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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File No. 1-10145

LYONDELL CHEMICAL COMPANY

(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:

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. ¨

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

There were 178,492,306 shares of the Registrant’s common stock issued and outstanding on June 30, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter. The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2004, based on the closing price of the Registrant’s common stock on the New York Stock Exchange composite tape on that date, was $3,092,507,157.

An aggregate of 245,527,548 shares of the Registrant’s common stock were issued and outstanding as of March 1, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive proxy statement for its 2005 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2004, is incorporated by reference to the extent specified under Part III.

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PART I

Items 1 and 2. Business and Properties

LYONDELL

Overview of the Business

Lyondell Chemical Company is a global chemical company that manufactures and markets a variety of basic chemicals and gasoline blending components.

Lyondell operates in four reportable segments: ethylene, co-products and derivatives; propylene oxide (“PO”) and related products; inorganic chemicals; and refining.

Lyondell’s ethylene, co-products and derivatives businesses (other than VAM, acetic acid and methanol, which are collectively referred to as “acetyls”) are conducted through Equistar Chemicals, LP, an indirect wholly owned subsidiary of Lyondell (“Equistar”). Lyondell’s inorganic chemicals businesses and the acetyls portion of its ethylene, co-products and derivatives businesses are conducted through Millennium Chemicals Inc., a wholly owned subsidiary of Lyondell (“Millennium”). Millennium also produces fragrance and flavors chemicals, which is not a reportable segment. Lyondell acquired Millennium in a stock-for-stock business combination on November 30, 2004, thereby also indirectly acquiring the remaining 29.5% interest in Equistar held by Millennium.

Lyondell’s refining business is conducted through LYONDELL-CITGO Refining LP (“LCR”). Lyondell owns 58.75% of LCR, with CITGO Petroleum Corporation (“CITGO”) owning the remaining 41.25% of LCR.

In this Annual Report on Form 10-K, unless the context requires otherwise, references to “Lyondell” or the “Company” are to Lyondell Chemical Company and its consolidated subsidiaries, and references to “LCC” or “Lyondell Chemical Company” are to Lyondell Chemical Company without its consolidated subsidiaries.

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Prior to Lyondell’s November 30, 2004 acquisition of Millennium, Lyondell reported its results of operations in four segments: intermediate chemicals and derivatives; petrochemicals; polymers; and refining. For additional segment information and for geographic information for each of the years in the three-year period ended December 31, 2004, see Note 20 to the Consolidated Financial Statements.

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Additional Information Available

Lyondell Chemical Company was incorporated under the laws of Delaware in 1985. Its principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 (Telephone: (713) 652-7200). Lyondell’s website address is www.lyondell.com. Lyondell’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 Lyondell’s website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission. In addition, to ensure access to its governing documents, Lyondell Chemical Company provides copies of its Certificate of Incorporation, By-Laws, Business Ethics and Conduct Policy, Principles of Corporate Governance and the charters of each of the committees of its Board of Directors on its website, free of charge. Shareholders also may obtain a printed copy of any of these documents (excluding exhibits), free of charge, by writing to Lyondell’s Investor Relations Department at the address provided above. Information contained on Lyondell’s website or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

Strategy

Guiding Principles

Lyondell has built its businesses around fundamental beliefs that, to be a successful competitor in the global chemical industry, the Company must have:

Lyondell’s Portfolio

Lyondell’s products are basic chemicals and their derivatives that become building blocks for broadly used goods that are integrally linked to the global economy. These goods include clothing, packaging, construction and home building and improvement materials, household furnishings and automobile parts. Driven by the Company’s fundamental beliefs, Lyondell has assembled a balanced product portfolio comprising four major business segments that are integrated. Each plays a strategic role in creating stakeholder value:

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Building a Solid Foundation

Since its spin-off from Atlantic Richfield Company (“ARCO”) in 1989, Lyondell has grown into one of the world’s largest independent chemical companies with approximately $17 billion in assets under management and approximately 10,800 employees, including LCR, as of December 31, 2004. Lyondell began to focus on its strategic formation in the mid-1990’s. The major strategic achievements prior to 2002 included:

Recent Activities

Over the past three years, Lyondell has further advanced its strategic plan through the following major steps:

Business Focus

The Company’s businesses focus on having efficient, reliable operations, with an underlying goal to take advantage of areas of strength. In the ethylene, co-products and derivatives segment, the major emphasis is on maintaining low production costs. Lyondell remains differential from the rest of the North American industry based on its ability to process crude oil-based liquid raw materials for a much greater percentage of the ethylene, co-products and derivatives segment’s raw material requirements versus the industry. These crude oil-based raw materials historically have been cost-advantaged in comparison to natural gas liquids-based raw materials, assuming the co-products were recovered and sold. In the PO and related products segment, that strength takes the form of global presence and a leadership position in technology. Through its inorganic chemicals segment, Lyondell is one of the major producers that possesses and practices, in approximately 77% of its capacity, the more efficient chloride-based TiO₂ technology, while also benefiting from the fact that it has TiO₂ manufacturing sites in four regions of the world. The refining segment’s major advantage lies with its ability to process heavy, high sulfur crude oil and its contractual supply relationship with Petróleos de Venezuela, S.A. (“PDVSA”), the national oil company of Venezuela.

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Operational Excellence

Through intense focus on Operational Excellence—Lyondell’s approach to continuous improvement in all aspects of its operations—Lyondell continually seeks to maximize the value of each of the businesses in its portfolio. The actions of Lyondell’s employees have led to:

Financial Strategy

Lyondell’s financial strategy is designed to maximize value for its stakeholders as it seeks to:

During industry trough conditions, liquidity had been a priority for Lyondell and was achieved through a combination of Operational Excellence and a focus on sound financial management. In 2004, the Company began to see improving business conditions and, during the last five months of 2004, Lyondell called $500 million of debt for prepayment. Longer term, as industry conditions continue to improve, the Lyondell business portfolio is designed to generate significant amounts of cash, which will continue to be directed toward the repayment of debt. The Company’s goal is to improve its financial flexibility by achieving an investment grade credit rating, which the Company believes can be achieved following debt reduction and strengthening of the Company’s financial position.

ETHYLENE, CO-PRODUCTS AND DERIVATIVES SEGMENT

Overview

Lyondell’s ethylene, co-products and derivatives businesses (other than acetyls) are conducted through Equistar. The acetyls portion of Lyondell’s ethylene, co-products and derivatives businesses is conducted through Millennium. Equistar and Millennium became wholly owned subsidiaries of Lyondell on November 30, 2004, as a result of Lyondell’s November 30, 2004 acquisition of Millennium.

The segment can produce ethylene, co-products and derivatives at eighteen facilities located in six states. Ethylene co-products include propylene, butadiene, benzene and toluene. Derivatives include polyethylene, EO, EG, EO derivatives, and ethanol, VAM and polypropylene. The segment also produces MTBE, alkylate, acetic acid and methanol. Ethylene, co-products and derivatives are fundamental to many segments of the economy, including the production of consumer products, packaging, housing and automotive components and other durable and nondurable goods.

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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. Lyondell can produce ethylene at seven sites located in four states. The Chocolate Bayou, Corpus Christi and Channelview, Texas 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. Based upon independent surveys, management believes that the Channelview facility is one of the lowest cash production cost ethylene facilities in the United States. The Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and La Porte, 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 segment’s Gulf Coast plants with major ethylene and co-products customers. Raw materials are sourced both internationally and domestically and are shipped via vessel and pipeline. The Lake Charles, Louisiana ethylene and co-products facility has been idled since the first quarter 2001, pending sustained improvement in market conditions. Trade and related party sales of ethylene accounted for approximately 12% of Equistar’s total revenues in 2004, 13% in 2003 and 11% in 2002.

Ethylene co-products are manufactured by Lyondell primarily at four facilities in Texas. The Morris, Illinois; Clinton, Iowa; and Lake Charles, Louisiana facilities also can produce propylene. Trade and related party sales of propylene, which is used to produce polypropylene, acrylonitrile and propylene oxide, accounted for approximately 18% of Equistar’s total revenues in 2004, 16% in 2003 and 17% in 2002. Benzene is used to produce styrene, phenol and cyclohexane, which are used in the production of nylon, plastics, synthetic rubber and polystyrene. Trade and related party sales of benzene accounted for approximately 10% of Equistar’s total revenues in 2004 and less than 10% in 2003 and 2002.

Polyethylene is manufactured by Lyondell using a variety of technologies at five facilities in Texas and at the Morris, Illinois and Clinton, Iowa facilities. Polyethylene is 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. The Morris and Clinton facilities enjoy a freight cost advantage over Gulf Coast facilities in delivering products to customers in the U.S. Midwest. Polyethylene includes high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low density polyethylene (“LLDPE”). HDPE accounted for approximately 14% of Equistar’s total revenues in 2004, 15% in 2003 and 16% in 2002, and polyethylene (HDPE, LDPE and LLDPE collectively) accounted for approximately 26% of Equistar’s total revenues in 2004, 28% in 2003 and 29% in 2002.

EO and its primary derivative, EG, are produced at the Bayport facility located in Pasadena, Texas and through a 50/50 joint venture with E. I. du Pont de Nemours and Company (“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 other derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane seating and bedding foams.

VAM and acetic acid are manufactured by Lyondell at facilities in La Porte, Texas. VAM is used to produce a variety of polymers used in adhesives, water-based paint, textile coatings and paper coatings. Acetic acid is used to produce VAM, industrial solvents and a variety of other chemicals. Trade and related party sales of VAM accounted for approximately 16% of Millennium’s total revenues in 2004 and 2003 and 15% in 2002. Trade and related party sales of acetyls collectively accounted for approximately 24% of Millennium’s total revenues in 2004, 25% in 2003 and 21% in 2002. Millennium also owns an 85% interest in La Porte Methanol Company, which produces methanol at a plant in La Porte, Texas.

The Morris, Illinois facility manufactures polypropylene using propylene produced as a co-product of the segment’s ethylene production, as well as propylene purchased from unrelated parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries.

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The ethylene, co-products and derivatives segment also produces performance polymer products, which include enhanced grades of polyethylene and polypropylene. Wire and cable insulating resins and compounds are performance polymers used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Many of the segment’s polyethylene facilities can produce wire and cable insulating resins, some of which are compounded with additive materials at the facilities in La Porte, Texas and Fairport Harbor, Ohio. Automotive compound production was temporarily consolidated at the Fairport Harbor, Ohio facility and the automotive compound production unit at the La Porte, Texas facility was temporarily idled at the end of the first quarter 2004, pending sustained improvement in market conditions. Lyondell 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.

The following table outlines the ethylene, co-products and derivatives segment’s primary products, annual processing capacity as of December 31, 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. Capacities shown include 100% of the capacity of joint venture facilities.

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Raw Materials

Raw material cost is the largest component of the total cost for the production of ethylene and co-products. The primary raw materials used are crude oil-based liquids (also referred to as “heavy liquids”) and NGLs. Crude oil-based liquids generally are delivered by ship or barge, and NGLs generally are delivered via pipeline.

Ethylene and co-products plants with the flexibility to consume a wide range of raw materials historically have had lower variable costs than those 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 fourth quarter 2003, when co-product values experienced seasonal weakness, the advantage dropped below average. However, the advantage rebounded strongly in 2004 as very strong co-product values overcame record high crude oil pricing to deliver the best annual average advantage in twenty years. Lyondell 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 ethylene and co-products facilities.

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. The La Porte facility processes mainly lighter NGLs, but can process some butane, natural gasoline and light naphtha. The three other ethylene and co-products facilities process only NGLs.

As described above, management believes that this raw material flexibility is a key advantage in the production of ethylene and co-products. As a result, crude-oil based liquids requirements for the segment are purchased via a mix of contractual and spot arrangements from a variety of domestic and international sources. Spot market purchases are made in order to maintain raw material flexibility and to take advantage of raw material pricing opportunities. A large portion of the NGLs requirements for the segment are purchased via contractual arrangements from a variety of sources, but NGLs also are purchased on the spot market. A portion of the crude oil-based liquids requirements for the segment also are obtained from LCR at market-related prices. Lyondell obtains all of its methanol requirements for ethylene and co-products at market-based prices through an arrangement with Methanex Corporation (“Methanex”). Also, the segment 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.

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

In addition to ethylene, acetic acid is a primary raw material for the production of VAM. The segment obtains its entire requirements for acetic acid and ethylene from its internal production. In 2004, Millennium used the majority of its acetic acid production to produce VAM.

The primary raw materials required for the production of acetic acid are carbon monoxide and methanol. The segment purchases its carbon monoxide from Linde AG (“Linde”) pursuant to a long-term contract under which pricing is based primarily on cost of production. La Porte Methanol Company, which is 85% owned by Millennium and 15% owned by Linde, supplies all of the acetyls’ requirements for methanol. Natural gas is the primary raw material required for the production of methanol and carbon monoxide.

The raw materials for ethylene, co-products and derivatives are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability for ethylene, co-products and derivatives has not been an issue. 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

Ethylene produced by the segment generally is consumed internally as a raw material in the production of derivatives, or is transferred by pipeline to related and unrelated parties. For the year ended December 31, 2004, approximately 90% of the segment’s ethylene, based on sales dollars, was used by the segment’s derivatives facilities or sold to related parties at market-related prices. The sales to related parties include significant ethylene sales to Occidental Chemical Corporation (a subsidiary of Occidental Petroleum Corporation, which owns approximately 17% of Lyondell’s outstanding common stock) during 2004 pursuant to a long-term ethylene supply agreement. See “Integration.”

The co-products that are not consumed internally generally are sold to customers with whom Lyondell has had long-standing relationships. These sales generally are made under written agreements that typically provide for monthly negotiation of price and customer purchases of a specified minimum quantity.

The segment consumes propylene in the production of polypropylene and also sells propylene to the PO and related products segment at market-related prices. The segment’s propylene production that is not consumed internally generally is sold under contracts that have initial terms ranging from two to six years and that typically contain automatic one to two year extension provisions. In addition, pursuant to a long-term propylene supply arrangement entered into in 2003 with a subsidiary of Sunoco, Inc., the ethylene, co-products and derivatives segment supplies 700 million pounds of propylene annually to Sunoco. Under the arrangement, a majority of the propylene is supplied under a cost-based formula and the balance is supplied on a market-related basis. This 15-year supply arrangement replaced a previous contract under which the segment 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.”

The segment generally sells its butadiene under contracts that have initial terms of three to five years and that typically contain automatic one to two year extension provisions. The segment sells benzene to the PO and related products segment and toluene to LCR at market-related prices. Most of the segment’s benzene and

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toluene production that is not consumed internally is sold under contracts that have initial terms ranging from three to five years and that typically contain automatic one-year extension provisions. The segment also sells benzene produced by LCR, which it purchases from LCR at market-related prices. The segment serves as LCR’s sole agent to market toluene produced by LCR and receives a marketing fee for such services.

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

MTBE produced at one of the two Channelview units is transferred to the PO and related products segment at market-related prices or sold to LCR at market-related prices. MTBE is processed for LCR at the second Channelview unit for a processing fee. In addition, MTBE produced at Chocolate Bayou is transferred at market-related prices to the PO and related products segment.

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 ethylene and co-products producers allow access to customers who are not directly connected to this pipeline system. Some ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois and also to customers. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. Butadiene, benzene, toluene and other products are distributed by pipeline, railcar, truck, barge or ocean-going vessel.

Polyethylene products primarily are sold to an extensive base of established customers. Approximately two-thirds of the domestic polyethylene product volumes are sold to customers under contracts typically having a term of one to three years. The remainder of the polyethylene volume generally is sold under customary terms and conditions without formal contracts. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement.

EO and EG typically are sold under three- to five-year contracts, with market-based pricing. Glycol ethers, ethanolamines and brake fluids are sold primarily into the solvent and distributor markets at market prices. Ethanol and ethers primarily are sold under contracts at market prices. EO is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-going vessel.

VAM that is not consumed internally is sold into domestic and export markets under contracts with terms of one to seven years, and also on a spot basis. Acetic acid that is not consumed internally for the production of VAM is sold into domestic and export markets under contracts with terms of one to five years, and also on a spot basis. Contract pricing generally is determined by market-based negotiation, market index or cost-based formulas. Millennium also has a long-term agreement with DuPont to convert acetic acid produced at the La Porte, Texas plant into VAM through DuPont’s nearby VAM plant and to acquire all of the VAM production at DuPont’s plant not utilized internally by DuPont. The contract expires on December 31, 2006 but may be extended by mutual agreement thereafter from year-to-year. VAM and acetic acid are shipped by barge, ocean-going vessel, pipeline, tank car and tank truck. The segment has bulk storage arrangements in Europe and Asia to better serve its customers’ requirements in those regions. Sales are made through a direct sales force, agents and distributors.

The La Porte, Texas methanol facility is owned by La Porte Methanol Company, a partnership owned 85% by Millennium and 15% by Linde. Each party receives its respective share of the methanol production. The segment uses the methanol as a raw material for acetic acid and also sells the methanol under contracts that range

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in term from one to three years and on a spot basis to large domestic customers. The product is shipped by barge and pipeline.

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

No single acetyls customer accounted for 10% or more of Millennium’s revenues in 2004. No single external ethylene, co-products and derivatives customer accounted for 10% or more of Equistar’s total revenues in 2004. For geographic data, see Note 20 to the Consolidated Financial Statements.

Competition and Industry Conditions

The bases for competition in the ethylene, co-products and derivatives businesses are price, product quality, product delivery, reliability of supply, product performance and customer service. The segment’s ethylene and co-products compete with other large domestic producers of ethylene and co-products, including BP p.l.c. (“BP”), Chevron Phillips Chemical Company LP (“ChevronPhillips”), Enterprise Products Partners L.P., Exxon Mobil Corporation (“ExxonMobil”), Huntsman Chemical Company (“Huntsman”) and Shell Chemical Company (“Shell”). The segment’s derivatives products compete with large producers of derivatives, including BP, Celanese AG (“Celanese”), ChevronPhillips, The Dow Chemical Company (“Dow”), Eastman Chemical Company, ExxonMobil, Formosa Plastics Corporation, Huntsman, Methanex, NOVA Chemicals Corporation, Saudi Basic Industries Corp. (“SABIC”), Total and Westlake Polymers. 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, competitors.

Lyondell’s rated capacity at December 31, 2004 was approximately 11.6 billion pounds per year, or approximately 15% of total North American production capacity. Based on published rated production capacities, Lyondell is the second largest producer of ethylene in North America. North American ethylene rated capacity at December 31, 2004 was approximately 75 billion pounds per year. Approximately 77% of the total ethylene production capacity in North America is located along the Gulf Coast.

Based on published rated industry capacities, Lyondell is the third largest producer of polyethylene in North America. The rated capacity of Lyondell’s polyethylene units as of December 31, 2004 was approximately 5.8 billion pounds per year, or approximately 13% of total industry capacity in North America. There are many other North American producers of polyethylene, the most significant of which are ChevronPhillips, Dow and ExxonMobil.

Lyondell is the second largest producer of VAM and acetic acid in North America, and the third largest producer worldwide, based on published rated production capacity.

Profitability of the segment is affected not only by supply and demand for ethylene, co-products and derivatives, but also by raw material costs and vigorous price competition among producers, which may intensify due to, among other things, the addition of new capacity. In 2004, ethylene markets began a cyclical recovery from the downturn brought about by the prior three years’ of weak demand. The shutdown of two of a competitor’s Gulf Coast ethylene and co-products plants in 2003 and improving demand, driven by worldwide economic recovery, resulted in greatly improved industry operating rates in 2004. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions, capacity utilization and other factors that will affect industry profitability in the future.

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PO AND RELATED PRODUCTS SEGMENT

Overview

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

In North America, the Company produces PO, TBA, PG and PGE at its Bayport (Pasadena), Texas plants and PO, SM, MTBE and BDO at its Channelview, Texas plants. The Company also has the ability to produce ethyl tertiary butyl ether (“ETBE”) at its Channelview, Texas plant as an alternative to MTBE production. The Bayport PO/TBA plants and the Channelview PO/SM I plant are owned by the U.S. PO manufacturing joint venture (the “U.S. PO Joint Venture”) between the Company and Bayer. The Channelview PO/SM II plant is owned by the Company together with unrelated equity investors. The Company produces TDI at its Lake Charles, Louisiana plant. In Europe, the Company produces PO, TBA, PG, PGE, BDO and MTBE at plants near Rotterdam, The Netherlands. Additionally, a world-scale PO/SM plant operated by Lyondell and located at Maasvlakte (near Rotterdam), The Netherlands began production late in the fourth quarter 2003. The Maasvlakte PO/SM plant is owned by a joint venture with Bayer in which Lyondell has a 50% interest. The Company produces PO, TBA, PG and MTBE at a plant in Fos-sur-Mer, France. In addition, the Company can produce ETBE at its Fos-sur-Mer, France plant as an alternative to MTBE production. In the Asia Pacific region, the Company has a 40% interest in Nihon Oxirane Co., Ltd. (“Nihon Oxirane”), a joint venture that operates a PO/SM plant in Chiba, Japan. In Europe, Rhodia Intermédiaires (“Rhodia”) operates a TDI facility located in Pont de Claix, France on behalf of the Company. See “Joint Ventures and Other Agreements.”

The Company estimates, based in part on published data, that worldwide demand for PO was approximately 12.8 billion pounds in 2004. Approximately 90% of that volume was consumed in the manufacture of three families of PO derivative products: polyols, glycols and glycol ethers. The remainder was consumed in the manufacture of a growing segment of performance products, including BDO and its derivatives. Polyols are used primarily in the production of polyurethanes. The Company sells approximately 1.2 billion pounds of its annual capacity of PO in the merchant market and consumes the rest in the production of derivatives. PO sold in the merchant market accounted for approximately 12% of Lyondell’s total revenues in 2004, 14% in 2003 and 13% in 2002. PG principally is used to produce unsaturated polyester resins and also is used in certain food, cosmetic and pharmaceutical applications and in automotive coolants and aircraft deicers. PGE are used as solvents for paints, coatings and cleaners. BDO and its derivatives are utilized in the production of fibers, engineering plastics, pharmaceuticals, personal care products and high performance coatings.

TDI also is used primarily in the production of polyurethanes for flexible foam applications ranging from furniture, bedding and carpet underlay to transportation and packaging. Additionally, TDI is used in the manufacture of coatings, sealants, adhesives and elastomers.

SM is produced and sold worldwide for commodity and specialty polymer applications, such as polystyrene and unsaturated polyester resins, as well as various uses in the rubber industry. Based on published data, worldwide demand for SM in 2004 was approximately 52 billion pounds. SM accounted for approximately 18% of Lyondell’s total revenues in 2004 and 2003 and 15% in 2002.

Lyondell converts most of its TBA to isobutylene, which is reacted with methanol to produce MTBE, an oxygenated gasoline blending component that increases octane and reduces automotive emissions. MTBE accounted for approximately 22% of Lyondell’s total revenues in 2004, 26% in 2003 and 35% in 2002. At its

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Fos-sur-Mer, France facility, Lyondell also converts some of its isobutylene to ETBE, an alternative to MTBE that is produced by the reaction of isobutylene with agriculturally produced ethanol. Lyondell produces ETBE at the Fos-sur-Mer, France facility to address Europe’s growing demand for biofuels, in accordance with market conditions.

Worldwide demand for MTBE in 2004 is estimated to have been approximately 360,000 to 430,000 barrels per day, based on published data. 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. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. For example, California, Connecticut and New York banned the use of MTBE, effective January 1, 2004. Lyondell’s North American MTBE sales represented approximately 14% of Lyondell’s total revenues in 2004, 17% in 2003 and 26% in 2002. Lyondell intends to install equipment at its Channelview, Texas facility that would provide Lyondell with the flexibility to produce di-isobutylene, an alternative gasoline component, instead of MTBE at that facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” for additional discussion regarding these U.S. federal and state initiatives and their potential impact on Lyondell.

The following table outlines the PO and related products segment’s primary products, annual processing capacities as of December 31, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacities were calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than capacities set forth below. Capacities shown include 100% of the capacity of joint venture facilities.

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Raw Materials

The primary raw materials purchased by the PO and related products segment are propylene, butane, ethylene, benzene and methanol. The market prices of these raw materials historically have been related to the price of: crude oil and its principal refinery derivatives; natural gas liquids; and natural gas, as well as market conditions for these materials. These materials are received in bulk quantities via pipeline or marine vessels. Generally, the segment’s raw materials requirements are purchased at market-based prices from numerous suppliers in the United States and Europe with which the Company has established contractual relationships, as well as in the spot market.

The PO and related products segment obtains propylene, benzene and ethylene raw materials from the ethylene, co-products and derivatives segment and expects the ethylene, co-products and derivatives segment to be the major supplier of these raw materials to the U.S. PO and related products businesses in 2005. Raw materials for the non-U.S. businesses primarily are obtained from unrelated parties. See “Integration” below and Note 5 to the Consolidated Financial Statements.

The PO and related products segment is a large volume consumer of isobutane for chemical production. The Company has invested in facilities, or entered into processing agreements with unrelated parties, to convert the widely available commodity, normal butane, to isobutane. The segment also is a large consumer of oxygen for its PO/TBA plants at Bayport, Texas; Botlek (Rotterdam), The Netherlands; and Fos-sur-Mer, France.

In December 2002, the Company entered into an agreement for Methanex to become the exclusive supplier of the worldwide methanol raw material requirements for the Company (other than its acetyls businesses, which the Company acquired in November 2004). The agreement provides supplies of methanol at cost-based prices and is being phased-in over time beginning in 2003 and extending through 2009. Methanex has an option to extend the agreement for an additional three-year period.

The cost of raw materials generally is the largest component of total production cost for the PO and related products business. The segment’s raw materials are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue. However, in order to enhance reliability and competitiveness of prices and rates for supplies of raw materials, industrial gas and other utilities, the Company is party to long-term agreements and other

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arrangements with suppliers, including the ethylene, co-products and derivatives segment, for a substantial portion of its production requirements. 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

In 2004, most of the segment’s revenues were derived from sales to, or processing agreements with, unrelated parties. In 2004, no single PO and related products customer accounted for 10% or more of Lyondell’s total revenues.

The PO and related products segment produces and delivers products through sales agreements, processing agreements and spot sales as well as product exchanges. Production levels at Lyondell’s PO/SM and PO/TBA co-product production facilities primarily are determined by the demand for PO and PO derivatives. The resulting production levels of co-products SM and MTBE thus depend primarily on the demand for PO and PO derivatives and secondarily on the relative market demand for SM and MTBE, as well as the operational flexibility of Lyondell’s multiple production facilities in meeting this demand.

Lyondell purchases SM and MTBE for resale, when necessary, to satisfy customer demand for these co-products above co-product production levels. Volumes of SM and MTBE purchases made for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profitability.

Lyondell has a number of multi-year PO processing (or tolling) and sales agreements in an effort to mitigate the adverse impact of competitive factors and economic business cycles on demand for the segment’s PO. In addition, Bayer’s ownership interest in the U.S. PO Joint Venture represents ownership of an in-kind portion of the PO production of the U.S. PO Joint Venture. Bayer also has the right to 50% of the production of the Maasvlakte PO/SM plant. See “Joint Ventures and Other Agreements.”

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

Lyondell sells most of its SM production into the North American and European merchant markets and to Asian and South American export markets through long-term sales contracts and processing agreements. See “Joint Ventures and Other Agreements.”

The Company sells its MTBE production under market-based sales agreements and in the spot market.

The Company shut down its methanol production during September 2004, with Methanex purchasing 100% of the methanol produced by Lyondell during 2004 (other than methanol produced in its acetyls businesses acquired November 30, 2004).

The segment’s sales are made by Company marketing and sales personnel and through distributors and independent agents located in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. The Company has centralized certain sales and order fulfillment functions in regional customer service centers located in Houston, Texas; Rotterdam, The Netherlands; Hong Kong, China; and Sao Paolo, Brazil. Lyondell also has long-term contracts for distribution and logistics to ensure reliable and efficient supply to its customers. PO, PG and SM are distributed by barge, ocean-going vessel, pipeline, tank car and tank truck. MTBE is distributed by barge, ocean-going vessel and tank truck. Other derivatives products primarily are distributed by tank truck and railcar.

For geographic data, see Note 20 to the Consolidated Financial Statements.

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Joint Ventures and Other Agreements

On March 31, 2000, Lyondell contributed its Channelview, Texas PO/SM I plant and its Bayport, Texas PO/TBA plants to the U.S. PO Joint Venture. Bayer’s ownership interest in the U.S. PO Joint Venture represents ownership of 1.6 billion pounds of the PO production annually, in-kind. Lyondell takes in-kind the remaining PO production and all co-product (SM and TBA) production from the U.S. PO Joint Venture. As part of the transaction, Lyondell and Bayer also formed a separate joint venture (the “PO Technology Joint Venture”) through which Bayer was granted a non-exclusive and non-transferable right to use certain PO technology in the U.S. PO Joint Venture. Under the terms of the operating and logistics agreements, Lyondell operates the U.S. PO Joint Venture plants and arranges and coordinates the logistics of PO delivery from the plants. Lyondell and Bayer also formed a separate joint venture (the “European PO Joint Venture”) for the construction and ownership of the Maasvlakte PO/SM plant near Rotterdam, The Netherlands, which began production late in the fourth quarter 2003. Lyondell and Bayer each have a 50% share in the European PO Joint Venture, pursuant to which they each take in-kind 50% of the PO and SM production of the European PO Joint Venture. Lyondell and Bayer do not share marketing or product sales under either the U.S. PO Joint Venture or the European PO Joint Venture.

Lyondell’s PO/SM II plant at the Channelview, Texas complex is owned by the Company together with unrelated equity investors. The Company retains a majority interest in the PO/SM II plant and is the operator of the plant. A portion of the SM output of the PO/SM II plant is committed to the unrelated equity investors under long-term processing agreements. As of December 31, 2004, the Company had 1.1 billion pounds of SM capacity, or 22% of its worldwide capacity, committed to unrelated equity investors under long-term processing arrangements.

Lyondell has a 40% equity interest in Nihon Oxirane, a joint venture in Japan with Sumitomo Chemical Co., Ltd. (“Sumitomo”). Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. In March 2003, Lyondell and Sumitomo completed a restructuring of their Nihon Oxirane joint venture, including the sale by Lyondell to Sumitomo of a 10% interest in the joint venture, reducing Lyondell’s interest in Nihon Oxirane from 50% to 40%. The governance of the joint venture remains substantially unchanged. The agreements also include provisions for the cross licensing of certain technology rights, construction of a new PG plant by Nihon Oxirane, and changes in operations agreed to by the partners to expand Nihon Oxirane’s market position in Asia for PO and PG and to improve Nihon Oxirane’s cost structure. Construction of the new PG plant was completed at the end of 2004, with a PG capacity of 220 million pounds. In addition, under the new agreements, a PO plant in Chiba, Japan constructed by Sumitomo and which began production in the second quarter 2003 is expected to be transferred to Nihon Oxirane by 2006.

In June 2000, Lyondell entered into agreements with Rhodia for the design and construction of an expansion to Rhodia’s TDI facility at Pont de Claix, France, to be operated by Rhodia on behalf of Lyondell. The facility was completed in 2002 and is designed to have an average annual production capacity of 274 million pounds of TDI. The facility is operated by Rhodia under an operating agreement, which extends through March 31, 2016. Rhodia is responsible for providing all raw materials required for the TDI production, except toluene, toluene diamine (“TDA”) and carbon monoxide. The TDI produced at the Pont de Claix facility is marketed principally in Europe, the Middle East, Africa and Asia. Lyondell purchases TDA from Rhodia’s plant in Lille, France pursuant to an agreement that expires December 31, 2005. Under the agreement, Lyondell can purchase up to a maximum of approximately 70 million pounds of TDA per year. The TDA that Lyondell purchases from the Lille plant is used in the production of the TDI at the Pont de Claix plant.

Competition and Industry Conditions

Competition within the PO and related products business is significant and is based on a variety of factors, including product quality and price, reliability of supply, technical support, customer service and potential substitute materials. Profitability in this segment is affected by the worldwide level of demand along with vigorous price competition, which may intensify due to, among other things, new industry capacity. Demand is a

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function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect industry profitability in the future. Capacity share figures for this segment and its competitors, discussed below, are based on completed production facilities and, where appropriate, include the full capacity of joint venture facilities and certain long-term supply agreements.

The Company’s major worldwide PO competitors are Dow and Shell. Based on published data regarding PO capacity, including the total capacity of Nihon Oxirane, the U.S. PO Joint Venture and the European PO Joint Venture, the Company believes it is the largest producer of PO worldwide, with approximately 31% of the total worldwide capacity for PO.

Approximately 2.5 billion pounds of new industry PO capacity, or approximately 17%, has been added from 1999 to 2004, primarily in Europe and Singapore. Shell and BASF AG (“BASF”), as 50/50 partners, began production in the third quarter 1999 at a PO/SM plant in The Netherlands with a PO capacity of 550 million pounds and began production in the third quarter 2002 at a PO/SM plant in Singapore with a PO capacity of 550 million pounds. Repsol YPF, S.A. started up its second PO/SM plant in Spain, with a capacity of 330 million pounds of PO, in the first quarter 2000. In addition, the Maasvlakte PO/SM plant, near Rotterdam, The Netherlands, with a PO capacity of 625 million pounds, began production late in the fourth quarter 2003. The Company also cooperated with Sumitomo on the commercialization of new PO technology utilized in Sumitomo’s new plant in Chiba, Japan, which has an initial PO capacity in excess of 330 million pounds and began production in the second quarter 2003.

From 2005 to 2008, PO capacity expansion is expected to include the start up by Shell of a new PO/SM plant at its Nanhai, China complex in 2005, with a PO capacity of 550 million pounds. In addition, Dow and BASF have announced that they will begin construction in 2006 of a plant in Antwerp, Belgium using their hydrogen peroxide to PO technology. The plant is expected to start up in 2008, with a PO capacity of 660 million pounds. Sumitomo and Saudi Aramco also have announced the planned construction of an integrated refining and petrochemical complex in Rabigh, Saudi Arabia. A PO plant is expected to be constructed at the site using Sumitomo’s technology, with an expected PO capacity of 440 million pounds starting up by 2008. PO and derivatives markets may be adversely affected by excess capacity as a result of capacity additions if not fully absorbed by demand growth.

The Company both manufactures and has long-term tolling agreements for TDI. The Company competes with several TDI producers worldwide, including BASF, Bayer, Dow and Mitsui. Based on published data regarding TDI capacity and including the TDI capacity operated by Rhodia on behalf of the Company, the Company believes it is the third largest producer of TDI worldwide and has approximately 14% of total worldwide capacity.

The Company competes with many MTBE producers worldwide, the most significant of which is SABIC. Based on published data regarding MTBE capacity, the Company believes that it is one of the largest producers of MTBE worldwide. MTBE faces competition from substitute products such as ethanol as well as other octane components. See “Risks and Other Factors That May Affect Lyondell and Its Joint Ventures—Environmental Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

The Company competes with many SM producers worldwide, among which are BASF, BP, ChevronPhillips, Dow, NOVA Chemicals Corporation, Shell and TotalFinaElf. Based on published data regarding SM capacity, the Company believes that it is one of the largest producers of SM worldwide.

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INORGANIC CHEMICALS SEGMENT

Overview

Lyondell’s inorganic chemicals businesses are conducted through Millennium, which has been a wholly owned subsidiary since Lyondell’s November 30, 2004 acquisition of Millennium.

TiO₂ is the primary product of the inorganic chemicals segment, which accounted for approximately 71% of Millennium’s total revenues in 2004, 69% in 2003 and 73% in 2002. TiO₂ is a white pigment used for imparting whiteness, brightness, opacity and durability in a wide range of products, including paint and coatings, plastics, paper and elastomers.

As of December 31, 2004, the inorganic chemicals segment’s annual TiO₂ production capacity, using the chloride process and the sulfate process discussed below, was approximately 670,000 metric tons. Unless otherwise specified, annual processing capacities were calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than capacities set forth below.

TiO₂ is produced in two crystalline forms: rutile and anatase. Rutile TiO₂ has better opacification and tinting strength in many applications, and some rutile TiO₂ products also provide better resistance to the harmful effects of weather. As a result, rutile TiO₂ is the preferred form for use in paint and coatings, ink and plastics. Anatase TiO₂ has a bluer undertone and is less abrasive than rutile and, therefore, is often preferred for use in paper, ceramics, rubber and man-made fibers.

TiO₂ is manufactured using two different technologies. The newer chloride process is a high-temperature process in which chlorine is used to produce an intermediate TiO₂ rutile crystal pigment, with greater purity and higher control over the size distribution of the pigment particles than the alternative sulfate process permits. In general, the chloride process is also less intensive than the sulfate process in terms of labor and energy. Because much of the chlorine can be recycled, the chloride process produces less waste than does the sulfate process.

The sulfate process is a wet chemical process that uses concentrated sulfuric acid to produce either an intermediate TiO₂ anatase or rutile crystal pigment. The sulfate process generates higher volumes of waste, including iron sulfate and spent sulfuric acid.

Once an intermediate TiO₂ pigment has been produced by either the chloride or sulfate process, it is processed into a product with specific performance characteristics for particular end-use applications through proprietary processes involving surface treatment with various chemicals and combinations of milling and micronizing.

The inorganic chemicals segment’s TiO₂ plants are located in the four major world markets for TiO₂: North America, South America, Western Europe and the Asia/Pacific region. The North American plants, consisting of one in Baltimore, Maryland and two in Ashtabula, Ohio, use the chloride process. The plant in Salvador, Bahia, Brazil uses the sulfate process. The segment also owns a mineral sands mine located at Mataraca, Paraiba, Brazil, which supplies the Brazilian plant with titanium ores. The mine has over two million metric tons of recoverable reserves. The mine produced approximately 114,000 metric tons of ilmenite, a titanium-bearing ore, in 2004.

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Approximately 103,000 metric tons of ilmenite produced at the mine were used internally by the Salvador TiO₂ plant, while approximately 700 metric tons were sold to unrelated parties. The mine also produced approximately 20,000 metric tons of zircon and approximately 2,000 metric tons of natural rutile titanium ore, substantially all of which were sold to unrelated parties. The Stallingborough, United Kingdom plant uses the chloride process. The plants in France at Le Havre, Normandy and Thann, Alsace use the sulfate process. The Kemerton plant in Western Australia uses the chloride process.

The inorganic chemicals segment also produces a number of specialty and performance TiO₂-related products, some of which are manufactured at dedicated plants and others of which are manufactured at plants that also produce other TiO₂ products. These products include titanium tetrachloride (“TiCl₄”), titanyl sulfate (“TiOSO₄”), ultra-fine TiO₂, silica gel and cadmium-based pigments.

Raw Materials

Naturally occurring titanium-bearing ores such as ilmenite and natural rutile occur as sand or hard rock deposits in many parts of the world and are used as raw materials in the TiO₂ extraction process. Mining companies are increasingly treating ilmenite to extract iron and other minerals to produce slag or synthetic rutile with higher TiO₂ concentrations, resulting in lower amounts of wastes and by-products during processing by TiO₂ pigment plants. Generally, titanium-bearing ores are shipped by using bulk carriers from terminals in the country of origin to TiO₂ production plants, usually located near port facilities. The segment obtains ores from a number of suppliers in South Africa, Australia, Canada, Brazil, India and Ukraine, generally pursuant to one- to six-year supply contracts expiring between 2005 and 2007. Rio Tinto Iron & Titanium Inc. (through its affiliates Richards Bay Iron & Titanium (Proprietary) Limited and QIT-Fer et Titane Inc.) and Iluka Resources Limited are the world’s largest producers of titanium ores and upgraded titaniferous raw materials and accounted for approximately 70% of the titanium ores and upgraded titaniferous raw materials purchased by Millennium in 2004.

Other major raw materials used in the production of TiO₂ are chlorine, caustic soda, coke, aluminum, sodium silicate, sodium aluminate, sulfuric acid, oxygen, nitrogen and natural gas. The number of sources for and availability of these materials is specific to the particular geographic region in which a facility is located. There are certain risks related to the acquisition of raw materials from less-developed or developing countries. See “Risks and Other Factors That May Affect Lyondell, Its Subsidiaries and Its Joint Ventures—International Operations and Country Risks.”

A number of the raw materials used by the inorganic chemicals segment in the production of TiO₂ and the segment’s other products are provided by only a few vendors and, accordingly, if one significant supplier or a number of significant suppliers were unable to meet their obligations under present supply arrangements, the inorganic chemicals segment could suffer reduced supplies and/or be forced to incur increased costs for these raw materials. For example, for the Australian plant, chlorine and caustic soda are obtained exclusively from one supplier under a long-term supply agreement. See “Risks and Other Factors That May Affect Lyondell, Its Subsidiaries and Its Joint Ventures—Raw Materials and Energy Costs.” However, at the present time, chloride- and sulfate-process raw materials are available in sufficient quantities.

Marketing and Sales

Of the TiO₂ sold by the inorganic chemicals segment in 2004, approximately 63% was sold to customers in the paint and coatings industry, approximately 24% to customers in the plastics industry, approximately 12% to customers in the paper industry, and approximately 1% to other customers. The inorganic chemicals segment experiences some seasonality in its TiO₂ sales because, in general, its customers’ production of paint and coatings are greatest in the spring and summer months. TiO₂ generally is sold by the segment at prices determined by market-based negotiation under contracts that range from two to five years, typically with automatic one-year extension provisions. TiO₂ is sold either directly to customers or, to a lesser extent, through agents or distributors, and is distributed by rail, truck and ocean carrier in either dry or slurry form.

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No single inorganic chemicals customer accounted for 10% or more of Millennium’s total revenues in 2004. For geographic data, see Note 20 to the Consolidated Financial Statements.

Competition and Industry Conditions

The bases for competition in the inorganic chemicals businesses are price, product quality, product performance, product delivery, customer service and reliability of supply. Certain inorganic chemicals competitors are more vertically integrated than Lyondell’s inorganic chemicals segment, producing titanium-bearing ores as well as TiO₂. The inorganic chemicals segment is vertically integrated at the Brazilian facility, which owns the titanium ore mine that supplies that facility. The major competitors in the TiO₂ business are DuPont, Kerr-McGee Chemical Corporation (“Kerr-McGee Chemicals,” a unit of Kerr-McGee Corporation, both directly and through various joint ventures), Huntsman Tioxide (“Huntsman Tioxide,” a business segment of Huntsman International LLC), and Kronos Worldwide, Inc. (“Kronos”). Lyondell estimates that collectively, as of December 31, 2004, DuPont, Lyondell, Kerr-McGee Chemicals, Huntsman Tioxide and Kronos accounted for approximately 70% of the world’s TiO₂ production capacity. Lyondell is the second largest producer of TiO₂ in the world, based on published rated capacity.

In certain applications, TiO₂ competes with other whitening agents that are generally less effective but less expensive. These alternate products include kaolin clays, calcium carbonate pigments, both ground and precipitated forms, and synthetic polymers materials.

Generally, new plant capacity additions in the TiO₂ industry are slow to develop because of the substantial capital expenditure required and the significant lead time (three to five years typically for a new plant) needed for planning, obtaining environmental approvals and permits, construction of manufacturing facilities and arranging for raw material supplies. Debottlenecking and other capacity expansions at existing plants require substantially less time and capital and can increase overall industry capacity.

OTHER CHEMICALS

Lyondell also produces fragrance and flavors chemicals. The Brunswick, Georgia and Jacksonville, Florida facilities manufacture terpene-based fragrance ingredients and flavor ingredients, primarily for the oral care markets. These products also are used in a number of other applications, including chemical reaction agents, or initiators, for the rubber industry and solvents and cleaners, such as pine oil, for the hard surface cleaner markets.

REFINING SEGMENT

Overview

Lyondell participates in petroleum refining through an equity interest in LCR, a limited partnership organized under the laws of the state of Delaware. Lyondell holds a 58.75% interest in LCR and CITGO holds a 41.25% interest in LCR. Lyondell owns its interest in LCR through wholly owned subsidiaries, which serve as general partner and limited partner. Similarly, CITGO, which is an indirect wholly owned subsidiary of PDVSA, the national oil company of Venezuela, owns its interest in LCR through wholly owned subsidiaries, which serve as general partner and limited partner.

LCR owns and operates a refinery (the “Refinery”), which is located on the Houston Ship Channel in Houston, Texas. LCR was formed in 1993 to upgrade the Refinery’s ability to process substantial volumes of lower cost, heavy, high sulfur crude oil. As of December 31, 2004, the Refinery’s heavy, high sulfur crude oil processing capacity was approximately 268,000 barrels per day.

The Refinery is a full conversion refinery designed to run heavy (16 to 18 degrees API), high sulfur crude oil. This crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of

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sulfur and heavy metals, making it more difficult to refine into gasoline and other high value fuel products, but less costly to purchase. Processing heavy, high sulfur crude oil in significant quantities requires a refinery with extensive coking, catalytic cracking, hydrotreating and desulfurization capabilities, i.e., a “complex refinery.” The Refinery’s complexity enables it to operate in full conversion mode, producing a slate of products that consists primarily of high value, clean products (due to a lack of conversion equipment, many refineries produce significant quantities of lower value products such as conventional gasoline, high sulfur diesel and heavy fuel oil). The Refinery’s clean products include premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and aromatics. The Refinery’s products also include conventional gasoline, lube oils (industrial lubricants, white oils and process oils), carbon black oil, refinery-grade propylene, sulfur, residual fuel and petroleum coke. Gasoline accounted for approximately 38% of LCR’s total revenues in 2004 and 39% in 2003 and 2002. Diesel accounted for approximately 29% of LCR’s total revenues in 2004 and 26% in 2003 and 2002. The aromatics produced by the Refinery are benzene, toluene, orthoxylene and paraxylene. These products are sold to manufacturers of intermediate chemicals and polyester intermediates and are ultimately used in clothing, soft drink bottles and drinking cups, audio and video tapes, and resins.

The following table outlines the refining segment’s primary products, annual rated capacity (on a calendar day basis) as of December 31, 2004, and the primary uses for such products. The term “rated capacity,” as used in this table, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than the rated capacity. Capacities shown represent 100% of the capacity of LCR, of which Lyondell owns 58.75%.

Management of LCR

LCR is governed by a Limited Partnership Agreement (the “LCR Partnership Agreement”), which provides that LCR is managed by a Partnership Governance Committee composed of six representatives, three of whom are appointed by each general partner. The day-to-day operations of the Refinery are managed by a general manager, who is a loaned employee of Lyondell. Lyondell and CITGO also perform various administrative services for LCR pursuant to an administrative services agreement.

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Raw Materials

In 1993, LCR entered into a long-term crude supply agreement (the “Crude Supply Agreement”) with PDVSA Petróleo, S.A. (“PDVSA Oil”), an affiliate of CITGO and of PDVSA. Most of the crude oil used by LCR as a raw material for its Refinery is purchased under the Crude Supply Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of PDVSA.

The Crude Supply Agreement, which expires on December 31, 2017, incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or raw material, less: (1) certain deemed refining costs, adjustable for inflation and energy costs; (2) certain actual costs; and (3) a deemed margin, which varies according to the grade of crude oil or other raw material delivered. The actual refining margin earned by LCR may vary from the formula amount depending on, among other things, timing differences in incorporating changes in refined product market values and energy costs into the Crude Supply Agreement’s deemed margin calculations and the efficiency with which LCR conducts its operations. Although LCR believes that the Crude Supply Agreement reduces the volatility of LCR’s earnings and cash flows over the long-term, the Crude Supply Agreement also limits LCR’s ability to enjoy higher margins during periods when the market price of crude oil is low relative to the then-current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR’s costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. Expansion or contraction of the average market heavy crude oil refining margin can result in situations in which the Crude Supply Agreement per barrel margin is either greater than or less than the margin that could be obtained through open market purchases of heavy crude oil. For example, during 2000 to 2003 and the early portion of 2004, the Crude Supply Agreement contract was advantageous to LCR; however, during the fourth quarter of 2004, the Crude Supply Agreement per barrel margin was less than the margin that could be obtained through open market purchases of heavy crude oil.

The Crude Supply Agreement provides that Lyondell controls all of LCR’s decisions and enforcement rights in connection with the Crude Supply Agreement so long as PDVSA has a direct or indirect ownership interest in LCR. However, there are risks associated with reliance on PDVSA Oil for supplies of crude oil and with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-United States affiliates of a sovereign nation. All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is produced in Venezuela, which has experienced economic difficulties and attendant social and political changes and unrest in recent years, including a national strike during the fourth quarter 2002 and the first quarter 2003 that disrupted crude oil deliveries to LCR. Venezuela may continue to experience these difficulties and changes. It is impossible to predict how governmental policies may change under the current or any subsequent Venezuelan government. In addition, there are risks associated with enforcing judgments of United States courts against entities whose assets are located outside of the United States and whose management does not reside in the United States. Although the parties have negotiated certain alternative arrangements in the event of specified force majeure conditions, including Venezuelan governmental or other actions restricting or otherwise limiting PDVSA Oil’s ability to perform its obligations, any such alternative arrangements may not be as beneficial to LCR as the Crude Supply Agreement. From time to time, the Company and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. The Company is unable to predict whether changes in either arrangement will occur.

If the Crude Supply Agreement is modified or terminated or this source of crude oil is otherwise interrupted, due to production difficulties, political or economic events in Venezuela or other factors, LCR could experience significantly lower earnings and cash flows. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. If neither CITGO, PDVSA Oil nor their affiliates were a partner in LCR, PDVSA Oil would have an option to terminate the Crude Supply Agreement. Depending on then-current market conditions,

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any breach or termination of the Crude Supply Agreement, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. Alternative crude oil supplies with similar margins may not be available for purchase by LCR.

Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of heavy crude oil, which constitutes approximately 86% of LCR’s refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. At such times, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments to LCR under a different provision of the Crude Supply Agreement in partial compensation for such reductions.

In January 2002, PDVSA Oil again declared itself in a force majeure situation and, beginning in March 2002, reduced deliveries of crude oil to LCR. Although deliveries increased to contract levels of 230,000 barrels per day during the third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure declaration during 2002. A national strike in Venezuela began in early December 2002 and disrupted deliveries of crude oil to LCR under the Crude Supply Agreement. PDVSA Oil again declared a force majeure and reduced deliveries of crude oil to LCR. In March 2003, PDVSA Oil notified LCR that the force majeure had been lifted with respect to crude oil under the Crude Supply Agreement. For additional discussion regarding the effects of the political unrest in Venezuela on operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

LCR has consistently contested the validity of PDVSA Oil’s and PDVSA’s reductions in deliveries under the Crude Supply Agreement. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, on February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations, which LCR is continuing to litigate. See “Item 3. Legal Proceedings—Litigation Matters.”

Marketing and Sales

The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics, lube oils and certain industrial products. On a weekly basis, LCR evaluates and determines the optimal product output mix for the Refinery, based on spot market prices and conditions. Under a long-term product sales agreement (the “Products Agreement”), CITGO is obligated to purchase and LCR is required to sell 100% of the finished gasoline, jet fuel, heating oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases these products at market-related prices based on regional industry benchmark indexes. For example, the price for gasoline is based on prices published by Platts Oilgram, an industry trade publication. The Products Agreement provides that Lyondell controls all of LCR’s material decisions and enforcement rights in connection with the Products Agreement so long as CITGO has a direct or indirect ownership interest in LCR. The Products Agreement expires on December 31, 2017. Under the terms of lubricant sales agreements expiring on December 31, 2017, CITGO purchases all of the lube oils manufactured by LCR. In addition, CITGO serves as LCR’s sole agent to market paraxylene and orthoxylene produced by LCR. The ethylene, co-products and derivatives segment purchases benzene produced by LCR, and also serves as LCR’s sole agent to market toluene produced by LCR.

Competition and Industry Conditions

The refining business tends to be volatile as well as cyclical. Crude oil prices, which are impacted by worldwide political events and the economics of exploration and production in addition to refined products demand, are the largest source of the volatility. Demand for refined products is influenced by seasonal and short-

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term factors such as weather and driving patterns, as well as by longer term issues such as the economy, energy conservation and alternative fuels. Industry refined products supply is also dependent on industry operating capabilities and on long-term refining capacity trends. Management believes that the combination of the Crude Supply Agreement and the Products Agreement generally has the effect of stabilizing earnings and cash flows and reducing the market-driven aspects of the business’ volatility over the long-term.

With a capacity of approximately 268,000 barrels per day, the Company believes that the Refinery is one of North America’s largest full conversion (i.e., not producing asphalt or high sulfur heavy fuel) refineries capable of processing 100% heavy, high sulfur crude oil.

Among LCR’s refining competitors are major integrated oil companies and domestic refiners that are owned by or affiliated with major integrated oil companies. Based on published industry data, as of December 31, 2004, there were 132 crude oil refineries in operation in the United States, and total domestic refinery capacity was approximately 16.8 million barrels per day. During 2004, LCR processed an average of 265,000 barrels per day of crude oil or approximately 1.6% of all U.S. crude capacity.

INTEGRATION

The Lyondell businesses are integrated across several parts of the product chain, with products from one operation being used as raw materials for conversion to other products. Other forms of internal integration consist of sharing resources, including physical assets and human resources, across different businesses. These forms of integration create value within and across the four Lyondell businesses. For example, Equistar produces ethylene and other products. This ethylene is then used as a raw material in derivatives such as polyethylene and VAM within the ethylene, co-products and derivatives business segment, and styrene within the PO and related products business segment. The ethylene also is sold to other parties, including Occidental, which owns approximately 17% of Lyondell’s common stock and was a partner in Equistar from 1998 to 2002. The four Lyondell businesses also share common plant sites, which increases efficiencies in many ways, such as minimizing transportation costs and sharing overhead costs. In addition, the costs of corporate services and other staff functions are minimized by sharing them across a larger, more integrated enterprise. Lyondell seeks to maximize value by optimizing these relationships to support the entire enterprise in the most efficient manner.

Lyondell believes that the transactions discussed in this section are on terms substantially no more or less favorable than those that would be agreed upon by third parties on an arm’s-length basis. These arrangements provide benefits to all parties. For example, the long-term ethylene sales arrangements with Lyondell’s businesses and with Occidental provide Equistar with long-term customers and provide Lyondell and Occidental with a long-term source of a raw material. Lyondell generally expects that similar transactions will occur during 2005.

Product Integration

Within each Lyondell business, primary products are converted into derivative products. For example, ethylene is used as a raw material for derivative products, such as polyethylene and EO, within the ethylene, co-products and derivatives businesses of Equistar. Approximately 64% of the ethylene produced is used internally by Equistar for these products. Also, within the ethylene, co-products and derivatives segment, Equistar sold approximately $52 million of ethylene to Millennium in 2004 for use as a raw material in the production of the ethylene derivative VAM, and purchased approximately $10 million of VAM and glacial acetic acid from Millennium for use in making various Equistar products.

The ethylene, co-products and derivatives segment transfers propylene to the PO and related products segment, at market-related prices, for use as a raw material in PO and related products. Approximately 55% of Lyondell’s PO capacity, excluding the PO capacity represented by Lyondell’s partners in joint ventures, is converted into derivatives, such as PG, PGE, and BDO.

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The Equistar ethylene, co-products and derivatives businesses provide ethylene, propylene, benzene and toluene to the Lyondell PO and related product businesses for styrene, PO and TDI production. During 2004, the PO and related product businesses acquired approximately $923 million of raw materials and MTBE from Equistar’s ethylene, co-products and derivatives businesses. Conversely, the ethylene, co-products and derivatives businesses acquired approximately $54 million of by-products from the PO and related products businesses in 2004 for producing ethylene and its co-products.

In 2004, Lyondell’s subsidiary, Equistar, purchased approximately $425 million of refined products from LCR, for use in producing ethylene and its co-products. Equistar sells ethylene co-products and MTBE to LCR for processing into refining products. LCR purchased approximately $747 million of these products from Equistar for processing into gasoline in 2004. Equistar also processes LCR butylenes into alkylate and MTBE and occasionally sells additional alkylate to LCR.

In other cases, products are sold from one Lyondell business to another better able to market the product for resale to customers. For example, Equistar purchases benzene from LCR for resale to Equistar’s customers, and Equistar also serves as LCR’s sole agent to market toluene.

Product integration is monitored and adjustments are made based on changing market conditions in an effort to take full advantage of these related businesses being operated together.

Commercial Transactions with Occidental

During 2004, Lyondell’s subsidiary, Equistar, sold approximately $634 million of ethylene, ethers and glycols to Occidental. During 2004, Lyondell purchased less than $1 million of sodium methylate and caustic soda from Occidental, which are used in the production of PO and derivatives. Equistar also purchased various other products from Occidental at market-related prices totaling approximately $3 million in 2004. Millennium purchased approximately $5 million of sodium silicate and other products from Occidental during 2004.

PROPERTIES

Principal Manufacturing Facilities and Mine

The principal manufacturing facilities and mine are set forth below, and are identified by the principal segment or segments using the facility or mine. The facilities producing fragrance and flavors chemicals also are identified below. The facilities and mine are wholly owned, except as otherwise noted below.

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Other Locations

Lyondell leases its executive offices and headquarters in downtown Houston, Texas and its offices in Baltimore, Maryland. Lyondell also maintains leased research facilities in Baltimore, Maryland and Newtown Square, Pennsylvania. The Company’s European headquarters and regional customer service center for Europe, the Middle East and Africa are located in leased facilities in Rotterdam, The Netherlands, and its Asia Pacific headquarters are located in leased facilities in Hong Kong. The Company also leases various sales facilities.

The Company has storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons in caverns within a salt dome in Mont Belvieu, Texas. There are an additional approximately three million barrels of ethylene and propylene storage with related brine facilities operated by the Company on leased property in Markham, Texas.

Depending on location and market needs, the Company’s production facilities can receive primary raw materials by pipeline, railcar, truck, barge or ship and can deliver finished products by pipeline, railcar, truck, barge, isotank, ship or in drums. The Company uses an extensive pipeline system, some of which it owns and some of which it leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. The Company also owns other pipelines in connection with its Chocolate Bayou, Corpus Christi, La Porte, Matagorda and Victoria facilities. The Company uses a pipeline owned and operated by an unaffiliated party to transport ethylene from its Morris facility to its Tuscola facility. The Company also 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.

The Company charters ships, owns and charters barges and leases isotanks and railcars for the dedicated movement of products between plants, products to customers or terminals, or raw materials to plants, as necessary. The Company leases liquid and bulk storage and warehouse facilities at terminals in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer harbor area, the Company owns and operates a butane storage tank, propylene spheres, pipeline connections and a jetty that accommodates deep-draft vessels, and the European PO Joint Venture between Bayer and Lyondell owns and operates two benzene storage tanks, two propylene spheres, pipeline connections and a jetty. The Company 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. The Company owns or leases approximately 11,075 railcars for use in its businesses.

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

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RESEARCH AND TECHNOLOGY; INTELLECTUAL PROPERTY

Lyondell conducts research and development principally at technology centers in Baltimore, Maryland; Cincinnati, Ohio; and Newtown Square, Pennsylvania.

Lyondell maintains an extensive patent portfolio and continues to file new patent applications in the United States and other countries. As of December 31, 2004, Lyondell owned approximately 530 United States patents and approximately 1,250 worldwide patents. Lyondell owns globally registered and unregistered trademarks, including the Lyondell, Equistar and Millennium logos. While Lyondell believes that its intellectual property provides competitive advantages, Lyondell does not regard its businesses as being materially dependent upon any single patent, trademark or license.

The research and development expenditures for Lyondell, including December 2004 expenditures for Equistar and Millennium, were $41 million in 2004, $37 million in 2003 and $30 million in 2002, all of which were expensed as incurred. Prior to Lyondell’s November 30, 2004 acquisition of Millennium, Equistar and Millennium were not consolidated subsidiaries of Lyondell. On a separate company basis, Equistar’s research and development expenditures were $34 million in 2004, $38 million in 2003 and $38 million in 2002, and Millennium’s research and development expenditures were $21 million in 2004, $23 million in 2003 and $21 million in 2002. All of these amounts were expensed as incurred. In addition, as part of the acquisition of Millennium, $64 million of the purchase price was allocated to the value of purchased in-process research and development (“IPR&D”). Accordingly, Lyondell’s results of operations include a charge of $64 million for the value of the acquired IPR&D.

Lyondell owns a 58.75% interest in LCR. LCR owns trademarks relating to lubricants, which are licensed by LCR exclusively to CITGO. LCR does not regard its business as being materially dependent upon any single patent, trademark or license.

EMPLOYEE RELATIONS

On December 31, 2004, Lyondell had approximately 9,930 full-time and part-time employees (including Equistar and Millennium employees), approximately 6,640 of whom were located in the United States, approximately 2,145 of whom were located in Europe, approximately 705 of whom were located in Latin America, approximately 355 of whom were located in Australia and approximately 85 of whom were located in Asia. As of December 31, 2004, approximately 13% of the employees located in the U.S., approximately 55% of the employees located in Europe and substantially all of the employees located in Latin American were represented by labor unions. With the exception of annual salary negotiations for certain international sites, no union contracts need to be renegotiated in 2005. In addition to its own employees, Lyondell uses the services of independent contractors in the routine conduct of its businesses. Lyondell believes its relations with its employees are good.

At December 31, 2004, LCR employed approximately 875 full-time employees. Approximately 56% of LCR’s employees are covered by a collective bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and Energy Workers International Union, which expires in January 2006. In addition to its own employees, LCR uses the services of Lyondell and CITGO employees pursuant to shared services and loaned employee arrangements and also uses the services of independent contractors in the routine conduct of its business. LCR believes its relations with its employees are good.

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RISKS AND OTHER FACTORS THAT MAY AFFECT LYONDELL, ITS SUBSIDIARIES

AND ITS JOINT VENTURES

There are many factors that may affect the businesses and results of operations of Lyondell, its subsidiaries and joint ventures. Some of these factors are discussed below. For additional discussion regarding factors that may affect the businesses and operating results of Lyondell and its subsidiaries and joint ventures, 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.”

Industry Cyclicality and Overcapacity

Lyondell’s historical operating results reflect the cyclical and volatile nature of the supply-demand balance in both the chemical and refining industries, and its future operating results continue to be affected by this cyclicality and volatility. 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. The cyclicality of these industries results in volatile profits and cash flow over the business cycles.

The chemical industry has entered a period characterized by tight supply in many product areas and increased demand as the global economy continues to improve. Product growth has returned to historical levels and, in some cases, has exceeded them. As a result, the industry has seen a return to enhanced profitability, even in a world of volatile raw material and energy costs. However, the sustainability of these positive business conditions remains subject to uncertainty. The global economic and political environment continues to be uncertain, and negative changes could result in a decline in demand. When coupled with new capacity additions by some participants in the industry, especially those in the Middle East and Asia which are expected to startup in the middle to latter part of the decade, the current positive business conditions could be depressed, eventually leading to another period of oversupply and poor profitability.

Raw Materials and Energy Costs

Lyondell purchases large amounts of raw materials and energy for its businesses. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of its operating expenses. The costs of raw materials and energy used for most of its products generally follow price trends of, and vary with the market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. Raw material costs have increased through 2004 and remain at high levels. There have been in the past, and will likely be in the future, periods of time when Lyondell is unable to pass raw material cost increases on to customers quickly enough to avoid adverse impacts on its results of operations. In addition, customer consolidation has made it more difficult to pass along cost increases to customers. Lyondell’s results of operations have been, and could be in the future, significantly affected by increases and volatility in these costs. Cost increases may increase working capital needs, which could reduce Lyondell’s liquidity and cash flow. See “Competitive Markets” below.

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

Furthermore, across Lyondell, there are a limited number of suppliers for some of its raw materials and utilities and, in some cases, the number of sources for and availability of raw materials is specific to the

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particular geographic region in which a facility is located. For example, for the inorganic chemicals segment, raw materials generally have been purchased pursuant to one-year to six-year supply contracts that expire between 2005 and 2007. In 2004, the inorganic chemicals segment purchased approximately 70% of its titanium ores and titaniferous raw materials from two suppliers, Rio Tinto Iron & Titanium Inc. (through its affiliates Richards Bay Iron & Titanium (Proprietary) Limited and QIT-Fer et Titane Inc.) and Iluka Resources Limited, under multiple year contractual commitments. In addition, the inorganic chemicals segment obtains chlorine and caustic soda exclusively from one supplier for its Australian operations under a long-term supply agreement. Moreover, Lyondell purchases all of its carbon monoxide for its acetyls from Linde AG pursuant to a long-term contract based primarily on the cost of production. Each of Lyondell’s chloride TiO₂ manufacturing plants has long-term supply agreements for oxygen and nitrogen through either nearby suppliers dedicated to the site or through a direct pipeline arrangement. Each of these contracts is an exclusive supply contract. Accordingly, if one of these suppliers were unable to meet its obligations under present supply arrangements, the inorganic chemicals segment could suffer reduced supplies or be forced to incur increased costs for its raw materials, which would have a direct negative impact on plant operations.

General Economic Conditions and Other External Factors

External factors beyond Lyondell’s or LCR’s control can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for its products and can magnify the impact of economic cycles on its businesses. Examples of external factors include: general economic conditions, international events and circumstances, competitor actions, and governmental regulation in the U.S. and abroad. Lyondell believes that events in the Middle East have had a particularly adverse influence on its businesses in recent years and may continue to do so. In addition, a number of Lyondell’s products are highly dependent on durable goods markets, such as the housing and automotive markets, which also are cyclical. Many of Lyondell’s products are components of other chemical products that, in turn, are subject to the supply-demand balance of both the chemical and refining industries and general economic conditions. The global economy has continued to improve, increasing demand for Lyondell’s products and resulting in improved operating results as operations begin to approach full capacity. This has occurred even as the volatility and elevated level of prices for crude oil and natural gas have resulted in increased raw material costs. However, the impact of the factors cited above may once again cause a slowdown in the business cycle, reducing demand and lowering operating rates and, ultimately, reducing profitability. Although Lyondell’s and LCR’s access to capital currently is not impeded, these same risks could increase instability in the financial markets and make Lyondell’s and LCR’s ability to access capital more difficult. With respect to LCR, management believes that the combination of the Crude Supply Agreement and the Products Agreement generally tends to stabilize earnings and to reduce market driven volatility over the long-term. However, there are risks associated with these agreements. See “International Operations and Country Risks” below.

Lyondell 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 impairment and other charges to earnings. Temporary outages sometimes last for several quarters or, in certain cases, longer, and could cause Lyondell to incur costs, including the expenses of maintaining and restarting these facilities. It is possible that factors such as increases in raw material costs or lower demand in the future will cause Lyondell to reduce operating rates, idle facilities or exit uncompetitive businesses.

International Operations and Country Risks

Lyondell has substantial international operations, which are subject to the risks of doing business abroad, including fluctuations in currency exchange rates, transportation delays and interruptions, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory

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environments. These events could reduce the demand for its products internationally or decrease the prices at which it can sell its products internationally, which could reduce its operating results. In addition, the inorganic chemicals segment and the ethylene, co-products and derivatives segment obtain a substantial portion of their principal raw materials from sources outside the U.S., which are subject to these same risks. Although Lyondell has compliance programs and processes intended to ensure compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which it may be subject, Lyondell is subject to the risk that its compliance could be challenged. Furthermore, these laws may be modified, the result of which may be to prevent or limit foreign subsidiaries from transferring cash to Lyondell. For geographic data, see Note 20 to the Consolidated Financial Statements.

In addition, Lyondell generates revenue from export sales and operations conducted outside the U.S. that may be denominated in currencies other than the relevant functional currency. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. Future events, which may significantly increase or decrease the risk of future movement in foreign currencies in which it conducts its business, cannot be predicted. Lyondell also may hedge certain revenues and costs using derivative instruments to minimize the impact of changes in the exchange rates of those currencies compared to the respective functional currencies. It is possible that fluctuations in foreign exchange rates will result in reduced operating results.

As discussed earlier, LCR is party to a long-term crude supply agreement with PDVSA Oil, a wholly owned subsidiary of PDVSA. There are risks associated with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-U.S. affiliates of a sovereign nation. Additionally, all of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is produced in Venezuela, which has experienced economic difficulties and attendant social and political changes and unrest in recent years. See “Items 1. and 2. Business and Properties—Refining Segment—Raw Materials,” “Item 3. Legal Proceedings—Litigation Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competitive Markets

Lyondell sells its products in highly competitive markets. Due to the commodity nature of certain of its products, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, Lyondell 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, Lyondell’s ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for its products, as well as the capacity utilization rates for those products. Timing differences in pricing between rising raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have reduced and may continue to reduce profitability.

Environmental and Other Regulatory Matters

Lyondell and LCR cannot predict with certainty the extent of future liabilities and costs under environmental, health and safety laws and regulations and whether liabilities and costs will be material. In addition, Lyondell and LCR may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at their facilities or chemicals that they otherwise manufacture, handle or own. Although these types of claims have not historically had a material impact on their operations, a substantial increase in the success of these types of claims could result in the expenditure of a significant amount of cash by Lyondell or LCR to pay claims, and could reduce their operating results.

Lyondell and LCR (together with the industries in which they operate) are subject to extensive national, state and local environmental laws and regulations concerning, and are required to have permits and licenses

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

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

The Company and LCR have on-site solid-waste management units at several facilities. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to these facilities. The Company and LCR also have liabilities under the Resource Conservation and Recovery Act and various state and non-U.S. government regulations related to several current and former plant sites. The Company and LCR also are responsible for a portion of the remediation of certain off-site waste disposal facilities. The Company and LCR are contributing funds to the cleanup of several waste sites throughout the U.S. under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Superfund Amendments and Reauthorization Act of 1986. The Company and LCR also have been named as potentially responsible parties at several other sites. The Company’s policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. The Company, to the extent appropriate, has accrued amounts (without regard to potential insurance recoveries or other third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures based upon its interpretation of current environmental standards. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the amount recorded. Based on the establishment of such accruals, and the status of discussions with regulatory agencies, the Company does not anticipate any material adverse effect upon its financial position or liquidity or competitive position as a result of compliance with the laws and regulations described in this or the preceding paragraphs. See also “Item 3. Legal Proceedings—Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

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, 2004, 2003 and 2002, the Company, including Equistar and Millennium for December 2004, spent approximately $30 million, $11 million and $11 million, respectively,

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for environmentally related capital expenditures at existing facilities. Capital expenditures by LCR (on a 100% basis) for regulatory compliance were $31 million, $16 million and $31 million in the same periods. The increased capital expenditures resulted from new emission reduction rules, as discussed below.

Prior to Lyondell’s November 30, 2004 acquisition of Millennium, Equistar and Millennium were not consolidated subsidiaries of Lyondell. On a separate company basis, in the years ended December 31, 2004, 2003 and 2002, Equistar spent approximately $44 million, $38 million and $14 million, respectively, and Millennium spent approximately $8 million, $9 million and $17 million, respectively, for environmentally related capital expenditures at existing facilities.

The Company currently estimates that environmentally related capital expenditures at its facilities (including Equistar and Millennium facilities) will be approximately $120 million for 2005 and $108 million for 2006. These amounts include estimated expenditures related to emission control standards for nitrogen oxides (“NOx”) and highly reactive, volatile organic compounds (“HRVOCs”), and a wastewater management project. Environmentally related capital expenditures at LCR’s facilities (on a 100% basis) are estimated to be approximately $96 million in 2005 and $129 million in 2006. The expected increase in environmental spending at LCR’s facilities reflects spending for low sulfur fuels regulations, as well as emission reductions.

Kalamazoo River Superfund Site—Lyondell acquired Millennium on November 30, 2004. A Millennium subsidiary, which is now a subsidiary of Lyondell, has been identified as a Potential Responsible Party (“PRP”) with respect to the Kalamazoo River Superfund Site. The site involves cleanup of river sediments and floodplain soils contaminated with polychlorinated biphenyls (“PCBs”), cleanup of former paper mill operations, and cleanup and closure of landfills associated with the former paper mill operations. Litigation concerning the matter commenced in December 1987 but was subsequently stayed and is being addressed under CERCLA. In 2000, the Kalamazoo River Study Group (the “KRSG”), of which the Millennium subsidiary and other PRPs are members, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study, which evaluated a number of remedial options for the river. The estimated costs for these remedial options ranged from $0 to $2.5 billion.

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

As of December 31, 2004, the probable liability associated with the river cannot be determined with certainty. A liability of $40 million has been recognized, representing Millennium’s interim allocation of 55% of the $73 million estimated cost of bank stabilization, recommended as the preferred remedy in 2000 by the KRSG. Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome.

In addition, Lyondell has recognized a liability of $38 million primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

Millennium’s ultimate liability for the Kalamazoo River Superfund Site will depend on many factors that have not yet been determined, including the ultimate remedy selected, the determination of natural resource damages, the number and financial viability of the other PRPs, and the determination of the final allocation among the PRPs. See “Item 3. Legal Proceedings—Environmental Proceedings.”

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Ozone Standard—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the EPA under a “one-hour” ozone standard. Emission reduction controls for NOx, which contribute to ozone formation, must be installed at LCR’s refinery and each of Lyondell’s ten facilities in the Houston/Galveston region prior to a November 2007 compliance deadline for the one-hour ozone standard. In addition, in December 2004, the regulatory agency for the state of Texas, the Texas Commission on Environmental Quality, or “TCEQ,” finalized controls over HRVOCs. Lyondell and LCR are still assessing the impact of the HRVOC rules. In April 2004, the EPA designated the eight-county Houston/Galveston region a moderate non-attainment area under an “eight-hour” ozone standard. As a result, the TCEQ must submit a plan to the EPA in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010. Although the one-hour ozone standard expires in 2005, the controls under that standard will not be relaxed under the EPA’s new eight-hour transition rules. As a result, Lyondell and LCR still will be required to meet the new emission standards for NOx and HRVOCs. The timing and amount of the estimated expenditures are subject to these regulatory and other uncertainties, as well as to obtaining the necessary permits and approvals. The ultimate cost of implementing any plan developed to comply with the final ozone standards cannot be estimated at this time. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Environmental Matters.”

MTBE—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. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. See “Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations—Environmental Matters” for further discussion regarding these U.S. federal and state initiatives and their potential impact on Lyondell, including potential capital expenditures required for Lyondell to produce alternative gasoline blending components.

Gasoline and Diesel Fuel Standards—The Clean Air Act specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and required refiners to produce a lower sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel fuel to produce 80% as ultra low sulfur diesel (“ULSD”) by June 2006, and 100% by the end of 2009, with less stringent standards for “off road” diesel fuel. To date, the off-road diesel fuel standards have not been finalized. These gasoline and diesel fuel standards will result in increased capital investment for LCR. In addition, these standards could result in higher operating costs for LCR. Lyondell’s business may also be impacted if these standards increase the cost for processing fuel components. See “Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations – Environmental Matters” for a summary of the estimated capital expenditures required for LCR to comply with these standards.

Other Regulatory Requirements—In addition to the environmental matters described above, Lyondell and LCR are subject to other material regulatory requirements, including those relating to the shipment or exportation of products. Although Lyondell and LCR have compliance programs and other processes intended to ensure compliance with all such regulations, Lyondell and LCR are subject to the risk that their compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could be significant.

Lead Paint—Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Lyondell’s Millennium subsidiary has been named as a defendant in various legal proceedings alleging that Millennium and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. The plaintiffs in these legal proceedings include municipalities, counties, school districts, individuals and the State of Rhode Island, and seek recovery under a

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variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud, misrepresentation and nuisance. The majority of these legal proceedings assert unspecified monetary damages in excess of the statutory minimum and, in certain cases, contain general language requesting equitable relief from defendants such as abatement of lead-based paint in buildings. All these legal proceedings are in various pre-trial, post-trial and post-dismissal settings, some of which are on appeal. One legal proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, the judge in that case declared a mistrial after the jury declared itself deadlocked. The sole issue before the jury was whether lead pigment in paint in and on Rhode Island buildings constituted a “public nuisance.” This case is tentatively set to be retried on September 7, 2005. An order is anticipated from the court specifying the additional issues to be considered by the jury in the retrial beyond the public nuisance questions considered by the jury in the first trial. While Lyondell believes that Millennium has valid defenses to all the lead-based paint and lead pigment proceedings and is vigorously defending them, litigation is inherently subject to many uncertainties. Additional lead-based paint and lead pigment litigation may be filed against Millennium in the future asserting similar or different legal theories and seeking similar or different types of damages and relief, and any adverse court rulings or determinations of liability, among other factors, could affect this litigation by encouraging an increase in the number of future claims and proceedings. In addition, from time to time, legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead-based paint and lead pigment respecting asserted health concerns associated with such products or to overturn successful court decisions. Lyondell is unable to predict the outcome of lead-based paint and lead pigment litigation, the number or nature of possible future claims and proceedings, and the effect that any legislation and/or administrative regulations may have on Millennium and, therefore, Lyondell. In addition, Lyondell cannot reasonably estimate the scope or amount of the costs and potential liabilities related to such litigation, or any such legislation and regulations. Thus, any liability Millennium incurs with respect to pending or future lead-based paint or lead pigment litigation, or any legislation or regulations could, to the extent not covered by insurance, have a material impact on Millennium’s and, therefore, Lyondell’s financial position, results of operations or cash flows. In addition, Lyondell has not accrued any liabilities for judgments or settlements against Millennium resulting from lead-based paint and lead pigment litigation. See “Item 3. Legal Proceedings.”

Operating Hazards

The occurrence of material operating problems at facilities owned by Lyondell and LCR, including, but not limited to, the events described below, may materially reduce the productivity and profitability of a particular manufacturing facility, or the Company as a whole, during and after the period of such operational difficulties. The Company’s operating results are dependent on the continued operation of its and LCR’s various production facilities and the ability to complete construction projects on schedule.

Although the Company and LCR take precautions to enhance the safety of their operations and minimize the risk of disruptions, their operations, along with the operations of other members of the chemical and refining industries, are subject to hazards inherent in chemical manufacturing and refining 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 failure; unscheduled downtimes; supplier disruptions; 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, the Company and LCR will also continue to be subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters. The Company and LCR maintain property, business interruption and casualty insurance that they believe are in accordance with customary industry practices, but they are not fully insured against all potential hazards incident to their businesses, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and

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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 the Company or LCR were to incur a significant liability for which they were not fully insured, that company might not be able to finance the amount of the uninsured liability on terms acceptable to it or at all, and might be obligated to divert a significant portion of its cash flow from normal business operations.

Joint Venture Risks

A portion of the Company’s operations is conducted through joint ventures. The Company shares control of these joint ventures with third parties.

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

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

Lyondell or any of the other owners of the joint ventures may transfer control of their joint venture interests or engage in mergers or other business combination transactions that could result in a change in control of Lyondell or the joint venture or the other owner. In many instances, such a transfer would be subject to an obligation to first offer the other owner an opportunity to purchase the interest. Lyondell and the other joint venture owners have discussed, and from time to time may continue to discuss, in connection with their ordinary course dialog regarding the joint ventures or otherwise, transactions that could result in a transfer or modification, directly or indirectly, of their ownership in a joint venture. Lyondell cannot be certain that any of the joint venture owners will not sell, transfer or otherwise modify their ownership interest in a joint venture, whether in a transaction involving third parties and/or the other owner. LCR’s credit facility provides that an event of default occurs if Lyondell and CITGO cease to individually or collectively hold at least a 35% interest in LCR. In addition, LCR’s credit facility provides that an event of default occurs if (1) Lyondell transfers its interest as a member of LCR to a person other than an affiliate or (2) neither CITGO nor any of its affiliates is a member of LCR.

Limitations on Transfers of Cash between Lyondell, Millennium, Equistar and LCR

Although Equistar and Millennium are wholly owned subsidiaries of Lyondell, debt covenants limit the ability to transfer cash among Lyondell, Equistar and Millennium. Debt covenants also limit transfers of cash between Lyondell and LCR.

One of Millennium’s indentures currently prevents it from paying dividends to LCC. This prohibition will continue unless and until Millennium’s cumulative earnings and its fixed charge coverage ratio reach specified levels. Accordingly, cash flow of Millennium currently is not, and in the future may not be, available to LCC to fund LCC’s needs, such as servicing LCC’s debt, paying its capital expenditures or paying dividends to its shareholders.

LCC’s indentures contain a covenant that currently prohibits it from making cash investments in subsidiaries and joint ventures which are not restricted subsidiaries as defined in the indentures, subject to only limited exceptions. Neither Millennium nor Equistar currently is a restricted subsidiary. Lyondell’s flexibility to make investments in LCR, and Millennium’s flexibility to make investments in Equistar, also continue to be limited by other tests. Future borrowings also may contain restrictions on making cash investments in subsidiaries and joint ventures.

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Some of Equistar’s indentures require additional interest payments to the noteholders if Equistar makes distributions to Lyondell and Millennium when Equistar does not meet a specified fixed charge coverage ratio. Equistar met this ratio as of December 31, 2004. In addition, Equistar’s credit facility and LCR’s credit facility prohibit the payment of distributions during any default under their respective facilities. These provisions may deter or limit the movement of cash from Equistar to Lyondell and Millennium and from LCR to Lyondell.

Future borrowings by Lyondell’s subsidiaries and joint ventures also may contain restrictions on the payment of distributions by such subsidiaries and joint ventures to Lyondell. Applicable state law may also limit the amounts they are permitted to pay as distributions on their equity interests. The ability of Lyondell’s subsidiaries and joint ventures to distribute cash to Lyondell also is dependent upon their economic performance, which is dependent on a variety of factors, including factors described elsewhere in this “Risks and Other Factors that May Affect Lyondell, Its Subsidiaries and Its Joint Ventures” section.

Potential Acquisitions, Divestitures and Joint Ventures

Lyondell 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. These transactions may be financed by the issuance of equity securities or, to the extent permitted by applicable debt covenants, additional borrowings by Lyondell, its subsidiaries or joint ventures. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could reduce Lyondell’s operating results in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of Lyondell’s businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

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FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget” or other words that convey the uncertainty of future events or outcomes. Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond Lyondell’s control. Lyondell’s 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 these factors, or a combination of these factors, could materially affect Lyondell’s, its subsidiaries’ or its joint ventures’ future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Lyondell’s, its subsidiaries’ or its joint ventures’ future performance, and Lyondell’s, its subsidiaries’ or its joint ventures’ actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. See “Items 1 and 2. Business and Properties,” “Risks and Other Factors That May Affect Lyondell, Its Subsidiaries and Its Joint Ventures,” “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 Lyondell, its subsidiaries and its joint ventures. These factors are not necessarily all of the important factors that could affect Lyondell, its subsidiaries and its joint ventures. Use caution and common sense when considering these forward-looking statements. Lyondell does not intend to update these statements unless securities laws require it to do so.

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

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INDUSTRY AND OTHER INFORMATION

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

NON-GAAP FINANCIAL MEASURES

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

Lyondell sometimes uses EBITDA in its communications with investors, financial analysts and the public. This is because EBITDA is perceived as a useful and comparable measure of operating performance and 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 because of their differing 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.

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

Lyondell also reports certain proportionate share data for Lyondell and its joint ventures that are not consolidated, but are accounted for by the equity method of accounting. Accordingly, in Lyondell’s financial statements investors only see a single line item—investments—for the unconsolidated joint ventures in the balance sheet and one line item—equity income from joint venture investments—in the income statement. Therefore, investors may not get a complete appreciation of the magnitude of certain operating and financial measures for Lyondell and its unconsolidated joint ventures and the scope of their business activities.

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Management believes that reporting certain proportionate share data may give investors a more complete picture of the size and scope of the operating activities of Lyondell and its joint ventures.

Item 3. Legal Proceedings

Litigation Matters

The Company, its subsidiaries and its joint ventures are, from time to time, defendants in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, the Company does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it, its subsidiaries or its joint ventures currently are involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on the business or financial condition of the Company. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Lyondell’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 Lyondell, its subsidiaries and its joint ventures are involved in numerous and varied legal proceedings, a significant portion of their outstanding litigation arose in five contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by or located on the premises of the respective entities; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; (3) claims for personal injury, property damage and/or air, noise and water pollution allegedly arising out of operations; (4) employment and benefits related claims; and (5) commercial disputes.

Millennium—Lyondell’s Millennium subsidiary has received requests from the staff of the Northeast Regional Office of the Securities and Exchange Commission for the voluntary production of documents in connection with an informal inquiry into the previously disclosed restatement of Millennium’s financial statements for the years 1998 through 2002 and for the first quarter of 2003. Millennium is complying with all such requests received.

Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging that Millennium and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. The plaintiffs in these legal proceedings include municipalities, counties, school districts, individuals and the State of Rhode Island, and seek recovery under a variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud, misrepresentation and nuisance. The majority of these legal proceedings assert unspecified monetary damages in excess of the statutory minimum and, in certain cases, contain general language requesting equitable relief from defendants such as abatement of lead-based paint in buildings. Legal proceedings relating to lead pigment or paint are in various procedural stages of pre-trial, post-trial and post-dismissal settings. These legal proceedings are described below in groups pursuant to their particular procedural posture.

Pending legal proceedings relating to lead pigment or paint in various pre-trial stages are as follows: The City of New York et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of the State of New York on June 8, 1989; Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992; City of St. Louis v. Lead Industries Association, Inc., et al., commenced in the St. Louis, Missouri, Circuit Court on January 25, 2000; Mark Ludwigsen Walters v. NL Industries, Inc., et al., commenced on July 18, 2002, in the Supreme Court, County of Kings, New York; William Russell, et al. v. NL Industries, et al., commenced in the Circuit Court of LeFlore County, Mississippi on December 30, 2002; Will T. Turner v. Sherwin-Williams Company, et al., commenced in the Circuit Court of

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Jefferson County, Mississippi on December 30, 2002; John Henry Sweeney v. The Sherwin Williams Co., et al., commenced in the Circuit Court of Hinds County, Mississippi on December 30, 2002; and Herman Frederick Jackson, Billye Raye Ishee, Gaiey Ducksworth, Jr. and Roy Lee Merrick v. Phillips Building Supply of Laurel, et al., commenced in the Circuit Court of Jones County, Mississippi on January 14, 2002.

Kayla Sabater et al., individually and on behalf of all those similarly situated in the State of New York v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of New York, Bronx County, on November 25, 1998, and was dismissed without prejudice in June 2004. On October 29, 2002, after a trial in which the jury deadlocked, the court in the State of Rhode Island v. Lead Industries Association, Inc., et al. (which commenced in the Superior Court of Providence, Rhode Island, on October 13, 1999) declared a mistrial. The sole issue before the jury was whether lead pigment in paint in and on public and private Rhode Island buildings constituted a “public nuisance.” This case is tentatively set to be retried on September 7, 2005. An order is anticipated from the court specifying the additional issues to be considered by the jury in the retrial beyond the public nuisance questions considered by the jury in the first trial.

Legal proceedings relating to lead pigment or paint dismissed after motions to dismiss or for summary judgment were granted by the court in favor of the defendants, but pending appeal are as follows: Steven Thomas, et al. v. Lead Industries Association, Inc., et al., commenced in the Milwaukee County, Wisconsin, Circuit Court on September 10, 1999; Reginald Smith, et al. v. Lead Industries Association, Inc., et al. commenced in the Baltimore City, Maryland, Circuit Court on September 29, 1999; and In Re Lead Paint Litigation, consolidated on February 11, 2002, in the Superior Court of New Jersey, Law Division: Middlesex County, Case Code 702. In addition, on February 7, 2005, the Circuit Court, Cook County, Illinois granted the defendants’ motion for summary judgment in Mary Lewis, Tashswan Banks and Jacqueline Nye v. Lead Industries Association, Inc., et al., which case was filed on March 14, 2002. On March 11, 2005, the plaintiffs filed a motion for reconsideration of the order granting summary judgment to the defendants and, on March 15, 2005, the plaintiffs served a motion for leave to file a third amended complaint. There are two cases in which the court entered summary judgment on behalf of all defendants, and notices of appeal have been filed: The County of Santa Clara, a political subdivision of the State of California, individually and on behalf of all those similarly situated v. Atlantic Richfield et al., commenced in the Santa Clara County, California, Superior Court on March 23, 2000; and City of Chicago v. American Cyanamid Company, et al., commenced on September 5, 2002, in the Circuit Court, Cook County, Illinois.

Legal proceedings relating to lead pigment or paint that are pending but have been abated under the laws of the State of Texas pending resolution of the appeal of a decision granting summary judgment in favor of one lead pigment defendant in Spring Branch Independent School District v. Lead Industries Association, and for which no defense costs will be incurred during the abatement period, are as follows: Houston Independent School District v. Lead Industries Association, et al., commenced in the District Court of Harris County, Texas, on June 30, 2000; Harris County v. Lead Industries Association, et al., commenced in the District Court of Harris County, Texas, on April 23, 2001; Liberty Independent School District v. Lead Industries Association, et al., commenced in the District Court of Liberty County, Texas, on January 22, 2002; and Brownsville Independent School District v. Lead Industries Association, Inc., et al., filed on May 28, 2002, in the District Court, Cameron County, Texas.

Legal proceedings relating to lead pigment or paint that have been filed with a court, are pending, but have yet to be formally served on Millennium, any of its subsidiaries, or alleged predecessor companies, are as follows: Hall, et al. v. Lead Industries Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on June 19, 2000; Hart, et al. v. Lead Industries Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on June 26, 2000; Johnson, et al. v. Clinton, et al., commenced in the Baltimore City, Maryland, Circuit Court on October 10, 2000; Randle, et al. v. Lead Industries Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on August 10, 2000; Williams, et al. v. Lead Industries Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on July 7, 2000; Myreona Stewart, et al. v. NL Industries, et al., commenced in the Circuit Court of LeFlore County, Mississippi on December 31, 2002; and Moran v. Atlantic Richfield Co., et al., commenced in the San Francisco County, California, Superior Court on December 9, 2004.

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Millennium’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. Millennium has not accrued any liabilities for any lead-based paint and lead pigment litigation. Millennium has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. Millennium’s ability to collect under the indemnity coverage would depend upon the timing of any request for indemnity and the solvency of the various insurance carriers that are part of the coverage block at the time of such a request. As a result of insurance coverage litigation initiated by Millennium, an Ohio trial court issued a decision in 2002 effectively requiring certain insurance carriers to resume paying defense costs in the lead-based paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio court’s decision. The insurance carriers may appeal the Ohio decision regarding defense costs, and they have in the past and may in the future attempt to deny indemnity coverage if there is ever a settlement or an adverse judgment in any lead-based paint or lead pigment case.

In 1986, a predecessor of a company that is now a subsidiary of Millennium sold its recently acquired Glidden Paints business. As part of that sale, the seller agreed to indemnify the purchaser against certain claims made during the first eight years after the sale; the purchaser agreed to indemnify the seller against such claims made after the eight-year period. With the exception of the two cases discussed below, all pending lead-based paint and lead pigment litigation involving Millennium and its subsidiaries, including the Rhode Island case, was filed after the eight-year period. Accordingly, Millennium believes that it is entitled to full indemnification from the purchaser against lead-based paint and lead pigment cases filed after the eight-year period. The purchaser disputes that it has such an indemnification obligation, and claims that the seller must indemnify it. Since Millennium’s defense costs to date largely have been covered by insurance and there never has been a settlement paid by, nor any judgment rendered against, Millennium (or any other company sued in any lead-based paint or lead pigment litigation), the parties’ indemnification claims have not been ruled on by a court.

A current subsidiary and an alleged predecessor company are parties to the only two remaining cases originally filed within the eight-year period following the 1986 sale of the Glidden Paints business referred to above. In the first of these cases, The City of New York et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of the State of New York on June 8, 1989, the New York City Housing Authority brought an action relating to tens of thousands of public housing units. All claims in that case have been dropped except for those relating to two housing projects. The other remaining case, Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes two minors as plaintiffs. Dispositive motions were filed in that case in late 2002 and have yet to be ruled on by the court.

Millennium believes that it has valid defenses to all pending lead-based paint and lead pigment proceedings and is vigorously defending them. However, litigation is inherently subject to many uncertainties. Additional lead-based paint and lead pigment litigation may be filed against Millennium or its subsidiaries in the future asserting similar or different legal theories and seeking similar or different types of damages and relief, and any adverse court rulings or determinations of liability, among other factors, could affect the litigation by encouraging an increase in the number of future claims and proceedings. In addition, from time to time, legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead-based paint and lead pigment respecting asserted health concerns associated with such products or to overturn successful court decisions. Millennium is unable to predict the outcome of lead-based paint and lead pigment litigation, the number or nature of possible future claims and proceedings, or the effect that any legislation and/or administrative regulations may have on Millennium or its subsidiaries. In addition, management cannot reasonably estimate the scope or amount of the costs and potential liabilities related to such litigation, or any such legislation and regulations. Accordingly, Millennium has not accrued any amounts for such litigation.

LCR—On February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in the United States District Court, Southern District of New York in connection with various force majeure declarations since April 1998. In the lawsuit, LCR alleges that the force majeure declarations by PDVSA and PDVSA Oil are invalid and

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that PDVSA and PDVSA Oil have breached the contracts related to the delivery of crude oil by PDVSA and PDVSA Oil to LCR. LCR is seeking monetary damages of at least $90 million resulting from PDVSA Oil’s failure to pay LCR the amounts required by contract relating to past crude oil deliveries of less than the contractual amount. LCR also is seeking declaratory relief relating to the force majeure declarations, and is seeking a declaratory interpretation of the disputed contract provisions in order to clarify the rights and obligations of the parties for the remaining duration of the contracts, which expire in December 2017. On May 31, 2002, the defendants filed a motion to dismiss LCR’s complaint on the ground that the “act of state” doctrine prevented the court from deciding LCR’s breach of contract claims. On August 6, 2003, the court denied the defendants’ motion to dismiss LCR’s claims based on the “act of state” doctrine. Both parties filed motions for summary judgment during November 2004.

Environmental Proceedings

From time to time the Company, its subsidiaries and its joint ventures receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. 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). For additional information regarding environmental matters, see “Items 1. and 2. Business and Properties—Risks and Other Factors that May Affect Lyondell, Its Subsidiaries and Its Joint Ventures—Environmental and Other Regulatory Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

As of December 31, 2004, the environmental liability for Lyondell and its subsidiaries (including Equistar and Millennium) for future remediation costs at all current and former plant sites and Superfund sites totaled $147 million. The liabilities for individual sites range from $1 million to $78 million and are expected to be incurred over a number of years, and not be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require the Company to reassess its potential exposure related to environmental matters. See “Items 1. and 2. Business and Properties—Risks and Other Factors that May Affect Lyondell, Its Subsidiaries and Its Joint Ventures—Environmental and Other Regulatory Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

Equistar—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 settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000.

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.

Millennium—Lyondell acquired Millennium on November 30, 2004. A Millennium subsidiary, which is now a subsidiary of Lyondell, has been identified as a PRP with respect to the Kalamazoo River Superfund Site. The site involves cleanup of river sediments and floodplain soils contaminated with PCBs, cleanup of former paper mill operations, and cleanup and closure of landfills associated with the former paper mill operations. Litigation concerning the matter commenced in December 1987 but was subsequently stayed and is being addressed under CERCLA. In 2000, the KRSG, of which the Millennium subsidiary and other PRPs are

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members, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study, which evaluated a number of remedial options for the river. The estimated costs for these remedial options ranged from $0 to $2.5 billion.

As of December 31, 2004, the probable liability associated with the river cannot be determined with certainty. A liability of $40 million has been recognized, representing Millennium’s interim allocation of 55% of the $73 million estimated cost of bank stabilization, recommended as the preferred remedy in 2000 by the KRSG. Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome.

In addition, Lyondell has recognized a liability of $38 million primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

Millennium’s ultimate liability for the Kalamazoo River Superfund Site will depend on many factors that have not yet been determined, including the ultimate remedy selected, the determination of natural resource damages, the number and financial viability of the other PRPs, and the determination of the final allocation among the PRPs. For additional information regarding the Kalamazoo River Superfund Site, see “Risks and Other Factors That May Affect Lyondell, Its Subsidiaries and Its Joint Ventures—Environmental and Other Regulatory Matters.”

Indemnification

Lyondell, its subsidiaries and its joint ventures are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. For example, Lyondell entered into indemnification arrangements in connection with the transfer of assets and liabilities from ARCO to Lyondell prior to Lyondell’s initial public offering, in connection with Lyondell’s acquisition of the outstanding shares of ARCO Chemical Company and in connection with the formation of LCR; Equistar and its owner companies (including Lyondell and Millennium) entered into indemnification arrangements in connection with the formation of Equistar; and Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc. Pursuant to these arrangements, Lyondell, its subsidiaries and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of December 31, 2004, Lyondell has not accrued any significant amounts for such indemnification obligations, other than amounts under tax sharing agreements that have been reflected in the provision for income taxes, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Lyondell. Lyondell cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the executive officers of Lyondell Chemical Company as of March 1, 2005. The By-Laws of Lyondell Chemical Company provide that each officer shall hold office until the officer’s successor is elected or appointed and qualified or until the officer’s death, resignation or removal by the Board of Directors. Certain of the executive officers of Lyondell Chemical Company also are executive officers of, or members of the governing bodies of, Equistar and Millennium, as described below.

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

Lyondell Chemical Company held a special meeting of stockholders on November 30, 2004. Please refer to its Current Report on Form 8-K dated November 30, 2004 for a description of the matters voted upon at the special meeting and the votes cast.

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PART II

Market Information and Holders

The common stock, par value $1.00 per share, of Lyondell Chemical Company is listed on the New York Stock Exchange under the symbol “LYO.” As of December 31, 2004, there were 243,684,998 shares of Lyondell’s common stock issued and outstanding.

The reported high and low sale prices of Lyondell’s common stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from January 1, 2003 through December 31, 2004, inclusive, were as set forth below.

On March 1, 2005, the closing sale price of the common stock on the New York Stock Exchange was $33.95 per share, and there were approximately 6,743 holders of record of the common stock.

Between August 22, 2002 and December 31, 2004, Lyondell also had outstanding shares of Series B common stock, par value $1.00 per share, all of which were held by Occidental Chemical Holding Corporation, a subsidiary of Occidental. On December 31, 2004, all of the outstanding shares of Series B common stock were converted, at Lyondell’s election, into shares of the common stock on a one-for-one basis and no shares of the Series B common stock since have been outstanding.

Dividend Policy

Holders of the common stock are entitled to receive such dividends as may from time to time be declared by Lyondell Chemical Company’s Board of Directors. During the last two years, Lyondell has declared $0.225 per share quarterly cash dividends (which were paid after the end of the quarter to which they related). During 2003 and 2004, it paid $116 million and $127 million, respectively, in cash dividends on its common stock. It did not pay any dividends in cash with respect to the Series B common stock. During the periods when shares of Series B common stock were outstanding, Lyondell paid regular quarterly dividends on those shares by issuing additional shares of Series B common stock in lieu of cash, as permitted by its Certificate of Incorporation.

The future declaration and payout of dividends and the amount thereof will be dependent upon the Company’s results of operations, financial condition, cash position and requirements, investment opportunities, future prospects, contractual restrictions and other factors deemed relevant by the Board of Directors. Subject to these considerations, the provisions of the Certificate of Incorporation and the legal considerations discussed below, Lyondell currently intends to distribute dividends to its shareholders at a quarterly rate of $0.225 per share. All of the 2004 dividends paid by Lyondell are treated as taxable dividends to shareholders for U.S. federal income tax purposes.

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LCC’s credit agreement and the indentures for its senior secured and senior subordinated notes contain restrictions that provide that it may not pay dividends on its common stock at an annual rate exceeding $0.90 per share. In addition, LCC may not pay dividends if it is in default under its credit agreement. Furthermore, pursuant to a settlement agreement entered into with the Pension Benefit Guaranty Corporation in 1998, LCC may not pay extraordinary dividends (as defined by regulations under the Employee Retirement Income Security Act of 1974, as amended) without providing a letter of credit meeting certain specified requirements. In February 2002, LCC provided a letter of credit meeting these requirements.

Issuer Purchases of Equity Securities

The Company did not repurchase any shares of common stock during the fourth quarter of 2004 and does not currently have any publicly announced share repurchase plan or program.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

This discussion should be read in conjunction with information contained in the Consolidated Financial Statements of Lyondell Chemical Company (“LCC”), together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), and the notes thereto.

In addition to comparisons of annual operating results, Lyondell has included, as additional disclosure, certain “trailing quarter” comparisons of fourth quarter 2004 operating results to third quarter 2004 operating results. Lyondell’s and its joint ventures’ 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 Lyondell and its joint ventures.

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

Overview

General—Lyondell is a global chemical company that manufactures and markets a variety of basic chemicals and gasoline blending components. As a result of its acquisition of Millennium Chemicals Inc. (“Millennium”) on November 30, 2004 and Lyondell’s resulting 100% ownership of Millennium and Equistar Chemicals, LP (“Equistar”), the operations of Millennium and Equistar are included in Lyondell’s consolidated financial statements prospectively from December 1, 2004. Lyondell’s operations primarily comprise the ethylene, co-products and derivatives (“EC&D”) segment, the propylene oxide and related products (“PO&RP”) segment, the inorganic chemicals segment and the refining segment, consisting of Lyondell’s equity investment in LYONDELL-CITGO Refining LP (“LCR”), a joint venture with CITGO Petroleum Corporation (“CITGO”). Prior to the acquisition of Millennium, Lyondell held an equity investment of 70.5% in Equistar, a joint venture with Millennium.

During 2004, the chemical industry experienced broad-based improvements as a stronger global economy led to increased demand and tighter chemical industry supply/demand balances compared to 2003. In this improved business environment, the industry experienced higher sales volumes and generally higher product margins in 2004 compared to 2003.

Lyondell, through its investment in Equistar, was able to implement sales price increases for ethylene and derivatives that more than offset the effect of significantly higher raw material and energy costs. In addition, Lyondell was able to implement significant sales price increases for ethylene co-products such as propylene, benzene and fuels. The higher raw material and energy costs in 2004 and 2003 reflected the effect of a significant escalation in crude oil prices and ongoing high natural gas prices compared to 2002. Lyondell also was able to implement sales price increases for propylene oxide (“PO”) and derivatives that more than offset the effect of significant increases in the price of propylene, a key PO raw material, resulting in higher product margins compared to 2003. In addition, a stronger domestic gasoline market in 2004 resulted in higher margins for methyl tertiary butyl ether (“MTBE”) and other fuel-based products compared to 2003.

In 2004, LCR’s refining operations benefited from higher margins on crude oil refining, stronger aromatics markets and higher processing rates for Venezuelan heavy, high sulfur crude oil compared to 2003. The stronger domestic gasoline and diesel markets in 2004 resulted in higher product margins for LCR.

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

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

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

In 2004 and 2003, as indicated in the above table, benchmark crude oil prices and natural gas prices continued at high levels, resulting in higher raw material and energy costs compared to 2002.

In 2003, compared to 2002, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. These factors combined to put downward pressure on industry product margins and sales volumes during 2003. In addition, Lyondell was negatively impacted in 2003 by the phase out, in several U.S. states, of MTBE as an oxygenate in reformulated gasoline and the expiration of a favorable MTBE sales contract at the end of 2002.

Results of Operations

Lyondell’s wholly owned operations prior to the acquisition of Millennium comprised the PO&RP segment. As a result of the acquisition of Millennium on November 30, 2004, Lyondell’s operating income for the month of December 2004 also includes operations of Equistar and Millennium as wholly owned subsidiaries, as discussed in the EC&D and inorganic chemicals sections below. Prior to the acquisition of Millennium, Lyondell’s activities in the EC&D segment were conducted through its investment in Equistar, accounted for using the equity method. Lyondell’s activities in the refining business segment are conducted through its interest in LCR, which is accounted for using the equity method.

Revenues—Lyondell’s revenues were $5,968 million in 2004, $3,801 million in 2003 and $3,262 million in 2002. Lyondell’s 2004 revenues included the December 2004 revenues of Equistar and Millennium, which were $945 million and $148 million, respectively. Prior to December 1, 2004, Lyondell’s revenues comprised the revenues of the PO&RP segment.

Cost of Sales—Lyondell’s cost of sales was $5,475 million in 2004, $3,599 million in 2003 and $2,898 million in 2002. Lyondell’s cost of sales for 2004 included the December 2004 cost of sales of Equistar and Millennium, which was $798 million and $121 million, respectively. Cost of sales increased during the three-year period as a result of continuing increases in the average price of raw materials, primarily propylene, which increased 19% from 2002 to 2003 and 49% from 2003 to 2004. In addition, Lyondell’s 2004 cost of sales

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included a $12 million charge related to future insurance premiums expected to be paid to an industry mutual insurance consortium.

SG&A Expenses—Selling, general and administrative (“SG&A”) expenses were $283 million in 2004, $166 million in 2003 and $160 million in 2002. The increase in 2004 was primarily due to the effect of Lyondell’s higher common stock price and improved performance on incentive compensation expense in 2004, and the consolidation of Equistar’s and Millennium’s December 2004 SG&A expenses, which totaled $45 million.

In-Process Research and Development Charge—As part of the acquisition of Millennium, $64 million of the purchase price was allocated to purchased in-process research and development (“IPR&D”). Accordingly, Lyondell’s 2004 results of operations include a charge of $64 million for the value of the acquired IPR&D.

Operating Income (Loss)—Lyondell had operating income of $105 million in 2004, an operating loss of $1 million in 2003 and operating income of $174 million in 2002. Lyondell’s 2004 operating income included Equistar’s December 2004 operating income of $110 million and Millennium’s December 2004 operating income of $12 million. Lyondell’s 2004 operating income was reduced by the $64 million charge in December 2004 for purchased IPR&D. Prior to December 1, 2004, Lyondell’s operating results comprised the operating results of the PO&RP segment. Lyondell’s operating results are reviewed further in the discussion of the PO&RP segment below.

Interest Expense—Interest expense was $463 million in 2004, $415 million in 2003 and $384 million in 2002. Lyondell’s 2004 interest expense included the December 2004 interest expense of Millennium and Equistar, which totaled $29 million. Additionally, during 2003, Lyondell capitalized $19 million of interest related to the construction of the Maasvlakte PO/styrene monomer (“SM” or “styrene”) plant.

Interest expense in 2003 increased compared to 2002 as a result of the issuance of fixed rate debt, including $325 million of 10.5% Senior Secured Notes in May 2003, $337 million of 9.5% Senior Secured Notes in December 2002 and $278 million of 11.125% Senior Secured Notes in July 2002. The fixed rate debt had higher rates of interest than the variable-rate term loans it replaced, resulting in higher interest expense in 2003 compared to 2002. Debt levels were also higher in 2003 than in 2002, primarily due to the purchase of the previously-leased Botlek butanediol (“BDO”) plant in Europe. The increase in interest expense in 2003 was partly offset by a $9 million increase in capitalized interest. During 2003 and 2002, Lyondell capitalized $19 million and $10 million of interest, respectively, related to the construction of the Maasvlakte PO/SM plant, which began production in the fourth quarter 2003.

Interest Income—Interest income was $14 million in 2004, $23 million in 2003 and $11 million in 2002. Lyondell’s 2004 interest income included the December 2004 interest income of Millennium and Equistar, which totaled $2 million. In 2003, interest income included $15 million of interest income related to a settlement of income tax issues.

Other Income (Expense), Net—Lyondell had other expense, net, of $30 million in 2004, other income, net, of $15 million in 2003 and other expense, net, of $29 million in 2002. Other expense, net, of $30 million in 2004 included $18 million of charges related to the prepayment of $300 million of Lyondell’s 9.875% Senior Secured Notes, Series B, which mature in 2007. Lyondell’s other income, net, in 2003 included an $18 million gain on the sale of a 10% interest in the Nihon Oxirane joint venture, based in Japan, to Lyondell’s partner in the venture and a $5 million refinancing charge related to prepayment of $103 million of term loans. Other expense, net, of $29 million in 2002 included refinancing charges of $23 million related to prepayment of term loans under Lyondell’s credit facility.

Income from Equity Investment in Equistar—Effective December 1, 2004, Equistar became a wholly owned subsidiary of Lyondell and was included in Lyondell’s consolidated operating results prospectively from

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that date. Through November 30, 2004, Lyondell’s equity investment in Equistar resulted in income of $141 million in 2004 and losses of $228 million and $117 million in 2003 and 2002, respectively. The increases in Lyondell’s equity losses from Equistar in 2003 compared to 2002 were due to Equistar’s increased net loss coupled with the effect of the August 2002 increase in Lyondell’s ownership percentage from 41% to 70.5%. See Note 5 to the Consolidated Financial Statements. Equistar’s operating results are reviewed further in the discussion of the EC&D segment below.

Income from Equity Investment in LCR—Lyondell’s income from its equity investment in LCR was $303 million in 2004, $144 million in 2003 and $135 million in 2002. LCR’s operating results are reviewed in the discussion of the refining segment below.

Income Tax—Lyondell’s 2004 effective tax rate was 30% compared to 37% in 2003 and 31% in 2002. The 2004 effective tax rate of 30% reflects benefits that reduced taxes on non-U.S. income, including benefits associated with the internal financing of the Maasvlakte PO/SM plant construction. In 2004, the impact on the effective tax rate of the nondeductibility of the purchased IPR&D resulting from the Millennium acquisition was offset by a tax benefit of a reduction in the Dutch statutory tax rate. The effective tax rates for 2003 and 2002 reflected a tax benefit from operating losses incurred during those years. The 2003 tax benefit exceeded the statutory federal rate due to benefits, including the benefits of internal financing, that reduced taxes on non-U.S. income. The lower 2002 rate reflected the effect of taxes on non-U.S. earnings.

Net Income—Lyondell’s net income of $54 million in 2004 compares to net losses of $302 million and $148 million in 2003 and 2002, respectively. The following table summarizes the major components contributing to the 2004, 2003 and 2002 results of operations. In 2004, results of operations include Millennium and Equistar for the month of December 2004, while income from Lyondell’s equity investment in Equistar reflects eleven months through November 30, 2004.

The improvement in operating income in 2004 compared to 2003 was primarily due to higher product margins in 2004. The increase in the net loss in 2003 compared to 2002 primarily reflected the effect of significantly higher raw material and energy costs, compared to 2002, and the inability to fully recover these costs through price increases during 2003. The operating results of the segments are reviewed in the Segment Analysis below.

Fourth Quarter 2004 versus Third Quarter 2004

Lyondell had net income of $16 million in the fourth quarter 2004 compared to $50 million in the third quarter 2004. The $34 million decrease was primarily due to the $64 million charge for purchased IPR&D, a $51 million after tax seasonal decrease in fourth quarter 2004 MTBE margins, and a $78 million after tax increase in SG&A expenses. The higher SG&A expenses resulted from the effect of Lyondell’s higher common stock price and improved Lyondell and Equistar performance on incentive compensation expense in the fourth quarter 2004 and the consolidation of Equistar’s and Millennium’s December 2004 SG&A expenses, which totaled $38

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million after tax. These decreases were partially offset by inclusion of 100% of Equistar’s and Millennium’s net income for the month of December 2004, which totaled $110 million and was primarily due to Equistar, and by higher product margins for PO and derivatives, as well as by a reduction of the effective tax rate. The improvement in Equistar’s results compared to the third quarter 2004 was primarily due to higher product margins.

Segment Analysis

Lyondell operates primarily in four reportable segments: EC&D, PO&RP, inorganic chemicals and refining. Lyondell’s refining operations are conducted through its interest in LCR.

The EC&D segment comprises the operations of Equistar, which became a wholly owned subsidiary of Lyondell with the November 30, 2004 acquisition of Millennium, and the acetyls business of Millennium. The PO&RP segment represents the operations of the former intermediate chemicals and derivatives segment of Lyondell, and the inorganic chemicals segment comprises Millennium’s titanium dioxide (“TiO₂”) and related products business.

Ethylene, Co-products and Derivatives Segment

Overview—In its EC&D segment, Lyondell manufactures and markets ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene. Lyondell also manufactures and markets derivatives, primarily polyethylene (including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear-low density polyethylene (“LLDPE”)), ethylene glycol, ethylene oxide and its derivatives, and ethanol and vinyl acetate monomer (“VAM”). In the EC&D segment, Lyondell also manufactures and markets methyl tertiary butyl ether (“MTBE”), alkylate, acetic acid, methanol and polypropylene. The manufacturing and marketing of VAM, acetic acid and methanol (collectively, “acetyls”) are conducted by Millennium and the manufacturing and marketing of the remaining EC&D products are conducted by Equistar. Millennium and Equistar became wholly owned subsidiaries of Lyondell on November 30, 2004.

Operations of the Millennium acetyls business are included in the EC&D segment prospectively from December 1, 2004. Revenues and operating income of the acetyls business for the month of December 2004 were $45 million and $10 million, respectively.

The following is a review of Equistar’s operating results for the periods on a stand-alone basis. Consequently, it excludes the acetyls business and any effect of Lyondell’s accounting for its acquisition of Millennium and its resultant acquisition of Equistar. See Note 3 to the Consolidated Financial Statements for further discussion of Lyondell’s acquisition of Millennium.

The stronger global economy led to increased demand and tighter chemical industry supply/demand balances in 2004 compared to 2003. U.S. ethylene demand grew an estimated 9% in 2004 compared to 2003. In this improved business environment, the industry experienced higher sales volumes and generally higher product margins in 2004 compared to 2003.

Equistar was able to implement sales price increases in many products that more than offset the effect of significantly higher raw material and energy costs during 2004 and 2003. The higher raw material and energy costs in 2004 and 2003 reflected the effect of a significant escalation in crude oil prices and ongoing high natural gas costs compared to 2002.

The magnitude of price increases had a negative effect on product demand in 2003, and contributed to Equistar experiencing lower sales volumes in 2003 compared to 2002. For the year 2003, U.S. industry ethylene demand decreased slightly compared to 2002. In addition, Equistar completed scheduled maintenance turnarounds at its two largest ethylene plants in 2003.

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

Revenues—Equistar’s revenues of $9,316 million in 2004 increased 42% compared to revenues of $6,545 million in 2003, reflecting higher average sales prices and volumes. Benchmark ethylene sales prices were 18% higher in 2004 compared to 2003. Benchmark benzene sales prices averaged 87% higher and benchmark propylene sales prices averaged 49% higher in 2004 compared to 2003. Benchmark prices of HDPE averaged 20% higher in 2004 than in 2003. Ethylene and derivative sales volumes were 10% higher in 2004 compared to 2003.

Revenues of $6,545 million in 2003 increased 18% compared to revenues of $5,537 million in 2002 due to higher sales prices, partly offset by a decrease in 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. Sales volumes were lower in 2003 compared to 2002 due to the negative effect of price increases on product demand and maintenance turnarounds noted above, as well as the sale of the polypropylene production facility in Pasadena, Texas in 2003.

Operating Income—Equistar’s operating income was $502 million in 2004 compared to an operating loss of $89 million in 2003. The improvement was primarily due to higher product margins and higher sales volumes in 2004 due to improved supply/demand fundamentals compared to 2003. The effect of sales price increases in response to higher raw material and energy costs were generally more favorable in 2004 than in 2003, resulting in higher average product margins in 2004. Operating results in 2003 also were negatively impacted by scheduled maintenance turnarounds at two major ethylene plants, a $12 million loss on the sale of the polypropylene plant and an $11 million charge for the write-off of a research and development (“R&D”) facility for derivatives.

Equistar had an operating loss of $89 million in 2003 compared to an operating loss of $44 million in 2002. The increased operating loss in 2003 compared to 2002 was due to the $12 million loss on the sale of the polypropylene plant, the $11 million charge for the write-off of the R&D facility and lower sales volumes due to the two scheduled maintenance turnarounds, partially offset by an increase in derivative product margins as higher average sales prices more than offset higher raw material costs. The operating loss in 2002 included a $33 million negative impact of certain fixed price natural gas and NGL purchase contracts entered into in early 2001.

Fourth Quarter 2004 versus Third Quarter 2004

As noted, EC&D operating income for the fourth quarter 2004 included 100% of the December 2004 operating income of Equistar and Millennium’s acetyls business. Millennium’s acetyls operating income was $10 million for the month of December 2004. The following discussion of “trailing quarter” comparisons of fourth quarter 2004 results to third quarter 2004 operating results relates to Equistar’s results on a stand-alone basis.

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Equistar’s fourth quarter 2004 net income was $156 million compared to net income of $72 million in the third quarter 2004. The $84 million improvement primarily resulted from higher sales prices for ethylene and derivatives, which more than offset the higher raw material costs compared to the third quarter 2004. All ethylene-based product prices increased during the fourth quarter 2004. In addition, ethylene and derivative sales volumes were 2% higher compared to the third quarter 2004. Benchmark crude prices averaged 10% higher in the fourth quarter 2004 compared to the third quarter 2004, but this increase in raw material costs was offset by an increase in co-product prices.

Propylene Oxide and Related Products Segment

Overview—The PO&RP segment produces and markets PO; PO derivatives, such as propylene glycol (“PG”), propylene glycol ethers (“PGE”), and butanediol (“BDO”); toluene diisocyanate (“TDI”); styrene and methyl tertiary butyl ether (“MTBE”), the principal derivative of tertiary butyl alcohol (“TBA”). SM and TBA are co-products of Lyondell’s two major PO production processes, referred to as PO/SM and PO/TBA. Operations in 2004 included the operations of the 50% owned Maasvlakte PO/SM plant, which began production in the fourth quarter 2003.

As a result of improved supply/demand balances in 2004, sales price increases for PO and derivatives more than offset the effect of significant increases in the price of propylene, resulting in higher product margins compared to 2003. In the U.S., the benchmark cost of propylene, a key raw material, averaged 49% higher in 2004 than in 2003. During 2004, MTBE sales prices and margins benefited from a strong gasoline market and high gasoline prices compared to 2003. Partly offsetting these improvements, TDI and styrene product margins were lower in 2004 as sales price increases for these products failed to offset raw material cost increases. In particular, 2004 benchmark prices for raw material benzene in the U.S. were 87% higher compared to 2003, negatively affecting styrene margins.

In 2003, compared to 2002, PO&RP operating results were negatively impacted by the phase out, in several U.S. states, of MTBE and the expiration of the favorable MTBE sales contract at the end of 2002, as well as experiencing high and volatile raw material and energy costs and ongoing excess industry capacity.

The Maasvlakte PO/SM plant incurred prestart-up expenses during 2003 of approximately $40 million, of which Lyondell’s 50% share was $20 million. Also in 2003, Lyondell completed a restructuring of its Nihon Oxirane joint venture in Japan, including the sale of a 10% interest in the joint venture to Lyondell’s partner for $28 million, resulting in an $18 million gain and reducing Lyondell’s remaining interest from 50% to 40%.

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

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The above sales data include processing volumes and purchases for resale. The purchases for resale reflected in the 2003 sales volumes, principally styrene, were substantially replaced in 2004 by production volumes from the Maasvlakte PO/SM plant in the Netherlands, which began production in the fourth quarter 2003.

Revenues—PO&RP revenues of $5,006 million in 2004 increased 32% compared to revenues of $3,801 million in 2003. The higher revenues were primarily due to higher average sales prices and higher product sales volumes. Sales volumes for PO and derivatives were 17% higher in 2004, reflecting stronger demand compared to 2003. Sales volumes for co-product styrene were 7% higher, while MTBE sales volumes were 2% lower in 2004 compared to 2003.

Revenues of $3,801 million in 2003 increased 17% from revenues of $3,262 million in 2002 due primarily to higher average sales prices and the foreign exchange effect of a weaker U.S. dollar. Sales volumes for PO and derivatives and styrene increased but were partly offset by lower MTBE volumes. Average sales prices in 2003 for most products were higher in response to the higher raw material and natural gas costs in 2003. Sales volumes for PO and derivatives increased 9%, including BDO, deicers and PG, reflecting increased demand, a full year of production from the Botlek BDO plant and more severe weather, which increased deicer demand. These higher volumes were partly offset by lower TDI sales volumes. Sales volumes increased 4% for styrene in 2003 compared to 2002, as a result of increased U.S. spot sales. Sales volumes for MTBE and other TBA derivatives decreased 5% on lower MTBE demand.

Operating Income—The PO&RP segment had operating income of $66 million in 2004 compared to an operating loss of $1 million in 2003. The improvement was primarily due to higher product margins and sales volumes for PO and derivatives and higher MTBE margins. The higher product margins resulted from increases in sales prices for PO and derivatives which more than offset the increase in propylene prices. These increases in operating income were partly offset by lower product margins for styrene as well as the segment’s share of higher SG&A expenses. The increase in SG&A expenses was primarily due to the effect of Lyondell’s higher common stock price and improved performance on incentive compensation expense in 2004.

The operating loss in 2003 of $1 million compares to operating income in 2002 of $174 million. The $175 million decrease in operating results was primarily due to lower 2003 MTBE margins and volumes and, to a lesser extent, lower volumes and margins for TDI. These effects were partly offset by improved results for PO and derivatives. The lower MTBE margins and volumes reflected decreased MTBE demand, the expiration of the favorable MTBE sales contract and higher raw material and energy costs related to high natural gas costs in the U.S. MTBE demand decreased as use of MTBE was phased out in certain key states. Higher 2003 PO and derivatives sales volumes and prices more than offset the effect of higher operating costs, which were primarily due to higher U.S. natural gas costs and the new Botlek BDO plant.

Fourth Quarter 2004 versus Third Quarter 2004

The PO&RP segment had an operating loss of $26 million in the fourth quarter 2004 compared to operating income of $49 million in the third quarter 2004. The $75 million decrease was primarily due to lower MTBE profitability by approximately $60 million as margins followed typical seasonal trends and the effect of Lyondell’s higher common stock price and improved performance on its incentive compensation programs. TDI results also decreased by approximately $10 million as a result of increased costs and scheduled maintenance turnaround activity. Partially offsetting these decreases were improved results for PO and derivatives, as product margins improved due to increased sales prices, and sales volumes increased, driven by seasonal aircraft deicer sales. PO and derivative sales volumes were 11% higher in the fourth quarter 2004 compared to the third quarter 2004. Styrene operating results were relatively unchanged versus the third quarter 2004.

Inorganic Chemicals Segment

Lyondell’s inorganic chemicals segment comprises the titanium dioxide (“TiO₂”) and related products business of Millennium, which became a wholly owned subsidiary of Lyondell on November 30, 2004. This

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segment’s operating results for the month of December 2004 are included in Lyondell’s Consolidated Statement of Income for the year ended December 31, 2004. Revenues of this segment for the month of December 2004 were $97 million and operating income was $7 million.

Refining Segment

Overview—Lyondell’s activities in the refining segment are conducted through its interest in LCR, and the following discussion of LCR’s operating results is on a 100% basis. LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. PDVSA Petróleo, S.A. (“PDVSA Oil”) supplies heavy, high sulfur Venezuelan crude oil to LCR under a long-term crude supply agreement (“Crude Supply Agreement” or “CSA”)—see “Crude Supply Agreement” section of Note 16 to the Consolidated Financial Statements. Under the CSA, LCR purchases 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of its rated crude oil refining capacity of 268,000 barrels per day. LCR generally purchases the balance of its crude oil requirements on the spot market. Profit margins on spot market crude oil tend to be more volatile than margins on CSA crude oil.

CSA crude oil processing rates were 237,000 barrels per day in 2004 compared to 224,000 barrels per day in 2003. During the early part of 2003, a national strike in the Bolivarian Republic of Venezuela (“Venezuela”), which began in early December 2002, disrupted deliveries of CSA crude oil to LCR, causing LCR to temporarily reduce operating rates. As a result of the reduced CSA crude oil deliveries, LCR purchased significant volumes of crude oil from alternate sources during January 2003. The crude oil from these alternate sources did not completely offset the financial impact of the reduced CSA supplies from Venezuela. CSA deliveries returned to contract levels, beginning in February 2003, and LCR benefited from deliveries of CSA crude oil at above contract volumes for the remainder of 2003 and in 2004.

In 2004, LCR benefited from higher CSA and spot crude oil margins compared to 2003. The higher CSA crude oil margins primarily reflected favorable effects in the CSA contract formula, resulting from more efficient operations and natural gas prices. The CSA contract pricing formula reflects natural gas prices on a lagged basis and resulted in a more favorable effect on CSA crude oil margins compared to the effect in 2003. The higher spot crude oil margins reflected the strong gasoline market and high gasoline prices in 2004 compared to 2003. LCR also benefited from higher aromatics margins in 2004 compared to 2003. Improved aromatics margins reflected significant increases in prices, primarily in the third quarter 2004.

In 2002, CSA crude oil deliveries were below the contract rate as PDVSA Oil declared itself in a force majeure situation in January 2002 and, beginning in March 2002, reduced 2002 deliveries under the CSA. CSA deliveries were restored to contract levels in the third quarter 2002. During 2002, LCR increased its use of crude oil purchased in the spot market to compensate for the lower CSA deliveries. LCR’s CSA crude oil processing rates averaged 213,000 barrels per day in 2002.

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