This discussion and analysis should be read in conjunction with information contained in the accompanying unaudited consolidated interim financial statements of Westlake Chemical Corporation and the notes thereto and the consolidated financial statements and notes thereto of Westlake Chemical Corporation included in Westlake Chemical Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The following discussion contains forward-looking statements. Please read "Forward-Looking Statements" for a discussion of limitations inherent in such statements.

We are a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are olefins and vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.

In 2007 and 2008, weakness in the construction markets contributed to lower demand for our vinyls products, and operating margins declined in our vinyls business. In 2008, olefins margins declined significantly due to a sharp drop in product demand that started in August 2008 as customers began to anticipate lower product prices due to a weakened global economy and collapsing energy prices. This was followed by a sharp drop in product prices in the last quarter of 2008, which resulted in continued weak demand, lower operating rates and a significant operating loss for us in the fourth quarter of 2008. Continued weakness in the construction markets and reduced industrial activity, resulting in a precipitous decline in caustic prices, contributed to operating losses in our vinyls segment for the first nine months of 2009. In our olefins segment, a strong export market and balanced supply and demand fundamentals for polyethylene in the U.S. resulted in improving sales volumes and positive operating margins and cash flow for the first nine months of 2009. A cost advantage for gas-based ethylene producers over naphtha-based ethylene producers and lower customer inventory levels following the destocking that occurred in the fourth quarter of 2008 and first quarter of 2009 also contributed to the increased demand and margins in our Olefins segment. Olefins industry forecasts, however, show a significant increase in worldwide capacity over the next few years, with the largest increase expected to come from the Middle East. As a result, olefins operating margins could face downward pressure. While the economic slowdown has been challenging for our customers, we believe our customer base remains generally healthy. As we continue to manage our business in the current environment, we have taken steps designed to address the decrease in demand and margins and its resulting impact on our operations by matching production with sales demand and continuing to operate our plants in an efficient manner. We have also implemented cost reduction programs, temporarily idled some capacity and cut back on discretionary capital spending to preserve cash. The global economic downturn has been challenging on our business and depending on the length and severity of the downturn could have a material adverse affect on our financial condition, results of operations or cash flows.

Recent Developments

In October 2009, as a result of excess capacity due to the weak construction market and in an effort to reduce total costs, we idled our Bristol, Indiana PVC pipe facility and will move the production to our other PVC pipe facilities. In the third quarter of 2009, we recorded asset impairments relating to idled PVC pipe facilities, including the Bristol facility, of $3.9 million.

In August 2009, we entered into a $100.0 million revenue bond issuance facility (the "Series 2009A Revenue Bonds Facility") with the Louisiana Local Government Environmental Facility and Development Authority (the "Authority"). The Authority initially issued $5.0 million of floating rate tax-exempt revenue bonds due August 1, 2029 under the Gulf Opportunity Zone Act of 2005 (the "Initial Series 2009A Revenue Bonds") under the Series 2009A Revenue Bonds Facility. In connection with the issuance of the Initial Series 2009A Revenue Bonds, we entered into a loan agreement with the Authority under which proceeds from the bond offering were lent by the Authority to us. The Initial Series 2009A Revenue Bonds are backed by an irrevocable $5.1 million letter of credit in favor of The Bank of New York Mellon Trust Company, N.A., as trustee for the Initial Series 2009A Revenue Bonds.

Results of Operations



                                             Three Months Ended                  Nine Months Ended
                                               September 30,                       September 30,
                                           2009              2008              2009             2008
                                                            (dollars in thousands)
Net external sales
Olefins
Polyethylene                           $     314,752      $   504,035      $    874,286      $ 1,447,222
Ethylene, styrene and other                  126,221          221,028           275,998          704,624

Total olefins                                440,973          725,063         1,150,284        2,151,846

Vinyls
Fabricated finished products                  96,533          127,498           245,346          364,151
VCM, PVC and other                            95,065          221,174           300,057          579,248

Total vinyls                                 191,598          348,672           545,403          943,399

Total                                  $     632,571      $ 1,073,735      $  1,695,687      $ 3,095,245


                                             Three Months Ended                  Nine Months Ended
                                               September 30,                       September 30,
                                           2009              2008              2009             2008
                                                            (dollars in thousands)
Income (loss) from operations
Olefins                                $      61,650      $    18,190      $    122,013      $    96,146
Vinyls                                        (8,079 )         30,483           (28,289 )         45,752
Corporate and other                           (4,548 )            115            (9,429 )         (5,675 )

Total income from operations                  49,023           48,788            84,295          136,223
Interest expense                              (8,772 )         (8,093 )         (26,163 )        (25,908 )
Other income, net                              1,456            1,267             5,236            5,874
Provision for income taxes                    11,941           14,598            22,826           36,165

Net income                             $      29,766      $    27,364      $     40,542      $    80,024

Diluted earnings per share             $        0.45      $      0.42      $       0.61      $      1.22


                                             Three Months Ended                  Nine Months Ended
                                             September 30, 2009                 September 30, 2009
                                          Average                            Average
                                        Sales Price         Volume         Sales Price         Volume
Product sales price and volume
percentage change from prior year
period
Olefins (1)                                    -40.9 %            1.7 %           -36.7 %           -9.9 %
Vinyls (2)                                     -41.3 %           -3.8 %           -29.8 %          -12.4 %
Company average                                -41.0 %            0.0 %           -34.6 %          -10.6 %

(1) Includes: Ethylene and co-products, polyethylene, and styrene.
(2) Includes: Ethylene co-products, caustic, VCM, PVC resin, PVC pipe, and other fabricated products.

                                             Three Months Ended                  Nine Months Ended
                                               September 30,                       September 30,
                                           2009              2008              2009             2008
Average industry prices (1)
Ethane (cents/lb)                               15.9             36.7              14.1             35.4
Propane (cents/lb)                              20.6             39.8              18.0             38.3
Ethylene (cents/lb) (2)                         32.3             68.0              31.8             64.9
Polyethylene (cents/lb) (3)                     72.3            103.7              68.4             95.4
Styrene (cents/lb) (4)                          56.4             85.7              47.7             79.0
Caustic ($/short ton) (5)                      171.7            786.7             453.9            593.3
Chlorine ($/short ton) (6)                     388.3            265.0             255.8            280.0
PVC (cents/lb) (7)                              54.5             64.0              49.6             59.0

(1) Industry pricing data was obtained through the Chemical Market Associates, Inc., or CMAI. We have not independently verified the data.

(2) Represents average North American contract prices of ethylene over the period as reported by CMAI.

(3) Represents average North American contract prices of polyethylene low density film over the period as reported by CMAI.

(4) Represents average North American contract prices of styrene over the period as reported by CMAI.

(5) Represents average North American average acquisition prices of caustic soda (diaphragm grade) over the period as reported by CMAI.

(6) Represents average North American contract prices of chlorine (into chemicals) over the period as reported by CMAI.

(7) Represents North American contract prices of PVC over the period as reported by CMAI.

Summary

For the quarter ended September 30, 2009, net income was $29.8 million, or $0.45 per diluted share, on net sales of $632.6 million. This represents an increase in net income of $2.4 million, or $0.03 per diluted share, from the quarter ended September 30, 2008 net income of $27.4 million, or $0.42 per diluted share, on net sales of $1,073.7 million. Sales for the third quarter of 2009 decreased $441.1 million compared to the third quarter of 2008 due primarily to lower sales prices for all major products. Income from operations was $49.0 million for the third quarter of 2009 as compared to $48.8 million for the third quarter of 2008. Operating margins benefited from significantly lower energy and feedstock costs in the 2009 period, which was mostly offset by lower sales prices and significantly lower caustic margins resulting from a 78.2% decrease in industry caustic prices compared to the third quarter of 2008. The third quarter of 2008 was negatively impacted by outages caused by Hurricanes Gustav and Ike at our Lake Charles and Geismar facilities. Trading activity resulted in a loss of $0.4 million in the third quarter of 2009 as compared to a loss of $0.9 million in the third quarter of 2008.

For the nine months ended September 30, 2009, net income was $40.5 million, or $0.61 per diluted share, on net sales of $1,695.7 million. This represents a decrease in net income of $39.5 million, or $0.61 per diluted share, from the nine months ended September 30, 2008 net income of $80.0 million, or $1.22 per diluted share, on net sales of $3,095.2 million. Sales for the nine months ended September 30, 2009 decreased $1,399.5 million compared to the first nine months of 2008 largely due to lower sales prices for all major products and lower sales volumes for all major products except caustic and styrene. Income from operations was $84.3 million for the first nine months of 2009 as compared to $136.2 million for the first nine months of 2008. The decrease in income from operations was attributable to a number of factors, including reduced demand for our major products due to the current economic downturn, an unscheduled outage caused by an ice storm at our Calvert City, Kentucky complex in the first quarter of 2009 and a turnaround at one of our ethylene units in Lake Charles in the first quarter of 2009. The decrease was partially offset by a gain from trading activity of $3.6 million during the first nine months of 2009 compared to a loss of $7.8 million during the first nine months of 2008. The Calvert City outage and Lake Charles turnaround resulted in repair costs and the expensing of unabsorbed fixed manufacturing costs of $19.5 million during the first quarter of 2009. A turnaround and revamp of our styrene facility in Lake Charles and the effects of Hurricanes Gustav and Ike at our Lake Charles and Geismar facilities negatively impacted income from operations in the first nine months of 2008.

RESULTS OF OPERATIONS

Third Quarter 2009 Compared with Third Quarter 2008

Net Sales. Net sales decreased by $441.1 million, or 41.1%, to $632.6 million in the third quarter of 2009 from $1,073.7 million in the third quarter of 2008. This decrease was primarily due to lower sales prices for all major products as a result of significantly lower raw material costs in the third quarter of 2009 and continued weakness in the construction industry. Average sales prices for the third quarter of 2009 decreased by 41.0% as compared to the third quarter of 2008, while sales volume remained relatively flat when compared to the third quarter of 2008.

Gross Margin. Gross margin percentage of 11.5% for the third quarter of 2009 increased from the 6.7% gross margin percentage for the third quarter of 2008. The increase was primarily due to lower energy costs and raw material cost reductions that outpaced the drop in sales prices. Our raw material cost in both segments normally tracks industry prices, which experienced a decrease of 56.7% for ethane and 48.2% for propane as compared to the third quarter of 2008. Sales prices decreased an average of 41.0% during the third quarter of 2009.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the third quarter of 2009 increased by $0.5 million, or 2.2%, as compared to the third quarter of 2008.

Interest Expense. Interest expense increased by $0.7 million to $8.8 million in the third quarter of 2009 from $8.1 million in the third quarter of 2008 primarily due to the higher average debt outstanding in the third quarter of 2009.

Other Income, Net. Other income, net increased to $1.5 million in the third quarter of 2009 from $1.3 million in the third quarter of 2008 primarily due to higher equity in income from our joint venture in China, partially offset by lower interest income.

Income Taxes. The effective income tax rate was 28.6% for the third quarter of 2009. The 2009 tax rate is below the statutory rate of 35% primarily due to the decrease in the domestic manufacturing deduction lost caused by carrying back the year-to-date taxable loss and a reduction in state tax liabilities. The effective income tax rate was 34.8% for the third quarter of 2008. The 2008 tax rate was below the statutory rate of 35% primarily due to state tax credits and the domestic manufacturing deduction, partially offset by state income taxes.

Olefins Segment

Net Sales. Net sales decreased by $284.1 million, or 39.2%, to $441.0 million in the third quarter of 2009 from $725.1 million in the third quarter of 2008. This decrease was primarily due to a drop in sales prices for all major olefins products driven by significantly lower raw material costs in the third quarter of 2009 as compared to the third quarter of 2008. Average sales prices for the Olefins segment decreased by 40.9% in the third quarter of 2009 as compared to the third quarter of 2008, while average sales volumes increased slightly by 1.7% in the third quarter of 2009 compared to the third quarter of 2008.

Income from Operations. Income from operations increased by $43.5 million, or 239.0%, to $61.7 million in the third quarter of 2009 from $18.2 million in the third quarter of 2008. This increase was primarily due to lower energy and feedstock costs, partially offset by lower sales prices for all major olefins products. In addition, the third quarter of 2008 was negatively impacted by Hurricanes Gustav and Ike.

Vinyls Segment

Net Sales. Net sales decreased by $157.1 million, or 45.1%, to $191.6 million in the third quarter of 2009 from $348.7 million in the third quarter of 2008. This decrease was primarily attributable to lower sales prices for all major vinyls products. Average sales prices for the Vinyls segment decreased by 41.3% in the third quarter of 2009 as compared to the third quarter of 2008. The lower average sales prices were largely attributable to significantly lower raw material costs and continued weakness in the construction markets.

(Loss) Income from Operations. The Vinyls segment incurred a loss from operations of $8.1 million in the third quarter of 2009 as compared to income from operations of $30.5 million in the third quarter of 2008, a decline of $38.6 million. This change was primarily caused by significantly lower caustic margins due to a 78.2% drop in industry caustic prices compared to the third quarter of 2008, higher chlorine costs, lower operating rates and asset impairment costs of $3.9 million related to our PVC pipe business, partially offset by an insurance recovery gain of $4.6 million in the third quarter of 2009 related to damage caused by the ice storm at our Calvert City facility in the first quarter of 2009.

Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008

Net Sales. Net sales decreased by $1,399.5 million, or 45.2%, to $1,695.7 million in the first nine months of 2009 from $3,095.2 million in the first nine months of 2008. This decrease was primarily due to lower sales prices for all of our major products and lower sales volumes for all of our major products except caustic and styrene. Average sales prices and volumes for the first nine months of 2009 decreased by 34.6% and 10.6%, respectively, as compared to the first nine months of 2008. As a result of the economic downturn and weakness in the construction markets, order activity for most of our major products declined in the first nine months of 2009 compared to the same period in 2008.

Gross Margin. Gross margin percentage of 8.7% for the first nine months of 2009 increased from the 6.6% gross margin percentage for the first nine months of 2008. The increase was primarily due to lower energy costs, raw material cost reductions that outpaced the drop in product sales prices and a positive change of $11.4 million in trading activity, partially offset by lower operating rates. Trading activity resulted in a gain of $3.6 million during the first nine months of 2009, compared to a loss of $7.8 million during the first nine months of 2008. The lower operating rates were primarily due to the decreased demand for most of our major products, the ice storm in Calvert City and the turnaround at one of our ethylene units in Lake Charles during the first quarter of 2009. Our raw material cost in both segments normally tracks industry prices, which experienced a decrease of 60.2% for ethane and 53.0% for propane as compared to the first nine months of 2008. Sales prices decreased an average of 34.6% during the first nine months of 2009.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.7 million, or 6.8%, in the first nine months of 2009 as compared to the first nine months of 2008. The decrease was primarily due to a reduction in total selling expenses consistent with the decrease in sales.

Interest Expense. Interest expense in the first nine months of 2009 increased slightly by $0.3 million to $26.2 million in the first nine months of 2009 from $25.9 million in the first nine months of 2008 as average debt balances and interest rates were relatively flat compared to the first nine months of 2008.

Other Income, Net. Other income, net decreased by $0.7 million to $5.2 million in the first nine months of 2009 from $5.9 million in the first nine months of 2008 primarily due to lower interest income, partially offset by higher equity in income from our joint venture in China.

Income Taxes. The effective income tax rate was 36.0% for the nine months ended September 30, 2009. The 2009 tax rate was above the statutory rate of 35% primarily due to state income taxes, partially offset by state tax credits. The effective tax rate was 31.1% for the nine months ended September 30, 2008. The 2008 tax rate was below the statutory rate of 35% primarily due to state tax credits, the domestic manufacturing deduction, and a reduction of gross unrecognized tax benefits, partially offset by state income taxes.

Olefins Segment

Net Sales. Net sales decreased by $1,001.5 million, or 46.5%, to $1,150.3 million in the first nine months of 2009 from $2,151.8 million in the first nine months of 2008. This decrease was primarily due to lower sales prices for all major products and lower sales volumes for all major products except styrene. Average selling prices for the Olefins segment decreased by 36.7% in the first nine months of 2009 as compared to the first nine months of 2008.

Income from Operations. Income from operations increased by $25.9 million, or 27.0%, to $122.0 million in the first nine months of 2009 from $96.1 million in the first nine months of 2008. This increase was due to lower energy and feedstock costs, partially offset by lower sales prices for all major products and lower operating rates. In addition, trading activity resulted in a gain for the first nine months of 2009 of $3.6 million as compared to a loss of $7.8 million for the first nine months of 2008. The first nine months of 2008 were negatively impacted by Hurricanes Gustav and Ike, which caused two separate outages at the Lake Charles plant, and a styrene plant turnaround, also in Lake Charles.

Vinyls Segment

Net Sales. Net sales decreased by $398.0 million, or 42.2%, to $545.4 million in the first nine months of 2009 from $943.4 million in the first nine months of 2008. This decrease was mainly driven by the decrease in the sales prices for all major products and sales volumes of all products except caustic. Average selling prices for the Vinyls segment decreased by 29.8% in the first nine months of 2009 as compared to the first nine months of 2008.

(Loss) Income from Operations. The segment produced a loss from operations of $28.3 million in the first nine months of 2009 as compared to income from operations of $45.8 million in the first nine months of 2008, a decline of $74.1 million. This decrease was primarily attributable to a significant reduction in caustic margins, lower operating rates, lower sales prices for all of our major products and reduced margins in our vinyls downstream businesses as a result of the continued weakness in the construction market. Operating rates were negatively impacted by the unscheduled outage at our Calvert City facility in the first quarter of 2009.

CASH FLOW DISCUSSION FOR NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Cash Flows

Operating Activities

Operating activities provided cash of $213.5 million in the first nine months of 2009 compared to cash provided of $76.6 million in the first nine months of 2008. The $136.9 million increase in cash flows from operating activities was primarily due to favorable changes in working capital, partially offset by a reduction in income from operations and capitalized turnaround costs of $23.6 million resulting from the turnaround of our ethylene unit in Lake Charles in the first quarter of 2009. Income from operations decreased by $51.9 million in the first nine months of 2009 as compared to the first nine months of 2008 primarily as a result of pricing pressures and reduced demand for our products. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, provided cash of $68.8 million in the first nine months of 2009 (including a federal tax refund of $30.0 million, resulting from overpayment of 2008 federal income taxes), compared to $72.0 million of cash used in the first nine months of 2008, a favorable change of $140.8 million. This change was largely due to an increase in accounts payables and accrued liabilities as a result of the improving operating rates during the first nine months of 2009 and reduced working capital requirements attributable to a decrease in energy and feedstock costs and a decrease in average sales prices as compared to the prior year period.

Investing Activities

Net cash used for investing activities during the first nine months of 2009 was $66.4 million as compared to net cash used for investing activities of $126.2 million in the first nine months of 2008. Capital expenditures were $65.0 million in the first nine months of 2009 compared to $127.2 million in the first nine months of 2008. The decrease in capital expenditures in the 2009 period was partially attributable to a reduction in our discretionary capital spending in 2009 due to the current economic environment as well as expenditures related to the expansions at Calvert City and the opening of the new plant in Yucca, Arizona during 2008. The remaining capital expenditures in the first nine months of 2009 and 2008 primarily related to maintenance, safety and environmental projects. Other investing activities during the first nine months of 2009 included the purchase of a PVC pipe plant in Janesville, Wisconsin for $6.3 million, partially offset by the proceeds received from the disposition of assets.

Financing Activities

Net cash provided by financing activities during the first nine months of 2009 was $15.6 million as compared to net cash provided of $47.2 million in the first nine months of 2008. The 2009 activity was primarily related to a $27.7 million draw-down of our restricted cash for use for eligible capital expenditures, partially offset by the payment of cash dividends and fees incurred in connection with the issuance of the Initial Series 2009A Revenue Bonds and the amendment of our revolving credit facility. The 2008 activity was primarily related to borrowing a net $4.4 million under our revolving credit facility and a $55.0 million draw-down of our restricted cash, partially offset by the payment of cash dividends and fees incurred in connection with the amendment of our revolving credit facility.

Liquidity and Capital Resources

Liquidity and Financing Arrangements

Our principal sources of liquidity are from cash and cash equivalents, restricted cash, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing. While the economic downturn has negatively impacted our business, cash flows have remained positive for the first nine months of 2009 primarily due to the reduced working capital requirements resulting from the reductions in energy and feedstock costs compared to the first nine months of 2008. In addition, we have increased our focus on cost cutting and implemented various cost reduction initiatives designed to preserve cash and improve our liquidity.

In August 2008, we announced plans for the construction of a new chlor-alkali . . .