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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File No. 333-76473

EQUISTAR CHEMICALS, LP

(Exact name of Registrant as specified in its charter)

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

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

None

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

None

Indicate by check mark 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.  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

There is no established public trading market for the Registrant’s equity securities. As of June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, all of the Registrant’s equity securities were held by affiliates.

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PART I

Items 1 and 2. Business and Properties

Overview

Equistar Chemicals, LP (“Equistar”) is one of the world’s largest producers of basic chemicals, with total 2003 revenues of $6.5 billion, and assets of $5.0 billion as of December 31, 2003. It is North America’s second largest producer of ethylene, the world’s most widely used petrochemical. Equistar also is the third largest producer of polyethylene in North America.

Equistar’s petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Equistar’s olefins products include ethylene, propylene and butadiene. Olefins and their co-products are basic building blocks used to create a wide variety of products. Equistar’s oxygenated products include ethylene oxide (“EO”) and its derivatives, ethylene glycol (“EG”), ethanol and methyl tertiary butyl ether (“MTBE”). Oxygenated products have uses ranging from paint to cleaners to polyester fibers to gasoline additives. Equistar’s aromatics include benzene and toluene.

Equistar’s polymers segment manufactures polyolefins, including high-density polyethylene (“HDPE”), low-density polyethylene (“LDPE”), linear low-density polyethylene (“LLDPE”), polypropylene and various performance polymers. Polyethylene is used to produce packaging film, trash bags and lightweight high-strength plastic bottles for milk, juices, shampoos and detergents. Polypropylene is used in a variety of products including plastic caps and other closures, rigid packaging, automotive components, and carpet facing and backing. Equistar’s performance polymers include enhanced grades of polyethylene such as wire and cable insulating resins and polymeric powders. For additional segment information, see Note 15 of Notes to the Consolidated Financial Statements.

Equistar was formed in October 1997 as a Delaware limited partnership. Equistar began operations in December 1997 when Lyondell Chemical Company (“Lyondell”) contributed substantially all of the assets of its petrochemicals and polymers business segments to Equistar and Millennium Chemicals Inc. (“Millennium”) contributed substantially all of the assets of Millennium Petrochemicals Inc.’s ethylene, polyethylene and related products, performance polymers and ethanol businesses to Equistar. In May 1998, Lyondell, Millennium, Equistar and Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”) consummated a series of transactions to expand Equistar through the addition of Occidental’s petrochemical assets (the “Occidental Contributed Business”). From May 1998 to August 2002, Equistar’s owners were subsidiaries of Lyondell, Millennium and Occidental, with Lyondell owning a 41% interest in Equistar, and each of Millennium and Occidental owning a 29.5% interest in Equistar. On August 22, 2002, Lyondell purchased Occidental’s 29.5% interest in Equistar. As a result, Lyondell owns a 70.5% interest in Equistar, and Millennium owns the remaining 29.5% interest in Equistar.

Additional Information Available

Equistar’s principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 and its telephone number is (713) 652-7200. Equistar’s website address is www.equistarchem.com. Equistar’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge through Equistar’s website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). In addition, Equistar provides a copy of its Business Ethics and Conduct Policy on its website, free of charge. Information contained on Equistar’s website or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

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Petrochemicals Segment

Overview

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

The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use crude oil-based liquid raw materials, including naphtha, condensates and gas oils, to produce ethylene. The use of crude oil-based liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty products, such as dicyclopentadiene (“DCPD”), isoprene, resin oil and piperylenes. Based upon independent surveys, management believes that its Channelview facility is one of the lowest cash production cost olefins facilities in the United States. Equistar’s Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and LaPorte (Deer Park), Texas plants are designed to consume primarily natural gas liquids, including ethane, propane and butane (collectively “NGLs”), to produce ethylene with some co-products such as propylene. The Corpus Christi and Channelview plants also may consume NGLs to produce ethylene, depending upon the relative economic advantage of the alternative raw materials. 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’s Lake Charles, Louisiana facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. Olefins accounted for approximately 56% of Equistar’s total revenues in 2003, 59% in 2002 and 60% in 2001.

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

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

The following table outlines Equistar’s primary petrochemical products, annual processing capacity as of January 1, 2004, 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.

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Raw Materials

The raw materials cost for olefins production is the largest component of total cost for the petrochemicals business. The primary raw materials used in the production of olefins are crude oil-based liquids (also referred to as “heavy raw materials”) and NGLs (also referred to as “light raw materials”). Crude oil-based liquids generally are delivered by ship or barge. NGLs are delivered to Equistar’s facilities primarily via pipeline.

Olefins plants with the flexibility to consume a wide range of raw materials historically have had lower variable costs than olefins plants that are restricted in their raw material processing capability to NGLs. Crude oil-based liquids have had an historical cost advantage over NGLs such as ethane and propane, assuming the co-products were recovered and sold. Facilities using crude oil-based liquids historically have generated, on average, approximately four cents of additional variable margin per pound of ethylene produced compared to facilities restricted to using ethane. This margin advantage is based on an average of historical data over a period of years and is subject to short-term fluctuations, which can be significant. For example, during the first quarter of 2003, when crude oil prices rose sharply in anticipation of the war in Iraq, the advantage was significantly reduced. However, the advantage rebounded strongly in the second quarter of 2003, bringing the 2003 yearly average back to historical levels. Equistar has the capability to realize this margin advantage due to its ability to process crude oil-based liquids at the Channelview, Corpus Christi and Chocolate Bayou facilities. Equistar temporarily idled its LaPorte ethylene facility from June 2003 to August 2003 to lower its average cost of U.S. ethylene production by taking advantage of unused production capacity at its Channelview, Corpus Christi and Chocolate Bayou facilities, which can process crude oil-based liquids.

The Channelview facility is particularly flexible because it can range from processing all crude oil-based liquids to processing a majority of NGLs. The Corpus Christi plant can range from processing predominantly crude oil-based liquids to processing predominantly NGLs. The Chocolate Bayou facility processes 100% crude oil-based liquids. Equistar’s LaPorte facility can process natural gasoline and NGLs, including heavier NGLs such as butane. Equistar’s three other olefins facilities process only NGLs.

As described above, Equistar believes that its raw material flexibility is a key advantage in the production of olefins. As a result, although the majority of Equistar’s crude oil-based liquids requirements are purchased via contractual arrangements from a variety of domestic and international sources, Equistar also purchases crude oil-based liquids on the spot market from domestic and international sources in order to maintain its raw material flexibility and to take advantage of raw material pricing opportunities. Similarly, Equistar purchases a majority of its NGLs requirements via contractual arrangements from a variety of sources, but also purchases NGLs on the spot market. Equistar also obtains a portion of its crude oil-based liquids requirements from LCR at market-related prices. Equistar purchases all of its methanol requirements from Lyondell at cost-based prices. Also, Equistar purchases large amounts of natural gas to be used as energy for consumption in its business via market-based contractual arrangements with a variety of sources.

The raw materials for Equistar’s petrochemicals segment are, in general, commodity crude oil-based liquids and NGLs with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s petrochemicals business segment. For additional discussion regarding the effects of raw material pricing on recent operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Ethylene produced by the Clinton and Morris facilities generally is consumed as a raw material by the polymers operations at those sites, or is transferred to Tuscola from Morris by pipeline for the production of ethanol. Ethylene produced by Equistar’s LaPorte facility is consumed as a raw material by Equistar’s polymers operations and Millennium’s vinyl acetate operations in LaPorte and also is distributed by pipeline for other internal uses and to third parties. Ethylene and propylene produced at the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles olefins plants generally are distributed by pipeline or via exchange agreements to Equistar’s Gulf Coast polymer and EO/EG facilities as well as to Equistar’s affiliates and unrelated parties. Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. For the year ended December 31, 2003, approximately 70% of Equistar’s ethylene, based on sales dollars, was sold to

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Equistar’s polymers or oxygenated products businesses or sold to Equistar’s owners and their affiliates at market-related prices. In addition, Equistar also had significant ethylene sales to Occidental Chemical Corporation (a subsidiary of Occidental, which is the beneficial owner of approximately 25% of Lyondell) during 2003 pursuant to a long-term ethylene supply agreement.

Equistar sells a majority of its olefins products to customers with whom it has had long-standing relationships. These sales generally are made under written agreements that typically provide for monthly negotiation of price; customer purchases of a specified minimum quantity; and three- to six-year terms with automatic one- or two-year term extension provisions. Some contracts may be terminated early if deliveries have been suspended for several months. No single petrochemicals customer accounted for 10% or more of Equistar’s total revenues in 2003.

EO and EG typically are sold under three- to five-year contracts, with monthly pricing based on market conditions. Lyondell provides sales services for Equistar outside of North America for EO derivatives. Glycol ethers are sold primarily into the solvent and distributor markets at market prices, as are ethanolamines and brake fluids. Ethanol and ethers primarily are sold under one-year contracts at market prices.

Equistar licenses MTBE technology under a license from a subsidiary 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 processed by Equistar and returned to LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold at market-related prices to Lyondell for resale.

Equistar sells most of its aromatics production under contracts that have initial terms ranging from one to three years and that typically contain automatic one-year term extension provisions. These contracts provide for monthly price adjustments based upon market prices. Benzene produced by LCR is sold directly to Equistar at market-related prices. Equistar serves as LCR’s sole agent to market toluene produced by LCR and receives a marketing fee for such services.

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

Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi, La Porte 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 ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. 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.

In 2003, Equistar entered into a long-term propylene supply arrangement with a subsidiary of Sunoco, Inc. Beginning in April 2003, Equistar supplies 700 million pounds of propylene annually to Sunoco, with a majority of the propylene to be supplied under a cost-based formula and the balance to be supplied on a market-related basis. This 15-year supply arrangement replaces a previous contract under which Equistar supplied 400 million pounds of propylene annually to Sunoco at market-related prices. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition and Industry Conditions

The bases for competition in Equistar’s petrochemicals products are price, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large domestic producers of petrochemicals, including BP p.l.c. (“BP”), Chevron Phillips Chemical Company LP (“ChevronPhillips”), The Dow Chemical Company (“Dow”), Enterprise Products Partners L.P., Exxon Mobil Corporation (“ExxonMobil”),

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Huntsman Chemical Company (“Huntsman”) and Shell Chemical Company. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide and the formation of ChevronPhillips, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Equistar’s combined rated ethylene capacity at January 1, 2004 was approximately 11.6 billion pounds per year, or approximately 15% of total North American production capacity. Based on published rated production capacities, Equistar believes it is the second largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 2004 was approximately 78 billion pounds per year. Approximately 77% of the total ethylene production capacity in North America is located along the Gulf Coast.

Petrochemicals profitability is affected by raw materials costs and the level of demand for petrochemicals and their derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. Ethylene markets continue to be affected by excess capacity as a result of previous capacity additions, which have not yet been fully absorbed due to weak demand growth over the last three years. However, with the shut down of two of Dow’s Gulf Coast olefins plants in 2003 and improving demand as worldwide economic growth recovers, operating rates have begun to improve. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors that will affect petrochemical industry profitability in the future. The petrochemicals industry historically has experienced significant volatility in profitability due to fluctuations in capacity utilization. Equistar’s other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of olefins.

Polymers Segment

Overview

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

Equistar manufactures polyethylene using a variety of technologies at five facilities in Texas and at its Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the U.S. Midwest and on the East Coast of the United States. Polyethylene accounted for approximately 28% of Equistar’s total revenues in 2003, 27% in 2002 and 27% in 2001. Equistar produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. Equistar believes that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polyethylenes. Equistar also produces wire and cable insulating resins and compounds at its LaPorte, Texas facility, and wire and cable insulating compounds at its Fairport Harbor, Ohio facility. Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Equistar intends to temporarily consolidate its automotive compound production at the Fairport Harbor, Ohio facility and temporarily idle the automotive compound production unit at the LaPorte, Texas facility at the end of the first quarter of 2004. Equistar’s Morris, Illinois facility manufactures polypropylene using propylene produced as a co-product of Equistar’s ethylene production as well as propylene purchased from unrelated parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. On March 31, 2003, Equistar sold its Bayport polypropylene manufacturing unit in Pasadena, Texas to a subsidiary of Sunoco. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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The following table outlines Equistar’s polymers and performance polymers products, annual processing capacity at January 1, 2004, 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.

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Raw Materials

The primary raw material for Equistar’s polymers segment is ethylene. With the exception of the Chocolate Bayou polyethylene plant, Equistar’s polyethylene production facilities can receive their ethylene directly from Equistar’s petrochemical facilities via Equistar’s olefins pipeline system, by third-party pipelines or from on-site production. All of the ethylene used in Equistar’s polyethylene production is produced internally by Equistar’s petrochemicals segment. However, the polyethylene plants at Chocolate Bayou, LaPorte and Bayport, Texas are connected by pipeline to unrelated parties and could receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois receives propylene from Equistar’s petrochemicals segment and from unrelated parties.

The raw materials for Equistar’s polymers segment are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s polymers business segment. For additional discussion regarding the effects of raw material pricing on recent operating results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Equistar’s polymers products primarily are sold to an extensive base of established customers. Approximately 65% of Equistar’s polymers products volumes are sold to customers under term contracts, typically having a duration of one to three years. The remainder generally is 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 polymers customer accounted for 10% or more of Equistar’s total revenues in 2003.

Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 7,850 railcars for use in its polymers business. Equistar sells the vast majority of its polymers products in North America, and such sales primarily are through its own sales organization. It generally engages sales agents to market its polymers in the rest of the world.

Competition and Industry Conditions

The bases for competition in Equistar’s polymers products are price, product performance, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large producers of polymers, including Atofina, BP Solvay Polyethylene, ChevronPhillips, Dow, Eastman Chemical Company, ExxonMobil, Formosa Plastics, Huntsman, NOVA Chemicals Corporation and Westlake Polymers. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide, the formation of ChevronPhillips, and the polymers business combinations between BP and Solvay, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Based on published rated industry capacities, Equistar is the third largest producer of polyethylene in North America. The combined rated capacity of Equistar’s polyethylene units as of January 1, 2004 was approximately 5.7 billion pounds per year, or approximately 15% of total industry capacity in North America. There are 19 other North American producers of polyethylene, the most significant of which are ChevronPhillips, Dow and ExxonMobil.

Polymers profitability is affected by raw material costs and the worldwide level of demand for polymers, 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. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors, which will affect polymers industry profitability in the future.

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Properties Owned or Leased by Equistar

Equistar’s principal manufacturing facilities and principal products as of January 1, 2004 are set forth below. All of these facilities are wholly owned by Equistar unless otherwise noted.

Storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons is provided in caverns within the salt dome at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage and four brine ponds 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 Chocolate Bayou, Corpus Christi, LaPorte, Matagorda and Victoria facilities. Equistar uses a pipeline owned and operated by an unaffiliated party to transport ethylene from its Morris facility to

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its Tuscola facility. Equistar owns and leases several pipelines connecting the Channelview facility, the LCR refinery and the Mont Belvieu storage facility, which are used to transport raw materials, 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 9,400 railcars for use in its petrochemicals and polymers businesses.

Lyondell provides office space to Equistar for its executive offices and headquarters in downtown Houston, Texas as part of a shared services arrangement. See “Item 13. Certain Relationships and Related Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” In addition, Equistar owns facilities that house the Chocolate Bayou, Cincinnati and Morris research operations. Equistar also leases sales facilities and leases storage facilities, primarily in the Gulf Coast area, from various parties for the handling of products.

Employee Relations

As of December 31, 2003, Equistar employed approximately 3,165 full-time employees. In addition to its own employees, Equistar uses the services of Lyondell employees pursuant to a shared services arrangement and also uses the services of independent contractors in the routine conduct of its business. Approximately 5% of Equistar’s employees are covered by collective bargaining agreements. Equistar believes that its relations with its employees are good. See “Item 13. Certain Relationships and Related Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.”

Research and Technology; Patents and Trademarks

Equistar conducts research and development principally at its Cincinnati, Ohio technical center, with an additional technical center located at the Chocolate Bayou, Texas facility. Equistar’s research and development expenditures were $38 million in 2003, $38 million in 2002 and $39 million in 2001, all of which were expensed as incurred.

Equistar maintains a patent portfolio that is continuously supplemented by new patent applications related to its petrochemicals and polymers businesses. As of December 31, 2003, Equistar owned approximately 215 United States patents and approximately 335 worldwide patents. Equistar has numerous trademarks and trademark registrations in the United States and other countries, including the Equistar logo. Equistar does not regard its business as being materially dependent upon any single patent or trademark.

RISK FACTORS THAT MAY AFFECT EQUISTAR

There are many factors that may affect the businesses and results of operations of Equistar. Some of these factors are discussed below. For additional discussion regarding factors that may affect the businesses and operating results of Equistar, see “Items 1 and 2. Business and Properties,” “Forward-Looking Statements,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk.”

Cyclicality and Overcapacity in the Petrochemical and Polymer Industries

Equistar’s historical operating results reflect the cyclical and volatile nature of the supply-demand balance in the petrochemical and polymer industries. These industries historically have experienced alternating periods of capacity shortages leading to tight supply, causing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. This cyclical pattern is most visible in the markets for ethylene and polyethylene, resulting in volatile profits and cash flow over the business cycle.

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There is ongoing overcapacity in the petrochemical and polymer industries, as a number of Equistar’s competitors in various segments of the petrochemical and polymer industries have added capacity and demand growth has lagged behind rates experienced historically. There can be no assurance that future growth in product demand will be sufficient to utilize current or additional capacity. Excess industry capacity has depressed and may continue to depress Equistar’s volumes and margins. The global economic and political environment continues to be uncertain. This environment and uncertainty contributed to low industry operating rates, added to the volatility of raw material and energy costs, and forestalled the industry’s recovery from trough conditions, which has and may continue to place pressure on Equistar’s results of operations. As a result of excess industry capacity and weak demand for products, as well as rising energy costs and raw material prices, Equistar’s operating income has declined and may remain volatile.

Raw Materials and Energy Costs

Equistar purchases large amounts of raw materials and energy for its businesses. The cost of these raw materials and energy, in the aggregate, represent a substantial portion of Equistar’s operating expenses. The prices of raw materials and energy generally follow price trends of, and vary with the market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. Results of operations for Equistar have been and could be in the future significantly affected by increases and volatility in these costs. Price increases increase Equistar’s working capital needs, and can therefore also adversely affect Equistar’s liquidity and cash flow.

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

General Economic Conditions and Other External Factors

External factors beyond Equistar’s control, such as general economic conditions, international events and circumstances, competitor actions, and governmental regulation in the United States and abroad, can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for Equistar’s products, and can magnify the impact of economic cycles on Equistar’s businesses. Equistar believes that events in the Middle East had a particular influence in 2003 and may continue to do so. In addition, a number of Equistar’s products are highly dependent on durable goods markets, such as the housing and automotive markets, that are themselves particularly cyclical. If the global economy does not improve, demand for Equistar’s products and its income and cash flow would continue to be adversely affected. In addition, these risks have and may continue to increase volatility in prices for crude oil and natural gas and could result in increased raw material costs. Further, these risks could cause increased instability in the financial markets and adversely affect Equistar’s ability to access capital.

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

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Commodity Products

Equistar sells its products in highly competitive markets. Due to the commodity nature of most of Equistar’s products, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, Equistar generally is not able to protect its market position for these products by product differentiation and may not be able to pass on cost increases to its customers. Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. In addition, Equistar’s ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for Equistar’s products, as well as the capacity utilization rates for those products. Timing differences in pricing between raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have had and may continue to have a negative effect on profitability.

Environmental and Other Regulatory Matters

Equistar cannot predict with certainty the extent of its future liabilities and costs under environmental, health and safety laws and regulations and Equistar cannot guarantee that they will not be material. In addition, Equistar may face liability for alleged personal injury or property damage due to exposure to chemicals and other hazardous substances at its facilities or chemicals that it otherwise manufactures, handles or owns. Although these types of claims have not historically had a material impact on Equistar’s operations, a significant increase in the success of these types of claims could materially adversely affect Equistar’s business, financial condition, operating results or cash flow.

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

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. Also, U.S. “Superfund” statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including Equistar) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.”

Equistar has on-site solid waste management units at several of its facilities, which were used in the past to dispose of waste generated at the facilities. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to these facilities. Equistar’s policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors

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as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. Equistar has accrued amounts (without regard to potential insurance recoveries or third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures based upon its interpretation of current environmental standards. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. Based on the establishment of such accruals, Equistar 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.” Lyondell, Millennium Petrochemicals and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions. Lyondell, Millennium, Occidental and Equistar each remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See “Item 13. Certain Relationships and Related Transactions – Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.

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, 2003, 2002 and 2001, Equistar spent approximately $38 million, $14 million and $16 million, respectively, for environmentally related capital expenditures at existing facilities. The increased 2003 capital expenditures resulted from new emission reduction rules, as discussed below. Equistar currently estimates that environmentally related capital expenditures at its existing facilities will be approximately $87 million and $82 million for 2004 and 2005, respectively, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOCs”), as discussed below.

The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002 changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” for a summary of the estimated capital expenditures required for Equistar to comply with the 80% NOx emission reduction requirements. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues in 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.

In addition to the environmental matters described above, Equistar is subject to other material regulatory requirements, including those relating to the shipment or exportation of its products. Although Equistar has compliance programs and other processes intended to ensure compliance with all such regulations, Equistar is subject to the risk that its compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could have a material adverse effect on Equistar’s financial position.

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Operating Hazards

The occurrence of material operating problems at Equistar’s facilities, 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 Equistar as a whole, during and after the period of such operational difficulties. Equistar’s income and cash flow are dependent on the continued operation of its various production facilities and the ability to complete construction projects on schedule.

Although Equistar takes precautions to enhance the safety of its operations and minimize the risk of disruptions, Equistar’s operations, along with those of other members of the chemical industry, are subject to hazards inherent in chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These hazards include: pipeline leaks and ruptures; explosions; fires; severe weather and natural disasters; mechanical failures; unscheduled downtimes; labor difficulties; transportation interruptions; remediation complications; chemical spills; discharges or releases of toxic or hazardous substances or gases; storage tank leaks; other environmental risks; and potential terrorist acts. Some of these hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties.

Furthermore, Equistar is also subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters. Equistar 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, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If Equistar were to incur a significant liability for which it was not fully insured, it could have a material adverse effect on its financial position.

Potential Acquisitions, Divestitures and Joint Ventures

Equistar continuously seeks opportunities to generate value through business combinations, purchases and sales of assets and contractual arrangements or joint ventures. These transactions are intended to result in the realization of synergies, the creation of efficiencies or the generation of cash to reduce debt. To the extent permitted under Equistar’s credit facilities and other debt agreements, some of these transactions may be financed with additional borrowings by Equistar. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could adversely affect the results of operations of Equistar in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of Equistar’s businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

Effect of any Change in Ownership

Lyondell or Millennium may transfer control of their interests in Equistar or engage in mergers or other business combination transactions with a third party or with the other owner that could result in a change in control of any one of Lyondell, Millennium or Equistar. Because of the unanimous approval requirements in Equistar’s partnership governance structure, any transfer of an interest in Equistar or change of control of any one of Equistar’s owners could affect the governance of Equistar. Equistar cannot predict how a change of owners would affect Equistar’s operations or business.

Unless waived by each of Equistar’s owners, Equistar’s partnership agreement provides that a direct or indirect transfer of an interest in Equistar generally may occur only if the other owner is first offered the opportunity to purchase the interest and, if the transferee is a third party, the transferee has, or in the opinion of a nationally recognized investment bank could reasonably be expected to obtain, an “investment grade” debt rating. However, if interests are transferred in connection with a merger or sale of a majority of the other assets of Lyondell or Millennium, the other owner does not have a right of first option and the investment grade requirement is not applicable.

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The types of transactions described above could involve third parties and/or either Lyondell or Millennium. Equistar’s owners have discussed, and from time to time may continue to discuss, whether in connection with their ordinary course dialogue regarding Equistar’s business or otherwise, transactions which if consummated could result in a transfer or modification, either directly or indirectly, of their ownership interest in Equistar. For example, in August 2002, Lyondell purchased Occidental’s 29.5% ownership interest in Equistar. Equistar cannot be certain that its owners will not sell, transfer or otherwise modify their ownership interest in Equistar, whether in transactions involving third parties and/or the other owner.

Equistar’s credit facility provides that an event of default occurs if Lyondell, Millennium and/or Occidental or their successors (collectively, the “Original Owners”) cease to collectively hold more than 50% of the interests and voting power in Equistar. In addition, an event of default occurs under the credit facility if a party other than an Original Owner (1) acquires a substantial portion of Lyondell’s Governance Committee powers, (2) acquires the right to exercise powers of the Governance Committee that require unanimous consent or (3) owns more than 25% of the interests and voting power in Equistar and has a debt rating below a specified level. An event of default under Equistar’s credit facility would permit the lenders to declare amounts outstanding under the credit facility immediately due and payable, terminate future commitments and proceed against the collateral granted to them to secure the indebtedness under the credit facility, which consists of substantially all of Equistar’s personal property, including inventory. If the lenders under the credit facility accelerated their loans, it could result in a default under Equistar’s outstanding notes, which then could be accelerated. These events of default under Equistar’s credit facility also are events of termination under Equistar’s accounts receivable sales facility. An event of termination under Equistar’s accounts receivable sales facility terminates the accounts receivable sales program such that additional accounts receivable may not be sold under the facility and the then-existing purchasers of accounts receivable would receive all collections from Equistar’s sold accounts receivable until they have collected on their interests in the purchased accounts receivable.

Conflicts of Interest between Equistar and its Owners

Conflicts of interest may arise between Equistar and one or more of its owners when Equistar is faced with decisions that could have different implications for Equistar and its owners. Although Equistar’s partnership agreement requires that any transaction or dealing between Equistar and an owner or one of its affiliates be approved on Equistar’s behalf by the disinterested owner, this does not address all conflicts of interest that may arise. For example, Equistar’s owners are permitted, in certain circumstances, to compete with Equistar. Because Equistar’s owners control it, conflicts of interest arising because of competition between Equistar and an owner could be resolved in a manner adverse to Equistar. All of Equistar’s executive officers are also executive officers of Lyondell. Pursuant to Equistar’s partnership agreement, Equistar’s chief executive officer is designated by Lyondell. It is possible that there will be situations where Equistar’s owners’ interests are in conflict with Equistar’s interests, and Equistar’s owners, acting through the partnership governance committee or through the executive officers, could resolve these conflicts in a manner adverse to Equistar. See “Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar—The Partnership Agreement.”

Deadlock of Owners

Under the terms of Equistar’s partnership agreement, the partnership governance committee manages and controls Equistar’s business, property and affairs, including the determination and implementation of its strategic direction. Equistar’s partnership governance committee consists of six members, called representatives, three appointed by each owner. Under the partnership agreement, many important decisions, including decisions relating to changes in Equistar’s scope of business, Equistar’s strategic plan, certain capital expenditures and business combinations, among other specified matters, require the unanimous agreement of at least two representatives of each owner. It is possible that, as to unanimous consent items, the partnership governance committee may not reach agreement regarding matters that are very important to Equistar and could be deadlocked. The partnership agreement does not include procedures for resolving deadlocks, unless the deadlock relates to approval of Equistar’s updated strategic plan. If deadlocks cannot be resolved, inaction may result, which could, among other things, result in Equistar losing business opportunities. See “Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar—The Partnership Agreement.”

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Related Party Transactions

Equistar’s owners and parties related to Equistar’s owners have various agreements and transactions with Equistar. For example, Equistar is party to a shared services arrangement with Lyondell pursuant to which Lyondell provides Equistar with many services that are essential to the administration and management of Equistar’s business, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Accordingly, Equistar depends to a significant degree on Lyondell for the administration of Equistar’s business. If Lyondell did not fulfill its obligations under the shared services arrangement, it would disrupt Equistar’s business and could have a material adverse effect on Equistar’s business and results of operations. In addition, Equistar has product supply agreements with each of its owners and various other related parties, pursuant to which Equistar sells a substantial amount of its products. Equistar expects to continue to derive a significant portion of its business from transactions with these parties. If they are unable or otherwise cease to purchase Equistar’s products, Equistar’s revenues, margins and cash flow could be adversely affected. See “Item 13. Certain Relationships and Related Transactions.”

FORWARD-LOOKING STATEMENTS

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

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

All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and in this report. See “Items 1 and 2. Business and Properties,” “Risk Factors That May

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Affect Equistar,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk” for additional information about factors that may affect the businesses and operating results of Equistar. These factors are not necessarily all of the important factors that could affect Equistar. Use caution and common sense when considering these forward-looking statements. Equistar does not intend to update these statements unless securities laws require it to do so.

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

NON-GAAP FINANCIAL MEASURES

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

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

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

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Item 3. Legal Proceedings

Equistar is, from time to time, a defendant in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, Equistar does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on its business or financial condition. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Equistar’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of co-defendants or others, or by any insurance coverage that may be available.

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

From time to time Equistar 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 Equistar 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 April 1997, the Illinois Attorney General’s Office filed a complaint in Grundy County, Illinois Circuit Court seeking monetary sanctions for releases into the environment at Millennium’s Morris, Illinois plant in alleged violation of state regulations. The Morris, Illinois plant was contributed to Equistar on December 1, 1997 in connection with the formation of Equistar. Equistar has reached a tentative settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000, and is finalizing the settlement consent decree with the State of Illinois. Equistar does not believe that the ultimate resolution of this complaint will have a material adverse effect on the business or financial condition of Equistar.

In May 2003, the TCEQ notified Equistar that it is seeking a civil penalty of $167,000 in connection with alleged exceedances of permitted emissions at certain cooling towers at Equistar’s Channelview plant. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

In August 2003, the EPA notified Equistar that it is seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at Equistar’s Lake Charles plant. Equistar has reached a tentative settlement with the EPA, which includes a civil penalty in the amount of $195,000, and is finalizing the settlement consent decree with the EPA. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

In connection with the formation of Equistar, Lyondell, Millennium Petrochemicals and Occidental each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed to Equistar. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2003, Equistar had incurred approximately $7 million with respect to the indemnification baskets for the businesses contributed by each of Lyondell and Millennium Petrochemicals and approximately $6 million for the business contributed by Occidental. Pursuant to these indemnification arrangements, Equistar will assume all third party claims relating to the contributed businesses that are filed on or after December 1, 2004 as to Lyondell and Millennium Petrochemicals and May 15, 2005 as to Occidental. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements

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to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See “Item 13. Certain Relationships and Related Transactions–Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.

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

None.

PART II

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

Equistar does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. There is no established public trading market for the partnership interests of Equistar. See “Item 12. Security Ownership of Certain Beneficial Owners and Management” for a listing of the holders of Equistar’s partnership interests.

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

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

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto.

In addition to comparisons of annual operating results, Equistar Chemicals, LP (“Equistar”) has included certain “trailing quarter” comparisons of fourth quarter 2003 operating results to third quarter 2003 operating results. Equistar’s businesses are highly cyclical in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Equistar.

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

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Overview

Equistar produces and markets olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”) in its petrochemicals segment. Additionally, Equistar produces and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders in its polymers segment.

In 2003, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. Preliminary estimates by CMAI indicate that U.S. industry ethylene demand in 2003 decreased slightly compared to 2002.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Olefins are produced from two major raw material groups:

Equistar has the ability to shift its ratio of raw materials used in production of olefins to take advantage of the relative costs of liquids and NGLs.

The following table shows the average benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark sales prices for ethylene and co-product propylene, which Equistar produces and sells. The benchmark weighted average cost of ethylene production is based on the estimated average ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision by CMAI.

As indicated above, raw material and energy costs averaged significantly higher in 2003 than in 2002, putting upward pressure on raw material costs for the chemical industry, including Equistar. In response to the higher raw material and energy costs, Equistar implemented significant sales price increases in 2003 for substantially all of its petrochemicals and polymers products. Raw material and energy cost increases of nearly $1 billion were recovered through sales price increases in 2003. The magnitude of these price increases had a negative effect on product demand, and contributed to Equistar experiencing lower sales volumes, particularly in the second quarter 2003. Although demand recovered during the second half of 2003, sales volumes were lower for the year 2003 compared to 2002.

In 2003, Equistar issued $700 million of new senior unsecured notes, deferring debt maturities, restructured its credit facility and entered into a new receivables sales facility to maintain its liquidity. These actions resulted in $37 million of financing fees and related expenses in 2003.

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In March 2003, Equistar completed transactions involving a 15-year propylene supply arrangement and the sale of its Bayport polypropylene production facility in Pasadena, Texas. Equistar received total cash proceeds of $194 million, including the value of the polypropylene inventory sold. Cash proceeds of $159 million of the total represented a partial prepayment under the long-term propylene supply arrangement. Equistar also took steps in 2003 to refocus its research and development (“R&D”) activities, resulting in the write off of an R&D facility and incurrence of employee severance costs.

Equistar also completed scheduled maintenance turnarounds at its two largest ethylene plants in 2003. While negatively impacting raw material flexibility in 2003, conclusion of these turnarounds increases Equistar’s future production flexibility.

In 2002, compared to 2001, the chemical industry experienced weak demand growth and ongoing excess capacity. For the year 2002, U.S. industry ethylene demand grew 2.8%, compared to 2001, which failed to absorb excess ethylene industry capacity. This continued to put downward pressure on industry prices and as a result, on product margins. Overall, Equistar experienced lower product margins in 2002 than in 2001.

RESULTS OF OPERATIONS

Net Loss—Equistar had a 2003 net loss of $339 million compared to a 2002 net loss of $246 million, before the cumulative effect of an accounting change in 2002. The $93 million higher loss in 2003 included $37 million of refinancing costs, a $12 million loss on the sale of the polypropylene plant, an $11 million charge for the write-off of a polymer R&D facility and $6 million of employee severance costs. The 2002 loss included the negative impact of certain fixed price natural gas and NGL purchase contracts. Equistar’s costs under these contracts were approximately $33 million higher than market-based costs would have been. The remaining $60 million decrease in operating results was primarily due to lower sales volumes, which were only partly offset by higher average product margins in 2003. In addition, selling, general and administrative expenses in 2003 were $27 million higher than in 2002, reflecting higher pension and medical benefit costs and a higher provision for doubtful accounts.

Equistar had a 2002 net loss of $246 million, before the cumulative effect of an accounting change, compared to a 2001 net loss of $283 million. The 2002 loss included the $33 million negative impact of the fixed price natural gas and NGL purchase contracts. The 2001 period included $33 million of goodwill amortization, $22 million of shutdown costs for Equistar’s Port Arthur, Texas polyethylene facility and a $35 million negative impact from the fixed price natural gas and NGL contracts. Apart from these items, the increase in the net loss primarily reflected a $129 million decrease in petrochemicals segment operating income, partly offset by a $112 million improvement in the polymers segment operating loss. Petrochemicals segment operating income decreased as sales prices decreased more than raw material costs, resulting in lower petrochemicals product margins in 2002 compared to 2001. The polymers segment operating loss was reduced as raw material costs, primarily ethylene and propylene, decreased more than the decreases in average polymers product sales prices, resulting in higher polymers product margins in 2002 compared to 2001.

Fourth Quarter 2003 versus Third Quarter 2003

Equistar had a net loss of $104 million in the fourth quarter 2003 compared to a net loss of $40 million in the third quarter 2003. Equistar’s fourth-quarter operations were negatively impacted by an increase in the cost of ethylene production driven by higher prices for raw materials and energy. Equistar responded with price increases, but the timing of the price increases was such that they were insufficient to fully offset the cost increases. The benchmark cost of ethylene production was over 2 cents per pound higher in the fourth quarter 2003 compared to the third quarter 2003, while benchmark ethylene sales prices increased by less than 1 cent per pound. Additionally, a scheduled maintenance turnaround at an ethylene plant during the fourth quarter 2003 had a modest negative impact on operations by affecting Equistar’s ability to optimize its raw material utilization. The fourth quarter 2003 included $18 million of finance charges and $6 million of severance costs, while the third quarter 2003 included the $11 million charge for the write-off of the polymer R&D facility.

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Sales volumes continued to improve during the fourth quarter 2003 versus the third quarter 2003. Sales of ethylene and ethylene derivatives increased by approximately 2 percent. Sales volumes typically decrease in the fourth quarter versus the third quarter.

Segment Data

The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for Equistar’s business segments.

Petrochemicals Segment

Revenues—Revenues of $6.0 billion in 2003 increased 22% compared to revenues of $5.0 billion in 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 28% higher in 2003 compared to 2002 in response to significant increases in the cost of ethylene production, while benchmark propylene sales prices averaged 19% higher. Segment sales volumes decreased 3% in 2003 compared to 2002 due to lower sales to the polymers segment and lower co-product production in 2003. Lower co-product production reflected the scheduled maintenance turnarounds at two major ethylene plants in 2003.

Revenues of $5.0 billion in 2002 decreased 8% compared to revenues of $5.4 billion in 2001 as lower 2002 average sales prices were only partly offset by a 4% increase in sales volumes. Equistar’s sales prices in 2002 averaged 11% lower than in 2001, reflecting lower raw material costs and low demand growth coupled with excess industry capacity. Benchmark ethylene sales prices averaged 22.2 cents per pound in 2002, a 16% decrease

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compared to 2001. These lower ethylene sales prices were slightly offset by higher 2002 propylene sales prices. Benchmark propylene sales prices averaged 3% higher in 2002 than in 2001.

Cost of Sales—Cost of sales of $5.9 billion in 2003 increased 23% compared to $4.8 billion in 2002 due to higher costs of liquid- and NGL-based raw materials and energy in 2003 compared to 2002. The benchmark cost of ethylene production averaged 32% higher in 2003 than in 2002, while benchmark natural gas costs averaged 63% higher.

Cost of sales of $4.8 billion in 2002 decreased 6% compared to $5.1 billion in 2001, or 2% less than the percent decrease in revenues. While the costs of natural gas and NGL raw materials decreased from historically high levels experienced in 2001, other raw material costs, such as heavy liquids, did not decrease similarly.

Operating Income—The operating income for the segment of $124 million in 2003 decreased $22 million compared to operating income of $146 million in 2002. Operating income for 2002 included the $33 million negative effect of the fixed price natural gas and NGL purchase contracts entered into in early 2001. The decrease in 2003 operating income was due to the negative effect of two scheduled maintenance turnarounds and 3% lower sales volumes.

Operating income of $146 million in 2002 decreased $129 million from $275 million in 2001 as sales prices decreased more than raw material costs, resulting in lower product margins. The effect of the lower 2002 product margins was only partly offset by the benefit of a 4% increase in sales volumes, which was in line with industry demand growth.

Polymers Segment

Revenues—Revenues of $2,023 million in 2003 increased 8% compared to revenues of $1,868 million in 2002. The increase was due to a 23% increase in average sales prices partly offset by a 12% decrease in sales volumes. Average sales prices increased in response to higher raw material costs, primarily ethylene, compared to 2002. The average benchmark price of ethylene increased 28% in 2003 compared to 2002. The lower polymers sales volumes reflected the negative effect of the higher sales prices on demand and, to a lesser extent, the sale of the Bayport polypropylene production facility in 2003.

Revenues of $1,868 million in 2002 decreased 6% compared to revenues of $1,980 million in 2001 due to a 9% decrease in average sales prices offset by a 4% increase in sales volumes. Lower sales prices in 2002 reflected generally lower raw material costs compared to 2001. Sales volumes increased due to stronger demand in 2002 compared to 2001.

Cost of Sales—Cost of sales of $2,006 million in 2003 increased 7% compared to $1,875 million in 2002. This increase reflected higher raw material costs, primarily ethylene, offset in part by the effect of the 12% decrease in sales volumes. Benchmark ethylene costs were 28% higher in 2003 compared to 2002.

Cost of sales of $1,875 million in 2002 decreased 10% compared to $2,088 million in 2001. The decrease during 2002 reflected lower raw material costs, primarily ethylene, and lower energy costs, partly offset by the 4% increase in sales volumes. Benchmark ethylene prices were 16% lower and were only partly offset by a 3% increase in benchmark propylene prices in 2002 compared to 2001.

Other Operating Expenses—Other operating expenses were $95 million in 2003 compared to $67 million in 2002. The 2003 increase was primarily due to an $11 million charge related to the write-off of a polymer R&D facility and a $12 million loss on the sale of the Bayport polypropylene production facility.

Operating Loss—The polymers segment had an operating loss of $78 million in 2003 compared to an operating loss of $74 million in 2002. The combined effects of the $11 million write-off and the $12 million loss on sale noted above, as well as the negative effect of the 12% decrease in sales volumes, was substantially offset by higher polymer product margins. Margins increased in 2003 compared to 2002 as higher average sales prices more than offset higher raw material costs.

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The operating loss of $74 million in 2002 decreased $112 million compared to the operating loss of $186 million in 2001. The $112 million improvement was due to higher polymers product margins and, to a lesser extent, higher sales volumes. Margins improved in 2002 compared to 2001, as decreases in sales prices were less than the decreases in polymers raw material costs.

Unallocated Items

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

Cost of Sales—Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets.

Other Operating Expenses—These include unallocated general and administrative expenses and, in 2001, goodwill amortization. Unallocated expenses were $135 million in 2003, $116 million in 2002 and $166 million in 2001. The increase from 2002 to 2003 was primarily due to an increase in general and administrative expenses due to higher pension and medical benefit costs and a higher provision for doubtful accounts. The decrease from 2001 to 2002 was primarily due to goodwill amortization of $33 million that ceased in 2002. See Note 2 to the Consolidated Financial Statements.

The following discusses items that are not included in operating income, but that affected Equistar’s net income. See Note 15 to the Consolidated Financial Statements.

Other Income (Expense), Net—Other income (expense), net was a net expense of $43 million in 2003 and net income of $2 million in 2002 and $5 million in 2001. The net expense in 2003 was primarily due to $37 million of charges related to refinancing. Equistar incurred a $3 million loss on early debt extinguishment in 2001, which was previously reported as an extraordinary item. See “Accounting and Reporting Changes” below.

Cumulative Effect of Accounting Change—Effective January 1, 2002, Equistar adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. See Note 2 to the Consolidated Financial Statements.

FINANCIAL CONDITION

Operating Activities—Operating activities provided cash of $164 million in 2003, $55 million in 2002 and $230 million in 2001. The $109 million increase in operating cash flow in 2003 compared to 2002 reflects $159 million received by Equistar as a partial prepayment for propylene to be delivered over a period of 15 years in connection with the long-term propylene supply arrangement entered into in March 2003. The cash flow benefit of this prepayment was partially offset by a higher net loss in 2003, excluding the $1.1 billion cumulative effect of an accounting change in 2002.

Cash provided by a net reduction in the controllable components of working capital – accounts receivable, inventory and accounts payable—was comparable, in total, in 2003 to 2002. In 2003, in consideration of discounts offered to certain customers for early payment for product delivered in December 2003, some receivable amounts were collected in December 2003 that otherwise would have been expected to be collected in January 2004, including $41 million from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”). Additionally, in December 2003, Equistar replaced its previous $100 million accounts receivable sales facility with a new $450 million, four-year, accounts receivable sales facility. The balance of Equistar’s accounts receivable sold under the new facility at December 31, 2003 was $102 million compared to $81 million at December 31, 2002 under the previous facility.

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Operations in 2003 also included cash expenditures of $97 million for scheduled maintenance turnarounds at two of Equistar’s largest ethylene plants. Operations in 2002 and 2001 included expenditures of $49 million and $15 million, respectively, for scheduled maintenance turnarounds.

The $175 million decrease in operating cash flow in 2002 compared to 2001 was due to higher cash expenditures in 2002 for scheduled maintenance turnarounds, interest, employee benefits and railcar lease prepayments and a lower benefit from net reductions in the controllable components of working capital. These were partly offset by a $37 million lower loss, before the $1.1 billion cumulative effect of an accounting change in 2002.

Investing Activities—Investing activities used cash of $37 million, $124 million and $107 million in 2003, 2002 and 2001, respectively.

Equistar’s capital expenditures were $106 million in 2003, $118 million in 2002 and $110 million in 2001. The 2003 and 2002 expenditures included $18 million and $47 million, respectively, for purchases of previously leased railcars. Equistar’s level of expenditures during the periods presented reflected reduced discretionary spending in view of the continuing poor business environment. Capital expenditures in these years primarily included reliability improvements and regulatory compliance projects. Equistar’s capital budget for 2004 is $148 million. The increase over 2003 spending is primarily to ensure compliance with new environmental regulations. See “Environmental Matters” below.

On March 31, 2003, concurrent with entering into the long-term propylene supply arrangement, Equistar sold a polypropylene production facility in Pasadena, Texas, for cash proceeds of $35 million. Also in 2003, Equistar sold certain railcars, which had been purchased in 2002, for a total of $34 million and leased the railcars from the buyers under operating lease agreements.

Financing Activities—Financing activities provided cash of $45 million in 2003, used cash of $106 million in 2002, and provided cash of $61 million in 2001. In December 2003, concurrent with entering into the new $450 million accounts receivable sales facility, Equistar entered into a new $250 million, four-year, inventory-based revolving credit facility, which replaced Equistar’s previous $354 million revolving credit facility. The new credit facility has no ratings triggers. At December 31, 2003, the interest rate under the new revolving credit facility was LIBOR plus 2.5%. The new revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable.

In April 2003, Equistar issued $450 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of term loans under Equistar’s previous $354 million revolving credit facility and prepayment premiums of approximately $17 million. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility. In November 2003, Equistar issued $250 million of 10.625% senior unsecured notes due in 2011. The gross proceeds of $262 million, net of related fees, were used to prepay in full $173 million of the outstanding term loan under Equistar’s previous $354 million revolving credit facility and to repay borrowing under that revolving credit facility.

In March 2003 and March 2002, Equistar obtained amendments to its previous $354 million revolving credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive.

Financing activities in 2002 included the scheduled retirement of $100 million of 9.125% notes.

In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included an amended credit facility consisting of a $500 million secured revolving credit facility and a $300 million secured term loan maturing in August 2007. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The refinancing replaced a $1.25 billion credit facility, $820 million of which was outstanding. A portion of the net proceeds was also used to repay $90 million of Equistar’s medium-term notes that matured on August 30, 2001. The remaining net proceeds were used for general business purposes. The amended credit facility also made certain financial ratio requirements less restrictive. Equistar previously had amended its credit facility in March 2001, easing certain financial ratio requirements.

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As a result of continuing adverse conditions in the industry and its debt service obligations, Equistar made no distributions to partners in 2003, 2002 and 2001.

Liquidity and Capital Resources—At December 31, 2003, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 59% of its total capitalization. Equistar had cash on hand of $199 million. In addition, the total amount available at December 31, 2003 under both the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility was approximately $430 million, which gives effect to the borrowing base less a $75 million unused availability requirement and is net of the $102 million sold under the accounts receivable facility and $18 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. There was no borrowing under the revolving credit facility at December 31, 2003.

In November 2003, Moody’s Investors Service (“Moody’s”) lowered Equistar’s senior unsecured debt rating from B1 to B2. During 2003, Standard & Poor’s rating service (“S&P”) lowered Equistar’s senior unsecured debt rating from BB to BB-, and, in January 2004, S&P further lowered it from BB- to B+. S&P cited weaker than expected fourth quarter and full year 2003 operating results at Equistar. In January 2004, as a result of Equistar completing the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility, Moody’s and S&P revised Equistar’s outlook from negative to stable. The rating services cited the significant improvement in Equistar’s liquidity provided by these transactions due to the absence of financial covenants and ratings triggers and prudent steps taken by management to extend debt maturities and maintain liquidity in a difficult business environment.

One or more of the rating agencies may reduce Equistar’s ratings in the future, whether as the result of adverse developments affecting Equistar’s business, events beyond Equistar’s control or other reasons cited by the agencies. A downgrade in debt rating could affect Equistar’s trade terms, borrowing costs and its ability to refinance or restructure debt in the future.

Equistar’s ability to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. Management believes that conditions will be such that cash balances, cash flow from operations, cash generated from higher utilization of the accounts receivable sales facility and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. However, if future operating cash flows are less than currently anticipated due to raw material prices or other factors, Equistar may be forced to reduce or delay capital expenditures, sell assets, or reduce operating expenses.

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

In December 2003, Equistar entered into a new $450 million, four-year, accounts receivable sales facility to replace its previous accounts receivable sales facility. Pursuant to the facility, Equistar sells, through a wholly owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. The new accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the new inventory-based revolving credit facility. See discussion of “Liquidity and Capital Resources” above and discussion of “Long-Term Debt” below. The breach of these covenants would permit the counterparty to the accounts receivable sales facility to terminate further purchases of Equistar’s accounts receivable. The new facility does not contain ratings triggers. At December 31, 2003 and 2002, the balance of Equistar’s accounts receivable sold under the facilities was $102 million and $81 million, respectively. The facility accelerates availability to the business of cash from product sales that otherwise would have been collected over the normal billing and collection cycle. The availability of the accounts receivable sales facility provides one element of Equistar’s ongoing sources of liquidity and capital resources. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold, but Equistar would in no event be required to repurchase such interest. See Note 4 to the Consolidated Financial Statements for additional accounts receivable information.

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Contractual and Other Obligations—The following table summarizes, as of December 31, 2003, Equistar’s minimum payments for long-term debt, and contractual and other obligations for the next five years and thereafter.

Long-Term Debt—The new $250 million inventory-based revolving credit facility and the indentures governing Equistar’s senior notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The breach of these covenants would permit the lenders or noteholders to declare any outstanding debt immediately payable and would permit the lenders under Equistar’s new credit facility to terminate future lending commitments. The new credit facility is also subject to minimum unused availability requirements—see “Liquidity and Capital Resources” above. Equistar was in compliance with all covenants under these agreements as of December 31, 2003. See Note 9 to the Consolidated Financial Statements for descriptions of Equistar’s long-term debt and credit facility.

Pension and Other Postretirement Benefits—Equistar maintains several defined benefit pension plans and provides postretirement benefits, as described in Note 12 to the Consolidated Financial Statements. At December 31, 2003, the projected benefit obligation for Equistar’s plans exceeded the fair value of plan assets by $58 million. Subject to future actuarial gains and losses, as well as actual asset earnings, Equistar will be required to fund the $58 million, with interest, in future years. Pension contributions were $15 million, $18 million and $7 million for the years 2003, 2002 and 2001, and are estimated to be approximately $17 million for 2004 and 2005, $32 million in 2006 and $20 million in 2007 and 2008. Current projections indicate that contributions will have to be made quarterly, rather than annually, beginning in 2006, resulting in an acceleration of payments in 2006. Other postretirement benefits are unfunded and are paid by Equistar as incurred. Estimates of postretirement benefit payments through 2008 are included in the table above.

Advances from Customers—Equistar received advances from customers in 2003 and in 2002 in connection with long-term sales agreements under which Equistar is obligated to deliver product primarily at cost-based prices. These advances are treated as deferred revenue and will be amortized to earnings over the remaining terms of the respective contracts, which range from 8 to 14 years. The unamortized long-term portion of such advances totaled $156 million and $23 million as of December 31, 2003 and 2002, respectively. See Note 8 to the Consolidated Financial Statements.

Other Noncurrent Obligations—Other noncurrent obligations primarily include deferred compensation arrangements other than pension and postretirement benefits.

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Purchase Obligations—Equistar is a party to various unconditional obligations to purchase products and services, as summarized in the above table. These primarily include commitments for steam and power from a new co-generation facility. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See “Commitments” section of Note 13 to the Consolidated Financial Statements.

Operating Leases—Equistar leases various facilities and equipment, including railcars, under noncancelable operating lease arrangements for various periods. See Note 10 to the Consolidated Financial Statements for information on Equistar’s operating leases.

CURRENT BUSINESS OUTLOOK

The completion of scheduled maintenance turnarounds at three of Equistar’s largest ethylene plants has better positioned Equistar to take advantage of any recovery in 2004. A fourth ethylene plant will begin a scheduled maintenance turnaround in the first quarter of 2004. Thus far in 2004, Equistar has seen a continuation of the improvement in product sales volumes experienced in the second half of 2003. However, Equistar’s product margins are heavily dependent on hydrocarbons pricing, primarily crude oil and natural gas.

Thus far in 2004, hydrocarbon prices have remained high and volatile. Equistar has responded by implementing product price increases and announcing additional product price increases across the majority of its product lines. Because Equistar products have broad utilization across the economy, external factors, such as the pace of global economic growth, in addition to raw material pricing, will be important factors to Equistar’s financial performance during 2004.

RELATED PARTY TRANSACTIONS

Equistar makes significant sales of product to Lyondell, LYONDELL-CITGO Refining LP (“LCR”), affiliates of Millennium Chemicals Inc (“Millennium”) and affiliates of Occidental Petroleum Corporation, including Occidental Chemical Corporation and Oxy Vinyls, LP (“Oxy Vinyls”). Equistar also provides certain services and raw materials to Lyondell Methanol Company, L.P. (“LMC”), a wholly owned subsidiary of Lyondell. In turn, Equistar makes significant purchases of raw materials and products from LCR and receives significant administrative services from Lyondell.

Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium, and 29.5% by Occidental. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar, increasing its ownership interest in Equistar to 70.5%. As a result of this transaction, Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2003, Occidental Chemical Holding Corporation owned approximately 22% of Lyondell.

In view of Occidental’s relationship with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.

Equistar believes that all such aforementioned related party transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See “Item 13. Certain Relationships and Related Transactions” and Note 3 to the Consolidated Financial Statements for a description of related party transactions.

CRITICAL ACCOUNTING POLICIES

Equistar applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. Equistar’s more critical accounting policies include those related to long-lived assets, including the costs of major maintenance turnarounds and repairs, and accruals for long-term employee benefit costs such as pension and postretirement costs. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its

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estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. These critical accounting policies have been discussed with the Equistar Partnership Governance Committee. Equistar’s significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements.

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

Due to temporary decreases in demand for Equistar’s products, certain facilities may remain idle until market conditions improve. Assets that are temporarily idled are tested for impairment at the time they are temporarily idled. Fixed assets with a net book value of approximately $152 million were temporarily idled at December 31, 2003. Those assets continue to be depreciated over their remaining useful lives. No impairments were recorded in 2003, 2002 or 2001 for temporarily idled facilities. Charges of $11 million were recorded in 2003 for abandoned research and development facilities.

Equistar defers the costs of turnaround maintenance and repair activities in excess of $5 million, amortizing such costs over the period until the next expected major turnaround of the affected unit. During 2003, 2002 and 2001, cash expenditures of $97 million, $49 million and $15 million, respectively, were deferred and are being amortized, generally over a period of 5 to 7 years. Amortization in 2003, 2002 and 2001, of previously deferred turnaround costs was $30 million, $24 million and $20 million, respectively.

The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $307 million in 2003. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated.

Additional information on long-lived assets, deferred turnaround costs and related depreciation and amortization appears in Note 6 to the Consolidated Financial Statements.

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

The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Equistar’s assumed discount rate is based on average rates published by Moody’s and Merrill Lynch for high-quality (Aa rating) ten-year fixed income securities. For the purpose of measuring the benefit obligations at December 31, 2003, Equistar lowered its assumed discount rate from 6.5% to 6.25%, reflecting the general decline in market interest rates during 2003. The 6.25% rate also will be used to measure net periodic benefit cost during 2004. A further one percentage point reduction in the assumed discount rate for Equistar would increase Equistar’s benefit obligation for pensions and postretirement benefits by approximately $50 million, and would reduce Equistar’s net income by approximately $7 million annually.

The benefit obligation and the periodic cost of postretirement medical benefits also are measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2003, the assumed rate of increase was 10.0% for 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. A one percentage point change in the health care cost trend rate assumption would have no significant effect on either the benefit liability or the net periodic cost, due to limits on Equistar’s maximum contribution level under the medical plan.

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

Prior to 2003, Equistar’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be earned over time. The expectation was based on an asset allocation of 50% U.S. equity securities (11% expected return), 20% non-U.S. equity securities (11.7% expected return), and 30% fixed income securities (6.5% expected return) that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Equistar’s actual return on plan assets averaged 0.9% per year. In 2003, Equistar reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Equistar reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.

The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Based on the market value of plan assets at December 31, 2003, a one percentage point decrease in this assumption for Equistar would decrease Equistar’s net income by approximately $1 million annually.

Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. As a result of asset earnings significantly below the expected return on plan assets rate over the last several years, the level of unrecognized investment losses, together with the net actuarial gains and losses, is $56 million at December 31, 2003. This unrecognized amount, to the extent it exceeds ten percent of the projected benefit obligation for the respective plan, will be recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan. This annual amortization charge will be approximately $4 million per year based on the December 31, 2003 unrecognized amount.

Additional information on the key assumptions underlying these benefit costs appears in Note 12 to the Consolidated Financial Statements.

ACCOUNTING AND REPORTING CHANGES

Effective January 1, 2003, Equistar implemented SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a loss of $3 million on the early extinguishment of debt in the year ended December 31, 2001. See Note 2 to the Consolidated Financial Statements.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Equistar to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Equistar increased its pension disclosure to comply with SFAS No. 132 (Revised 2003). See Note 12 to the Consolidated Financial Statements.

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In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Such FASB guidance could require a change in currently reported information. Equistar elected to make the one-time deferral and is currently evaluating the effect of FSP FAS 106-1.

Effective January 1, 2003, Equistar adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Equistar’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FIN 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Equistar’s application of FIN 46R has no material impact on its consolidated financial statements.

Effective January 1, 2002, Equistar implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge to earnings that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. See Note 2 to the Consolidated Financial Statements.

ENVIRONMENTAL MATTERS

Various environmental laws and regulations impose substantial requirements upon the operations of Equistar. Equistar’s policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) as amended, the Resource Conservation and Recovery Act (“RCRA”) and the Clean Air Act Amendments. Equistar does not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales. Equistar also makes capital expenditures to comply with environmental regulations. Such capital expenditures totaled approximately $38 million, $14 million and $16 million for 2003, 2002 and 2001, respectively. Capital expenditures increased in 2003 as a result of new emission reduction rules, discussed below, and Equistar currently estimates 2004 and 2005 expenditures at approximately $87 million and $82 million, respectively, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOC”). However, Equistar is still completing its assessment of the impact of the proposed HRVOC emission standards.

The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002

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changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Of these amounts, Equistar’s spending through December 31, 2003 totaled $69 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues in 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.

Equistar’s accrued liability for environmental remediation as of December 31, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the liability recorded for environmental matters.

Item 7A. Disclosure of Market and Regulatory Risk

COMMODITY PRICE RISK

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

In addition, Equistar at times enters into commodity derivative hedging transactions, primarily price swaps and call options, to help manage its exposure to commodity price risk with respect to purchases of natural gas and crude oil-related raw materials as well as product sales. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are monitored using value at risk. During 2003, 2002 and 2001, the derivative transactions were not significant compared to Equistar’s overall inventory purchases and product sales. At December 31, 2003, the market value of outstanding derivatives and the related value at risk was not material.

INTEREST RATE RISK

During 2003, Equistar repaid its remaining variable rate debt that was outstanding at December 31, 2002, using proceeds of new fixed-rate debt offerings, and had no borrowing outstanding under its inventory-based revolving credit facility as of December 31, 2003. Accordingly, Equistar’s exposure to variable interest rate risk was minimal at December 31, 2003.

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REGULATORY RISK

New air pollution standards promulgated by federal and state regulatory agencies in the U.S., including those specifically targeting the eight-county Houston/Galveston region, will affect a substantial portion of the operating facilities of Equistar. Compliance with these standards will result in increased capital investment during the next several years and higher annual operating costs for Equistar. Revised rules adopted by the regulatory agencies changed the required NOx, reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over HRVOCs. Equistar is still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See “Clean Air Act” section of Note 13 to the Consolidated Financial Statements and “Environmental Matters” above.

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Item 8. Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

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REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 8, 2004

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to the Consolidated Financial Statements.

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EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL