 132 109
Other 172 137
------------------ ------------------
Total deferred charges and other assets $ 761 $ 804
================== ==================

Accumulated amortization was $145 million at December 31, 1999 and $48 million
at December 31, 1998.

69

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

14. OTHER ACCRUED LIABILITIES

Other accrued liabilities were as follows at December 31:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

Accrued taxes other than income $ 134 $ 49
Accrued payroll and benefits 115 148
Accrued interest 101 55
Accrued contractual obligations 70 139
Other 26 38
------------------ ------------------
Total other accrued liabilities $ 446 $ 429
================== ==================

15. PENSION AND OTHER POSTRETIREMENT BENEFITS

Lyondell provides defined pension and postretirement benefit plans to employees.
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of the plans:

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- ---------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ---------------- ---------------- ---------------- ----------------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 487 $ 136 $ 73 $ 5
Service cost 18 7 2 1
Interest cost 32 18 6 2
Actuarial (gain) loss (80) 42 (5) 5
Effect of settlement - - 10 - - - -
Purchase of ARCO Chemical - - 303 - - 61
Benefits paid (47) (29) (4) (1)
Foreign exchange effects (11) - - - - - -
---------------- ---------------- ---------------- ----------------
Benefit obligation, December 31 399 487 72 73
---------------- ---------------- ---------------- ----------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 448 103 - - - -
Actual return of plan assets 56 11 - - - -
Company contributions 11 12 4 1
Purchase of ARCO Chemical - - 351 - - - -
Benefits paid (47) (29) (4) (1)
Foreign exchange effects (12) - - - - - -
---------------- ---------------- ---------------- ----------------
Fair value of plan assets, December 31 456 448 - - - -
---------------- ---------------- ---------------- ----------------
Funded status 57 (39) (72) (73)
Unrecognized actuarial (gain) loss (27) 70 19 8
Unrecognized prior service cost 6 6 (33) (18)
Unrecognized transition obligation 4 5 - - - -
---------------- ---------------- ---------------- ----------------
Net amount recognized $ 40 $ 42 $ (86) $ (83)
================ ================ ================ ================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 53 $ 54 $ - - $ - -
Accrued benefit liability (13) (12) (86) (83)
---------------- ---------------- ---------------- ----------------
Net amount recognized $ 40 $ 42 $ (86) $ (83)
================ ================ ================ ================

70

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The above table for pension benefits includes foreign pension plans of ARCO
Chemical. These plans constituted approximately 25% of the benefit obligation
and 21% of the plan assets at December 31, 1999 and 20% of the benefit
obligation and 23% of the plan assets at December 31, 1998. The assumptions
used in determining the net periodic pension cost and pension obligation for
foreign pension plans were based on the economic environment of each applicable
country.

The benefit obligation and fair value of assets for pension plans with benefit
obligations in excess of plan assets were $154 million and $122 million,
respectively, as of December 31, 1999 and $180 million and $120 million,
respectively, as of December 31, 1998. The accumulated benefit obligation and
fair value of assets for pension plans with accumulated benefit obligations in
excess of plan assets were $16 million and $4 million, respectively, as of
December 31, 1999 and $12 million and $2 million, respectively, as of December
31, 1998.

In connection with the formation of Equistar, pension obligations and assets
were not contributed by Lyondell to Equistar. The employees transferred to
Equistar became fully vested in the Lyondell pension plan effective December 1,
1997 and no longer accrue pension service with Lyondell. However, an accrued
postretirement benefit obligation of $12 million associated with Lyondell
employees transferred to Equistar was contributed to Equistar by Lyondell.

Net periodic pension and other postretirement benefit costs included the
following components:

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- -------------------------
MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997
- ------------------- -------- ------ ------ ------- ------- -----

Components of net periodic benefit cost:
Service cost $ 18 $ 7 $ 6 $ 2 $ 1 $ 3
Interest cost 32 19 10 5 2 2
Expected return of plan assets (40) (24) (8) -- -- --
Prior service cost amortization 1 -- -- (3) (1) --
Actuarial loss amortization 2 1 1 2 -- --
--------------------------- -------------------------
Net periodic benefit cost before settlement 13 3 9 6 2 5
Effect of settlement -- 2 -- -- -- --
--------------------------- -------------------------
Net periodic benefit cost after settlement $ 13 $ 5 $ 9 $ 6 $ 2 $ 5
=========================== =========================

The above net periodic benefit costs included twelve months and five months of
expense in 1999 and 1998, respectively, of the business acquired from ARCO
Chemical and eleven months of 1997 costs of the business contributed to Equistar
on December 1, 1997. Foreign pension plans comprised $2 million and $1 million
of net periodic pension cost for 1999 and 1998, respectively.

The assumptions used as of December 31, 1999, 1998, and 1997 in determining the
domestic net pension cost and net pension liability were as follows:

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------------------------

1999 1998 1997 1999 1998 1997
----- ----- ----- ------- ------- ------

Weighted-average assumptions as of
DECEMBER 31:
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%

71

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 1999 was 7.0% for
2000-2001 and 5.0% thereafter. A one-percentage-point increase in assumed health
care cost trend rates would increase the postretirement benefit obligation by $1
million, while a one-percentage-point decrease would reduce the obligation by
less than $1 million. The effect of a one-percentage-point change would be less
than $1 million on the total of the service and interest cost components.

Lyondell also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Lyondell were $10 million,
$4 million and $5 million for the years ended December 31, 1999, 1998 and 1997,
respectively.

16. LONG-TERM DEBT AND FINANCING ARRANGEMENTS

In connection with the ARCO Chemical acquisition, Lyondell executed a bank
credit agreement providing for aggregate borrowing of up to $7 billion. As part
of the acquisition, Lyondell assumed approximately $870 million of ARCO Chemical
debt. Borrowing under the $7 billion Credit Facility of $6.5 billion was used
for: (i) the purchase of approximately 97.4 million shares of ARCO Chemical
common stock; (ii) repayment of debt, including the $345 million term note
payable to Equistar, short-term borrowings of Lyondell and ARCO Chemical and
other long-term borrowing of ARCO Chemical; and (iii) payment of certain debt
issuance costs.

The $7 billion Credit Facility was originally comprised of a five-year,
$500 million revolving credit facility and four separate term loans as follows:
(a) Term Loan A - $2.0 billion to be amortized over five years;
(b) Term Loan B - $1.25 billion to be amortized over seven years;
(c) Term Loan C - $1.25 billion with principal maturing on June 30, 1999; and
(d) Term Loan D - $2.0 billion with principal maturing on June 30, 2000.

All of the term loans were funded on July 28, 1998. No amounts have been funded
to date under the revolving credit facility. The Credit Facility was initially
collateralized by cash flow streams from Lyondell's three joint ventures and
Lyondell's common stock ownership in its subsidiaries.

During May 1999, Lyondell amended the $7 billion Credit Facility. The Credit
Facility amendments provided the lenders with additional collateral, re-priced
the existing loans to reflect then market interest rates and revised certain
financial covenants. Also in May 1999, Lyondell issued 40.25 million shares of
common stock, receiving net proceeds of $736 million. Lyondell also issued $500
million of senior subordinated notes and $1.9 billion of senior secured notes.
Lyondell borrowed additional amounts under the amended Credit Facility through
the Credit Facility's new $850 million Term Loan E, maturing June 30, 2006 and
the Credit Facility's new $150 million Term Loan F, maturing December 31, 2003.
Lyondell used the proceeds to retire the $1.25 billion principal amount of Term
Loan C, maturing June 30, 1999, and the $2 billion principal amount of Term Loan
D, maturing June 30, 2000, and to partially repay principal amounts outstanding
under Term Loans A and B under the Credit Facility.

The amended Credit Facility requires Lyondell to issue $470 million of
subordinated notes, or more junior securities, by June 2002. The requirement to
issue $470 million of subordinated notes will be reduced by $2 for each $1 of
equity securities issued by Lyondell, and will be eliminated if Lyondell
achieves either (1) a specified total debt to adjusted EBITDA ratio, as defined,
or (2) a specified credit rating for its senior unsecured debt.

Under the covenant provisions of the amended Credit Facility, Lyondell has
agreed to, among other things, (i) maintain certain specified financial ratios
and consolidated net worth (as defined in the Credit Facility), (ii) refrain
from making certain distributions with respect to Lyondell's capital stock,
(iii) refrain from making certain investments, as defined, (iv) refrain from
allowing its subsidiaries to incur certain types and amounts of debt, and

72

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

(v) use its best efforts to maintain certain ownership interests in its joint
ventures and to ensure that the joint ventures maintain certain capital
expenditure and debt levels and cash distribution policies.

The indentures under which the senior secured notes and the senior subordinated
notes were issued contain covenants that restrict the ability of Lyondell and
its subsidiaries to (i) incur additional debt or issue subsidiary preferred
stock, (ii) increase dividends on Lyondell capital stock, (iii) redeem or
repurchase capital stock or repurchase subordinated debt, (iv) engage in
transactions with affiliates, except on an arms-length basis, (v) create liens
or engage in sale and leaseback transactions, (vi) make some types of
investments and sell assets, and (vii) consolidate or merge with, or sell
substantially all of its assets to, another person. Some of the covenants will
no longer apply if the notes achieve specified credit ratings. The notes are
unconditionally guaranteed by a Lyondell subsidiary (see Note 25).

Lyondell was in compliance with all such covenants as of December 31, 1999,
however, given the poor current business environment in the petrochemicals
industry, Lyondell secured an amendment to certain financial covenants in
February 2000 that will increase its financial and operating flexibility in the
near term. Additionally, the amendment eliminated a cross-default provision in
the Credit Facility that could have been triggered by a default on LCR's
$450 million Construction Facility, which expires in May 2000.

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

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

Term Loan A $1,095 $1,852
Term Loan B 1,156 1,248
Term Loan C -- 1,250
Term Loan D -- 2,000
Term Loan E 844 --
Term Loan F 149 --
Senior Secured Notes, Series A due 2007, 9.625% 900 --
Senior Secured Notes, Series B due 2007, 9.875% 1,000 --
Senior Subordinated Notes due 2009, 10.875% 500 --
Debentures - due 2000, 9.9% 200 200
Debentures - due 2005, 9.375% 100 100
Debentures - due 2010, 10.25% 100 100
Debentures - due 2020, 9.8% 224 224
Other 3 20
------------------ ------------------
Total long-term debt 6,271 6,994
Less current maturities 225 1,603
------------------ ------------------
Long-term debt, net $6,046 $5,391
================== ==================

The term loans currently bear interest at the following variable rates:
(i) Term Loan A - LIBOR plus 3.25%; (ii) Term Loan B - LIBOR plus 3.75%;
(iii) Term Loan E - LIBOR plus 3.875%; and (iv) Term Loan F - LIBOR plus 3.5%.

Lyondell transferred $745 million of long-term debt to Equistar on December 1,
1997 of which $563 million was outstanding at December 31, 1999. Lyondell
remains an obligor on the debt. Under certain limited circumstances the debt
holders have the right to require repurchase of up to $163 million of the debt.

Aggregate maturities of all long-term debt during the next five years are $225
million in 2000, $455 million in 2001, $455 million in 2002, $583 million in
2003, $461 million in 2004, and $4.1 billion thereafter.

73

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

17. FINANCIAL INSTRUMENTS

Lyondell does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.

Foreign currency swap and forward contracts are used to minimize foreign
exchange exposures. Foreign exchange exposures result from cash flows between
U.S. and international operations and transactions denominated in currencies
other than the local currency of an operating entity. Swap contracts and
forward contracts are used to hedge foreign exchange exposures. At December 31,
1999 Lyondell had one forward contract outstanding in the notional amount of $3
million, hedging the euro, maturing in January 2000. The notional amounts of
foreign currency contracts outstanding, principally involving the Netherlands
guilder, were $205 million at December 31, 1998 with various maturity dates in
1999.

Gains and losses, realized and unrealized, on foreign currency forward and swap
contracts as well as realized and unrealized gains and losses on the underlying
exposures are recognized currently in "Other income (expense), net" in the
Consolidated Statements of Income. For the years ended December 31, 1999 and
1998, the results of foreign exchange transactions, including foreign currency
derivative instruments, were not significant.

During 1998, to mitigate interest rate exposure on its anticipated future public
debt issuance, Lyondell entered into treasury-rate lock transactions in the
notional amount of $1 billion. As a result of the refinancing, Lyondell settled
the treasury locks during the second quarter 1999 in the amount of $4 million.
This amount is being amortized to interest expense over the life of the related
debt.

The carrying value and the estimated fair value of Lyondell's financial
instruments as of December 31, 1999 and 1998 are shown as assets (liabilities)
in the table below:

1999 1998
---------------------------------------- -----------------------------------------
CARRYING FAIR CARRYING FAIR
Millions of dollars VALUE VALUE VALUE VALUE
- ------------------- ------------------ ----------------- ------------------ -----------------

Nonderivatives:
Investments and long-term receivables $1,015 $1,015 $1,078 $1,078
Long-term debt (including current
maturities) 6,271 6,334 6,994 7,027
Derivatives:
Treasury locks -- -- -- (53)
Foreign currency forwards -- -- (10) (11)
Foreign currency swaps -- -- (1) (1)

All derivative instruments are off-balance-sheet instruments, however net
receivable or payable positions related to derivative instruments are carried on
the balance sheet.

The fair value of all nonderivative financial instruments included in current
assets and current liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and notes payable, approximated their carrying
value due to their short maturity. Investments and long-term receivables, which
consist primarily of equity investments in affiliated companies, were valued
using current financial and other available information. Long-term debt,
including amounts due within one year, was valued based upon the borrowing rates
currently available to Lyondell for debt with terms and average maturities
similar to Lyondell's debt portfolio. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts were
settled at yearend and are based on market quotes.

Lyondell is exposed to credit risk related to its financial instruments in the
event of nonperformance by the counterparties. Lyondell does not generally
require collateral or other security to support these financial

74

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

instruments. The counterparties to these transactions are major
institutions deemed creditworthy by Lyondell. Lyondell does not anticipate
nonperformance by the counterparties.

18. COMMITMENTS AND CONTINGENCIES

Lyondell has commitments, including those related to capital expenditures, all
made in the normal course of business. During August 1998, as contemplated at
the time of the ARCO Chemical Acquisition, Lyondell announced the delay of
construction of a PO plant, known as PO-11, that ARCO Chemical had previously
scheduled for startup in late 2001. As part of the delay, Lyondell is
negotiating the cancellation of the related lump-sum contract for the
engineering, procurement and construction of the PO-11 plant. Lyondell recorded
estimated liabilities for penalties and cancellation charges related to the
cancellation of the lump-sum contract and related commitments at the time of the
acquisition of ARCO Chemical. Based on changes in circumstances, it
subsequently revised these estimates and the recorded liability by $13 million
(see Note 3).

Lyondell is party to a resale agreement and a tolling agreement for toluene
diisocyanate ("TDI"). Under these agreements, Lyondell is entitled to all of the
TDI output of the supplier's two plants in France, which have a combined rated
capacity of approximately 264 million pounds per year. Lyondell is required to
purchase a minimum of 216 million pounds of TDI per year for up to 15 years,
beginning January 1, 1995. The aggregate purchase price is a combination of
plant cost and market price. Lyondell is further obligated to pay additional
capacity reservation fees based upon plant output factors.

Prior to the formation of Equistar on December 1, 1997, Lyondell was party to
various unconditional purchase obligation contracts as a purchaser of product
and services. Lyondell's total purchases under those agreements, were
$27 million in 1997.

Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil is required
to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy
crude oil, which constitutes approximately 88% of the Refinery's refining
capacity of 260,000 barrels per day of crude oil (see Note 5). In late April
1998, LCR received notification from PDVSA Oil that it would reduce allocations
of crude oil on the grounds of announced OPEC production cuts. LCR began
receiving reduced allocations of crude oil from PDVSA Oil in August 1998,
amounting to 195,000 barrels per day in that month. LCR was advised by PDVSA Oil
in May 1999 of a further reduction in the allocations of crude oil supplied
under the Crude Supply Agreement to 184,000 barrels per day, effective May 1999.
On several occasions since then, PDVSA Oil has further reduced certain crude oil
deliveries, although it has made payments in partial compensation for such
reductions. PDVSA has announced that it intends to renegotiate the crude supply
agreements that it has with all third parties, including LCR. However, they have
confirmed that they expect to honor their commitments if a mutually acceptable
restructuring of the Crude Supply Agreement is not achieved. The breach or
termination of the Crude Supply Agreement would require LCR to purchase all or a
portion of its crude oil feedstocks in the merchant market, would subject LCR to
significant volatility and price fluctuations and could adversely affect LCR
and, therefore, Lyondell.

LCR Debt--LCR has $450 million outstanding under a five-year Construction
Facility, which expires in May 2000. Lyondell and CITGO, as partners of LCR,
have agreed to pursue a refinancing of the indebtedness, although the final
terms have not been determined. Because a bank commitment has not yet been
received, the independent accountants of LCR have stated in their audit report
that the lack of such a commitment or new agreement raises substantial doubt
concerning LCR's ability to continue as a going concern. However, management
expects that LCR will be able to refinance or repay the indebtedness. In
addition, as an interim measure, LCR may seek to extend the maturity date of the
existing loan.

75

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from ARCO to Lyondell in 1988, Lyondell agreed to assume certain
liabilities arising out of the operation of Lyondell's integrated petrochemicals
and refining business prior to July 1, 1988. In connection with the transfer of
such liabilities, Lyondell and ARCO entered into an agreement, updated in 1997
("Revised Cross-Indemnity Agreement"), whereby Lyondell agreed to defend and
indemnify ARCO against certain uninsured claims and liabilities which ARCO may
incur relating to the operation of Lyondell prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits. For
current and future cases related to Lyondell's products and operations, ARCO and
Lyondell bear a proportionate share of judgment and settlement costs according
to a formula that allocates responsibility based upon years of ownership during
the relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell
will assume responsibility for its proportionate share of future costs for waste
site matters not covered by ARCO insurance.

In connection with the acquisition of ARCO Chemical, Lyondell succeeded,
indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical
indemnified ARCO against certain claims or liabilities that ARCO may incur
relating to ARCO's former ownership and operation of the businesses of ARCO
Chemical ("Former ARCO Businesses"), including liabilities under laws relating
to the protection of the environment and the workplace, and liabilities arising
out of certain litigation. As part of the agreement, ARCO indemnified ARCO
Chemical with respect to claims or liabilities and other matters of litigation
not related to the ARCO Chemical business.

Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and
Occidental have each agreed to provide certain indemnifications to Equistar with
respect to the petrochemicals and polymers businesses contributed by the
Partners. In addition, Equistar agreed to assume third party claims that are
related to certain pre-closing contingent liabilities that are asserted prior to
December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental,
to the extent the aggregate thereof does not exceed $7 million to each Partner,
subject to certain terms of the respective asset contribution agreements. As of
December 31, 1999 Equistar had expensed approximately $4 million under the
$7 million indemnification basket with respect to the business contributed by
Lyondell.

Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Lyondell
cannot accurately predict future developments, such as increasingly strict
environmental laws and inspection and enforcement policies, as well as higher
compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste.

Lyondell is currently contributing funds to the clean up of one waste site
located near Houston, Texas under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as amended and the Superfund
Amendments and Reauthorization Act of 1986. Lyondell has also been named, along
with several other companies, as a potentially responsible party for another
CERCLA site near Houston, Texas. Lyondell is also subject to certain assessment
and remedial actions at the Refinery under the Resource Conservation and
Recovery Act ("RCRA"). In addition, Lyondell has negotiated an order with the
Texas Natural Resource Conservation Commission ("TNRCC") for assessment and
remediation of groundwater and soil contamination at the Refinery.

As part of the acquisition of ARCO Chemical, Lyondell assumed ARCO Chemical's
environmental liability related to potential future remediation costs for known
ARCO Chemical sites. The liability under RCRA and various state and foreign
government regulations primarily relates to six current plant sites and two
former plant sites. Under CERCLA, the liability primarily relates to one
federal site. Further, as a result of the acquisition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell

76

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

estimates, based upon currently available information, that potential loss
contingencies associated with these CERCLA sites, individually and in the
aggregate, are not significant.

As of December 31, 1999, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled $37
million. The liabilities per site range from less than $1 million to $13
million and are expected to be incurred over the next two to seven years. In
the opinion of management, there is currently no material range of loss in
excess of the amount recorded for these sites. However, it is possible that new
information about the sites for which the accrual has been established, new
technology or future developments such as involvement in other CERCLA, RCRA,
TNRCC or other comparable state or foreign law investigations, could require
Lyondell to reassess its potential exposure related to environmental matters.

MTBE--Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, the State of California has initiated
action, pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by
December 31, 2002. Such action, to be effective, would require (i) a waiver of
the oxygenate mandate for California, (ii) Congressional action in the form of
an amendment to the Clean Air Act or (iii) California refiners to replace MTBE
with another oxygenate such as ethanol, a more costly and less widely available
additive. At the federal level, a blue ribbon panel appointed by the
Environmental Protection Agency issued its report on July 27, 1999. That report
recommended, among other things, reducing the use of MTBE in gasoline. The EPA
has recently announced its intent to seek legislative changes from Congress to
give EPA authority to ban MTBE over a three-year period. Such action would only
be granted through amendments to the Clean Air Act. Additionally, the EPA is
seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic
Substance Control Act. It would take at least three years for such a rule to
issue. These initiatives or other governmental actions could result in a
significant reduction in Lyondell's MTBE sales. The Company has developed
technologies to convert TBA into alternate gasoline blending components should
it be necessary to reduce MTBE production in the future. In addition, Lyondell
has a take-or-pay contract with ARCO, which contributes significant pretax
margin. If legislation is enacted or other governmental action taken, ARCO has
indicated that it might attempt to invoke a force majeure provision in the
contract in order to reduce the quantities of MTBE it purchases under, or to
terminate the contract. Lyondell would vigorously dispute such action.

General--Lyondell is involved in various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the Lyondell
Consolidated Financial Statements.

In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the Lyondell
Consolidated Financial Statements. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this Note could
have a material impact on Lyondell's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.

19. LEASE COMMITMENTS

Lyondell leases various facilities and equipment under noncancelable lease
arrangements for varying periods. As of December 31, 1999, future minimum lease
payments for years ending December 31, relating to all noncancelable operating
leases with lease terms in excess of one year were as follows:

77

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

MILLIONS OF DOLLARS
-------------------
2000 $ 64
2001 54
2002 42
2003 32
2004 31
Thereafter 168
--------
Total minimum lease payments $391
========

Operating lease net rental expenses for 1999, 1998 and 1997 were $106 million,
$39 million and $43 million, respectively.

20. STOCKHOLDERS' EQUITY

Common Stock--In May 1999, Lyondell issued 40.25 million shares of common stock
at $19 per share. The net proceeds of $736 million were credited to "Common
stock" and "Additional paid in capital" in the Consolidated Balance Sheet.
Common stock outstanding increased from 77.0 million shares at December 31, 1998
to 117.6 million shares at December 31, 1999.

Basic and Diluted Earnings per Share--Basic earnings per share for income (loss)
before extraordinary item for the periods presented are computed based upon the
weighted average number of shares outstanding for the periods. Diluted earnings
per share for income (loss) before extraordinary item include the effect of
outstanding stock options issued under the Executive Long-Term Incentive Plan
and the Incentive Stock Option Plan. These stock options were antidilutive in
1999. The following earnings (loss) per share ("EPS") data is presented for the
years ended December 31:

1999 1998 1997
------------------------------ ----------------------------- ----------------------
Thousands of shares Shares EPS SHARES EPS SHARES EPS
- ------------------ ------------- ----------- ------------- ----------- ------------- -----

Basic 103,115 $(.77) 77,669 $.67 79,796 $3.58
Dilutive effect of options -- -- 30 -- 17 --
Diluted 103,115 $(.77) 77,699 $.67 79,813 $3.58
============= =========== ============= =========== ============= =====

Treasury Stock--From time to time Lyondell purchases its shares in the open
market to issue under its employee compensation and benefits plans, including
stock option and restricted stock plans. During 1998, Lyondell purchased
500,000 shares for approximately $10 million to be used for such plans. In
addition during 1998, Lyondell completed the stock repurchase program authorized
by Lyondell's Board of Directors in September 1997. A total of 2,567,051 shares
were purchased for $75 million under this stock repurchase program. For the
years ended December 31, 1999 and 1998, respectively, Lyondell reissued, under
the Restricted Stock Plan, 299,227 shares and 88,848 shares previously
purchased.

1999 Incentive Plan--The 1999 Long-Term Incentive Plan ("1999 LTIP") provides
for the grant of awards to employees of Lyondell and its subsidiaries. Awards
to employees may be in the form of (i) stock options, (ii) stock appreciation
rights, payable in cash or common stock, (iii) restricted grants of common stock
or units denominated in common stock, (iv) performance grants denominated in
common stock or units denominated in common stock that are subject to the
attainment of one or more goals, (v) grants of rights to receive the value of a
specified number of shares of common stock (phantom stock), and (vi) a cash
payment. Awards of common stock under the 1999 LTIP are generally limited to
the lesser of ten million shares or 10% of the number of shares of common stock
outstanding at the time of granting of the award. During 1999, Lyondell awarded
stock option grants for 1,741,380 shares and grants for 463,123 performance
shares under this plan. The weighted-average grant-date fair value of the
performance share grants was $17.625 per share.

78

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Restricted Stock Plan--Under the 1995 Restricted Stock Plan, one million shares
of common stock are available for grants and awards to officers and other key
management employees. Lyondell grants fixed awards of common stock that are
forfeitable and subject to restrictions on transfer. Vesting is contingent on
the participant's continuing employment at Lyondell for a period specified in
the award. During 1999, Lyondell granted and issued 353,943 shares of
restricted stock to officers and employees. During 1998 Lyondell granted and
issued 241,223 shares of restricted stock to former employees of ARCO Chemical.
The shares vest on various dates through December 15, 2001, depending upon the
terms of the individual grants. Employees are entitled to receive dividends on
the restricted shares.

Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors of
Lyondell declared a dividend of one right ("Right") for each outstanding share
of Lyondell's common stock to stockholders of record on December 20, 1995. The
Rights become exercisable upon the earlier of: (i) ten days following a public
announcement by another entity that it has acquired beneficial ownership of 15%
or more of the outstanding shares of common stock; or (ii) ten business days
following the commencement of a tender offer or exchange offer to acquire
beneficial ownership of 15% or more of the outstanding shares of common stock,
except under certain circumstances. The Rights expire at the close of business
on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or
exchanged by Lyondell as described in the Rights Agreement dated as of December
8, 1995.

Stock Options--The following table summarizes activity relating to stock options
under the 1999 LTIP. As of December 31, 1999, options covering 1,654,480 shares
with a weighted average remaining life of 9 years were outstanding at prices
ranging from $11.8125 to $18.125 per share. None were exercisable.

AVERAGE
NUMBER OPTION PRICE
OF SHARES PER SHARE
-------------- ---------------
Balance, January 1, 1999 -- $ --
Granted 1,741,380 17.78
Cancelled (86,900) 18.13
-------------
Balance, December 31, 1999 1,654,480 17.76
=============

Lyondell's Executive Long-Term Incentive Plan ("LTI Plan") became effective in
November 1988. The last stock options granted under the LTI Plan were granted
in March 1994. No additional stock option grants will be made under this plan.
As of December 31, 1999, options covering 610,007 shares were outstanding under
the LTI Plan with a weighted average remaining life of 3 years, all of which
were exercisable at prices ranging from $18.25 to $26.00 per share. The
following summarizes stock option activity for the LTI Plan:

AVERAGE
NUMBER OPTION PRICE
OF SHARES PER SHARE
-------------- ---------------
Balance, January 1, 1997 743,802 $23.43
Exercised (11,642) 19.15
--------------
Balance, December 31, 1997 732,160 23.50
Exercised (110,325) 22.84
--------------
Balance, December 31, 1998 621,835 23.62
Cancelled (11,828) 24.79
--------------
Balance, December 31, 1999 610,007 23.60
==============

79

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Lyondell's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan,
became effective in January 1989. The last stock options granted under the ISO
Plan were granted in March 1993. No additional grants will be made under the
ISO Plan. As of December 31, 1998, options covering 145,191 shares were
outstanding at $30.00 per share. These options expired in January 1999. At
December 31, 1999, no stock options were outstanding. The following summarizes
stock option activity for the ISO Plan:

AVERAGE
NUMBER OPTION PRICE
OF SHARES PER SHARE
-------------- ---------------
Balance, January 1, 1997 175,804 $29.91
Canceled/forfeited (18,250) 29.68
Exercised (803) 19.44
--------------
Balance, December 31, 1997 156,751 29.99
Canceled/forfeited (11,408) 30.00
Exercised (152) 19.44
--------------
Balance, December 31, 1998 145,191 30.00
--------------
Canceled/forfeited/expired (145,191) 30.00
--------------
Balance, December 31, 1999 --
==============

Employee stock options are accounted for under the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, no compensation cost has been recognized in
connection with stock option grants under the plans. The pro forma impact on
both net income and earnings per share from calculating compensation expense
consistent with SFAS No. 123, Accounting for Stock-Based Compensation, in 1999
was not more than $6 million, or $.06 per share. There were no grants in the
years ended December 31, 1998 and 1997. The fair value per share of options
granted was estimated as of the date of grant using the Black-Scholes option-
pricing model and the following assumptions.

1999
--------
Fair value per share of options granted $4.67
Fair value assumptions:
Dividend yield 5%
Expected volatility 35%
Risk-free interest rate 5%
Maturity, in years 10

21. SUPPLEMENTAL CASH FLOW INFORMATION

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

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------ ------------------ ------------------ ------------------

Interest paid $ 570 $ 230 $ 66
================== ================== ==================
Net income taxes (received) paid $ (91) $ 63 $ 125
================== ================== ==================

Effective December 31, 1999, Lyondell made a noncash capital contribution to LCR
by converting $46 million of its note receivable from LCR to a capital
investment in LCR. The petrochemicals and polymers businesses contributed by
Lyondell to Equistar on December 1, 1997 included non-cash net assets with a net
book value of $762 million, including $381 million of accounts receivable, $233
million of inventory, $826 million of net property, plant and

80

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

equipment and $745 million of long-term debt, including the current maturities.
In addition, Lyondell contributed a $345 million term note payable to Equistar,
which was repaid in July 1998.

22. SEGMENT AND RELATED INFORMATION

Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Lyondell has identified four reportable
segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals;
(iii) polymers; and (iv) refining. The accounting policies of the segments are
the same as those described in "Summary of Significant Accounting Policies" (see
Note 2). The methanol segment is not a reportable segment. The reportable
segments are described further below:

Intermediate Chemicals and Derivatives--This segment consists of the production
and marketing of propylene oxide, polyether polyols, propylene glycol, propylene
glycol ethers, toluene diisocyanate, styrene monomer and methyl tertiary butyl
ether.

Petrochemicals--This segment consists of operations in: olefins, including
ethylene, propylene, butadiene, butylenes and specialty products; aromatics,
including benzene and toluene; methanol; oxygenated chemicals, including
ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and
specialty chemicals, including refinery blending stocks. The petrochemicals
business of Equistar for 1999, 1998 and December 1997 is included in this
segment.

Polymers--This segment consists of operations in: polyolefins, including high
density polyethylene, low density polyethylene, linear low density polyethylene
and polypropylene; and performance polymers products, including wire and cable
resins and compounds, adhesive resins, and fine powders. The polymers business
of Equistar for 1999, 1998 and December 1997 is included in this segment.
Equistar's color concentrates and compounds business, which was part of
performance polymers products, was sold effective April 30, 1999.

Refining--This segment, which is comprised of LCR operations, consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics produced at the Refinery, including
benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial
lubricants, white oils, process oils and base oils; carbon black oil; sulfur;
residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales.

No customer accounted for 10% or more of consolidated sales during the years
ended December 31, 1999, 1998 or 1997. However, under the terms of the LCR
Products Agreement (see Note 5), CITGO purchases substantially all of the
refined products of the Refining segment.

81

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Summarized financial information for Lyondell's reportable segments is shown in
the following table. Intersegment sales from the petrochemicals segment to the
polymers segment in 1997 include ethylene and propylene produced at Equistar's
Channelview facility. Intersegment sales between the petrochemicals and
refining segments in 1997 include olefins feedstocks and benzene produced at the
Refinery, and gasoline blending stocks and hydrogen produced at Equistar's
Channelview facility. Intersegment sales were made at prices based on current
market values.

INTERMEDIATE
CHEMICALS AND
Millions of dollars DERIVATIVES PETROCHEMICALS Polymers Refining Other Total
- ------------------ ----------------- ---------------- ----------- ----------- ----------- -----------

1999
- ----
Sales and other
operating revenues $3,693 $3,693
Operating income 404 404
Income from equity
investments -- $ 183 $ 21 $ 23 $(151) 76
Total assets 8,557 314 140 271 216 9,498
Capital expenditures 131 -- -- -- -- 131
Depreciation and
amortization expense 330 -- -- -- -- 330

1998
- ----
Sales and other
operating revenues $1,447 $1,447
Unusual charges 57 $ 4 61
Operating income 108 (4) 104
Income from equity
investments -- $ 159 $ 89 $110 (123) 235
Total assets 8,131 297 201 315 212 9,156
Capital expenditures 64 -- -- -- -- 64
Depreciation and
amortization expense 138 -- -- -- -- 138

1997
- ----
Sales and other
operating revenues:
Customers $2,108 $770 $2,878
Intersegment 424 -- $(424) --
Unusual charges -- -- 16 16
Operating income 444 82 (100) 426
Income from equity
investments 28 13 $102 (35) 108
Total assets 447 349 300 463 1,559
Capital expenditures 27 13 -- 9 49
Depreciation and
amortization expense 50 29 -- 5 84

The following table presents the details of "Income from equity investments" as
presented above in the "Other" column for the years ended December 31:

82

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------

Equistar items not allocated to petrochemicals and
polymers segments:
Principally general and administrative expenses
and interest expense, net $ (171) $ (129) $ (35)
Other income, net 19 -- --
Income from other equity investments 1 6 --
------------------ ------------------ ------------------
Total--Other $ (151) $ (123) $ (35)
================== ================== ==================

The following "Revenues" by country data is for the year ended December 31, 1999
and for the five months ended December 31, 1998, based upon the location of the
use of the product. The "Long-lived assets" by country data is based upon the
location of the assets.

REVENUES LONG-LIVED ASSETS
---------------------------------------- ----------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ------------------ ----------------- ------------------ -----------------

United States $1,826 $ 724 $2,944 $3,046
Foreign 1,867 723 1,347 1,465
------------------ ----------------- ------------------ -----------------
Total $3,693 $1,447 $4,291 $4,511
================== ================= ================== =================

Foreign long-lived assets primarily consist of the net property, plant and
equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur-Mer,
France, both of which are part of the intermediate chemicals and derivatives
segment. Prior to the purchase of ARCO Chemical as of July 28, 1998, Lyondell
had no operations outside the United States and no significant export sales.

23. PENDING ASSET SALE

In November 1999, Lyondell reached a definitive agreement to sell its worldwide
polyols business to Bayer AG of Germany ("Bayer") for $2.45 billion. Bayer will
also receive an ownership interest in certain of Lyondell's U.S. PO operations
through formation of a joint venture to produce PO. The Lyondell Board of
Directors and the Supervisory Board of Bayer have approved the agreement, and
the companies have received regulatory clearance in Europe and the United
States. Lyondell expects that the transaction will close on or about April 1,
2000. In addition, as part of the transaction, Lyondell and Bayer agreed to
pursue a joint venture for the construction of PO-11, a previously announced
worldscale propylene oxide/styrene monomer plant in Europe.

Included in the proposed sale to Bayer are Lyondell polyols manufacturing
facilities located in South Charleston and Institute, West Virginia;
Channelview, Texas; Rieme, Belgium; Fos-sur-Mer, France; Anyer, Indonesia; and
Kaohsiung, Taiwan. Also included in the transaction are Lyondell polyols
technology operations in Newtown Square, Pennsylvania; South Charleston, West
Virginia; Villers St. Paul, France; and Singapore. Lyondell will continue to
operate all of the existing Lyondell propylene oxide facilities and will serve
as operator of the polyols facilities at Channelview, Texas and Fos-sur-Mer,
France.

83

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

24. UNAUDITED QUARTERLY RESULTS

For the quarter ended
-------------------------------------------------------------------------------
Millions of dollars, except per share data March 31 JUNE 30 September 30 December 31
- ------------------------------------------ ------------------ ------------------ ------------------ ------------------

1999
- ----
Sales and other operating revenues $855 $ 854 $ 976 $1,008
Operating income 129 100 100 75
Income from equity investments 21 8 40 7
Net income (loss) (a) 2 (42) (17) (58)
Basic and diluted earnings (loss) per
share before extraordinary item (a) (b) .02 (.11) (.11) (.50)

1998
- ----
Sales and other operating revenues $ -- $ -- $ 566 $ 881
Operating income (loss) (10) (5) 30 89
Income from equity investments 117 50 57 11
Net income (loss) 65 29 (15) (27)
Basic and diluted earnings (loss) per
share (b) .82 .38 (.20) (.35)

(a) The second and third quarters of 1999 included an extraordinary loss on
early extinguishment of debt of $31 million, $.32 per share, and $4 million,
$.03 per share, respectively.

(b) Earnings per common share calculations for each of the quarters are based
upon the weighted average number of shares outstanding for each period
(basic earnings per share). The sum of the quarters may not necessarily be
equal to the full year earnings per share amount.

25. SUPPLEMENTAL GUARANTOR INFORMATION

Lyondell Chemical Worldwide, Inc. ("LCWI") and Lyondell Chemical Nederland, Ltd.
("LCNL" or "Guarantor") unconditionally guaranteed the $500 million of senior
subordinated notes and $1.9 billion of senior secured notes issued by Lyondell
in May 1999 (see Note 16). LCWI was a wholly owned subsidiary of Lyondell that
operated Lyondell's intermediate chemicals and derivatives business. Effective
at the end of business on December 31, 1999, LCWI was merged into Lyondell.
LCNL, a Delaware corporation and the remaining guarantor, is a wholly owned
subsidiary of Lyondell that operates a chemical production facility in
Rotterdam, the Netherlands. Separate financial statements of the Guarantor are
not considered to be material to the holders of the senior subordinated notes
and senior secured notes. The following condensed consolidating financial
information present supplemental information for the Guarantor as of and for the
years ended December 31, 1999 and 1998:

84

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As of and for the year ended December 31, 1999

NON- CONSOLIDATED
Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL
- ------------------ ------------ ------------- -------------- ---------------- -------------
BALANCE SHEET

Total current assets $ 1,569 $ 310 $ 7 $ -- $1,886
Property, plant and equipment, net 3,650 641 -- -- 4,291
Other investments and
long-term receivables 684 9 935 (613) 1,015
Goodwill, net 1,230 315 -- -- 1,545
Deferred charges and other assets 517 (1) -- 245 761
------------ ------------- -------------- ---------------- -------------
Total assets $ 7,650 $ 1,274 $ 942 $ (368) $9,498
============ ============= ============== ================ =============

Current maturities of long-term debt $ 225 $ -- $ -- $ -- $ 225
Other current liabilities 615 181 -- -- 796
Long-term debt,
less current maturities 6,046 -- -- -- 6,046
Other liabilities and deferred credits 331 -- -- -- 331
Deferred income taxes 494 145 252 -- 891
Intercompany liabilities (assets) (1,046) 980 62 4 --
Minority interest 202 -- -- -- 202
Stockholders' equity 783 (32) 628 (372) 1,007
------------ ------------- -------------- ---------------- -------------
Total liabilities and
stockholders' equity $ 7,650 $ 1,274 $ 942 $ (368) $9,498
============ ============= ============== ================ =============

STATEMENT OF INCOME

Sales and other operating revenues $ 3,226 $ 797 $ -- $ (330) $3,693
Cost of sales 2,666 553 -- (328) 2,891
Selling, general and
administrative expenses 240 -- -- -- 240
Research and development expense 58 -- -- -- 58
Amortization of goodwill
and other intangibles 93 7 -- -- 100
------------ ------------- -------------- ---------------- -------------
Operating income 169 237 -- (2) 404
Interest income (expense), net (606) 3 14 -- (589)
Other income (expense), net 156 (151) -- -- 5
Income from equity investments 4 -- 72 -- 76
Intercompany income (expense) 66 (67) (14) 15 --
Provision (benefit) for income taxes (53) 6 19 4 (24)
------------ ------------- -------------- ---------------- -------------
Income (loss) before
extraordinary item (158) 16 53 9 (80)
Extraordinary item, net of taxes (35) -- -- -- (35)
------------ ------------- -------------- ---------------- -------------
Net income (loss) $ (193) $ 16 $ 53 $ 9 $ (115)
============ ============= ============== ================ =============

85

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1999

NON- CONSOLIDATED
Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL
- ------------------ ------------ ------------- -------------- ---------------- -------------
STATEMENT OF CASH FLOWS

Net (loss) income $ (193) $ 16 $ 53 $ 9 $ (115)
Adjustments to reconcile net
(loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization 297 33 -- -- 330
Extraordinary item 35 -- -- -- 35
Deferred income taxes (73) 107 2 -- 36
Net changes in working
capital and other 346 (169) (154) (9) 14
------------ ------------- -------------- ---------------- -------------
Net cash (used in) provided
By operating activities 412 (13) (99) -- 300
------------ ------------- -------------- ---------------- -------------

Expenditures for property,
plant and equipment (131) -- -- -- (131)
Contributions and advances
to affiliates (17) -- (35) -- (52)
Distributions from affiliates
in excess of earnings -- -- 134 -- 134
Other 4 -- -- -- 4
------------ ------------- -------------- ---------------- -------------
Net cash (used in) provided
by investing activities (144) -- 99 -- (45)
------------ ------------- -------------- ---------------- -------------

Proceeds from issuance
of long-term debt 3,400 -- -- -- 3,400
Payment of debt issuance costs (107) -- -- -- (107)
Repayments of long-term debt (4,122) -- -- -- (4,122)
Issuance of common stock 736 -- -- -- 736
Dividends paid (97) -- -- -- (97)
Other 8 -- -- -- 8
------------ ------------- -------------- ---------------- -------------
Net cash used in
financing activities (182) -- -- -- (182)
------------ ------------- -------------- ---------------- -------------
Effect of exchange rate
changes on cash (13) 14 -- -- 1
------------ ------------- -------------- ---------------- -------------
Increase in cash and
cash equivalents 73 1 -- -- 74
Cash and cash equivalents:
Beginning of year 202 31 -- -- 233
------------ ------------- -------------- ---------------- -------------
End of year $ 275 $ 32 $ -- $ -- $ 307
============ ============= ============== ================ =============

86

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED)

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998

NON- CONSOLIDATED
Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL
- ------------------ ------------ ------------- -------------- ---------------- -------------
BALANCE SHEET

Total current assets $ 964 $ 359 $ 10 $ -- $ 1,333
Property, plant and equipment, net 3,837 674 -- -- 4,511
Other investments and
long-term receivables 653 1 1,018 (594) 1,078
Goodwill, net 1,119 311 -- -- 1,430
Deferred charges and other assets 554 (1) -- 251 804
------------ ------------- -------------- ---------------- -------------
Total assets $ 7,127 $ 1,344 $ 1,028 $ (343) $ 9,156
============ ============= ============== ================ =============

Current maturities of long-term debt $ 1,603 $ -- $ -- $ -- $ 1,603

Other current liabilities 522 217 -- -- 739
Long-term debt,
less current maturities 5,391 -- -- -- 5,391
Other liabilities and deferred credits 294 -- -- -- 294
Deferred income taxes 51 38 250 -- 339
Intercompany liabilities (assets) (1,309) 1,076 232 1 --
Minority interest 216 -- -- -- 216
Stockholders' equity 359 13 546 (344) 574
------------ ------------- -------------- ---------------- -------------
Total liabilities and
stockholders' equity $ 7,127 $ 1,344 $ 1,028 $ (343) $ 9,156
============ ============= ============== ================ =============
STATEMENT OF INCOME

Sales and other operating revenues $ 1,271 $ 308 $ -- $ (132) $ 1,447
Cost of sales 1,017 201 -- (129) 1,089
Selling, general and
administrative expenses 114 12 -- -- 126
Research and development expense 26 -- -- -- 26
Amortization of goodwill
and other intangibles 38 3 -- -- 41
Unusual charges 60 -- -- -- 61
------------ ------------- -------------- ---------------- -------------
Operating income 16 92 -- (3) 104
Interest expense, net (262) -- -- -- (262)
Other income (expense), net 267 (67) -- (188) 12
Income from equity investments -- -- 234 -- 235
Intercompany income (expense) 12 -- (13) 1 --
Provision (benefit) for income taxes (58) 18 77 -- 37
------------ ------------- -------------- ---------------- -------------
Net income $ 91 $ 7 $ 144 $ (190) $ 52
============ ============= ============== ================ =============

87

LYONDELL CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1998

NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTOR GUARANTORS ELIMINATIONS LYONDELL
- ------------------ ------------ ------------- -------------- ---------------- -------------
STATEMENT OF CASH FLOWS

Net income $ 91 $ 7 $ 144 $ (190) $ 52
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 129 9 -- -- 138
Unusual charges 60 -- -- -- 61
Deferred income taxes 55 8 13 -- 76
Net changes in working
capital and other (160) 5 97 (5) (64)
-------- ------- ------- -------- -------
Net cash provided by
operating activities 175 29 254 (195) 263
-------- ------- ------- -------- -------
Purchase of ARCO Chemical
Company, net of cash acquired (5,869) -- -- -- (5,869)
Expenditures for property,
plant and equipment (59) (5) -- -- (64)
Contributions and advances
to affiliates 114 -- (44) (105) (35)
Distributions from affiliates
in excess of earnings -- -- 435 -- 435
Deconsolidation of affiliate -- -- (11) -- (11)
-------- ------- ------- -------- -------
Net cash (used in) provided
by investing activities (5,814) (5) 380 (105) (5,544)
-------- ------- ------- -------- -------
Proceeds from issuance
of long-term debt 6,500 -- -- -- 6,500
Payment of debt issuance costs (130) -- -- -- (130)
Repayments of long-term debt (370) -- (345) -- (715)
Net decrease in short-term debt (100) -- -- -- (100)
Repurchase of common stock (59) -- -- -- (59)
Dividends paid (70) -- (300) 300 (70)
-------- ------- ------- -------- -------
Net cash (used in) provided
by financing activities 5,771 -- (645) 300 5,426
-------- ------- ------- -------- -------
Effect of exchange rate
changes on cash (5) 7 -- -- 2
-------- ------- ------- -------- -------
Increase (decrease) in
cash and cash equivalents 127 31 (11) -- 147
Cash and cash equivalents:
Beginning of year 75 -- 11 -- 86
-------- ------- ------- -------- -------
End of year $ 202 $ 31 $ -- $ -- $ 233
======== ======= ======= ======== =======

88

EQUISTAR CHEMICALS, LP

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partnership Governance Committee
of Equistar Chemicals, LP

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of Equistar
Chemicals, LP (the "Partnership") and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 and for the period from December
1, 1997 (inception) to December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
February 18, 2000

89

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------

SALES AND OTHER OPERATING REVENUES:
Unrelated parties $4,352 $3,826 $ 334
Related parties 1,084 537 31
------------------ ------------------ ------------------
5,436 4,363 365
------------------ ------------------ ------------------

OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 3,915 3,276 256
Related parties 929 491 30
Selling, general and administrative expenses 259 229 16
Research and development expense 42 40 3
Amortization of goodwill and other intangibles 33 31 3
Restructuring and other unusual charges 96 14 42
------------------ ------------------ ------------------
5,274 4,081 350
------------------ ------------------ ------------------

Operating income 162 282 15

Interest expense (182) (156) (10)
Interest income 6 17 2
Other income, net 46 - - - -
------------------ ------------------ ------------------
NET INCOME AND COMPREHENSIVE INCOME $ 32 $ 143 $ 7
================== ================== ==================

See Notes to Consolidated Financial Statements.

90

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

DECEMBER 31
----------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------------------- --------------------

ASSETS
Current assets:
Cash and cash equivalents $ 108 $ 66
Accounts receivable:
Trade, net 491 345
Related parties 209 142
Inventories 520 549
Prepaid expenses and other current assets 32 25
-------------------- --------------------
Total current assets 1,360 1,127

Property, plant and equipment, net 3,926 4,075
Investment in PD Glycol 52 55
Goodwill, net 1,119 1,151
Deferred charges and other assets 279 257
-------------------- --------------------
Total assets $6,736 $6,665
==================== ====================

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 457 $ 311
Related parties 35 26
Payables to partners - - 6
Current maturities of long-term debt 92 150
Other accrued liabilities 200 142
-------------------- --------------------
Total current liabilities 784 635

Obligations under capital leases - - 205
Long-term debt, less current maturities 2,169 1,865
Other liabilities and deferred credits 121 75
Commitments and contingencies
Partners' capital 3,662 3,885
-------------------- --------------------
Total liabilities and partners' capital $6,736 $6,665
==================== ====================

See Notes to Consolidated Financial Statements.

91

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
-------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------ ------------------ ------------------- ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32 $ 143 $ 7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 300 268 19
Equity in losses of investment in PD Glycol 4 3 - -
Net loss on disposition of assets 35 8 - -
(Increase) decrease in accounts receivable (213) 105 (100)
Decrease (increase) in receivables from
partners - - 150 (101)
Decrease (increase) in inventories 41 133 (5)
Increase in accounts payable 152 98 188
(Decrease) increase in payables to partners (6) (66) 54
Increase in other accrued liabilities 49 64 48
Net change in other working capital accounts (5) 2 (15)
Other (21) (62) 7
------------------ ------------------- ------------------
Net cash provided by operating activities 368 846 102
------------------ ------------------- ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (157) (200) (12)
Proceeds from sales of assets 75 3 - -
Contributions and advances to affiliates (24) (15) - -
------------------ ------------------- ------------------
Net cash used in investing activities (106) (212) (12)
------------------ ------------------- ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 993 757 50
Payment of debt issuance costs (6) - - - -
Repayments of long-term debt (747) (290) - -
Repayments of obligations under capital leases (205) - - - -
Distributions to partners (255) (1,421) (100)
Proceeds from Lyondell note repayment - - 345 - -
Cash contributions from partners - - - - 1
------------------ ------------------- ------------------
Net cash used in financing activities (220) (609) (49)
------------------ ------------------- ------------------

INCREASE IN CASH AND CASH EQUIVALENTS 42 25 41
Cash and cash equivalents at beginning of period 66 41 - -
------------------ ------------------- ------------------
Cash and cash equivalents at end of period $ 108 $ 66 $ 41
================== =================== ==================

See Notes to Consolidated Financial Statements.

92

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

MILLIONS OF DOLLARS LYONDELL MILLENNIUM OCCIDENTAL TOTAL
- ------------------ ------------------ ------------------ ------------------ ------------------

BALANCE AT DECEMBER 1, 1997 (INCEPTION) $ - - $ - - $ - - $ - -

Capital contributions at inception:
Net assets 763 2,048 - - 2,811
Note receivable from Lyondell LP 345 - - - - 345
Net income 4 3 - - 7
Distributions to partners (57) (43) - - (100)
------------------ ------------------ ------------------ ------------------

BALANCE AT DECEMBER 31, 1997 1,055 2,008 - - 3,063

Capital contributions:
Net assets - - - - 2,097 2,097
Other (14) 9 8 3
Net income (loss) 84 64 (5) 143
Distributions to partners (512) (460) (449) (1,421)
------------------ ------------------ ------------------ ------------------

BALANCE AT DECEMBER 31, 1998 613 1,621 1,651 3,885

Net income 14 9 9 32
Distributions to partners (105) (75) (75) (255)
------------------ ------------------ ------------------ ------------------
BALANCE AT DECEMBER 31, 1999 $ 522 $1,555 $1,585 $ 3,662
================== ================== ================== ==================

See Notes to Consolidated Financial Statements.

93

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. FORMATION OF THE PARTNERSHIP AND OPERATIONS

Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell Chemical
Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium") formed
Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium.
Lyondell owns its interest in Equistar through two wholly owned subsidiaries,
Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc. ("Lyondell
LP"). Millennium also owns its interest in Equistar through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP
LLC ("Millennium LP").

On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental Petroleum Corporation ("Occidental") (see Note 3). These assets
included the ethylene, propylene and ethylene oxide ("EO") and EO derivatives
businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy
Petrochemicals"), a former subsidiary of Occidental, a 50% interest in a joint
venture ("PD Glycol") between PDG Chemical Inc. and E.I. DuPont de Nemours and
Company, and a lease to Equistar of the Lake Charles, Louisiana olefins plant
and related pipelines held by Occidental Chemical Corporation ("Occidental
Chemical") (collectively, "Occidental Contributed Business"). Occidental
Chemical and PDG Chemical Inc. are both wholly owned, indirect subsidiaries of
Occidental. The Occidental Contributed Business included olefins plants at
Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol ("EG") and EG
derivatives businesses located at Bayport, Texas, Occidental's 50% ownership of
PD Glycol which operates EO/EG plants at Beaumont, Texas, 950 miles of owned and
leased ethylene/propylene pipelines, and the lease to Equistar of the Lake
Charles, Louisiana olefins plant and related pipelines.

In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was admitted
as a general partner in Equistar for an aggregate partnership interest of 29.5%.
In addition, Equistar assumed approximately $205 million of Occidental
indebtedness and Equistar issued a promissory note to an Occidental subsidiary
in the amount of $420 million, which was subsequently paid in cash in June 1998.
In connection with the contribution of the Occidental Contributed Business and
the reduction of Millennium's and Lyondell's ownership interests in the
Partnership, Equistar also issued a promissory note to Millennium LP in the
amount of $75 million, which was subsequently paid in June 1998. These payments
are included in "Distributions to partners" in the accompanying Statements of
Partners' Capital and of Cash Flows. The consideration paid for the Occidental
Contributed Business was determined based upon arms-length negotiations between
Lyondell, Millennium and Occidental. In connection with the transaction,
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental Chemical's U.S. manufacturing
plants.

Upon completion of this transaction, Equistar is now owned 41% by Lyondell,
29.5% by Millennium and 29.5% by Occidental, all through wholly owned
subsidiaries.

Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses"),
which consist of 17 manufacturing facilities on the U.S. Gulf Coast and in the
U.S. Midwest. The petrochemicals segment manufactures and markets olefins,
oxygenated chemicals, aromatics and specialty chemicals. Olefins include
ethylene, propylene and butadiene, and oxygenated chemicals include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene ("HDPE"), low-density
polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene,
and performance polymers, all of which are used in the production of a wide
variety of consumer and industrial products. The performance polymers include

94

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

enhanced grades of polyethylene, including wire and cable resins, and polymeric
powders. The concentrates and compounds business, which was part of performance
polymers products, was sold effective April 30, 1999 (see Note 18).

The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of nine representatives, three appointed by each
partner. Most of the significant decisions of the Partnership Governance
Committee require unanimous consent, including approval of the Partnership's
Strategic Plan and annual updates thereof.

Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based upon their percentage ownership of Equistar.
Distributions are made to the partners based upon their percentage ownership of
Equistar. Additional cash contributions required by the Partnership will also
be based upon the partners' percentage ownership of Equistar.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated financial statements include the
accounts of Equistar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition--Revenue from product sales is recognized upon delivery of
products to the customer.

Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Equistar's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. Equistar performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in Equistar's investment strategy.

Equistar has no requirements for compensating balances in a specific amount at a
specific point in time. The Partnership does maintain compensating balances for
some of its banking services and products. Such balances are maintained on an
average basis and are solely at Equistar's discretion. As a result, none of
Equistar's cash is restricted.

Accounts Receivable--Equistar sells its products primarily to companies in the
petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain circumstances,
requires letters of credit from them. The Partnership's allowance for doubtful
accounts, which is reflected in the accompanying Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $6 million and $3 million at
December 31, 1999 and 1998, respectively.

Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.

Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years. Upon retirement or sale, Equistar removes the cost
of the assets and the related accumulated depreciation from the accounts and
reflects any resulting gains or losses in the Consolidated Statements of Income.
Equistar's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.

95

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with substantial overhauls or maintenance
turnarounds of production units at Equistar's manufacturing facilities are
deferred and amortized on a straight-line basis until the next planned
turnaround, generally five to seven years. These costs are maintenance, repair
and replacement costs that are necessary to maintain, extend and improve the
operating capacity and efficiency rates of the production units. Equistar
amortized $25 million, $20 million and $2 million of deferred turnaround
maintenance and repair costs for the years ended December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.

Deferred Software Costs--Costs to purchase and develop software for internal use
are deferred and amortized on a straight-line basis over a range of 3 to 10
years. Equistar amortized $12 million, $6 million and less than $1 million of
deferred software costs for the years ended December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.

Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill
recorded in connection with the contribution of Occidental's assets. Goodwill
is being amortized using the straight-line method over forty years. Accumulated
amortization of goodwill was $199 million and $166 million at December 31, 1999
and 1998, respectively.

Investment in PD Glycol--Equistar holds a 50% interest in a joint venture with
E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in
Beaumont, Texas. This investment was contributed by Occidental in 1998. The
investment in PD Glycol is accounted for using the equity method of accounting.
At December 31, 1999 and 1998, Equistar's underlying equity in the net assets of
PD Glycol exceeded the cost of the investment by $8 million. The excess is
being accreted into income on a straight-line basis over a period of 25 years.

Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.

Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.

Income Taxes--The Partnership is not subject to federal income taxes as income
is reportable directly by the individual partners; therefore, there is no
provision for income taxes in the accompanying financial statements.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Comprehensive Income--Equistar had no items of other comprehensive income during
the years ended December 31, 1999 and 1998 and during the period from December
1, 1997 (inception) to December 31, 1997.

Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Equistar reviews its long-lived assets, including goodwill, for impairment on an
exception basis whenever events or changes in circumstances indicate a potential
loss in utility. Impairment losses are recognized in "Restructuring and other
unusual charges" in the Consolidated Statements of Income.

96

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Derivatives--Equistar is currently evaluating the effect that implementing SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, will have
on the Consolidated Financial Statements. The statement is effective for
Equistar's calendar year 2001.

Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1999.

3. OCCIDENTAL CONTRIBUTED BUSINESS

On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations for these assets are
included in the accompanying Consolidated Statements of Income prospectively
from May 15, 1998. Occidental contributed assets and liabilities to Equistar
with a net fair value of $2.1 billion in exchange for a 29.5% interest in the
Partnership. Equistar also issued a promissory note to an Occidental subsidiary
in the amount of $420 million, which was subsequently paid in cash in June 1998.
The fair value was allocated to the assets contributed and liabilities assumed
based upon the estimated fair values of such assets and liabilities at the date
of the contribution. The fair value was determined based upon a combination of
internal valuations performed by Lyondell, Millennium and Occidental using the
income approach. The fair value of the assets contributed and liabilities
assumed by the Partnership on May 15, 1998 is as follows:

MILLIONS OF DOLLARS
- -------------------

Total current assets $ 281
Property, plant and equipment 1,964
Investment in PD Glycol 58
Goodwill 43
Deferred charges and other assets 49
---------
Total assets $2,395
=========

Other current liabilities $ 79
Long-term debt 205
Other liabilities and deferred credits 14
Partners' capital 2,097
---------
Total liabilities and partners' capital $2,395
=========

The unaudited pro forma combined historical results of Equistar as if the
Occidental Contributed Business had been contributed on January 1, 1998 is as
follows:

FOR THE YEAR
ENDED
DECEMBER 31
MILLIONS OF DOLLARS 1998
- ------------------- ------------------

Sales and other operating revenues $4,869
Restructuring and other unusual charges 14
Operating income 320
Net income 154

The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Equistar that would have occurred had such
transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.

97

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Supplemental cash flow information is summarized as follows for the periods
presented:

FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------- -------------------

Cash paid for interest $ 146 $ 154 $ - -

Noncash investing and financing activities:
Inventory transfer from PD Glycol $ 24 $ 15 $ - -
Noncash adjustments to contributed capital - - 3 - -
Other 2 - - - -

Historical cost of assets contributed and liabilities assumed by the Partnership
in December 1997 (inception):

MILLIONS OF DOLLARS
- -------------------

Total current assets $ 948
Property, plant and equipment, net 2,121
Goodwill, net 1,142
Deferred charges and other assets 158
-------
Total assets $4,369
=======

Current maturities of long-term debt $ 36
Other current liabilities 17
Long-term debt 1,462
Other liabilities and deferred credits 43
Partners' capital 3,156
Note receivable from Lyondell LP (345)
-------
Total liabilities and partners' capital $4,369
=======

5. FINANCIAL INSTRUMENTS

Equistar does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.

Beginning October 1999, Equistar entered into over-the-counter "derivatives" and
price collar agreements for crude oil with Occidental Energy Marketing, Inc., a
subsidiary of Occidental, to help manage its exposure to commodity price risk
with respect to crude-oil related raw materials purchases. At December 31,
1999, "derivatives" and collar agreements covering 2.4 million and 1.5 million
barrels, respectively, and maturing in January 2000, were outstanding. Both the
carrying value and fair market value of these derivative instruments at December
31, 1999 represented an asset of $7 million and was based on quoted market
prices. Unrealized gains and losses on

98

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

"derivatives" and price collars are deferred until realized at which time they
are reflected in the cost of the purchased raw material.

The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, approximated their carrying value due
to their short maturity. Based on the borrowing rates currently available to
Equistar for debt with terms and average maturities similar to Equistar's debt
portfolio, the fair value of Equistar's long-term debt, including amounts due
within one year, was approximately $2.2 billion and $2.3 billion at December 31,
1999 and 1998, respectively.

Equistar had issued letters of credit totaling $6 million and $3 million at
December 31, 1999 and 1998, respectively.

6. RELATED PARTY TRANSACTIONS

Product Transactions with Occidental Chemical--Equistar and Occidental Chemical
entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales Agreement").
Under the terms of the Ethylene Sales Agreement, Occidental Chemical agreed to
purchase an annual minimum amount of ethylene from Equistar equal to 100% of the
ethylene feedstock requirements of Occidental Chemical's United States plants
(estimated to be 2 billion pounds per year at the time of the signing of the
agreement) less any quantities up to 250 million pounds tolled in accordance
with the provisions of such agreement. Equistar's maximum supply obligation in
any calendar year under the Ethylene Sales Agreement is 2.55 billion pounds.
Upon three years notice from either party to the other, Equistar's maximum
supply obligation in any calendar year under the Ethylene Sales Agreement may be
"phased down" as set forth in the agreement, provided that no phase down may
occur prior to January 1, 2009. In accordance with the phase down provisions of
the agreement, the annual minimum requirements set forth in the agreement must
be phased down over at least a five year period so that the annual required
minimum cannot decline to zero prior to December 31, 2013 unless certain
specified force majeure events occur. The Ethylene Sales Agreement provides for
an ethylene sales price based on market prices. In addition to ethylene,
Equistar sells methanol, ethers, and glycols to Occidental Chemical. During the
year ended December 31, 1999 and the period from May 15, 1998 to December 31,
1998, Equistar sold Occidental Chemical $435 million and $171 million,
respectively, of product, primarily under the Ethylene Sales Agreement.

Equistar also purchases various products from Occidental Chemical. During the
year ended December 31, 1999 and the period from May 15, 1998 to December 31,
1998, purchases from Occidental Chemical totaled $2 million and $4 million,
respectively.

Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy
Vinyls, LP ("Oxy Vinyls"), a joint venture company formed with an unrelated
party effective May 1, 1999. Ethylene sales to Oxy Vinyls totaled $93 million
for the period from May 1, 1999 to December 31, 1999 and were based upon market
prices.

Product Transactions with Millennium--Equistar sells ethylene to Millennium at
market-related prices pursuant to an agreement entered into in connection with
the formation of Equistar. Under this agreement, Millennium is required to
purchase 100% of its ethylene requirements for its LaPorte, Texas facility
(estimated to be 300 million pounds per year), up to a maximum of 330 million
pounds per year. Millennium has the option to increase the amount purchased to
up to 400 million pounds per year beginning January 1, 2001. The initial term
of the contract expires December 1, 2000 and thereafter, renews annually.
Either party may terminate on one year's notice, except that if Millennium
elects to increase its purchases under the contract, a party must provide two
year's notice of termination. The pricing terms of this agreement are similar
to the Ethylene Sales Agreement with Occidental Chemical. Equistar sold
Millennium $54 million, $41 million and $4 million of ethylene in 1999, 1998 and
December 1997, respectively.

99

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Equistar purchases vinyl acetate monomer ("VAM") feedstock from Millennium at
formula-based market prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Equistar is required to
purchase 100% of its VAM feedstock requirements for its LaPorte, Texas, Clinton,
Illinois, and Morris, Illinois plants (estimated to be 48 to 55 million pounds
per year), up to a maximum of 60 million pounds per year ("Annual Maximum") for
the production of ethylene vinyl acetate products at those locations. If
Equistar fails to purchase at least 42 million pounds of VAM in any calendar
year, Millennium has the right to reduce the Annual Maximum quantity by as much
as the total purchase deficiency for one or more successive years. In order to
reduce the Annual Maximum quantity, Millennium must notify Equistar within at
least 30 days prior to restricting the VAM purchases provided that the notice is
not later than 45 days after the year of the purchase deficiency. The initial
term of the contract expires December 31, 2000 and thereafter, renews annually.
Either party may terminate on one year's notice of termination. The initial
term will extend until December 31, 2002 if Millennium elects to increase the
amount of ethylene purchased under the Ethylene Sales Agreement. During the
years ending December 31, 1999 and 1998 and for the period December 1, 1997
(inception) to December 31, 1997, purchases from Millennium, primarily for vinyl
acetate monomer, were $12 million, $14 million, and $2 million, respectively.

Transactions with LCR--Lyondell's rights and obligations under the terms of its
product sales and feedstock purchase agreements with LYONDELL-CITGO Refining LP
("LCR"), a joint venture investment of Lyondell, were assigned to Equistar.
Accordingly, certain refinery products are sold to Equistar as feedstocks, and
certain olefins by-products are sold to LCR for processing into gasoline. Sales
of product to LCR were $250 million, $223 million and $26 million and purchases
from LCR were $190 million, $131 million and $10 million for the years ended
December 31, 1999 and 1998 and for the period from December 1, 1997 (inception)
to December 31, 1997, respectively. Equistar also assumed certain processing
arrangements as well as storage obligations between Lyondell and LCR and
provides certain marketing and information processing services for LCR.
Aggregate charges under these various service agreements of $13 million, $15
million and $1 million were made to LCR by Equistar for the years ended December
31, 1999 and 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. All of the agreements between LCR and Equistar
are on terms generally representative of prevailing market prices.

Product Transactions with Lyondell--Lyondell acquired its intermediate chemicals
and derivatives business through the acquisition of ARCO Chemical Company
effective August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene,
MTBE, benzene and alkylate, totaled $242 million and $89 million for the year
ended December 31, 1999 and for the period from August 1, 1998 to December 31,
1998, respectively. Purchases from Lyondell, primarily for normal butane,
totaled $6 million and $2 million for the year ended December 31, 1999 and for
the period from August 1, 1998 to December 31, 1998, respectively. Product
transactions between Equistar and Lyondell are based upon market prices.

Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of its
products to Equistar. For the years ending December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
purchases from LMC were $95 million, $103 million and $15 million, respectively.
Equistar sells natural gas to LMC at prices generally representative of its
cost. Purchases by LMC of natural gas feedstock from Equistar totaled $46
million, $44 million and $4 million for the years ended December 31, 1999 and
1998 and during the period from December 1, 1997 (inception) to December 31,
1997, respectively. Equistar provides operating and other services for LMC
under the terms of existing agreements that were assumed by Equistar from
Lyondell, including the lease to LMC by Equistar of the real property on which
its methanol plant is located. Pursuant to the terms of those agreements, LMC
pays Equistar a management fee and reimburses certain expenses of Equistar at
cost. Management fees charged by Equistar to LMC totaled $6 million during each
of the years ending December 31, 1999 and 1998 and less than $1 million during
the period from December 1, 1997 (inception) to December 31, 1997.

Shared Services Agreement with Lyondell--Lyondell provides certain corporate,
general and administrative services to Equistar, including tax, treasury, risk
management and other services pursuant to a shared services agreement.

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EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

During the years ended December 31, 1999 and 1998, Lyondell charged Equistar $9
million and $3 million for these services. During the period December 1, 1997
(inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, Equistar provides certain
general and administrative services to Lyondell, such as health, safety and
environmental services, materials management services, human resource services,
information services and legal services. During the year ended December 31,
1999, Equistar charged Lyondell $8 million for these services. During the year
ended December 31, 1998 and for the period December 1, 1997 (inception) to
December 31, 1997, Equistar charged Lyondell less than $1 million for these
services.

Shared Services and Shared-Site Agreements with Millennium--Equistar and
Millennium have entered into a variety of operating, manufacturing and technical
service agreements related to the business of Equistar and the businesses
retained by Millennium Petrochemicals. These agreements include the provision
by Equistar to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, and health and safety services. During
the years ended December 31, 1999 and 1998, Equistar charged Millennium
Petrochemicals $3 million and $5 million for these services. During the period
from December 1, 1997 (inception) to December 31, 1997, charges to Millennium
Petrochemicals were less than $1 million. These agreements also include the
provision by Millennium Petrochemicals to Equistar of certain operational
services, including barge dock access. During each of the years ended December
31, 1999 and 1998 and during the period December 1, 1997 (inception) to December
31, 1997, Millennium Petrochemicals charged Equistar less than $1 million for
these services.

Operating Agreement with Occidental Chemical--On May 15, 1998, Occidental
Chemical and Equistar entered into an Operating Agreement ("Operating
Agreement") whereby Occidental Chemical agreed to operate and maintain the
Occidental Contributed Business and to cause third-parties to continue to
provide equipment, products and commodities to those businesses upon
substantially the same terms and conditions as provided prior to the transfer.
The Operating Agreement terminated on June 1, 1998. During the term of the
Operating Agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million.

Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and Equistar entered into a Transition Services Agreement.
Under the terms of the Transition Services Agreement, Occidental Chemical agreed
to provide Equistar certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Predominantly all services under the Transition Services Agreement ceased in
June 1999 in accordance with the terms of the agreement. Health, safety, and
environmental services were extended until December 31, 1999 as permitted by the
Transition Services Agreement. During the year ended December 31, 1999 and the
period from June 1, 1998 to December 31, 1998, Equistar expensed $2 million and
$6 million, respectively, in connection with services provided pursuant to the
Transition Service Agreement.

Loans to Millennium and Occidental--In connection with Occidental's admission
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75 million and $420 million,
respectively. Each of the notes provided for the annual accrual of interest at
a rate equal to LIBOR plus 0.6%. These notes were paid in full in June 1998.
Interest expense incurred on these notes during 1998 was $3 million.

Note Receivable from Lyondell LP--Upon formation of the Partnership, Lyondell LP
contributed capital to Equistar in the form of a $345 million promissory note
("Lyondell Note"). The Lyondell Note bore interest at LIBOR plus a market
spread. The note was repaid in full by Lyondell in July 1998. Interest income
on the Lyondell Note totaled $13 million and $2 million during 1998 and during
the period from December 1, 1997 (inception) to December 31, 1997, respectively.

101

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7. ACCOUNTS RECEIVABLE

In December 1998, Equistar entered into a purchase agreement with an independent
issuer of receivables-backed commercial paper. Under the terms of the
agreement, Equistar agreed to sell on an ongoing basis and without recourse,
designated accounts receivable. To maintain the balance of the accounts
receivable sold, Equistar is obligated to sell new receivables as existing
receivables are collected. The agreement was renewed through December 2000 on
predominantly the same terms.

At December 31, 1998 and 1999, Equistar's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. Increases and decreases in
the amount have been reported as operating cash flows in the Consolidated
Statements of Cash Flows. Costs related to the sale are included in "Selling,
general and administrative expenses" in the Consolidated Statements of Income.

8. INVENTORIES

Inventories at December 31, 1999 and 1998 consisted of the following:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------

Finished goods $ 278 $ 301
Work-in-process 10 11
Raw materials 137 149
Materials and supplies 95 88
----------------- -----------------
Total inventories $ 520 $ 549
================= =================

The excess of the current cost of inventories over book value was approximately
$109 million at December 31, 1999.

9. PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1999 and 1998 were as follows:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------

Land $ 78 $ 78
Manufacturing facilities and equipment 5,656 5,349
Manufacturing equipment acquired under capital leases - - 236
Construction in progress 134 189
--------------- ---------------
Total property, plant and equipment 5,868 5,852
Less accumulated depreciation 1,942 1,777
--------------- ---------------
Property, plant and equipment, net $3,926 $4,075
=============== ===============

Depreciation expense for the years ending December 31, 1999 and 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $221 million,
$200 million and $15 million, respectively. At December 31, 1998, $10 million
of the accumulated depreciation reported in the accompanying Consolidated
Balance Sheet related to the manufacturing equipment acquired under capital
leases that was contributed by Occidental in 1998.

In July 1998, the depreciable lives of certain assets, primarily manufacturing
facilities and equipment, were increased from a range of 5 to 25 years to a
range of 5 to 30 years. The change was made to more accurately reflect

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EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

estimated periods during which such assets will remain in service, based upon
Equistar's actual experience with those assets. This change was accounted for
as a change in accounting estimate and resulted in a $33 million decrease in
depreciation expense for 1998.

10. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets at December 31, 1999 and 1998 were as follows:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------

Deferred turnaround costs, net $ 74 $ 84
Deferred software costs, net 76 70
Deferred pension asset 32 30
Other 97 73
------------------- -------------------
Total deferred charges and other assets $ 279 $ 257
=================== ===================

11. OTHER ACCRUED LIABILITIES

Other accrued liabilities at December 31, 1999 and 1998 were as follows:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------

Accrued property taxes $ 68 $ 76
Accrued payroll costs 68 44
Accrued interest 50 18
Other 14 4
------------------- -------------------
Total other accrued liabilities $ 200 $ 142
=================== ===================

12. LONG-TERM DEBT AND FINANCING ARRANGEMENTS

In February 1999, Equistar and Equistar Funding Corporation ("Equistar Funding")
co-issued $900 million of debt securities. Equistar Funding, a wholly owned
subsidiary of Equistar, is a Delaware corporation formed for the sole purpose of
facilitating the financing activities of Equistar. Equistar is jointly and
severally liable with Equistar Funding on the outstanding notes and new notes.
The debt securities include $300 million of 8.50% Notes, which will mature on
February 15, 2004, and $600 million of 8.75% Notes, which will mature on
February 15, 2009. Equistar used the net proceeds from this offering (i) to
repay the $205 million outstanding under a capitalized lease obligation relating
to Equistar's Corpus Christi facility, (ii) to repay the outstanding balance
under the $500 million credit agreement, after which the $500 million credit
agreement was terminated, (iii) to repay the outstanding $150 million, 10.00%
Notes due in June 1999, and (iv) to the extent of the remaining net proceeds, to
reduce outstanding borrowing under the five-year credit facility and for
Partnership working capital purposes.

Equistar has a five-year, $1.25 billion credit facility with a group of banks
expiring November 2002. Borrowing under the facility bears interest at either
the Federal Funds rate plus 1/2 of 1%, LIBOR plus 1/2 of 1%, a fixed rate
offered by one of the sponsoring banks or interest rates that are based on a
competitive auction feature wherein the interest rate can be established by
competitive bids submitted by the sponsoring banks, depending upon the type of
borrowing made under the facility. Borrowing under the facility had a weighted
average interest rate of 6.0% and 5.8% at December 31, 1999 and 1998,
respectively. Millennium America Inc., a subsidiary of Millennium, provided
limited guarantees with respect to the payment of principal and interest on a
total of $750 million principal amount of indebtedness under the $1.25 billion
revolving credit facility. However, the lenders may not proceed against
Millennium America Inc. until they have exhausted their remedies against
Equistar. The guarantee will remain in

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EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

effect indefinitely, but at any time after December 31, 2004, Millennium America
Inc. may elect to terminate the guarantee if certain conditions are met
including financial ratios and covenants. In addition, Millennium America Inc.
may elect to terminate the guarantee if Millennium Petrochemicals Inc. sells its
interests in Millennium GP and Millennium LP or if those entities sell their
interests in Equistar, provided certain conditions are met including financial
ratios and convenants.

The terminated $500 million credit agreement was entered into on June 12, 1998.
Borrowing under the agreement bore interest at either the Federal Funds rate
plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate, offered by one of the
sponsoring banks or interest rates that were based on a competitive auction
feature. At December 31, 1998, the weighted average interest rate for borrowing
under the subsequently terminated $500 million credit agreement was 6.1%.

The credit facility is available for working capital and general Partnership
purposes as needed and contain covenants relating to liens, sale and leaseback
transactions, debt incurrence, leverage and interest coverage ratios, sales of
assets and mergers and consolidations.

Long-term debt at December 31, 1999 and 1998 consisted of the following:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------

Bank credit facilities:
5-year term credit facility $ 800 $1,150
$500 million credit agreement -- 152
Other debt obligations:
Medium-term notes (due 2000-2005) 163 163
10.00% Notes due 1999 -- 150
9.125% Notes due 2002 100 100
8.50% Notes due 2004 300 --
6.50% Notes due 2006 150 150
8.75% Notes due 2009 598 --
7.55% Debentures due 2026 150 150
------ ------
Total long-term debt 2,261 2,015
Less current maturities 92 150
------ ------
Long-term debt, net 2,169 1,865
Capital lease obligations (5.89% due 2000) -- 205
------ ------
Total long-term debt and lease obligations $2,169 $2,070
====== ======

Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1999 are as follows: 2000-$92 million; 2001-$90 million; 2002-$851
million; 2003-$29 million; 2004-$300 million. A subsidiary of Millennium has
guaranteed $750 million of the credit facility. Lyondell remains an obligor on
the medium-term notes, the 9.125% Notes, the 6.5% Notes and the 7.55%
Debentures, all of which total $563 million. Occidental and Equistar are
parties to an agreement with respect to the 8.75% Notes due 2009 pursuant to
which Occidental has agreed, under certain limited circumstances, to contribute
to Equistar up to $420 million. The 8.75% Notes have a face amount of $600
million and are shown net of unamortized discount.

The medium-term notes mature at various dates from 2000 to 2005 and had a
weighted average interest rate of 10.0% and 9.9% at December 31, 1999 and 1998,
respectively.

13. RESTRUCTURING AND OTHER UNUSUAL CHARGES

During the fourth quarter 1999, Equistar recorded a charge of $96 million
associated with decisions to shut down polymer reactors at two Equistar sites
and to consolidate certain administrative functions between Lyondell and

104

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Equistar. The decision to shut down the reactors was based on their high
production cost, current market conditions in the polyethylene industry and the
flexibility to utilize more efficient reactors to meet customer requirements.
Accordingly, Equistar recorded a charge of $72 million to adjust the asset
carrying values. The remaining $24 million of the total charge represents
severance and other employee-related costs for approximately 500 employee
positions that are being eliminated. The eliminated positions, primarily
administrative functions, resulted from opportunities to share such services
between Lyondell and Equistar and, to a lesser extent, positions associated with
the shut down polymer reactors. Through December 31, 1999, no employees had
been terminated nor were any payments made. Equistar expects that severance
payments will take place in the first quarter of 2000.

During 1997 and 1998, Equistar incurred restructuring charges related to the
initial merger and integration of the businesses contributed by Lyondell and
Millennium upon formation of the Partnership. Equistar recorded $42 million of
these costs in December 1997. These charges included severance and other
employee related termination costs of $21 million related to a workforce
reduction, which were substantially paid in 1998. The workforce reduction
included approximately 430 employees, primarily in duplicate corporate overhead
functions. All of these 430 employees were terminated in 1998. Additionally,
these restructuring charges included employee relocation costs of $6 million and
various other charges of $7 million, all of which were recorded and paid as
incurred during 1997. In 1997, Equistar also recorded and paid as incurred $8
million of transaction closing costs.

In 1998, Equistar recorded and paid, as incurred, an additional $12 million in
restructuring charges related to the initial merger and integration of Equistar.
These costs included costs associated with the consolidation of operations and
facilities of $11 million and other miscellaneous charges of $1 million. The
restructuring actions related to the initial merger and integration were
substantially completed in 1998 and there were no other significant changes to
Equistar's original estimate of costs that were accrued as of December 31, 1997.
Equistar also incurred restructuring charges of $2 million related to the merger
and integration of the Occidental Contributed Business into the Partnership.
These charges were recorded and paid as incurred during 1998. There were no
amounts accrued as of December 31, 1998 related to the initial merger and
integration of Equistar or the merger and integration of the Occidental
Contributed Business. The restructuring actions related to the merger and
integration of the Occidental Contributed Business into Equistar were
substantially completed as of December 31, 1998. All restructuring charges were
included in the Unallocated segment. (See Note 17)

14. LEASE COMMITMENTS

At December 31, 1999, future minimum lease payments relating to noncancelable
operating leases with lease terms in excess of one year were as follows:

MILLIONS OF DOLLARS
- -------------------

2000 $ 94
2001 72
2002 58
2003 50
2004 44
Thereafter 482
------------------
Total minimum lease payments $800
==================

Operating lease net rental expense was $112 million and $110 million for the
years ending December 31, 1999 and 1998, respectively, and $11 million for the
period from December 1, 1997 (inception) to December 31, 1997.

105

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Equistar is party to various unconditional purchase obligation contracts as a
purchaser for product and services. At December 31, 1999, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:

MILLIONS OF DOLLARS
- -------------------

2000 $ 33
2001 31
2002 28
2003 27
2004 25
Thereafter 147
----
Total minimum contract payments $291
====

Equistar's total purchases under these agreements were $39 million and $35
million for the years ending December 31, 1999 and 1998, respectively, and $3
million during the period from December 1, 1997 (inception) to December 31,
1997.

15. PENSION AND OTHER POSTRETIREMENT BENEFITS

All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by Equistar. The plans became effective January
1, 1998, except for union represented employees formerly employed by Millennium,
whose plans were contributed to Equistar on December 1, 1997, and union
represented employees formerly employed by Occidental, whose plans were
contributed to Equistar on May 15, 1998. In connection with the formation of
Equistar, there were no pension assets or obligations contributed to Equistar,
except for the union represented plans described above. Retirement benefits are
based upon years of service and the employee's highest three consecutive years
of compensation during the last ten years of service. Equistar accrues pension
costs based upon an actuarial valuation and funds the plans through periodic
contributions to pension trust funds as required by applicable law. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits.

In addition, Equistar sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. These postretirement health care plans are
contributory while the life insurance plans are noncontributory. Currently,
Equistar pays approximately 80% of the cost of the health care plans, but
reserves the right to modify the cost-sharing provisions at any time.

106

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- ---------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ---------------- ---------------- ---------------- ----------------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 88 $ 21 $ 69 $ 50
Benefit obligation contributed by Occidental -- 46 -- 14
Service cost 22 16 4 3
Interest cost 7 5 6 4
Actuarial (gain) loss (8) 5 (2) (2)
Benefits paid (10) (5) -- --
----- ----- ----- -----
Benefit obligation, December 31 99 88 77 69
----- ----- ----- -----
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 88 40 -- --
Fair value of plan assets contributed by
Occidental -- 51 -- --
Actual return of plan assets 7 1 -- --
Partnership contributions 16 1 -- --
Benefits paid (10) (5) -- --
----- ----- ----- -----
Fair value of plan assets, December 31 101 88 -- --
----- ----- ----- -----
Funded status 2 -- (77) (69)
Unrecognized actuarial loss 5 13 13 16
----- ----- ----- -----
Net amount recognized $ 7 $ 13 $ (64) $ (53)
===== ===== ===== =====

AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 33 $ 30 $ -- $ --
Accrued benefit liability (26) (17) (64) (53)
----- ----- ----- -----
Net amount recognized $ 7 $ 13 $ (64) $ (53)
===== ===== ===== =====

The benefit obligation, accumulated benefit obligation and fair value of assets
for pension plans with benefit obligations in excess of plan assets were $40
million, $26 million and $13 million, respectively, as of December 31, 1999 and
$24 million, $17 million and $5 million, respectively, as of December 31, 1998.

Net periodic pension and other postretirement benefit costs included the
following components:

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------- ------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- --------------- --------------- --------------- ---------------

COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 22 $ 16 $ 4 $ 3
Interest cost 7 5 6 4
Amortization of actuarial loss 1 -- 1 --
Expected return of plan assets (8) (6) -- --
--------------- --------------- --------------- ---------------
Net periodic benefit cost after settlement $ 22 $ 15 $ 11 $ 7
=============== =============== =============== ===============

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EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------- -------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------

WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount rate 8.00% 6.75% 8.00% 6.75%
Expected return on plan assets 9.50% 9.50% - - - -
Rate of compensation increase 4.75% 4.75% 4.75% 4.75%

The non-union plans became effective January 1, 1998; therefore, Equistar did
not recognize any net periodic pension cost during the period from December 1,
1997 (inception) to December 31, 1997. The accrued postretirement benefit
liabilities at December 31, 1997 were calculated and contributed as of December
31, 1997; therefore, there were no net periodic postretirement benefit costs for
the period from December 1, 1997 (inception) to December 31, 1997.

For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 1999 was 7.0% for 2000-
2001 and 5.0% thereafter. The health care cost trend rate assumption does not
have a significant effect on the amounts reported. To illustrate, increasing or
decreasing the assumed health care cost trend rates by one percentage point in
each year would change the accumulated postretirement benefit liability as of
December 31, 1999 by less than $2 million and would not have a material effect
on the aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.

Equistar also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Equistar were $20 million,
$15 million and less than $1 million for the years ended December 31, 1999 and
1998 and during the period from December 1, 1997 (inception) to December 31,
1997, respectively.

16. COMMITMENTS AND CONTINGENCIES

Equistar has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market. See also Note 6,
describing related party commitments.

The Partnership is also subject to various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the financial
statements or liquidity of Equistar.

Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the years ended December 31, 1999 and 1998, Equistar
incurred $11 million and $5 million, respectively, for these uninsured claims
and liabilities. No expenses were incurred for these uninsured claims and
liabilities during the period December 1, 1997 (inception) to December 31, 1997.

Equistar's policy is to be in compliance with all applicable environmental laws.
Equistar is subject to extensive environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. Some of these laws and regulations are subject to varying and
conflicting interpretations. In addition, Equistar cannot accurately predict

108

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

future developments, such as increasingly strict requirements of environmental
laws, inspection and enforcement policies and compliance costs therefrom which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste. Equistar had no reserves
for environmental matters as of December 31, 1999 and 1998.

In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the financial
statements or liquidity of Equistar. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this Note could
have a material impact on Equistar's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.

17. SEGMENT INFORMATION AND RELATED INFORMATION

Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Equistar has identified two segments in
which it operates. The reportable segments are petrochemicals and polymers.
The petrochemicals segment includes olefins, oxygenated chemicals, aromatics and
specialty chemicals. Olefins include ethylene, propylene and butadiene, and the
oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE.
Aromatics include benzene and toluene. The polymers segment consists of
polyolefins, including high-density polyethylene, low-density polyethylene,
linear low-density polyethylene, polypropylene, and performance polymers. The
performance polymers include enhanced grades of polyethylene, including wire and
cable resins, and polymeric powders. The concentrates and compounds business,
which was part of performance polymers products, was sold effective April 30,
1999 (see Note 18).

No customer accounted for 10% or more of sales during the years ended December
31, 1999 and 1998 or the one-month ended December 31, 1997.

The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).

109

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Summarized financial information concerning Equistar's reportable segments is
shown in the following table. Intersegment sales between the petrochemicals and
polymers segments were made at prices based on current market values.

MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
- ------------------- -------------- -------- ----------- ------------ ------------

For the year ended December 31,
1999:
Sales and other operating
operating revenues:

Customers $3,412 $2,024 $ - - $ - - $ 5,436
Intersegment 1,324 - - $ - - (1,324) - -
------------------ ---------------- --------------- ---------------- ----------
$4,736 $2,024 $ - - $(1,324) $ 5,436
================== ================ =============== ================ ==========
Restructuring and other
unusual charges $ - - $ - - $ 96 $ - - $ 96
================== ================ =============== ================ ==========
Operating income $ 447 $ 51 $ (336) $ - - $ 162
================== ================ =============== ================ ==========
Total assets $3,671 $1,551 $1,514 $ - - $ 6,736
================== ================ =============== ================ ==========
Capital expenditures $ 61 $ 83 $ 13 $ - - $ 157
================== ================ =============== ================ ==========
Depreciation and
amortization expense $ 194 $ 53 $ 53 $ - - $ 300
================== ================ =============== ================ ==========

For the year ended December 31,
1998:
Sales and other operating
operating revenues:
Customers $2,351 $2,012 $ - - $ - - $ 4,363
Intersegment 1,112 46 - - (1,158) - -
------------------ ---------------- --------------- ---------------- ----------
$3,463 $2,058 $ - - $(1,158) $ 4,363
================== ================ =============== ================ ==========
Restructuring and other
unusual charges $ - - $ - - $ 14 $ - - $ 14
================== ================ =============== ================ ==========
Operating income $ 319 $ 177 $ (214) $ - - $ 282
================== ================ =============== ================ ==========
Total assets $3,625 $1,563 $1,477 $ - - $ 6,665
================== ================ =============== ================ ==========
Capital expenditures $ 71 $ 116 $ 13 $ - - $ 200
================== ================ =============== ================ ==========
Depreciation and
amortization expense $ 152 $ 65 $ 51 $ - - $ 268
================== ================ =============== ================ ==========

For the period from December 1, 1997
(inception) to December 31, 1997:
Sales and other
operating revenues:
Customers $ 179 $ 186 $ - - $ - - $ 365
Intersegment 105 - - - - (105) - -
------------------ ---------------- --------------- ---------------- ----------
$ 284 $ 186 $ - - $ (105) $ 365
================== ================ =============== ================ ==========
Restructuring and other
unusual charges $ - - $ - - $ 42 $ - - $ 42
================== ================ =============== ================ ==========
Operating income $ 47 $ 22 $ (54) $ - - $ 15
================== ================ =============== ================ ==========
Total assets $1,668 $1,504 $1,428 $ - - $ 4,600
================== ================ =============== ================ ==========
Capital expenditures $ 7 $ 4 $ 1 $ - - $ 12
================== ================ =============== ================ ==========
Depreciation and
amortization expense $ 7 $ 7 $ 5 $ - - $ 19
================== ================ =============== ================ ==========

110

EQUISTAR CHEMICALS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

The following table presents the details of "Operating income" as presented
above in the "Unallocated" column for the years ended December 31, 1999 and 1998
and for the period from December 1, 1997 (inception) to December 31, 1997:

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------- ------------- -------------
Expenses not allocated to petrochemicals and polymers:

Principally general and administrative expenses $(240) $(200) $ (12)
Restructuring and other unusual charges (96) (14) (42)
------------- ------------- -------------
Total--Unallocated $(336) $(214) $ (54)
============= ============= =============

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

MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------- ------------- -------------

Cash $ 108 $ 66 $ 41
Accounts receivable--trade and related parties 18 14 - -
Receivable with partners - - - - 150
Prepaids and other current assets 22 25 24
Property, plant and equipment, net 58 48 16
Goodwill, net 1,119 1,151 1,139
Deferred charges and other assets 189 173 58
------------- ------------- -------------
$1,514 $1,477 $1,428
============= ============= =============

18. SALE OF CONCENTRATES AND COMPOUNDS BUSINESS

Effective April 30, 1999, Equistar completed the sale of its concentrates and
compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar
recorded a net gain on the sale of approximately $42 million reported in "Other
income, net" in the Consolidated Statements of Income.

111

LYONDELL-CITGO REFINING LP

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP

In our opinion, the accompanying balance sheet as of December 31, 1999, the
related statements of income, partners' capital and cash flows for the year then
ended, and the statements of income, partners' capital and cash flows for the
year ended December 31, 1997 present fairly, in all material respects, the
financial position of LYONDELL-CITGO Refining LP (the Partnership) at December
31, 1999, and the results of its operations and its cash flows for the year
ended December 31, 1999 and the year ended December 31, 1997 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, the Partnership does not currently have the ability to
repay its $450 million note payable that is due May 5, 2000, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
February 25, 2000

112

LYONDELL-CITGO REFINING LP

INDEPENDENT AUDITORS' REPORT

To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP

We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP (a
Limited Partnership) as of December 31, 1998 and the related statements of
income, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of LYONDELL-CITGO Refining LP as of December
31, 1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Houston, Texas
February 11, 1999

113

LYONDELL-CITGO REFINING LP

STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------

SALES AND OTHER OPERATING REVENUES $2,571 $2,055 $2,697

OPERATING COSTS AND EXPENSES:
Cost of sales:
Crude oil and feedstock 1,959 1,264 1,960
Operating and other expenses 473 490 482
Selling, general and administrative expenses 66 78 72
Unusual charges 6 10 - -
------------------ ------------------ ------------------
2,504 1,842 2,514
------------------ ------------------ ------------------

Operating income 67 213 183

Interest expense (45) (44) (37)
Interest income 1 1 2
------------------ ------------------ ------------------
Income before state income taxes 23 170 148

Provision for (benefit from) state income taxes (1) 1 1
------------------ ------------------ ------------------
NET INCOME $ 24 $ 169 $ 147
================== ================== ==================

See Notes to Financial Statements.

114

LYONDELL-CITGO REFINING LP

BALANCE SHEETS

DECEMBER 31
--------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------ ------------------

ASSETS
Current assets:
Cash and cash equivalents $ 16 $ 24
Accounts receivable:
Trade, net 43 39
Related parties and affiliates 101 26
Inventories 47 106
Prepaid expenses and other current assets 12 2
------------------ ------------------
Total current assets 219 197
------------------ ------------------

Property, plant and equipment 2,255 2,234
Construction projects in progress 112 80
Accumulated depreciation and amortization (1,017) (944)
------------------ ------------------
1,350 1,370
Deferred charges and other assets 60 70
------------------ ------------------
Total assets $ 1,629 $1,637
================== ==================

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 75 $ 71
Related parties and affiliates 129 42
Distribution payable to Lyondell Partners 33 19
Distribution payable to CITGO Partners 23 13
Loan payable to bank - - 20
Current maturities of long-term debt 450 - -
Taxes, payroll and other liabilities 47 38
------------------ ------------------
Total current liabilities 757 203
------------------ ------------------

Long-term debt, less current maturities - - 450
Loans payable to Lyondell Partners 219 231
Loans payable to CITGO Partners 28 36
Pension, postretirement benefit and other liabilities 69 68
------------------ ------------------
Total long-term liabilities 316 785
Commitments and contingencies
Partners' capital 556 649
------------------ ------------------
Total liabilities and partners' capital $ 1,629 $1,637
================== ==================

See Notes to Financial Statements.

115

LYONDELL-CITGO REFINING LP

STATEMENTS OF CASH FLOWS

For the year ended December 31
---------------------------------------------------------------------
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ -------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24 $ 169 $ 147
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 103 100 91
(Increase) decrease in accounts receivable - trade,
net (4) (2) 72
(Increase) decrease in accounts receivable -
related parties (75) 16 9
Decrease (increase) in inventories 59 (9) - -
Increase in prepaid expenses and other current
assets (10) (1) (1)
Increase (decrease) in accounts payable - trade 4 4 (89)
Increase (decrease) in accounts payable - related
parties 87 (83) (27)
Increase in taxes, payroll and other liabilities 9 3 5
(Increase) in deferred charges and other assets and
change in pension, postretirement benefit and other
liabilities (16) (28) 5
------------------ ------------------ -------------------
Net cash provided by operating activities 181 169 212
------------------ ------------------ -------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment:
Maintenance capital expenditures (13) (19) (12)
Environmental capital expenditures (19) (12) (11)
Capital enhancement expenditures (24) (27) (17)
Refinery upgrade expenditures - - (3) (45)
------------------ ------------------ -------------------
Total capital expenditures (56) (61) (85)
Other (1) (1) (1)
------------------ ------------------ -------------------
Net cash used in investing activities (57) (62) (86)
------------------ ------------------ -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) bank loan (20) 20 (10)
Contributions from Lyondell Partners - - - - 66
Contributions from CITGO Partners - - - - 63
Proceeds from Lyondell Partners' loans 35 35 20
Proceeds from CITGO Partners' loans 25 19 16
Distributions to Lyondell Partners (101) (130) (147)
Distributions to CITGO Partners (71) (92) (91)
Reimbursements from CITGO Partners - - - - 10
------------------ ------------------ -------------------
Net cash used in financing activities (132) (148) (73)
------------------ ------------------ -------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8) (41) 53
Cash and cash equivalents at beginning of period 24 65 12
------------------ ------------------ -------------------
Cash and cash equivalents at end of period $ 16 $ 24 $ 65
================== ================== ===================

See Notes to Financial Statements.

116

LYONDELL-CITGO REFINING LP

STATEMENTS OF PARTNERS' CAPITAL

LYONDELL CITGO
MILLIONS OF DOLLARS PARTNERS PARTNERS TOTAL
- ------------------- ------------------ ------------------ ------------------

BALANCE, JANUARY 1, 1997 $ 57 $ 606 $ 663

Cash contributions 66 73 139
Distributions (158) (118) (276)
Net income 103 44 147
------------------ ------------------ ------------------

BALANCE, DECEMBER 31, 1997 68 605 673

Distributions (113) (80) (193)
Net income 110 59 169
------------------ ------------------ ------------------

BALANCE, DECEMBER 31, 1998 65 584 649

Other contributions 47 32 79
Distributions (115) (81) (196)
Net income 23 1 24
------------------ ------------------ ------------------
BALANCE, DECEMBER 31, 1999 $ 20 $ 536 $ 556
================== ================== ==================

See Notes to Financial Statements.

117

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS

1. THE PARTNERSHIP

On July 1, 1993, Lyondell Chemical Company ("Lyondell") and CITGO Petroleum
Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO
Refining LP ("LCR" or "Partnership") (formerly LYONDELL-CITGO Refining Company
Ltd.), a new entity formed and owned by subsidiaries of Lyondell and CITGO in
order to own and operate a refinery ("Refinery") located adjacent to the Houston
Ship Channel in Houston, Texas and a lube oil blending and packaging plant in
Birmingport, Alabama.

Lyondell owns its interest in the Partnership through wholly owned subsidiaries,
Lyondell Refining LP, LLC ("Lyondell LP") and Lyondell Refining Company
("Lyondell GP") (formerly LOwner). Lyondell LP and Lyondell GP together are
known as Lyondell Partners. CITGO holds its interest through CITGO Refining
Investment Company ("CITGO LP") (formerly COwner) and CITGO Gulf Coast Refining,
Inc. ("CITGO GP"), both wholly owned subsidiaries of CITGO. CITGO LP and CITGO
GP together are known as CITGO Partners. Lyondell Partners and CITGO Partners
together are known as the Partners.

During 1998, LCR converted from a Texas limited liability company to a Delaware
limited partnership. Accordingly, the name was changed from LYONDELL-CITGO
Refining Company Ltd. to LYONDELL-CITGO Refining LP. LCR will continue in
existence until it is dissolved under the terms of the Limited Partnership
Agreement ("Agreement").

The Partners have agreed to allocate net income and cash provided by operating
activities based on certain contributions and other factors instead of
allocating such amounts based on their capital account balances. Based upon
these contributions and other factors, Lyondell Partners and CITGO Partners had
ownership interests of approximately 59 percent and 41 percent, respectively, as
of December 31, 1999. CITGO Partners have a one-time option, expiring September
30, 2000, to increase their participation interest in LCR up to 50 percent by
making an additional capital contribution.

At December 31, 1999, the Partnership employed approximately 1,100 full-time
employees. Of these, approximately 650 were covered by collective bargaining
agreements between LCR and the Paper, Allied-Industrial, Chemical and Energy
Workers International Union ("PACE"), formerly the Oil, Chemical and Atomic
Workers International Union ("OCAW"). LCR also uses the services of independent
contractors in the routine conduct of its business.

2. LIQUIDITY

LCR has $450 million outstanding under a five-year term credit facility, which
expires in May 2000. Lyondell and CITGO expect that LCR will be able to extend
or refinance this debt before it is due. However, because there is presently no
definitive agreement in place, the debt is classified as a current liability.
The inability to extend or refinance the debt would raise substantial doubt
about LCR's ability to continue as a going concern in its present form. No
effect has been given to this uncertainty in these financial statements.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition--Revenue from product sales is recognized upon delivery of
products to the customer.

Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or

118

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

less. Cash equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated instruments
and limit the amount of credit exposure to any one institution.

Accounts Receivable--The Partnership sells its products primarily to companies
in the petrochemical and refining industries. The Partnership performs ongoing
credit evaluations of its customers' financial condition and in certain
circumstances requires letters of credit from them. The Partnership's allowance
for doubtful accounts receivable, which is reflected in the Balance Sheets as a
reduction of accounts receivable-trade, totaled approximately $50,000 and
$179,000 at December 31, 1999 and 1998, respectively.

Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.

Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. The primary components of property, plant and equipment are manufacturing
facilities and equipment. Depreciation of property, plant and equipment is
computed using the straight-line method over the estimated useful lives of the
related assets which range from five to thirty years.

Upon retirement or sale, the Partnership removes the cost of the assets and the
related accumulated depreciation from the accounts and reflects any resulting
gains or losses in income. Interest incurred on debt during the construction of
major projects is capitalized.

Effective January 1, 1998, the depreciable life of assets related to an upgrade
project completed in February 1997 was increased from twenty to twenty-four
years. These changes were accounted for as a change in accounting estimate.
The gross value of these assets when the depreciable life changed was
approximately $1 billion with accumulated depreciation of approximately $52
million. The increase in the depreciable life of these assets decreased
depreciation expense by approximately $9 million for each of the years ended
December 31, 1999 and 1998.

Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at the Refinery exceeding
$5 million are deferred and amortized using the straight-line method, until the
next planned turnaround, generally four to six years. These costs consist of
maintenance, repair and replacement costs that are necessary to maintain, extend
and improve the operating capacity and efficiency rates of the production units.
Amortization of deferred turnaround costs for 1999, 1998 and 1997 was
approximately $13 million, $12 million and $10 million, respectively. Other
turnaround costs and ordinary repair and maintenance costs are expensed as
incurred.

Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.

Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy. Exchanges settled through payment or receipt
of cash are accounted for as purchases or sales.

Income Taxes--Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the

119

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Balance Sheets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Long-Lived Assets Impairment--LCR periodically evaluates the carrying value of
long-lived assets to be held and used when events and circumstances warrant such
a review. The carrying value of long-lived assets is considered impaired when
the separately identifiable anticipated net undiscounted cash flow from such
asset is less than its carrying value.

Comprehensive Income--Effective January 1, 1998, LCR adopted SFAS No. 130,
Reporting Comprehensive Income. LCR had no items of other comprehensive income
during the three years ended December 31, 1999.

Derivatives--In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Subsequently, the FASB delayed the effective date by one year. The
statement is effective for the Partnership's calendar year 2001. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending upon whether a
derivative instrument is designed as part of a hedge transaction and, if it is,
the type of hedge transaction. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
as earnings in the periods in which earnings are impacted by the hedged item.
The ineffective portion of all derivatives designated as hedges will be
recognized in current-period earnings. LCR is currently evaluating the effect
that SFAS No. 133 implementation will have on LCR's Balance Sheets and
Statements of Income.

Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1999.

4. RELATED PARTY TRANSACTIONS

LCR is party to agreements with the following related parties:
. PDVSA
. PDVSA Oil
. CITGO
. CITGO Partners
. Lyondell
. Lyondell Partners
. Equistar Chemicals, LP ("Equistar") a 41% owned investment of Lyondell
. Atlantic Richfield Company ("ARCO"), former parent of Lyondell
. ARCO PipeLine Company, a former affiliate of Lyondell

LCR buys a substantial majority of its crude oil supply at market-based prices,
adjusted for certain indexed items (see Note 13), from PDVSA Oil under the terms
of a long-term crude oil supply agreement ("Crude Supply Agreement"). Under the
terms of a long-term product sales agreement, CITGO buys all of the gasoline,
low sulfur diesel and jet fuel produced at the Refinery at market-based prices.

120

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

LCR is party to a number of feedstock, product sales and administrative service
agreements with Lyondell and Equistar. In addition, a tolling agreement provides
for the production of alkylate and methyl tertiary butyl ether for the
Partnership at Equistar's Channelview, Texas petrochemical complex.

Effective January 1, 1999, the Partnership entered into a lubricant facility
operating agreement and lubricant sales agreements with CITGO. The lubricant
facility operating agreement allows CITGO to operate the lubricant facility in
Birmingport, Alabama while the Partnership retains ownership. Under the terms
of the lubricant sales agreements, CITGO buys paraffinic lubricants base oil,
naphthenic lubricants, white mineral oils and specialty oils from the
Partnership.

During 1999, 1998 and 1997, LCR paid Lyondell Partners approximately $9 million,
$9 million and $13 million, respectively, for interest on loans related to
funding a portion of the upgrade project at the Refinery and other capital
expenditures. Also, during 1999, 1998 and 1997, LCR paid CITGO Partners
approximately $1 million, $2 million and $1 million, respectively, for interest
on loans related to funding a portion of the upgrade project at the Refinery and
other capital expenditures.

Related party transactions are summarized as follows:

FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------

LCR billed related parties for the following:
- ---------------------------------------------
Sales of products:
Equistar (a) $ 190 $ 131 $ 188
CITGO 1,755 1,424 1,791
PDVSA - - - - 7
ARCO - - - - 1
Services and cost sharing arrangements:
Lyondell 3 4 5
CITGO 2 - - - -
Financing costs in connection with upgrade
project: CITGO Partners - - - - 7
Delivery shortfalls under Crude Supply
Agreement: PDVSA Oil 12 - - - -

Related parties billed LCR for the following:
- ---------------------------------------------
Purchase of products:
Equistar (a) 263 238 351
CITGO 46 31 42
PDVSA 764 547 1,019
Transportation charges:
CITGO 1 1 2
PDVSA 4 9 7
ARCO PipeLine Company - - - - 4
Services and cost sharing arrangements:
Lyondell 4 4 7
CITGO 1 - - - -

(a) These transactions were with Lyondell prior to December 1, 1997.

121

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

5. SUPPLEMENTAL CASH FLOW INFORMATION

At December 31, 1999, 1998 and 1997, property, plant and equipment included
approximately $7 million, $9 million and $13 million, respectively, of non-cash
additions which related to accounts payable accruals.

During 1999, 1998 and 1997, LCR paid interest of approximately $37 million, $43
million and $42 million, respectively. Of the interest paid during 1997,
approximately $9 million was capitalized. No interest costs were capitalized
during 1999 or 1998. During 1998 and 1997, LCR paid approximately $1 million
each year for state income and franchise taxes.

6. FINANCIAL INSTRUMENTS

The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and loans payable to bank, approximated their carrying value
due to their short maturity. The fair value of long-term loans payable
approximated their carrying value because they bear interest at variable rates.

At December 31, 1999, LCR had issued letters of credit totaling approximately $9
million.

The Partnership is party to take-or-pay contracts for hydrogen and electricity.
At December 31, 1999, future minimum payments under these contracts with
noncancelable contract terms in excess of one year were as follows:

MILLIONS OF DOLLARS
- -------------------

2000 $ 40
2001 40
2002 29
2003 29
2004 29
Thereafter 357
------------------
Total minimum lease payments $524
==================

Total LCR purchases under these agreements were approximately $87 million, $81
million and $90 million during 1999, 1998 and 1997, respectively.

7. INVENTORIES

Inventories were as follows at December 31:

MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- ------------------

Crude oil $ 14 $ 47
Refined products 20 45
Materials and supplies 13 14
------------------- ------------------
Total inventories $ 47 $ 106
=================== ==================

During the year ended December 31, 1999, inventories were reduced, which
resulted in a liquidation of LIFO inventory layers carried at costs which
prevailed in prior years. The effect of the liquidation was to decrease cost of

122

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

sales and increase net income by approximately $1 million. There were no
significant liquidations of LIFO inventories in 1998 or 1997. The excess of
replacement cost of inventories over the carrying value was approximately $115
million and $40 million at December 31, 1999 and 1998, respectively.

8. FINANCING ARRANGEMENTS

In May 1995, LCR entered into two credit facilities totaling $520 million with a
group of banks. The first facility, a $70 million, 364-day revolving working
capital facility, was most recently renewed in April 1999, and is being utilized
for general business purposes and for letters of credit. At December 31, 1999,
no amounts were outstanding under this credit facility. At December 31, 1998,
$20 million was outstanding under this credit facility with a weighted average
interest rate of 5.3 percent. Interest for this credit facility is based on
either prime, eurodollar rates or based on a competitive auction feature wherein
the interest rate can be established by competitive bids submitted by the
participating banks, all at LCR's option. The second facility is a $450
million, five-year term credit facility that was used to partially fund an
upgrade project at the Refinery which was completed in February 1997. This
second facility is due in May of 2000 and accordingly in 1999 the $450 million
was reclassified from a long-term liability to a current liability (see Note 2).
At both December 31, 1999 and 1998, $450 million was outstanding under this
credit facility with a weighted average interest rate of 5.8 percent and 6.2
percent, respectively. Interest for this facility is based on prime or
eurodollar rates at the Partnership's option.

Both facilities contain covenants that required LCR to maintain a minimum net
worth which increased each year until 1998 and maintain certain financial ratios
defined in the agreements. The facilities also contain other customary
covenants which limit the Partnership's ability to modify certain significant
contracts, incur additional debt or liens, dispose of assets, make restricted
payments as defined in the agreements or merge or consolidate with other
entities. In August 1999 both facilities were amended to change the covenant
calculations of certain financial ratios. In consideration for these changes
the Partners agreed that LCR would defer payment of interest accrued on loans
payable to the Partners (see next two paragraphs) from July 1, 1999 through the
termination date of the two facilities.

In October 1995 LCR began borrowing funds from Lyondell Partners in connection
with the upgrade project at the Refinery and other capital expenditures. These
loans are due on July 1, 2003 and are subordinate to the two bank credit
facilities. At December 31, 1999 and 1998, these subordinated loans totaled
approximately $219 million and $231 million, respectively, and had a weighted
average interest rate of 5.5 percent and 5.8 percent, respectively. Interest on
these loans is based on eurodollar rates. Interest was payable at the end of
each calendar quarter through June 30, 1999, but is now deferred, due to the
amendment of the two bank credit facilities noted above.

In January 1997 LCR began borrowing funds from CITGO Partners in connection with
the upgrade project at the Refinery and other capital expenditures. These loans
are due on July 1, 2003 and are subordinate to the two bank credit facilities.
At December 31, 1999 and 1998, these subordinated loans totaled approximately
$28 million and $36 million, respectively, and had a weighted average interest
rate of 5.5 percent and 5.8 percent, respectively. Interest on these loans is
based on eurodollar rates. Interest was payable at the end of each calendar
quarter through June 30, 1999, but is now deferred, due to the amendment of the
two bank credit facilities noted above.

In December 1999 the Partners agreed to reclassify part of the outstanding
balance of their respective loans to their respective partners' capital accounts
in relation to their ownership interests of approximately 59 percent for
Lyondell Partners and 41 percent for CITGO Partners. Approximately $47 million
and $32 million of Lyondell Partners' and CITGO Partners' loans, respectively,
were reclassified to the respective partners' capital accounts.

123

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

During 1999, 1998 and 1997, LCR incurred approximately $45 million, $44 million
and $45 million of interest cost, respectively. Of the interest cost incurred
in 1997, the Partnership capitalized approximately $9 million. No interest costs
were capitalized in 1999 or 1998.

9. LEASE COMMITMENTS

LCR leases crude oil storage facilities, a fleet of railroad tank cars,
computers, office equipment and other items. At December 31, 1999, future
minimum lease payments for operating leases with noncancelable lease terms in
excess of one year were as follows:

MILLIONS OF DOLLARS
- -------------------

2000 $13
2001 13
2002 9
2003 1
2004 1
Thereafter 6
------------------
Total minimum lease payments $43
==================

Operating lease net rental expenses for the years ended December 31, 1999, 1998
and 1997 were approximately $27 million, $26 million and $22 million,
respectively.

10. EMPLOYEE BENEFIT PLANS

Employee Savings--LCR sponsors qualified defined contribution retirement and
savings plans covering substantially all eligible salaried and hourly employees.
Participants make voluntary contributions to the plans and the Partnership makes
contributions, including matching employee contributions, based on plan
provisions. LCR expensed $5 million related to its contributions to these plans
in each of the three years ended December 31, 1999.

Pension Benefits--LCR sponsors one qualified noncontributory defined benefit
pension plan covering eligible hourly employees and one covering eligible
salaried employees. The Partnership also sponsors one nonqualified defined
benefit plan for certain eligible employees. The qualified plans' assets
include primarily stocks and bonds. The nonqualified plan is not funded.

LCR's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible limits.
The nonqualified plans are funded as necessary to pay retiree benefits. The
plan benefits for each of the qualified pension plans are primarily based on an
employee's years of plan service and compensation as defined by each plan.

Postretirement Benefits Other Than Pensions--In addition to pension benefits,
the Partnership also provides certain health care and life insurance benefits
for eligible salaried and hourly employees at retirement. These benefits are
subject to deductibles, co-payment provisions and other limitations and are
primarily funded on a pay as you go basis. The Partnership reserves the right
to change or to terminate the benefits at any time.

124

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

The following table sets forth the changes in benefit obligations and plan
assets for the pension and postretirement plans for the years ended December 31,
1999 and 1998 and the funded status of such plans reconciled with amounts
reported in the Partnership's Balance Sheets.

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- ---------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ---------------- ---------------- ---------------- ----------------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 88 $ 64 $ 46 $ 42
Service cost 5 5 1 2
Interest cost 6 5 2 2
Actuarial loss (gain) 6 9 (18) (2)
Liability transfer -- -- -- 2
Special termination benefits (17) 7 1 --
Benefits paid (22) (2) (1) --
---------------- ---------------- ---------------- ----------------
Benefit obligation, December 31 66 88 31 46
---------------- ---------------- ---------------- ----------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 43 37 -- --
Actual return on plan assets 2 3 -- --
Partnership contributions 16 5 1 --
Benefits paid (22) (2) (1) --
---------------- ---------------- ---------------- ----------------
Fair value of plan assets, December 31 39 43 -- --
---------------- ---------------- ---------------- ----------------

Funded status (27) (45) (31) (46)
Unrecognized actuarial loss 2 18 -- 6
Unrecognized prior service cost 2 2 (28) (2)
Unrecognized transition (asset) obligation -- (1) 16 --
---------------- ---------------- ---------------- ----------------
Accrued benefit cost $ (23) $ (26) $ (43) $ (42)
================ ================ ================ ================
Accumulated benefit obligation $ 48 $ 53 N/A N/A
================ ================ ================ ================

OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------- -------------------------------
MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997
- ------------------- ----------- ----------- ---------- ---------- --------- ------

Components of net periodic benefit cost:
Service cost $ 5 $ 5 $ 4 $ 1 $ 2 $ 2
Interest cost 6 5 5 2 2 3
Expected return on plan assets (4) (3) (3) -- -- --
Amortization of:
Prior service costs -- -- -- (3) -- --
Actuarial (gain) loss 1 -- -- 1 -- --
---------------------------------------- ----------------------------------
Net periodic benefit cost before FAS 88 cost 8 7 6 1 4 5
Effect of curtailments, settlements and
special termination benefits 5 -- -- 1 2 --
---------------------------------------- ----------------------------------
Net periodic benefit cost $ 13 $ 7 $ 6 $ 2 $ 6 $ 5
======================================== ==================================

Special termination benefit charge $ 3 $ 7 $ -- $ 1 $ -- $ --
======================================== ==================================

125

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

OTHER
--------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- --------------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ------- ------- ------

Weighted-average assumptions as of
December 31:
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 9.50% 9.50% 9.50% N/A N/A N/A
Rate of compensation increase 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%

For measurement purposes, the assumed annual rate of increase in the per capita
costs of health care benefits as of December 31, 1999 was 7 percent for 2000-
2001 and 5 percent thereafter.

The benefit obligation, accumulated benefit obligation and the fair value of
plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets were $52 million, $38 million and $27 million, respectively, as
of December 31, 1999 and $73 million, $53 million and $33 million, respectively,
as of December 31, 1998.

Assumed health care cost trend rates have an effect on the amounts reported for
the health care plan. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:

1-PERCENTAGE- 1-PERCENTAGE-
MILLIONS OF DOLLARS POINT INCREASE POINT DECREASE
- ------------------- -------------- --------------

Effect on total of service and interest cost components $ - - $ - -

Effect on postretirement benefit obligation 1 - -

During 1998, LCR and PACE ratified a new, three-year labor contract. That
contract called for a Reduction In Force ("RIF") program, which will result in
certain personnel reductions. LCR expensed approximately $6 million and $10
million in 1999 and 1998, respectively, relating to the two phases of the RIF
(RIF I and RIF II) which are reflected as "Unusual charges" on the Statements of
Income. In RIF I, approximately 80 employees in 1998 made an irrevocable
voluntary election to terminate employment and retire. In RIF II, approximately
45 employees are eligible to make an irrevocable voluntary election to terminate
employment and retire. The election period for RIF II was open from November
15, 1999 to January 31, 2000. At December 31, 1999, 37 employees had made the
election. Employees that have made the election or will make the election will
receive certain special termination benefits in the form of enhanced retirement
benefits. LCR expects additional amounts for RIF II to be expensed in 2000.

11. INCOME TAXES

LCR is treated as a partnership for federal income tax purposes; consequently,
no provision for federal income taxes is required. LCR is however, subject to
state income taxes, and therefore a provision for or benefit from state income
taxes has been recorded. Pretax income was taxed by domestic jurisdictions
only. The benefit from state income tax was approximately $1 million in 1999.
The provision for state income tax was approximately $1 million in both 1998 and
1997. In addition, there was no deferred provision for state income tax in
1999, 1998 and 1997.

12. PRODUCTION UNITS

On May 3, 1999 LCR shut down a fluid catalytic cracking unit as a result of a
malfunction that damaged the main air blower. Repairs were completed and the
unit was placed back in service in late May 1999. On May 7, 1999

126

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

LCR shut down one of two coker units following a fire. Repairs were completed
and this unit was placed back in service in early July 1999. As a result of
these two incidents, crude oil processing rates were reduced. Both of these
incidents are covered by business interruption insurance, subject to deductibles
of $10 million per incident. LCR is pursuing recoveries under its insurance
policies and claims against third parties with respect to the production unit
outages. LCR recorded approximately $12 million of business interruption
insurance recoveries related to these incidents in the year ended December 31,
1999. Additional amounts are expected to be recovered in 2000.

13. COMMITMENTS AND CONTINGENCIES

LCR is subject to various lawsuits and proceedings.

With respect to liabilities associated with LCR, Lyondell generally has retained
liability for events that occurred prior to July 1, 1993 and certain ongoing
environmental projects at the Refinery under the Contribution Agreement,
retained liability section. LCR generally is responsible for liabilities
associated with events occurring after June 30, 1993 and ongoing environmental
compliance inherent to the operation of the Refinery.

LCR's policy is to be in compliance with all applicable environmental laws. LCR
is subject to extensive environmental laws and regulations concerning emissions
to the air, discharges to surface and subsurface waters and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
Some of these laws and regulations are subject to varying and conflicting
interpretations. In addition, the Partnership cannot accurately predict future
developments, such as increasingly strict requirements of environmental laws,
inspection and enforcement policies and compliance costs therefrom, which might
affect the handling, manufacture, use, emission or disposal of products, other
materials or hazardous and non-hazardous waste.

LCR estimates that it has a liability of approximately $4 million at December
31, 1999 related to future Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), Resource Conservation and Recovery Act
("RCRA"), and the Texas Natural Resource Conservation Commission ("TNRCC")
assessment and remediation costs. Lyondell has a contractual obligation to
reimburse LCR for a portion of this liability, which is currently estimated to
be approximately $3 million. Accordingly, LCR has recorded a current liability
of approximately $1 million for the portion of this liability that will not be
reimbursed by Lyondell. In the opinion of management, there is currently no
material range of probable loss in excess of the amount recorded. However, it
is possible that new information about the sites associated with this liability,
new technology or future developments such as involvement in other CERCLA, RCRA,
TNRCC or other comparable state law investigations, could require LCR to
reassess its potential exposure related to environmental matters.

Under the Crude Supply Agreement, LCR is required to purchase, and PDVSA Oil is
required to sell 230,000 barrels per day of extra heavy Venezuelan crude oil.
Depending on market conditions, a breach or termination of the Crude Supply
Agreement could adversely affect LCR. In the event of certain force majeure
conditions, including governmental, OPEC or other actions restricting or
otherwise limiting PDVSA Oil's ability to perform its obligations, LCR may seek
alternative crude supply arrangements. Any such alternative arrangements may
not be as beneficial as the Crude Supply Agreement. Currently, alternative
crude oils with similar margins are not available for purchase by LCR.
Furthermore, the breach or termination of the Crude Supply Agreement would
require LCR to purchase all or a portion of its crude oil feedstocks in the
merchant market and would subject LCR to significant volatility and price
fluctuations.

In late April 1998, LCR received notification from PDVSA Oil of reduced
allocations of crude oil related to OPEC production cuts. LCR began receiving
reduced allocations of crude oil from PDVSA Oil in August 1998. Following the
March 1999 OPEC agreement to limit production, LCR was advised by PDVSA Oil in
May 1999 of a

127

LYONDELL-CITGO REFINING LP

NOTES TO FINANCIAL STATEMENTS--(Continued)

further reduction in the allocation of crude oil supplied under the Crude Supply
Agreement. In addition, PDVSA Oil reduced crude oil deliveries on several
occasions in 1999 for economic reasons unrelated to the OPEC production cuts.
PDVSA Oil has made payments in accordance with the Crude Supply Agreement for
these reduced crude oil deliveries that are not related to OPEC production cuts
and therefore are not subject to the force majeure provisions of the Crude
Supply Agreement.

LCR has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.

In the opinion of management, any liability arising from the matters discussed
in this Note will not have a material adverse effect on the financial position
of LCR. However, the adverse resolution in any reporting period of one or more
of the matters discussed in this Note could have a material impact on LCR's
results of operations for that period.

14. SUBSEQUENT EVENT

In January 2000, LCR and Calpine Construction Finance Company, L.P. ("Calpine")
entered into an agreement under which Calpine will construct, own and operate a
"Qualifying Cogeneration Facility" ("Cogen Facility") as defined under the
provisions of the Public Utilities Regulatory Policies Act of 1978, as amended.
The Cogen Facility will be built at the Refinery and will supply electricity and
steam to LCR. LCR is scheduled to first receive services from the Cogen
Facility in mid-2001.

128

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None except as set forth in the Company's Current Report on Form 8-K filed
pursuant to the Securities Exchange Act of 1934, as amended, on March 12, 1998.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 11. EXECUTIVE COMPENSATION

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding executive officers of the Company is included in Part I.
For the other information called for by Items 10, 11, 12 and 13, reference is
made to the Registrant's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 4, 2000, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1999, and which is
incorporated herein by reference.

129

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

1 and 2--Consolidated Financial Statements: these documents are listed in
the Index to Financial Statements.

3.1 --Amended and Restated Certificate of Incorporation of the
Registrant(15)
3.1(a) --Certificate of Ownership and Merger dated July 31, 1998.
3.2 --Amended and Restated By-Laws of the Registrant(16)
4.1 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Texas Commerce Bank National
Association, as Trustee(2)
4.1(a) --Second Supplemental Indenture between the Registrant, Equistar
and Texas Commerce Bank National Association(18)
4.2 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Continental Bank, National Association,
as Trustee(4)
4.2(a) --Second Supplemental Indenture between the Registrant, Equistar
and First Trust National Association(18)
4.3 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Texas Commerce Bank, as Trustee(11)
4.3(a) --Second Supplemental Indenture between the Registrant, Equistar
and Texas Commerce Bank National Association(18)
4.4 --Specimen certificate(1)
4.5 --LCR $70,000,000 Credit Agreement(7)
4.5(a) --Amendment No. 1 to the LCR $70,000,000 Credit Agreement(12)
4.5(b) --Amendment No. 2 to the LCR $70,000,000 Credit Agreement(14)
4.5(c) --Amendment No. 3 to the LCR $70,000,000 Credit Agreement(20)
4.5(d) --Amendment No. 4 to the LCR $70,000,000 Credit Agreement(20)
4.6 --LCR $450,000,000 Credit Agreement(7)
4.6(a) --Amendment No. 1 to the LCR $450,000,000 Credit Agreement(12)
4.6(b) --Amendment No. 2 to the LCR $450,000,000 Credit Agreement(14)
4.6(c) --Amendment No. 3 to the LCR $450,000,000 Credit Agreement(20)
4.6(d) --Amendment No. 4 to the LCR $450,000,000 Credit Agreement(20)

4.7 --Rights Agreement between the Registrant and the Bank of New York,
as Rights Agent(10)
4.8 --Credit Agreement dated as of November 25, 1997 among Equistar as
Borrower, Millennium America Inc., as Guarantor, and the lenders
party thereto(20)
4.8(a) --Amendment to the Credit Agreement dated as of November 25, 1997
among Equistar as Borrower, Millennium America Inc., as Guarantor,
and the lenders party thereto(20)
4.9 --Lyondell Petrochemical Company $7,000,000,000 Credit Agreement
dated as of July 23, 1998, as amended and restated as of April 16,
1999(21)
4.9(a) --Amendment No. 3, dated as of February 3, 2000, to Lyondell
Petrochemical Company $7,000,000,000 Credit Agreement dated as of
July 23, 1998
4.10 --Indenture dated as of January 15, 1999, as supplemented by a First
Supplemental Indenture between Equistar and The Bank of New York
(20)
4.10(a) --Second Supplemental Indenture dated October 4, 1999, between
Equistar and The Bank of New York
4.11 --Indenture, dated as of June 15, 1988, between ARCO Chemical
Company and Bank of New York as Trustee(20)
4.11(a) --First Supplemental Indenture dated as of January 5, 1999, between
the Registrant and Bank of New York as Trustee
4.11(b) --Form of 9 3/8% Debenture Due 2005 issuable under the Indenture
referred to in Exhibit 4.11(20)
4.11(c) --Form of 9.80% Debenture Due 2020 issuable under the Indenture
referred to in Exhibit 4.11(20)
4.11(d) --Form of 9.90% Debenture Due 2000 issuable under the Indenture
referred to in Exhibit 4.11(20)
4.11(e) --Form of 10.25% Debenture Due 2010 issuable under the Indenture
referred to in Exhibit 4.11(20)

130

4.12 --Indenture among the Registrant, the Subsidiary Guarantors party
thereto and The Bank of New York, as Trustee, dated as of May 17,
1999, for 9 5/8% Senior Secured Notes, Series A, due 2007(22)
4.13 --Indenture among the Registrant, the Subsidiary Guarantors party
thereto and The Bank of New York, as Trustee, dated as of May 17,
1999, for 9 7/8% Senior Secured Notes, Series B, due 2007(22)
4.14 --Indenture among the Registrant, the Subsidiary Guarantors party
thereto and The Bank of New York, as Trustee, dated as of May 17,
1999, for 10 7/8% Senior Subordinated Notes due 2009(22)

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

EXECUTIVE COMPENSATION:

10.1 --Amended and Restated Executive Supplementary Savings Plan(15)
10.2 --Amended and Restated Executive Long-Term Incentive Plan(3)
10.3 --Amended and Restated Supplementary Executive Retirement Plan(18)
10.3(a) --Amendment to the Amended and Restated Supplementary Executive
Retirement Plan(18)
10.4 --Executive Medical Plan(15)
10.4(a) --Amendment No. 1 to the Executive Medical Plan(15)
10.4(b) --Amendment No. 2 to the Executive Medical Plan(15)
10.5 --Amended and Restated Executive Deferral Plan(18)
10.6 --Executive Long-Term Disability Plan(4)
10.6(a) --Amendment No. 1 to the Executive Long-Term Disability Plan(15)
10.7 --Executive Life Insurance Plan(4)
10.8 --Amended and Restated Supplemental Executive Benefit Plans Trust
Agreement(18)
10.8(a) --Amendment to the Amended and Restated Supplemental Executive
Benefit Plans Trust Agreement(18)
10.9 --Restricted Stock Plan(6)
10.9(a) --Amendment No. 1 to the Restricted Stock Plan(9)
10.9(b) --Amendment No. 2 to the Restricted Stock Plan(18)
10.10 --Form of Registrant's Indemnity Agreement with Officers and
Directors
10.11 --Amended and Restated Elective Deferral Plan for Non-Employee
Directors as of October 16, 1998, as amended by Amendment No. 1
thereto dated January 3, 2000, effective as of December 2, 1999
10.12 --Amended and Restated Retirement Plan for Non-Employee Directors(18)
10.12(a) --Amendment to the Amended and Restated Retirement Plan for Non-
Employee Directors(18)
10.13 --Restricted Stock Plan for Non-Employee Directors(13)
10.13(a) --Amendment to the Restricted Stock Plan for Non-Employee
Directors(18)
10.14 --Non-Employee Directors Benefit Plans Trust Agreement(18)
10.14(a) --Amendment to the Non-Employee Directors Benefit Plans Trust
Agreement(18)
10.15 --1999 Long-Term Incentive Plan(20)
10.16 --Lyondell Chemical Company Executive Severance Pay Plan(20)
10.17 --ARCO Chemical Company Change of Control Plan(20)
10.18 --Description of 1998 Executive Incentive Plan(20)

OTHER MATERIAL CONTRACTS:

10.19 --Conveyance (conformed without exhibits) between the Registrant and
ARCO(1)
10.20 --Asset Purchase Agreement (conformed without exhibits) between the
Registrant and Rexene Products Company(2)
10.21 --Limited Partnership Agreement of LCR (20)
10.22 --Contribution Agreement between the Registrant and LYONDELL-CITGO
Refining Company Ltd.(5)
10.23 --Crude Oil Supply Agreement between LYONDELL-CITGO Refining
Company Ltd. and Lagoven, S.A.(5)
10.24 --Asset Purchase Agreement between the Registrant and Occidental
Chemical Company(8)

131

10.25 --Amended and Restated Limited Partnership Agreement of Equistar
Chemicals, LP(19)
10.25(a) --First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar(20)
10.25(b) --Second Amendment to Amended and Restated Limited Partnership
Agreement of Equistar
10.26 --Asset Contribution Agreement among the Registrant, Lyondell
Petrochemical LP and Equistar Chemicals, LP(17)
10.26(a) --First Amendment to Asset Contribution Agreement among the
Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP
(20)
10.27 --Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar Chemicals, LP(17)
10.27(a) --First Amendment to Asset Contribution Agreement among Millennium
Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP(20)
10.28 --Amended and Restated Parent Agreement dated May 15, 1998 among
Occidental Chemical, Oxy CH Corporation, Occidental, the
Registrant, Millennium and the Partnership(19)
10.28(a) --First Amendment to the Amended and Restated Parent Agreement(20)
10.28(b) --Assignment and Assumption Agreement with Respect to the Amended and
Restated Parent Agreement(20)
10.29 --Agreement and Plan of Merger and Asset Contribution dated May 15,
1998 among Occidental Petrochem Partner 1, Inc., Occidental
Petrochem Partner 2, Inc., Oxy Petrochemicals, PDG Chemical and the
Partnership(19)
10.30 --Master Transaction Agreement dated November 16, 1999, among the
Registrant, Bayer AG and Bayer Corporation(23)
12 --Statement Setting Forth Detail for Computation of Ratio of
Earnings to Fixed Charges
21 --Subsidiaries of the Registrant
23.1 --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Deloitte & Touche LLP
24 --Powers of Attorney
27 --Financial Data Schedule

___________
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 33-25407) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1989 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1992 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
July 1, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
May 1, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated
December 8, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Registration Statement on Form S-3
dated as of January 31, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1996 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.

132

(16) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
October 17, 1997 and incorporated herein by reference.
(18) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(19) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated as
of May 15, 1998 and incorporated herein by reference.
(20) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(21) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
April 19, 1999 and incorporated herein by reference.
(22) Filed as an exhibit to Registrant's Registration Statement on Form S-4 (No.
333-81831) incorporated herein by reference.
(23) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
November 16, 1999 and incorporated herein by reference.

(b) Consolidated Financial Statements and Financial Statement Schedules

(1) Consolidated Financial Statements

Consolidated Financial Statements filed as part of this Annual Report on
Form 10-K are listed in the Index to Financial Statements on page 53.

(2) Financial Statement Schedules

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

Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Secretary.

(c) Reports on Form 8-K:

The only Current Report on Form 8-K filed during the quarter ended December
31, 1999, was a Report dated November 16, 1999, to report, under Item 5, the
execution of a definitive agreement to sell Registrant's polyols business to
Bayer AG.

133

SIGNATURES

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

LYONDELL CHEMICAL COMPANY

BY: /s/ Dan F. Smith*
----------------------------------
Dan F. Smith
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/ William T. Butler* Chairman of the Board March 27, 2000
- -------------------------
(William T. Butler)

/s/ Dan F. Smith* President, Chief Executive March 27, 2000
- ------------------------- Officer and Director
(Dan F. Smith)

/s/ Carol A. Anderson* Director March 27, 2000
- -------------------------
(Carol A. Anderson)

/s/ Travis Engen* Director March 27, 2000
- -------------------------
(Travis Engen)

/s/ Stephen F. Hinchliffe, Jr.* Director March 27, 2000
- -------------------------------
(Stephen F. Hinchliffe, Jr.)

/s/ Dudley C. Mecum II* Director March 27, 2000
- -------------------------
(Dudley C. Mecum II)

/s/ Frank Savage* Director March 27, 2000
- -------------------------
(Frank Savage)

/s/ Paul R. Staley* Director March 27, 2000
- -------------------------
(Paul R. Staley)

/s/ Robert T. Blakely Executive Vice President March 27, 2000
- ------------------------- and Chief Financial Officer
(Robert T. Blakely)

/s/ Kelvin Collard Vice President and March 27, 2000
- ------------------------- Controller
(Kelvin Collard, Principal
Accounting Officer)

*By: /s/ Jeffrey R. Pendergraft March 27, 2000
-----------------------------------
(Jeffrey R. Pendergraft,
as Attorney-in-fact)

134