Edgar Filing: MILLENNIUM CHEMICALS INC

mch10q-093007.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ü]

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

[ ]

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

SECURITIES EXCHANGE ACT OF 1934

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

Commission file number 1-12091

MILLENNIUM CHEMICALS INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3436215
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Two Greenville Crossing, 4001 Kennett Pike	19807
Suite 238, Greenville, Delaware	(Zip Code)
(Address of principal executive offices)

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

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

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

(Check one): Large accelerated filer __ Accelerated filer __ Non-accelerated filer ü

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __No ü

Number of shares of common stock outstanding as of September 30, 2007: 661. There is no established public trading market for the registrant’s common stock.

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

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF INCOME

	For the three months ended						For the nine months ended
	September 30,						September 30,
Millions of dollars	2007			2006			2007			2006
Sales and other operating revenues:
Trade	$	149		$	138		$	429		$	398
Related parties		13			19			46			56
		162			157			475			454
Operating costs and expenses:
Cost of sales		136			138			400			418
Selling, general and administrative expenses		15			10			49			32
Research and development expenses		1			- -			3			2
		152			148			452			452
Operating income		10			9			23			2

Interest expense		(5	)		(17	)		(43	)		(48	)
Interest income		10			1			17			3
Other income (expense), net		1			- -			(15	)		(5	)
Income (loss) from continuing operations before equity investment and income taxes		16			(7	)		(18	)		(48	)
Income from equity investment in Equistar Chemicals, LP		6			23			12			136
Income (loss) from continuing operations before income taxes		22			16			(6	)		88
Provision for income taxes		13			6			1			1
Income (loss) from continuing operations		9			10			(7	)		87
Income from discontinued operations, net of tax		- -			7			297			77
Net income	$	9		$	17		$	290		$	164

See Notes to the Consolidated Financial Statements.

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MILLENNIUM CHEMICALS INC.

CONSOLIDATED BALANCE SHEETS

Millions of dollars, except shares	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	29		$	76
Accounts receivable:
Trade, net		102			96
Related parties		12			15
Inventories		88			87
Prepaid expenses and other current assets		27			13
Deferred tax assets		53			62
Notes receivable from Equistar Chemicals, LP		515			- -
Current assets held for sale		- -			661
Total current assets		826			1,010

Property, plant and equipment, net		123			129
Investment in Equistar Chemicals, LP		453			470
Goodwill, net		49			49
Other assets, net		74			62
Long-term assets held for sale		- -			694
Total assets	$	1,525		$	2,414


LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable:
Trade	$	71		$	84
Related parties		22			18
Accrued liabilities		179			72
Current liabilities associated with assets held for sale		- -			335
Total current liabilities		272			509
Long-term debt		391			767
Other liabilities		242			381
Deferred income taxes		266			248
Long-term liabilities associated with assets held for sale		- -			361
Commitments and contingencies
Minority interest		5			5
Stockholder’s equity:
Common stock, $0.01 par value, 1,000 shares authorized, 709 shares issued		- -			- -
Additional paid-in capital		1,176			1,176
Retained deficit		(593	)		(840	)
Accumulated other comprehensive loss		(144	)		(103	)
Treasury stock, at cost (48 shares issued)		(90	)		(90	)
Total stockholder’s equity		349			143
Total liabilities and stockholder’s equity	$	1,525		$	2,414

See Notes to the Consolidated Financial Statements.

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MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the nine months ended September 30,
Millions of dollars	2007			2006
Cash flows from operating activities:
Net income	$	290		$	164
Income from discontinued operations, net of tax		(297	)		(77	)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		23			19
Equity investment in Equistar Chemicals, LP –
Amount included in net income		(12	)		(136	)
Distributions of earnings		12			111
Deferred income taxes		23			(39	)
Debt prepayment premiums and charges		14			7
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(3	)		(1	)
Inventories		(1	)		24
Accounts payable		(10	)		(36	)
Other, net		(115	)		101
Net cash provided by (used in) operating activities – continuing operations		(76	)		137
Net cash provided by (used in) operating activities – discontinued operations		(120	)		38
Net cash provided by (used in) operating activities		(196	)		175
Cash flows from investing activities:
Advances under loan agreements to Equistar Chemicals, LP		(515	)		- -
Expenditures for property, plant and equipment		(12	)		(9	)
Payments to discontinued operations		(104	)		(12	)
Distributions from affiliates in excess of earnings		18			- -
Other		3			1
Net cash used in investing activities – continuing operations		(610	)		(20	)
Net proceeds from sale of discontinued operations before required repayment of debt		1,089			- -
Other net cash provided by (used in) investing activities – discontinued operations		89			(30	)
Net cash provided by (used in) investing activities		568			(50	)
Cash flows from financing activities:
Repayment of long-term debt		(390	)		(241	)
Other		1			(2	)
Net cash used in financing activities – continuing operations		(389	)		(243	)
Debt required to be repaid upon sale of discontinued operations		(99	)		- -
Other net cash provided by (used in) financing activities – discontinued operations		23			(13	)
Net cash used in financing activities		(465	)		(256	)
Effect of exchange rate changes on cash		1			2
Decrease in cash and cash equivalents		(92	)		(129	)
Cash and cash equivalents at beginning of period		121			279
Cash and cash equivalents at end of period		29			150
Less: Cash and cash equivalents at end of period – discontinued operations		- -			45
Cash and cash equivalents at end of period – continuing operations	$	29		$	105

See Notes to the Consolidated Financial Statements.

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

1.	Basis of Preparation	5
2.	Company Ownership	5
3.	Accounting and Reporting Changes	5
4.	Proposed Merger of Lyondell and Basell	6
5.	Discontinued Operations	6
6.	Notes Receivable from Equistar Chemicals, LP	8
7.	Investment in Equistar Chemicals, LP	8
8.	Inventories	9
9.	Property, Plant, and Equipment, Net	9
10.	Accounts Payable	10
11.	Long-Term Debt	10
12.	Pension and Other Postretirement Benefits	11
13.	Income Taxes	11
14.	Other Income (Expense), Net	12
15.	Commitments and Contingencies	12
16.	Comprehensive Income	16
17.	Segment and Related Information	16
18.	Supplemental Guarantor Information	17

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. Basis of Preparation

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

Certain previously reported amounts have been reclassified to present Millennium’s inorganic chemicals business as discontinued operations. Unless otherwise indicated, information presented in the notes to the financial statements relates only to Millennium’s continuing operations. Information related to Millennium’s discontinued operations is presented in Note 5.

2. Company Ownership

On November 30, 2004, Lyondell Chemical Company (“Lyondell”) acquired Millennium in a stock-for-stock business combination. As a result of the business combination, Millennium is a wholly owned subsidiary of Lyondell. The consolidated financial statements of Millennium reflect its historical cost basis and, accordingly, do not reflect any purchase accounting adjustments related to the acquisition by Lyondell.

3. Accounting and Reporting Changes

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

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

Millennium adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN No. 48, Millennium recognized a $47 million increase in the liability related to uncertain income tax positions, a $4 million increase in deferred tax assets and a $43 million increase of the January 1, 2007 balance of retained deficit (see Note 13).

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. Proposed Merger of Lyondell and Basell

On July 16, 2007, Lyondell, Basell AF, a Luxembourg company (“Basell”), and BIL Acquisition Holdings Limited, a Delaware corporation and a wholly owned subsidiary of Basell (“Merger Sub”), entered into an agreement and plan of merger pursuant to which Merger Sub will be merged with and into Lyondell with Lyondell continuing as the surviving corporation and a wholly owned subsidiary of Basell. Pursuant to the merger, each outstanding share of Lyondell’s common stock will be converted into the right to receive $48 per share in cash. A special meeting of Lyondell’s shareholders has been scheduled for November 20, 2007 to vote on the proposed merger, which is expected to close in the fourth quarter 2007.

The merger agreement restricts the ability of Lyondell and its subsidiaries, including Millennium and Equistar, to take specified actions without Basell’s approval including, among other things, making significant acquisitions, dispositions or investments, making certain significant capital expenditures not contemplated by the current capital plan, and entering into certain material contracts.

As a result of the proposed merger, Millennium’s 4% convertible debentures will be convertible at the conversion rate into the $48 cash per share merger consideration. In addition, depending on the financing structure of the merger, the Notes due 2026 may be amended or terminated.

5. Discontinued Operations

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

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

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

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

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Discontinued Operations – (Continued)

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

	For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2007		2006		2007		2006
Sales and other operating revenues	$	- -	$	339	$	514	$	1,035
Gain on sale of discontinued operations	$	- -	$	- -	$	337	$	- -
Other income from discontinued operations		- -		7		18		45
Provision for (benefit from) income taxes		- -		- -		58		(32	)
Income from discontinued operations, net of tax	$	- -	$	7	$	297	$	77

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

The provision for income taxes in the nine months ended September 30, 2007 primarily reflects the effect of a higher tax basis in the stock of a subsidiary included in the sale, which resulted in a lower taxable gain. Income taxes payable related to the sale were $48 million.

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

Millions of dollars	December 31, 2006
Cash	$	45
Inventories		353
Other current assets		263
Total current assets		661
Property, plant and equipment, net		522
Goodwill, net		55
Other noncurrent assets, net		117
Total long-term assets		694
Total assets	$	1,355

Current maturities of long-term debt	$	4
Other current liabilities		331
Total current liabilities		335
Long-term debt		82
Other noncurrent liabilities		239
Minority interest		40
Total long-term liabilities		361
Total liabilities	$	696

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Discontinued Operations – (Continued)

Additionally, accumulated other comprehensive loss includes income of $44 million related to discontinued operations at December 31, 2006.

6. Notes Receivable from Equistar Chemicals, LP

During the first nine months of 2007 Millennium received promissory notes from and advanced $515 million to Equistar Chemicals, LP (together with its consolidated subsidiaries, “Equistar”) pursuant to loan agreements permitting Equistar to borrow up to $600 million. In connection with the proposed merger of Lyondell and Basell (see Note 4), the maturity of the notes was extended to February 16, 2008 from December 21, 2007, or earlier upon demand. The notes bear interest, which is due quarterly, at the London Interbank Offered Rate (“LIBOR”) plus 1.75%. The balance of the notes outstanding at September 30, 2007 was $515 million.

7. Investment in Equistar Chemicals, LP

Equistar is owned 70.5% by Lyondell and 29.5% by Millennium. Millennium and Equistar are wholly owned subsidiaries of Lyondell. Millennium accounts for its investment in Equistar using the equity method. As a partnership, Equistar is not subject to federal income taxes.

Summarized financial information for Equistar follows:

Millions of dollars	September 30, 2007		December 31, 2006
BALANCE SHEETS
Total current assets	$	2,180	$	2,158
Property, plant and equipment, net		2,814		2,846
Investments and other assets, net		324		355
Total assets	$	5,318	$	5,359

Current maturities of long-term debt	$	400	$	- -
Notes payable – Millennium Chemicals Inc.		515		- -
Other current liabilities		1,332		1,217
Long-term debt		1,153		2,160
Other liabilities and deferred revenues		371		378
Partners’ capital		1,547		1,604
Total liabilities and partners’ capital	$	5,318	$	5,359

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	For the three months ended September 30,						For the nine months ended September 30,
Millions of dollars	2007			2006			2007			2006
STATEMENTS OF INCOME
Sales and other operating revenues	$	3,464		$	3,480		$	9,867		$	9,794
Cost of sales		3,314			3,151			9,414			8,849
Asset impairment		- -			135			- -			135
Selling, general and administrative expenses		71			54			202			163
Research and development expenses		10			8			28			25
Operating income		69			132			223			622
Interest expense, net		(47	)		(55	)		(150	)		(160	)
Other income (expense), net		- -			1			(32	)		- -
Net income	$	22		$	78		$	41		$	462

8. Inventories

Inventories consisted of the following components:

Millions of dollars	September 30, 2007		December 31, 2006
Finished goods	$	61	$	63
Work-in-process		17		15
Raw materials		4		4
Materials and supplies		6		5
Total inventories	$	88	$	87

9. Property, Plant and Equipment, Net

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

Millions of dollars	September 30, 2007			December 31, 2006
Land	$	3		$	2
Manufacturing facilities and equipment		333			342
Construction in progress		17			16
Total property, plant and equipment		353			360
Less accumulated depreciation		(230	)		(231	)
Property, plant and equipment, net	$	123		$	129

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Property, Plant and Equipment, Net – (Continued)

Depreciation and amortization expense is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
Millions of dollars	2007		2006		2007		2006
Property, plant and equipment	$	4	$	5	$	18	$	14
Other		2		1		5		5
Total depreciation and amortization	$	6	$	6	$	23	$	19

Millennium believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Millennium continually reviews the optimal future alternatives for its facilities. Any decision to retire one or more facilities would result in an increase to the present value of such obligations. At September 30, 2007 and December 31, 2006, no liability had been recognized for asset retirement obligations.

10. Accounts Payable

Accounts payable at September 30, 2007 and December 31, 2006 included liabilities in the amounts of $2 million and $1 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.

11. Long-Term Debt

Long-term debt consisted of the following:

Millions of dollars	September 30, 2007		December 31, 2006
Senior Notes due 2008, 9.25%	$	- -	$	375
Senior Debentures due 2026, 7.625%		241		245
Convertible Senior Debentures due 2023, 4%		150		150
Other		- -		(3	)
Total		391		767
Less current maturities		- -		- -
Total long-term debt, net	$	391	$	767

During the first nine months of 2007, Millennium repaid the remaining $373 million principal amount of its 9.25% Senior Notes due 2008, paying a premium of $13 million, and $4 million principal amount of its 7.625% Senior Debentures due 2026. In connection with the repayment of the 9.25% Senior Notes, Millennium terminated interest rate swap agreements in the notional amount of $175 million and recorded a loss of $2 million. As a result of the repayment of the 9.25% Senior Notes, Millennium is no longer prohibited from making certain restricted payments, including cash dividends to Lyondell, nor is it required to maintain financial ratios.

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Long-Term Debt – (Continued)

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

Millennium has outstanding letters of credit of $10 million at September 30, 2007. Related cash collateral of $14 million is included in “Other assets, net” at September 30, 2007.

Amortization of debt issuance costs of less than $1 million in each of the three- and nine-month periods ended September 30, 2007 and 2006 is included in interest expense in the Consolidated Statements of Income.

12. Pension and Other Postretirement Benefits

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

	For the three months ended September 30,						For the nine months ended September 30,
Millions of dollars	2007			2006			2007			2006
Service cost	$	- -		$	1		$	2		$	3
Interest cost		6			8			22			24
Recognized return on plan assets		(10	)		(10	)		(28	)		(28	)
Amortization		5			4			9			12
Net periodic pension benefit cost	$	1		$	3		$	5		$	11

Net periodic other postretirement benefits, which are provided to U.S. employees, were net credits of $2 million and $1 million, respectively, in the three month periods ended September 30, 2007 and 2006 and $3 million in each of the nine-month periods ended September 30, 2007 and 2006. A reduction of benefits in 2004 resulted in a net prior service benefit that is amortized to income as a credit of $4 million annually.

13. Income Taxes

Certain income tax returns of Millennium and various of its subsidiaries are under examination by the Internal Revenue Service (“IRS”) and various non-U.S. and state tax authorities. In many cases, these audits may result in proposed adjustments by the tax authorities. Millennium believes that its tax positions comply with applicable tax law and intends to defend its positions through appropriate administrative and judicial processes.

Tax benefits totaling $173 million relating to uncertain tax positions taken in prior years, including $44 million pertaining to discontinued operations, were unrecognized as of January 1, 2007 (see Note 3). As a result of the sale of the inorganic chemicals business, this amount decreased by the $44 million. There were no other material changes to the amount of unrecognized benefits during the nine months ended September 30, 2007.

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Income Taxes – (Continued)

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

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

The income tax provision for the nine months ended September 30, 2007 was $1 million on a loss before income taxes of $6 million, reflecting the negative effect of a change in estimate for prior year tax items, which was partially offset by a $2 million benefit from newly-enacted Texas state legislation, allowing the carryforward of certain tax losses for state income tax purposes. The income tax provision of $1 million on pretax income of $88 million for the nine months ended September 30, 2006 primarily reflected the effects of favorable settlements of and changes in estimates for prior year items.

14. Other Income (Expense), Net

Millennium’s other income (expense), net, in the first nine months of 2007 included debt prepayment charges of $14 million.

15. Commitments and Contingencies

Environmental Remediation—Millennium’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $148 million as of September 30, 2007 and December 31, 2006. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Millennium to reassess its potential exposure related to environmental matters.

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MILLENNIUM CHEMICALS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

The following table summarizes the activity in Millennium’s accrued environmental liability for the nine months ended September 30:

Millions of dollars	2007			2006
Balance at January 1	$	148		$	145
Additional provisions		12			6
Amounts paid		(12	)		(8	)
Balance at September 30	$	148		$	143

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

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

Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome. However, in 2004, Millennium recognized a liability representing Millennium’s interim allocation of 55% of the $73 million total of estimated cost of riverbank stabilization, recommended as the preferred remedy in 2000 by the KRSG study, and of certain other costs.

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

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

In addition, in 2004, Millennium recognized a liability primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. At September 30, 2007, the balance of the liability was $47 million. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

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

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

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

One legal proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, the judge in that case declared a mistrial after the jury declared itself deadlocked. The sole issue before the jury was whether lead pigment in paint in and on Rhode Island buildings constituted a “public nuisance.” The re-trial of this case began on November 1, 2005. On February 22, 2006, a jury returned a verdict in favor of the State of Rhode Island finding that the cumulative presence of lead pigments in paints and coatings on buildings in the state constitutes a public nuisance; that a Millennium subsidiary, Millennium Holdings, LLC, and other defendants either caused or substantially contributed to the creation of the public nuisance; and that those defendants, including the Millennium subsidiary, should be ordered to abate the public nuisance. On February 28, 2006, the judge held that the state could not proceed with its claim for punitive damages. On February 26, 2007, the court issued its decision denying the post-verdict motions of the defendants, including Millennium, for a mistrial or a new trial. The court concluded that it would enter an order of abatement and appoint a special master to assist the court in determining the scope of the abatement remedy. On March 16, 2007, the court entered a final judgment on the jury’s verdict. On March 20, 2007, Millennium filed its notice of appeal with the Rhode Island Supreme Court.

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

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

Guarantees—Millennium continues to guarantee certain obligations related to the sold inorganic chemicals business until such time as the buyer completes certain procedures to replace Millennium as guarantor. The guarantees, principally with respect to leases of offices, research facilities and railcars, have a total potential obligation of approximately $60 million over their remaining term. Millennium does not expect that any payments will be required under these guarantees.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Commitments and Contingencies – (Continued)

Indemnification—Millennium 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, Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc, and Equistar and its owner companies (including Millennium) entered into indemnification arrangements in connection with the formation of Equistar. Pursuant to these arrangements, Millennium and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of September 30, 2007, Millennium has not accrued any significant amounts for such indemnification obligations, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Millennium. Millennium cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

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

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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Comprehensive Income

The components of comprehensive income were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
Millions of dollars	2007		2006			2007			2006
Net income	$	9	$	17		$	290		$	164
Other comprehensive income, net of tax:
Continuing operations:
Foreign currency translation		- -		- -			- -			1
Amortization of actuarial and investment loss included in net periodic pension cost		1		- -			4			- -
Discontinued operations:
Foreign currency translation		- -		(1	)		16			22
Amortization of actuarial and investment loss included in net periodic pension cost		- -		- -			2			- -
Sale of discontinued operations		- -		- -			(63	)		- -
Total other comprehensive income (loss)		1		(1	)		(41	)		23
Comprehensive income	$	10	$	16		$	249		$	187

17. Segment and Related Information

Millennium, a wholly owned subsidiary of Lyondell, operates in two reportable segments:

Ethylene, co-products and derivatives (“EC&D”), including Millennium’s acetyls business, which produces vinyl acetate monomer (“VAM”), acetic acid and methanol; and Millennium’s equity investment in Equistar, which produces primarily ethylene, co-products such as propylene, butadiene and aromatics, and derivatives such as ethylene oxide, ethylene glycol and polyethylene; and

·	Fragrance and flavors chemicals, which includes terpene-based fragrance ingredients and flavor ingredients.

On May 15, 2007, Millennium completed the sale of its worldwide inorganic chemicals business (see Note 5).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Segment and Related Information – (Continued)

Summarized financial information concerning reportable segments is shown in the following table for the periods presented:

Millions of dollars	EC&D		Fragrance & Flavors			Other			Total
For the three months ended September 30, 2007
Sales and other operating revenues	$	132	$	30		$	- -		$	162
Operating income (loss)		22		(1	)		(11	)		10
Income from equity investment		6		- -			- -			6

For the three months ended September 30, 2006
Sales and other operating revenues	$	124	$	32		$	1		$	157
Operating income (loss)		12		4			(7	)		9
Income from equity investment		23		- -			- -			23

For the nine months ended September 30, 2007
Sales and other operating revenues	$	385	$	86		$	4		$	475
Operating income (loss)		58		4			(39	)		23
Income from equity investment		12		- -			- -			12

For the nine months ended September 30, 2006
Sales and other operating revenues	$	362	$	85		$	7		$	454
Operating income (loss)		13		7			(18	)		2
Income from equity investment		136		- -			- -			136

Operating income (loss) in the “Other” column above includes a business that is not a reportable segment and costs not allocated to Millennium’s business segments, including costs from predecessor businesses.

18. Supplemental Guarantor Information

Millennium America Inc. (“Millennium America”), a 100% owned indirect subsidiary of Millennium, is a holding company for all of Millennium’s continuing and discontinued operating subsidiaries other than the operations in the United Kingdom, France, Brazil and Australia, all of which are discontinued. Millennium America is the issuer of the 7.625% Senior Debentures and Millennium is the issuer of the 4% Convertible Senior Debentures. Millennium America fully and unconditionally guarantees all obligations under the 4% Convertible Senior Debentures. The 7.625% Senior Debentures are fully and unconditionally guaranteed by Millennium. The following condensed consolidating financial information presents supplemental information for Millennium Chemicals Inc., the parent, and Millennium America as of September 30, 2007 and December 31, 2006 and for the three- and nine-month periods ended September 30, 2007 and 2006. Millennium revised certain amounts within the Statement of Income in the condensed consolidating financial information for the six months ended June 30, 2007 to increase the equity in income of subsidiaries and decrease the provision for income taxes for Millennium America, Inc. and to decrease the benefit from income taxes for Non-Guarantor Subsidiaries. As a result, net income for the six months ended June 30, 2007 of Millennium America, Inc. is higher by $338 million and non-guarantor subsidiaries is lower by $288 million than previously reported. This had no effect on the consolidated totals.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET
As of September 30, 2007
Millions of dollars	Millennium Chemicals Inc.		Millennium America Inc.		Non-Guarantor Subsidiaries			Eliminations			Millennium Chemicals Inc. and Subsidiaries

Inventories	$	- -	$	- -	$	88		$	- -		$	88
Notes receivable from Equistar Chemicals, LP		200		315		- -			- -			515
Other current assets		4		9		210			- -			223
Property, plant and equipment, net		- -		- -		123			- -			123
Investment in Equistar Chemicals, LP		- -		- -		453			- -			453
Investment in subsidiaries		307		1,840		- -			(2,147	)		- -
Goodwill, net		- -		- -		49			- -			49
Other assets, net		2		13		59			- -			74
Total assets	$	513	$	2,177	$	982		$	(2,147	)	$	1,525

Current liabilities	$	3	$	7	$	262		$	- -		$	272
Long-term debt		150		241		- -			- -			391
Other liabilities		- -		- -		242			- -			242
Deferred income taxes		- -		- -		266			- -			266
Due to parent and affiliates, net		11		578		(589	)		- -			- -
Total liabilities		164		826		181			- -			1,171
Minority interest		- -		- -		5			- -			5
Stockholder’s equity		349		1,351		796			(2,147	)		349
Total liabilities and stockholder’s equity	$	513	$	2,177	$	982		$	(2,147	)	$	1,525

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

BALANCE SHEET
As of December 31, 2006
Millions of dollars	Millennium Chemicals Inc.			Millennium America Inc.			Non-Guarantor Subsidiaries		Eliminations			Millennium Chemicals Inc. and Subsidiaries

Inventories	$	- -		$	- -		$	87	$	- -		$	87
Other current assets		- -			62			200		- -			262
Current assets held for sale		- -			- -			661		- -			661
Property, plant and equipment, net		- -			- -			129		- -			129
Investment in Equistar Chemicals, LP		- -			- -			470		- -			470
Investment in subsidiaries		310			497			- -		(807	)		- -
Goodwill, net		- -			- -			49		- -			49
Other assets, net		(2	)		(2	)		66		- -			62
Due from parent and affiliates, net		- -			368			- -		(368	)		- -
Long-term assets held for sale		- -			- -			694		- -			694
Total assets	$	308		$	925		$	2,356	$	(1,175	)	$	2,414

Current liabilities	$	1		$	4		$	169	$	- -		$	174
Current liabilities associated with assets held for sale		- -			- -			335		- -			335
Long-term debt		150			617			- -		- -			767
Other liabilities		- -			3			378		- -			381
Deferred income taxes		- -			- -			248		- -			248
Due to parent and affiliates, net		14			- -			354		(368	)		- -
Long-term liabilities associated with assets held for sale		- -			- -			361		- -			361
Total liabilities		165			624			1,845		(368	)		2,266
Minority interest		- -			- -			5		- -			5
Stockholder’s equity		143			301			506		(807	)		143
Total liabilities and stockholder’s equity	$	308		$	925		$	2,356	$	(1,175	)	$	2,414

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME
For the Three Months Ended September 30, 2007
Millions of dollars	Millennium Chemicals Inc.			Millennium America Inc.			Non-Guarantor Subsidiaries			Eliminations			Millennium Chemicals Inc. and Subsidiaries

Sales and other operating revenues	$	- -		$	- -		$	162		$	- -		$	162
Cost of sales		- -			- -			136			- -			136
Selling, general and administrative expenses		- -			- -			15			- -			15
Research and development expenses		- -			- -			1			- -			1
Operating income		- -			- -			10			- -			10
Interest income (expense), net		(1	)		(4	)		10			- -			5
Intercompany interest income (expense), net		3			32			(35	)		- -			- -
Income from equity investment in Equistar Chemicals, LP		- -			- -			6			- -			6
Equity in income of subsidiaries		44			14			- -			(58	)		- -
Other income (expense), net		(57	)		30			28			- -			1
Benefit from (provision for) income taxes		20			(22	)		(11)			- -			(13	)
Net income	$	9		$	50		$	8		$	(58	)	$	9

STATEMENT OF INCOME
For the Three Months Ended September 30, 2006
Millions of dollars	Millennium Chemicals Inc.			Millennium America Inc.			Non-Guarantor Subsidiaries			Eliminations			Millennium Chemicals Inc. and Subsidiaries

Sales and other operating revenues	$	- -		$	- -		$	157		$	- -		$	157
Cost of sales		- -			- -			138			- -			138
Selling, general and administrative expenses		- -			- -			10			- -			10
Operating income		- -			- -			9			- -			9
Interest income (expense), net		(2	)		(15	)		1			- -			(16	)
Intercompany interest income (expense), net		(1	)		27			(26	)		- -			- -
Income from equity investment in Equistar Chemicals, LP		- -			- -			23			- -			23
Equity in income of subsidiaries		20			33			- -			(53	)		- -
Benefit from (provision) for income taxes		- -			(1	)		(5	)		- -			(6	)
Income from discontinued operations, net of tax		- -			- -			7			- -			7
Net income (loss)	$	17		$	44		$	9		$	(53	)	$	17

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

STATEMENT OF INCOME
For the Nine Months Ended September 30, 2007
Millions of dollars	Millennium Chemicals Inc.		Millennium America Inc.		Non-Guarantor Subsidiaries		Eliminations		Millennium Chemicals Inc. and Subsidiaries

Sales and other operating revenues	$	- -	$	- -	$	475	$	- -	$	475
Cost of sales		- -		- -		400		- -		400
Selling, general and administrative expenses		- -		- -		49		- -		49
Research and development expenses		- -		- -		3		- -		3
Operating income		- -