UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50132

 

Sterling Chemicals, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		76-0502785 (I.R.S. Employer Identification No.)
333 Clay Street, Suite 3600		(713-650-3700)
Houston, Texas 77002-4109		(Registrant’s telephone number,
(Address of principal executive offices)		including area code)

Common Stock, par value $.01 per share

(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ.

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ.

     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 þ No o.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o.

     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. þ.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

     The aggregate market value of the registrant’s common stock, par value $.01 per share, held by non-affiliates at June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the value of the last sales price of these shares as reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., was $10,221,032.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

     As of February 28, 2010, Sterling Chemicals, Inc. had 2,828,460 shares of common stock outstanding.

     Portions of the definitive Proxy Statement relating to the 2010 Annual Meeting of Stockholders of Sterling Chemicals, Inc. are incorporated by reference in Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

				Page
		PART I
Item 1.		Business			2
Item 1A.		Risk Factors			12
Item 2.		Properties			18
Item 3.		Legal Proceedings			18
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 8.		Financial Statements and Supplementary Data			35
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			70
Item 9A (T).		Controls and Procedures			70
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance			71
Item 11.		Executive Compensation			72
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			72
Item 13.		Certain Relationships and Related Transactions, and Director Independence			72
Item 14.		Principal Accountant Fees and Services			72
		PART IV
Item 15.		Exhibits and Consolidated Financial Statement Schedules			73
EX-10.1.B
EX-10.7
EX-10.08.A
EX-10.9.A
EX-10.10.F
EX-10.13.C
EX-10.13.D
EX-10.14
EX-10.15
EX-10.18.B
EX-10.25.A
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

Forward-Looking Statements

     This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give our current expectations or forecasts of future events. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “may,” “might,” “will,” “will be,” “will continue,” “will likely result,” “project,” “forecast,” “budget” and similar expressions. Statements in this report that contain forward-looking statements include, but are not limited to, information concerning our possible or assumed future results of operations and our future plans with respect to our plasticizers business and facility and related disclosures. While our 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 our control. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report.

     In addition, our other filings with the Securities and Exchange Commission, or the SEC, include additional factors that could adversely affect our business, results of operations or financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this Form 10-K are made only as of the date of this Form 10-K and are not guarantees of future performance. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such expectations may prove to be incorrect. All written or oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Document Summaries

     Descriptions of documents and agreements contained in this Form 10-K are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to this Form 10-K or other periodic reports we file with the SEC.

PART I

     Unless otherwise indicated, references to “we,” “us,” “our” and “ours” in this Form 10-K refer collectively to Sterling Chemicals, Inc. and its wholly-owned subsidiaries.

Item 1. Business

     We were formed in 1986 to acquire a petrochemicals facility located in Texas City, Texas that was previously owned by Monsanto Company. We are a North American producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products. Our primary products are acetic acid and plasticizers.

     Our acetic acid is used primarily to manufacture vinyl acetate monomer and purified terephthalic acid, which are used in a variety of products, including adhesives, surface coatings, polyester fibers, and films and plastic bottle resins, respectively. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, that extends to 2031, all of our acetic acid production is sold to BP Amoco Chemical Company, or BP Chemicals. We are BP Chemicals’ sole source of acetic acid production in the Americas. BP Chemicals markets all of the acetic acid that we produce and pays us, among other amounts, a portion of the profits derived from its sales of our acetic acid. In addition, BP Chemicals reimburses us for 100% of our fixed and variable costs of production, other than specified indirect costs. We also jointly invest with BP Chemicals in capital expenditures related to our acetic acid facility in the same percentage as the profits from the business we receive from BP Chemicals.

     We own and operate one of the lowest cost acetic acid facilities in the world. Our acetic acid facility utilizes BP Chemicals’ proprietary “Cativa” carbonylation technology, which we believe offers several advantages over competing production methods, including lower energy requirements and lower fixed and variable costs. Acetic acid production has two major raw material requirements, methanol and carbon monoxide. BP Chemicals, a producer of methanol, supplies 100% of our methanol requirements related to our production of acetic acid. All of our requirements for carbon monoxide are supplied by Praxair Hydrogen Supply, Inc., or Praxair, from a partial oxidation unit constructed by Praxair on land leased from us at our site in Texas City, Texas, or our Texas City facility.

     Our plasticizers business is comprised of two separate products: phthalate esters and phthalic anhydride, together commonly referred to as plasticizers. All of our plasticizers, which are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials, are sold to BASF Corporation, or BASF. Since 1986, we have sold all of our plasticizers production exclusively to BASF pursuant to our agreement with BASF, or our Plasticizers Production Agreement, which has been amended several times. We also previously produced phthalic anhydride, or PA, for BASF under the Plasticizers Production Agreement. Under our Plasticizers Production Agreement, BASF provides us with most of the required raw materials, markets the plasticizers that we produce and is obligated to make certain fixed quarterly payments to us and reimburse us monthly for our actual production costs and capital expenditures relating to our plasticizers facility. Effective as of April 1, 2008, we and BASF amended our Plasticizers Production Agreement after BASF nominated zero pounds of PA under the prior version of the agreement due to deteriorating market conditions, ultimately resulting in the closure of our PA unit. The closure of our PA unit did not, however, impact our continued production of plasticizers for BASF. On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective December 31, 2010, at which time we will no longer produce plasticizers for BASF. We will not be subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement. BASF, on the other hand, will be required to pay us an early termination fee of $9.8 million on December 31, 2010. In December 2010, in connection with the termination of our Plasticizers Production Agreement, we will be required to refund BASF’s $1.0 million pre-payment deposit previously paid by BASF. We are in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business after the termination of our Plasticizers Production Agreement with BASF. Since we are in the early stages of evaluating our commercial options regarding our plasticizers business, we cannot predict the ultimate outcome or the success of continuing the plasticizers business after December 31, 2010. In the event we conclude to permanently close our plasticizers facility, we have also developed plans for restructuring our operating costs following the termination of our Plasticizers Production Agreement. If we are unable to continue our plasticizers operations through other viable commercial options for our plasticizers business or facility or restructure our operating costs, or are unable to do so at or shortly after December 31, 2010, the termination of our Plasticizers Production Agreement will likely have a material adverse effect on our financial condition, results of operations and cash flows. However, we do not believe that these effects will impact our ability to continue as a going concern. For a further description of our agreement with BASF, see “Plasticizers-BASF” under “Contracts” and see “Risk Factors”.

     Prior to 2008, we produced styrene as one of our principal products. On September 17, 2007, we entered into a long-term exclusive styrene supply agreement and a related railcar purchase and sale agreement with NOVA Chemicals Inc., which was subsequently assigned by NOVA Chemicals Inc. to INEOS NOVA LLC, or INEOS NOVA. After the supply agreement became effective, INEOS NOVA nominated zero pounds of styrene under the supply agreement for the balance of 2007 and, in response, we exercised our right to terminate the supply agreement and permanently shut down our styrene facility. Under the supply agreement, we are responsible for the closure costs of our styrene facility and are also restricted from reentering the styrene business until November 2012. The restricted period was initially eight years. However, on April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     We sold substantially all remaining styrene inventory during the first quarter of 2008. The decommissioning process was completed by the end of 2008, with $18.9 million of the $19.6 million in total costs associated with the decommissions being incurred in 2008. In July 2008, we announced a reduction in work force in order to reduce our staffing to a level appropriate for our existing operations and site development projects. As a result, we reduced our salaried work force by 19 people and our hourly work force by 15 people and recognized and paid $1.4 million of severance costs in 2008. In addition, as a result of our work force reduction, the accrual of defined benefits for all future services of a significant number of employees was eliminated and we recorded a curtailment loss of $1.2 million for our benefit plans in 2008. The revenues and gross profit (loss) from our styrene operations, which are

reflected in discontinued operations, include $12.4 million of deferred income from the NOVA supply agreement that is being amortized over the contractual non-compete period of five years using the straight-line method, are summarized below:

		Year ended December 31,
		2009				2008
		(Dollars in Thousands)
Revenues		$	12,382			$	26,591
Gross profit (loss)			10,903				(7,757	)

     We own the acetic acid and plasticizers manufacturing units located at our Texas City facility. We lease a portion of our Texas City facility to Praxair, who constructed a partial oxidation unit on that land. We also lease a portion of our Texas City facility to S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., or Praxair Energy, which constructed a cogeneration facility on that land. However as our strategic initiatives under consideration do not require utilization of the steam produced by the cogeneration facility, we and Praxair Energy elected to terminate the joint venture and the Joint Venture Agreement governing S&L Cogeneration Company, or the Joint Venture Agreement, was amended to extend its term until the later of November 30, 2009 or upon completion of all final audits, and to address several matters related to the sale of the cogeneration facility, the distribution of the joint venture’s assets and the termination and winding-up of its affairs. We expect the joint venture to be terminated and wound-up during 2010. We lease space for our principal offices located in Houston, Texas. As of December 31, 2009, we operated in two segments: acetic acid and plasticizers.

Business Strategy

     Our strategic objectives include:

•

safe, reliable and environmentally responsible operations;

•

effective utilization of available capacity;

•

superior expense and capital expenditure management;

•

expansion of capacity through low cost or strategic investments;

•

flawless execution of contract management and administration;

•

monetization of under-utilized assets and infrastructure;

•

capture of economic merger and acquisition opportunities;

•

optimized capital structure, tax credits and governmental subsidies;

•

top-quality human resource management, development and utilization; and

•

leading shareholder returns.

     Operating Our Facilities Safely, Reliably and in an Environmentally Responsible Manner. We believe in operating our facilities in a manner that earns the confidence of our employees and our community. We have created a positive and open safety culture in which employee participation is encouraged in an atmosphere of ownership and pride. We proactively protect the safety of our employees, the community and the environment through the systematic identification, reduction and management of risks. Expectations and accountabilities for safety have been defined for all levels of our organization, and employees have aligned their personal goals to meet these responsibilities. Management and employee variable compensation programs are partially dependent on our individual and collective accomplishments. Our Board of Directors, or our Board, is informed of our progress

towards maintaining and improving our process safety programs through the use of performance metrics under our compensation programs and quarterly presentations to the Environmental, Health & Safety Committee of our Board.

     Profitably Grow Our Business. We believe that our acetic acid facility is well positioned for cost-effective future capacity expansions at low relative incremental cost due to previous investments made by us and BP Chemicals. These investments include the installation of a new reactor in 2003 that is capable of producing up to 1.7 billion pounds of acetic acid annually and the replacement of the primary column of our acetic acid facility in June 2009 with a column sized in excess of existing capacity. Although slowdowns in the housing and automotive markets during 2009 resulted in reduced demand for vinyl acetate monomer and, consequently, acetic acid in North America for the short-term, as demand for acetic acid recovers and grows, we intend to grow our acetic acid business through capacity expansions that take advantage of this positioning.

     Monetize Under-utilized Assets and Infrastructure. Our Texas City facility is strategically located on Galveston Bay and benefits from a deep-water dock capable of handling ships with up to a 40-foot draft, as well as four barge docks and direct access to Union Pacific and Burlington Northern Santa Fe railways with in-motion rail scales on site. Our Texas City facility also has truck loading racks, weigh scales, stainless and carbon steel storage tanks, three waste deepwells, 160 acres of available land zoned for heavy industrial use and additional land zoned for light industrial use and a supportive political environment for growth. We also have approximately 240 excess tons of perpetual NOx allowances under the Texas Commission on Environmental Quality Mass Emissions Cap and Trade Program which apply to the eight county Houston-Galveston-Brazoria, Texas nonattainment area, which may be sold or used for development projects. In addition, we are in the heart of one of the largest petrochemical complexes on the Gulf Coast and, as a result, have on-site access to a number of raw material pipelines, as well as close proximity to a number of large refinery complexes. Given our under-utilized infrastructure and our management, operational and engineering expertise, as well as our ample unoccupied land, we believe that there are significant opportunities for further development of our Texas City facility. We are currently pursuing numerous initiatives to attract new manufacturing, distribution or storage related businesses. Specifically, we are seeking long-term contractual business arrangements or partnerships that will provide us with an ability to realize the value of our under-utilized assets through profit sharing or other revenue generating arrangements. For development projects that may have significant capital expenditure requirements, we are considering joint ventures or other arrangements where we would contribute certain of our assets, management and operational expertise to minimize our share of the capital costs. In any case, we expect any new facility constructed at our Texas City facility to lower the amount of overall fixed costs allocated to each of our operating units and provide us with additional profit.

     Pursue Economic Merger and Acquisition Opportunities. We are pursuing strategic acquisitions, focusing on manufacturing businesses and assets which would allow us to increase the size and scope of our business, while adding revenue diversification to our existing businesses. We believe that the current economic environment has increased the potential number of acquisition targets and has provided an ideal situation for us to acquire businesses on favorable terms.

Industry Overview

     Acetic Acid. The North American acetic acid industry has enjoyed a long period of sustained domestic demand growth, as well as substantial export demand. This has led to North American industry utilization rates above 85% over the last six years. Although slowdowns in the housing and automotive markets during 2009 resulted in reduced demand for vinyl acetate monomer, and consequently acetic acid, in North America for the short-term, Tecnon OrbiChem, or Tecnon, projects acetic acid utilization rates will increase to over 98% by 2013. The North American acetic acid industry is inherently less cyclical than many other petrochemical products due to a number of important factors. There are only four large producers of acetic acid in North America. Historically these producers have made capacity additions primarily through small expansion projects or the exploitation of debottlenecking opportunities. Finally, the North American acetic acid industry tends to sell most of its products through long-term sales agreements having formula based pricing mechanisms, eliminating much of the volatility seen in other petrochemicals products and resulting in more stable and predictable earnings and profit margins.

     Global production capacity of acetic acid as of December 31, 2009 was approximately 31 billion pounds per year, with current North American production capacity at approximately six billion pounds per year. The North American acetic acid industry is mature and well developed, with the four major acetic acid producers accounting

for approximately 94% of production capacity in North America. Demand for acetic acid is linked to the demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Vinyl acetate monomer is the largest derivative of acetic acid, representing over 35% of global demand. Although slowdowns in the housing and automotive markets over the last year have reduced global demand for vinyl acetate monomer in the short-term, annual global production of vinyl acetate monomer is expected to increase from 10.3 billion pounds in 2008 to 14.2 billion pounds in 2013.

     Plasticizers. Plasticizers are produced from either ethylene-based linear alpha-olefins feedstocks or propylene-based non-linear technology. We produce both linear and non-linear plasticizers used to make flexible plastics such as shower curtains, floor coverings, automotive parts and construction materials. Feedstocks for plasticizers consist of PA and oxo-alcohols. Linear plasticizers have historically received a premium over competing propylene-based branched products for customers that require enhanced performance properties. Although we have not been exposed to fluctuations in costs or market conditions due to the contract terms in our Plasticizers Production Agreement with BASF, the markets for competing plasticizers may be affected by the cost of the underlying raw materials, especially when the cost of one olefin rises faster than the other or by the introduction of new products. Over the last several years, the price of linear alpha-olefins increased sharply, which caused many consumers to switch to lower cost branched products such as propylene-based plasticizers, despite the loss of some performance properties. As a result, we modified our plasticizer production facilities during the third quarter of 2006 to include branched plasticizers production. Ultimately, we expect branched plasticizers to replace linear plasticizers for most applications, although recently some branched plasticizers products have been the subject of health related concerns. Following termination of the Plasticizers Production Agreement, we may face greater cost fluctuations or exposure to market conditions if we continue to operate the plasticizers business. For a further description of our agreement with BASF, see “Plasticizers-BASF” under “Contracts” and see “Risk Factors”.

Product Summary

     The following table summarizes our principal products, including our capacity, the primary end uses for each product, the raw materials used to produce each product and the major competitors for each product. “Capacity” represents rated annual production capacity as of December 31, 2009, which is calculated by estimating the number of days in a typical year that a production facility is capable of operating after allowing for downtime for regular maintenance, and multiplying that number of days by an amount equal to the facility’s optimal daily output based on the design feedstock mix. As the capacity of a facility is an estimated amount, actual production may be more or less than capacity, and the following table does not reflect actual operating rates of any of our production facilities for any given period of time.

Sterling Product		Intermediate
(Capacity)		Products		Primary End Products		Raw Materials		Major Competitors
Acetic Acid (1.3 billion pounds per year)		Vinyl acetate monomer, terephthalic acid and acetate solvents		Adhesives, PET bottles, fibers and surface coatings		Methanol and Carbon Monoxide		Celanese AG, Eastman Chemical Company and Lyondell Basell Chemical Company
Plasticizers (200 million pounds per year of phthalate esters)		Flexible polyvinyl chloride, or PVC		Flexible plastics, such as shower curtains and liners, floor coverings, cable insulation, upholstery and plastic molding		Oxo-Alcohols and Phthalic Anhydride		ExxonMobil Corporation, Eastman Chemical Company and BASF Corporation

Products

     Acetic Acid. Our acetic acid is used primarily to manufacture vinyl acetate monomer and purified terephthalic acid, which are used in a variety of products, including adhesives, surface coatings, polyester fibers, and films and plastic bottle resins, respectively. We have the third largest production capacity for acetic acid in North America. Our acetic acid unit has a rated annual production capacity of approximately 1.3 billion pounds, which represents approximately 19% of total North American capacity. All of our acetic acid production is sold to BP Chemicals, and we are BP Chemicals’ sole source of production in the Americas. We sell all of our acetic acid to BP Chemicals pursuant to our Acetic Acid Production Agreement that extends until 2031. For a further description of our agreement with BP Chemicals, please refer to “Acetic Acid-BP Chemicals” under “Contracts.”

     Plasticizers. Our plasticizers business involves the production of phthalate esters, commonly referred to as plasticizers, from PA and oxo-alcohols. All of our plasticizers, which are used to make flexible plastics such as shower curtains, floor coverings, automotive parts and construction materials, are sold to BASF pursuant to our Plasticizers Production Agreement. Since 1986, we have sold all our plasticizers production exclusively to BASF

pursuant to our Plasticizers Production Agreement, which has been amended several times. We also previously produced PA for BASF under the Plasticizers Production Agreement. Effective as of April 1, 2008, we and BASF amended our Plasticizers Production Agreement after BASF nominated zero pounds of PA under the prior version of the agreement, ultimately resulting in the closure of our PA unit. The closure of our PA unit did not, however, impact our continued production of plasticizers for BASF. On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective December 31, 2010, at which time we will no longer produce plasticizers for BASF. We will not be subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement. BASF, on the other hand, will be required to pay us an early termination fee of $9.8 million on December 31, 2010. In December 2010, in connection with the termination of our Plasticizers Production Agreement, we will be required to refund BASF’s $1.0 million pre-payment deposit previously paid by BASF. We are in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business after the termination of our Plasticizers Production Agreement with BASF. Since we are in the early stages of evaluating our commercial options regarding our plasticizers business, we cannot predict the ultimate outcome or the success of continuing the plasticizers business after December 31, 2010. In the event we conclude to permanently close our plasticizers facility, we have also developed plans for restructuring our operating costs following the termination of our Plasticizers Production Agreement. If we are unable to continue the plasticizers operations through other viable commercial options for our plasticizers business or facility or restructure our operating costs, or are unable to do so at or shortly after December 31, 2010, the termination of our Plasticizers Production Agreement will likely have a material adverse effect on our financial condition, results of operations and cash flows. However, we do not believe that these effects will impact our ability to continue as a going concern. For a further description of our agreement with BASF, see “Plasticizers-BASF” under “Contracts” and see “Risk Factors”.

Sales and Marketing

     Our products are generally sold to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products throughout the world. Our Acetic Acid Production Agreement provides for the dedication of 100% of our production of acetic acid to BP Chemicals, and our Plasticizers Production Agreement provides for the dedication of 100% of our production of plasticizers to BASF. Under our Acetic Acid Production Agreement, we are reimbursed for our actual fixed and variable manufacturing costs (other than specified indirect costs) and also receive an agreed share of the profits earned from this business. Under our Plasticizers Production Agreement, we are reimbursed for our manufacturing costs and also receive a quarterly “facility fee” for the production unit included in our plasticizers business, but do not share in the profits or losses from that business.

Contracts

     Our significant contracts are described below.

     Acetic Acid-BP Chemicals

     In 1986, we entered into the initial version of our Acetic Acid Production Agreement with BP Chemicals, which has since been amended several times. We sell all of our acetic acid production to BP Chemicals under our Acetic Acid Production Agreement and we are BP Chemicals’ sole source of acetic acid production in the Americas. BP Chemicals markets all of the acetic acid that we produce and pays us, among other amounts, a portion of the profits derived from its sales of the acetic acid we produce. In addition, BP Chemicals reimburses us for 100% of our fixed and variable costs of production (other than specified indirect costs). Revenues from our acetic acid segment were $87.3 million and $129.7 million for the years ended December 31, 2009 and 2008, respectively, representing approximately 76% and 80%, respectively, of our total revenues for such period. Other than our Acetic Acid Production Agreement, we do not have any material relationships with BP Chemicals.

     Plasticizers-BASF

     Since 1986, we have sold all of our plasticizers production exclusively to BASF pursuant to our Plasticizers Production Agreement, which has been amended several times. We also previously produced PA for BASF under the Plasticizers Production Agreement. Under our Plasticizers Production Agreement, BASF provides us with most of the required raw materials and markets the plasticizers we produce, and is obligated to make certain fixed

quarterly payments to us and to reimburse us monthly for our actual production costs and capital expenditures relating to our plasticizers facility. Effective as of April 1, 2008, our Plasticizers Production Agreement was amended and restated in connection with BASF’s nomination of zero pounds of PA in response to deteriorating market conditions, ultimately resulting in the closure of our PA unit. The closure of our PA unit did not, however, impact our continued production of plasticizers for BASF. In exchange for being relieved of its obligations related to our PA manufacturing unit, BASF paid us an aggregate amount of approximately $3.2 million. However, we are obligated to refund 25% of this amount if we restart our PA manufacturing unit during 2010. The $3.2 million payment from BASF was made in exchange for the termination of BASF’s obligations under our Plasticizers Production Agreement with respect to the operation of our PA manufacturing unit and, consequently, is recognized using the straight-line method over the restricted period from April 1, 2008 through December 31, 2010. In addition, during the first half of 2008, BASF paid us approximately $3.7 million for reimbursement of certain direct fixed and variable costs associated with the shutdown and decontamination of our PA manufacturing unit, which amounts are not subject to refund. All direct fixed and variable costs associated with the shutdown and decontamination of our PA manufacturing unit have been incurred and expensed, and the $3.7 million in cost reimbursements was recognized as revenue in the first half of 2008.

     On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective December 31, 2010. We will not be subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement. BASF, on the other hand, will be required to pay us an early termination fee of $9.8 million on December 31, 2010, at which time we will no longer produce plasticizers for BASF. In December 2010, in connection with the termination of our Plasticizers Production Agreement, we will be required to refund BASF’s $1.0 million pre-payment deposit previously paid by BASF. If we continue to operate the plasticizers business after the termination of our Plasticizers Production Agreement, we will be required to make payments to BASF for its undepreciated capital expenditures related to past capital projects paid by BASF, over the remaining balance of the original term of our Plasticizers Agreement, based on a straight line, 8-year life. As of December 31, 2010, we expect the total amount of these undepreciated capital expenditures to be approximately $2.6 million, with approximately $1.0 million, $0.7 million, $0.6 million, and $0.3 million potentially to be paid in 2011, 2012, 2013, and 2014, respectively. If within 90 days after the termination of our Plasticizers Production Agreement, we provide written notice to BASF of our election to permanently close our plasticizers facility, the undepreciated capital expenditures paid by BASF for all capital projects is deemed to be zero, and we will not be required to make any payments to BASF. We are in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business after the termination of our Plasticizers Production Agreement with BASF. Since we are in the early stages of evaluating our commercial options regarding our plasticizers business, we cannot predict the ultimate outcome or the success of continuing the plasticizers business after December 31, 2010. In the event we conclude to permanently close our plasticizers facility, we have also developed plans for restructuring our operating costs following the termination of our Plasticizers Production Agreement. If we are unable to continue the plasticizers operations through other viable commercial options for our plasticizers business or facility or restructure our operating costs, or are unable to do so at or shortly after December 31, 2010, the termination of our Plasticizers Production Agreement will likely have a material adverse effect on our financial condition, results of operations and cash flows. However, we do not believe that these effects will impact our ability to continue as a going concern. Revenues from our plasticizers segment were $26.0 million and $31.0 million for the years ended December 31, 2009 and 2008, respectively, representing approximately 23% and 19%, respectively, of our total revenues for such period. Gross profit from our plasticizers operations was $5.9 million in 2009 and $4.1 million in 2008. Other than our Plasticizers Production Agreement, we do not have any material relationships with BASF.

     Sales to major customers constituting 10% or more of total revenues are included in Note 11 of the “Notes to Consolidated Financial Statements” included in Item 8, Part II of this Form 10-K.

Raw Materials and Energy Resources

     The aggregate cost of raw materials and energy resources used in the production of our products is far greater than the total of all other costs of production combined. As a result, an adequate supply of raw materials and energy at reasonable prices and on acceptable terms is critical to the success of our business. Although we believe that we will continue to be able to secure adequate supplies of raw materials and energy, we may be unable to do so at

acceptable prices or payment terms. See “Risk Factors.” Acetic acid is manufactured primarily from carbon monoxide and methanol. Praxair is our sole source for carbon monoxide and supplies us with all of the carbon monoxide we require for the production of acetic acid from its partial oxidation unit located on land leased from us at our Texas City site. Currently, our methanol requirements are supplied by BP Chemicals under our Acetic Acid Production Agreement. The primary raw materials for plasticizers are oxo-alcohols and orthoxylene, which are supplied by BASF under our Plasticizers Production Agreement. These sources of raw materials tend to mitigate certain risks typically associated with obtaining raw materials, as well as decrease our working capital requirements.

Technology and Licensing

     In 1986, we acquired our Texas City facility from Monsanto Company, or Monsanto. In connection with that acquisition, Monsanto granted us a non-exclusive, irrevocable and perpetual right and license to use Monsanto’s technology and other technology Monsanto acquired through third-party licenses in effect at the time of the acquisition. This license included Monsanto’s technology related to the production of acetic acid and plasticizers. During 1991, BP Chemicals Ltd., or BPCL, purchased Monsanto’s acetic acid technology, subject to existing licenses. Under a technology agreement with BP Chemicals and BPCL, BPCL granted us a non-exclusive, irrevocable and perpetual right and license to use acetic acid technology owned by BPCL and some of its affiliates at our Texas City facility, including any new acetic acid technology developed by BPCL at its acetic acid facilities in England or pursuant to the research and development program provided by BPCL under the terms of such agreement. We do not engage in alternative process research.

Competition

     There are only four large producers of acetic acid in North America. Historically these producers have made capacity additions primarily through small expansion projects or the exploitation of debottlenecking opportunities. The North American plasticizers industry is a mature market, with phthalate esters like those produced by us being subject to excess production capacity and diminishing demand due to the ability of consumers to substitute different raw materials based on relative costs at the time, as well as increasing health concerns regarding these products. A list of our principal competitors is found in the “Product Summary” table above.

Environmental, Health and Safety Matters

     Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic and that are extensively regulated by environmental and health and safety laws, regulations and permit requirements. Environmental permits required for our operations are subject to periodic renewal and may be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution and use of our chemical products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in environmental requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal and other waste handling practices and equipment.

     A business risk inherent in chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. While we believe our business operations and facilities are operated in compliance with applicable environmental and health and safety requirements in all material respects, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures or result in exposure or injury claims by employees, contractors or their employees or the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses.

     Our operating expenditures for environmental matters, primarily waste management and compliance, were $14.5 million and $15.9 million in 2009 and 2008, respectively. During 2009 and 2008, we spent $1.8 million and $1.1 million, respectively, for environmentally-related capital projects and anticipate spending approximately $0.3 million for capital projects related to waste management, incident prevention and environmental compliance during 2010.

     On December 13, 2007, the Texas Commission for Environmental Quality, or the TCEQ, issued an agreed order requiring us to remove all process wastewater from a holding pond at our Texas City facility in order to prevent discharges during heavy rain events. In order to comply with this agreed order, we implemented a capital project at a total cost to us of $2.8 million, which represented the majority of our environmentally-related capital projects in 2008 and 2009.

     In light of our historical expenditures and expected future results of operations and sources of liquidity, we believe we will have adequate resources to conduct our operations in compliance with applicable environmental, health and safety requirements. Nevertheless, we may be required to make significant site and operational modifications that are not currently contemplated in order to comply with changing facility permitting requirements and regulatory standards. Additionally, we have incurred, and may continue to incur, a liability for investigation and cleanup of waste or contamination at our own facilities or at facilities operated by third parties where we have disposed of waste. We continually review all estimates of potential environmental liabilities, but we may not have identified or fully assessed all potential liabilities arising out of our past or present operations or the amount necessary to investigate and remediate any conditions that may be significant to us. Based on information available at this time and reviews undertaken to identify potential exposure, we believe our amounts reserved for environmental matters are adequate to cover our potential exposure for clean-up costs.

     Air emissions from our Texas City facility are subject to certain permit requirements and self-implementing emission limitations and standards under state and federal laws. Our Texas City facility is subject to the federal government’s June 1997 National Ambient Air Quality Standards, or NAAQS, which lowered the ozone and particulate matter concentration thresholds for attainment. Our Texas City facility is located in an area that the Environmental Protection Agency, or the EPA, has classified as not having achieved attainment under the NAAQS for ozone, either on a 1-hour or an 8-hour basis. Ozone is typically controlled by reduction of emissions of volatile organic compounds, or VOCs, and nitrogen oxide, or NOx. The TCEQ has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve attainment status under the NAAQS for ozone. Local authorities may also impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future control costs for emissions of NOx, VOCs and particulate matter, the amount and full impact of which cannot be determined at this time.

     In 2002, the TCEQ adopted a revised State Implementation Plan, or SIP, in order to achieve compliance with the “1-hour” ozone standard under the Clean Air Act by 2007. The EPA approved this 1-hour SIP, which required an 80% reduction of NOx emissions and extensive monitoring of emissions of highly reactive VOCs or HRVOCs, in the Houston-Galveston-Brazoria area, or the HGB area. Despite implementation of these programs, the HGB area failed to attain compliance with the 1-hour ozone standard. As Section 185 of the Clean Air Act requires implementation of a program of emissions-based fees until this standard is attained, Section 185 fees will be assessed on all emissions of NOx and VOCs in 2008 and beyond in the HGB area which are in excess of 80% of the baseline year. The final rules for administering this fee system will be adopted in 2010. Based on the current draft rules, we do not expect to be assessed any fees in connection with emissions from our Texas City facility.

     In April 2004, the HGB area was designated a “moderate” non-attainment area with respect to the “8-hour” ozone standard of the Clean Air Act. On May 23, 2007, the TCEQ formally adopted revisions to the SIP to bring the HGB area from moderate non-attainment status into attainment status by June 15, 2010. This 8-hour SIP called for relatively modest additional controls at our Texas City facility, which would require very little expense. However, in response to a request from the Governor of Texas, the EPA has now reclassified the HGB area as a “severe” non-attainment area, effective as of October 31, 2008. As a result, the new mandated compliance date for attainment of the 8-hour ozone standard is June 15, 2019. A revised 8-hour SIP to address the HGB area’s severe non-attainment designation is expected to be submitted to the EPA by April 10, 2010. The content of the revised 8-hour SIP is currently unknown, making it difficult to predict our final cost of compliance with these regulations. However, given the permanent shutdown of our PA and styrene facilities, we do not anticipate incurring any further cost of compliance in connection with the revised 8-hour SIP.

     The EPA’s Greenhouse Gas, or GHG, reporting rules became effective on December 29, 2009. Under these rules, GHG monitoring systems must either be in place by April 1, 2010 or an extension request must be filed. We believe that we will be able to attain compliance with the GHG rules by making capital expenditures of less than

$0.1 million in 2010. However, the rules for regulating GHG emissions have not yet been defined and, consequently, we cannot predict what impact, if any, these rules may have on us.

     To reduce the risk of offsite consequences from unanticipated events, we acquired a greenbelt buffer zone adjacent to our Texas City site in 1991. We also participate in a regional air monitoring network to monitor ambient air quality in the Texas City community.

Employees

     As of December 31, 2009, we had 182 employees, of whom approximately 35% (all of our hourly employees at our Texas City facility) were represented by the Texas City, Texas Metal Trades Council, AFL-CIO, or the Union. On May 1, 2007, we entered into a collective bargaining agreement with the Union which is effective through May 1, 2012.

Insurance

     We maintain insurance coverage at levels that we believe are reasonable and typical for our industry. A portion of our insurance coverage is provided by a captive insurance company maintained by us and six other chemical companies. However, we are not fully insured against all potential hazards incident to our business. Additionally, we may incur losses beyond the limits of, or outside the coverage of, our insurance. We maintain full replacement value insurance coverage for property damage to our facilities and business interruption insurance. Nevertheless, a significant interruption in the operation of our acetic acid facility could have a material adverse effect on our business. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage.

     We do not currently carry terrorism coverage on our Texas City facility as we believe it is not economically justified on the terms currently being offered in the industry. While terrorism insurance coverage is available, the premiums for such coverage are very expensive, especially for chemical facilities, and these policies are subject to very high deductibles. In addition, available terrorism coverage typically excludes coverage for losses from acts of foreign governments, as well as nuclear, biological and chemical attacks.

     On September 13, 2008, Hurricane Ike struck the Texas Gulf Coast very near our Texas City facility. Our Texas City facility was shut down and secured prior to landfall and did not sustain any significant structural damage, although we did sustain some minor damage to three of our barge docks. Our Texas City facility lost all power and ancillary utilities during the storm, including our steam boilers. The resulting production outage lasted approximately 15 days, with our Texas City facility returning to normal operating levels on September 28, 2008. The losses we incurred from Hurricane Ike during 2008 totaled $2.6 million, and we incurred additional expenses of $0.2 million in 2009 related to damages caused by Hurricane Ike. Our total loss from Hurricane Ike of $2.8 million was less than the deductibles under our insurance policies and, as such, we did not recover any of these losses under our insurance policies.

Access to Filings

     Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.sterlingchemicals.com) at no cost, as soon as reasonably practicable after we have electronically filed such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Form 10-K.

Item 1A. Risk Factors

     In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.

Risks Related to Our Business

Each of our products is sold to only one customer.

     In 2009, a single customer, BP Chemicals, accounted for 100% of our acetic acid revenues. The termination of this long-term contract, or a material reduction in the amount of product purchased under our Acetic Acid Production Agreement, would materially adversely affect our overall business, financial condition, results of operations or cash flows.

     On November 11, 2009, BASF, which accounts for 100% of our plasticizers revenues, elected to terminate our Plasticizers Production Agreement, effective December 31, 2010. Since we are in the early stages of evaluating our commercial options regarding our plasticizers business, we cannot predict the ultimate outcome or the success of continuing the plasticizers business after December 31, 2010. If we are unable to continue the plasticizers operations through other viable commercial options for our plasticizers business or facility or restructure our operating costs, or are unable to do so at or shortly after December 31, 2010, the termination of our Plasticizers Production Agreement will likely have a material adverse effect on our financial condition, results of operations and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview – Business – Plasticizers.”

Our ability to realize increases in our acetic acid production capacity that could be made possible through low-cost, incremental capacity expansions is dependent on the availability of sufficient, economic quantities of carbon monoxide.

     Carbon monoxide is one of the principal raw materials required for acetic acid production. Currently, all of the carbon monoxide we use in the production of acetic acid is supplied by Praxair from a partial oxidation unit constructed and operated by Praxair on land leased from us at our Texas City site. Although our new reactor installed in 2003 is capable of producing up to 1.7 billion pounds of acetic acid annually and the new column installed in 2009 is capable of producing 1.6 billion pounds of acetic acid annually, Praxair’s existing partial oxidation unit is capable of supplying carbon monoxide in quantities sufficient for only 1.3 billion pounds of annual acetic acid production. While additional carbon monoxide may become available by routing surplus syngas from another Texas City source through a new supply pipeline or the use of an existing idled pipeline or through an expansion of Praxair’s partial oxidation unit, we may not be able to implement any of these options on a cost effective basis.

We depend upon the continued operation of a single site for all of our production.

     All of our products are produced at our Texas City facility. Significant unscheduled downtime at our Texas City facility could have a material adverse effect on our business, financial condition, results of operations or cash flows. Unanticipated downtime can occur for a variety of reasons, including equipment breakdowns, interruptions in the supply of raw materials, power failures, sabotage, natural forces or other hazards associated with the production of petrochemicals. Although we maintain business interruption insurance, recovery of losses is subject to time element deductibles of up to 45 days and policy limits of up to $400 million.

Our operations involve risks that may increase our operating costs, which could reduce our profitability.

     Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations are subject to hazards inherent in the manufacturing of chemical products. These hazards include:

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severe weather and natural disasters;

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mechanical failures, unscheduled downtimes, labor difficulties and transportation interruptions;

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environmental remediation complications;

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chemical spills and discharges or releases of toxic or hazardous substances or gases; and

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pipeline or storage tank leaks and ruptures, explosions and fires.

     Many of these hazards can cause bodily injury or loss of life, severe damage to or destruction of property or equipment or environmental damage, and may result in suspension of operations or the imposition of civil or criminal penalties and liabilities. Furthermore, we are subject to present and future claims with respect to workplace exposure of our employees or contractors on our premises or other persons located nearby, workers’ compensation and other matters.

Volatility in asset values and liability costs related to our pension plans may reduce our profitability and adversely impact current funding levels.

     We sponsor defined benefit pension plans for our employees. Effective July 1, 2007 and January 1, 2005, we froze all benefit accruals under these defined benefit pension plans for our hourly and salaried employees, respectively. The cash contributions made to our defined benefit pension plans are required to comply with minimum funding requirements imposed by laws governing employee benefit plans. The projected benefit obligation and assets of our defined benefit pension plans as of December 31, 2009 were $124.3 million and $86.8 million, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements to those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities can be volatile and may have an unfavorable impact on our costs and funding requirements. A decline in the market value of the assets in our defined benefit pension plans, as was experienced in 2008, will increase the funding requirements under the plans if the actual asset returns do not recover these declines in value in the near term. Additionally, the liabilities of our defined benefit pension plans are sensitive to changes in interest rates. As interest rates decrease, the liabilities of the plans increase, potentially increasing funding requirements and pension expense. Changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions may also increase the funding requirements and pension expense related to our defined benefit pension plans. Although we actively seek to control increases in these costs and funding requirements, we may not be successful in doing so. Future increases in pension expense and the contributions we are required to make to our defined benefit pension plans as a result of one or more of these factors could negatively affect our financial condition, results of operations or cash flows.

Our operations are subject to operating hazards and unforeseen interruptions for which we may not be adequately insured.

     We maintain insurance coverage at levels that we believe are reasonable and typical for our industry, portions of which are provided by a captive insurance company maintained by us and six other chemical companies. However, we are not fully insured against all potential hazards incident to our business. Accordingly, our insurance coverage may be inadequate for any given risk or liability, such as property damage suffered in hurricanes or business interruption incurred from a loss of our supply of electricity or carbon monoxide. In addition, our insurance companies may be incapable of honoring their commitments if an unusually high number of claims are concurrently made against their policies. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations or cash flows. We may not be able to renew our existing insurance coverage at commercially reasonable rates or that coverage may not be adequate to cover future claims that may arise.

     In addition, concerns about terrorist attacks, as well as other factors, have caused significant increases in the cost of our insurance coverage. We have determined that it is not economically prudent to obtain terrorism insurance and we do not carry terrorism insurance on our property at this time. In the event of a terrorist attack impacting one or more of our production units, we could lose the production and sales from one or more of these facilities, and the facilities themselves, and could become liable for contamination or personal injury or property damage from exposure to hazardous materials caused by a terrorist attack. Such loss of production, sales, facilities or incurrence of liabilities could materially adversely affect our business, financial condition, results of operations or cash flows.

New regulations concerning the transportation of hazardous chemicals and the security of chemical manufacturing facilities could result in higher operating costs.

     Chemical manufacturing facilities may be at greater risk of terrorist attacks than other potential targets in the United States. As a result, the chemical industry has responded to these issues by starting new initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States. Simultaneously, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Our business or our customers’ businesses could be adversely affected by the cost of complying with new security regulations.

Impact of Greenhouse Gases and Climate Change

     Our operations emit greenhouse gases. Proposed U.S. Federal legislation and regulations to address greenhouse gas emissions, which are in various stages of review, discussion or implementation, could adversely impact our business. While it is currently not possible to predict the impact, if any, that these issues will have on us or the industry in general, such legislation and regulation could result in increases in costs to operate and maintain our facilities, as well as capital outlays for new emission control equipment. In addition, any regulation limiting greenhouse gas emissions which specifically targets the petrochemicals manufacturing industry could adversely affect our ability to conduct our business.

We are subject to many environmental and safety regulations that may result in significant unanticipated costs or liabilities or cause interruptions in our operations.

     Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic and that are extensively regulated by environmental and health and safety laws, regulations and permit requirements. We may incur substantial costs, including fines, damages and criminal or civil sanctions, or experience interruptions in our operations for actual or alleged violations or compliance requirements arising under environmental laws, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Our operations could result in violations of environmental laws, including spills or other releases of hazardous substances into the environment. In the event of a catastrophic incident, we could incur material costs. Furthermore, we may be liable for the costs of investigating and cleaning up environmental contamination on or from our properties or at off-site locations where we disposed of or arranged for the disposal or treatment of hazardous materials. If significant previously unknown contamination is discovered or we have underestimated the costs to investigate and remediate known contamination, or if existing laws or their enforcement change, then the resulting expenditures could have a material adverse effect on our business, financial condition, results of operations or cash flows.

     Environmental, health and safety laws, regulations and permit requirements, and the potential for further expanded laws, regulations and permit requirements may increase our costs or reduce demand for our products and thereby negatively affect our business. Environmental permits required for our operations are subject to periodic renewal and may be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements and the potential for further expanded regulation may increase our costs and can affect the manufacturing, handling, processing, distribution and use of our products. If so affected, our business and operations may be materially and adversely affected. In addition, changes in these requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal and other waste handling practices and equipment. For these reasons, we may need to make capital expenditures beyond those currently anticipated to comply with existing or future environmental or safety laws.

Approximately 35% of our employees are covered by a collective bargaining agreement that expires on May 1, 2012. Disputes with the Union representing these employees or other labor relations issues may negatively affect our business.

     As of December 31, 2009, we had approximately 182 employees, of whom approximately 35% (all of our hourly employees at our Texas City facility) were represented by the Union and are covered by a collective bargaining agreement which expires on May 1, 2012. Future strikes or other labor disturbances could have a material adverse effect on our business, financial condition, results of operations or cash flows.

A failure to retain or attract key employees could adversely affect our business.

     We are dependent on the services of the members of our senior management team to remain competitive in our industry. There is a risk that we will not be able to retain these key employees or attract other key employees. Our current key employees are subject to employment conditions or arrangements that permit the employees to terminate their employment without notice. The loss of any member of our senior management team could materially adversely affect our business, financial condition, results of operations or cash flows.

     Stock options or other equity awards offered to certain employees may not provide effective incentives to remain with us due to the dilutive effect of the quarterly paid-in-kind dividends paid on our Series A Convertible Preferred Stock, or our Preferred Stock, and the fact that our common stock is not listed on any national or regional securities exchange. Quotations for shares of our common stock are listed by certain members of the National Association of Securities Dealers, Inc. on the Over-the-Counter, or OTC, Electronic Bulletin Board. In recent years, the trading volume of our common stock has been very low and the transactions that have occurred were typically effected in transactions for which reliable market quotations have not been available. An active trading market may not develop or, if developed, may not continue for our equity securities and a holder of any of these securities, including stock options or other equity awards, could find it difficult obtain a positive return.

We may not successfully develop our under-utilized infrastructure at our Texas City facility.

     We may be unable to identify or attract a long-term contractual business arrangement or partnership to our Texas City facility that will provide us with an ability to realize the value of our under-utilized assets. For development projects that may have significant capital expenditure requirements, we are considering joint ventures or other arrangements where we would contribute certain of our assets and management expertise to minimize our share of the capital costs. Even if we do identify a long-term contractual business arrangement or partnership, we may not be able to come to agreeable terms or the capital costs for the project may be prohibitively high.

We may not successfully complete acquisitions that we are pursuing or any future acquisitions may present unforeseen integration obstacles or costs, increase our leverage or negatively impact our performance.

     We may not be able to identify suitable acquisition candidates or successfully complete identified acquisitions, and the expense incurred in consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could affect our growth or result in our incurring unanticipated expenses and losses. Furthermore, we may not be able to realize any anticipated benefits from acquisitions. To finance an acquisition we may need to incur debt or issue equity. However, we may not be able to obtain favorable debt or equity financing to complete an acquisition, or at all, and we may not be unable to secure the consent of our existing long-term debt holders to the incurrence of additional debt. The lack of an active trading market in our common stock, as well as the dilutive terms of the quarterly paid-in-kind dividends payable on our Preferred Stock, may make our common stock unattractive as consideration for an acquisition. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with our acquisition strategy, which could materially adversely affect our business, financial condition, results of operations or cash flows, include:

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potential disruption of our ongoing business and distraction of management;

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unexpected loss of key employees or customers of an acquired business;

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conforming an acquired business’ standards, processes, procedures or controls with our operations;

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coordinating new product and process development;

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hiring additional management or other critical personnel;

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encountering unknown contingent liabilities which could be material; and

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increasing the scope, geographic diversity and complexity of our operations.

     Our acquisition strategy may not be favorably received by customers, and we may not realize any anticipated benefits from acquisitions.

We are unable to predict the impact of the recent downturn in the credit markets and the resulting costs or constraints in obtaining financing on our business and financial results.

     U.S. and global credit and equity markets have undergone significant disruption in the past 12 to 18 months, making it difficult for many businesses to obtain financing on acceptable terms. In addition, equity markets are continuing to experience wide fluctuations in value. If these conditions continue or worsen, our cost of borrowing may increase, and it may be more difficult to obtain financing in the future. In addition, a number of financial institutions have reported significant deterioration in their financial condition. If any of the financial institutions are unable to perform their obligations under our contracts, and we are unable to find suitable replacements on acceptable terms, our financial condition, results of operations, liquidity and cash flows could be adversely affected. We also face challenges relating to the impact of the disruption in the global financial markets on other parties with which we do business, such as customers and suppliers. The inability of these parties to obtain financing on acceptable terms could impair their ability to perform under their agreements with us and lead to various negative affects on us, including business disruption, decreased revenues and increases in bad debt write-offs. A sustained decline in the financial stability of these parties could have a material adverse impact on our business, financial condition, results of operations and cash flows.

If we are unable to successfully prevent or address material weaknesses in our internal control over financial reporting, or any other control deficiencies, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other reporting requirements may be adversely affected.

     While we have taken actions designed to address compliance with the internal control, disclosure control and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in our ability to control all circumstances. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. For example, as of December 31, 2009, our management identified a material weakness in our internal control over financial reporting resulting from a lack of effective controls over the billing for utilities at our Texas City facility. If we are unable to successfully prevent or address these and other material weaknesses in our internal control systems, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other reporting requirements may be adversely affected.

Risks Relating to Our Indebtedness

Our leverage and debt service obligations may adversely affect our cash flow and our ability to make payments on our indebtedness.

     As of December 31, 2009, we had total long-term debt of $125.0 million (consisting of outstanding principal on our 10¹/4% Senior Secured Notes due 2015, or our Secured Notes). The terms and conditions governing our indebtedness, including our Secured Notes:

•

require us to dedicate a substantial portion of our cash flow from operations to service our existing debt service obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate expenditures;

•

increase our vulnerability to adverse general economic or industry conditions and limit our flexibility in planning for, or reacting to, competition or changes in our business or our industry;

•

limit our ability to obtain additional financing;

•

place restrictions on our ability to make certain payments or investments, sell assets, make strategic acquisitions, engage in mergers or other fundamental changes and exploit business opportunities; and

•

place us at a competitive disadvantage relative to competitors with lower levels of indebtedness in relation to their overall size or less restrictive terms governing their indebtedness.

     Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt, including our Secured Notes, and meet our other obligations. Further, failing to comply with the financial and other restrictive covenants in the agreements governing our indebtedness could result in an event of default under such indebtedness, which could materially adversely affect our business, financial condition, results of operations or cash flows.

Any failure to meet our debt obligations could harm our business, financial condition, results of operations or cash flows.

     If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell assets, seek additional equity or debt capital or restructure our debt, including our Secured Notes. We may not be able to refinance or restructure our debt, raise equity or debt capital or sell assets on terms acceptable to us, if at all. In addition, any failure to make scheduled payments of interest or principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient for payments of interest or principal on our debt in the future, including payments on our Secured Notes, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and impair our liquidity.

Risks Relating to the Ownership of Our Common Stock

Our common stock is thinly traded. There is no active trading market for our common stock and an active trading market may not develop.

     Our common stock is not listed on any national or regional securities exchange. Quotations for shares of our common stock are listed by certain members of the National Association of Securities Dealers, Inc. on the OTC Electronic Bulletin Board. In recent years, the trading volume of our common stock has been very low and the transactions that have occurred were typically effected in transactions for which reliable market quotations have not been available. An active trading market may not develop or, if developed, may not continue for our equity securities, and a holder of any of these securities may find it difficult to dispose of, or to obtain accurate quotations as to the market value of, such securities.

We have a significant stockholder which has the ability to control our actions.

     Resurgence Asset Management, L.L.C. and its and its affiliates’ managed funds and accounts, or collectively Resurgence, beneficially own in excess of 98% of our preferred stock and over 55% of our common stock, representing ownership of 85% of the total voting power of our equity. The interests of Resurgence may differ from our other stockholders and Resurgence may vote their interests in a manner that may adversely affect our other stockholders. Through their direct and indirect interests in us, Resurgence is in a position to influence the outcome of most matters requiring a stockholder vote. This concentrated ownership makes it less likely that any other holder or group of holders of common stock would be able to influence the way we are managed or the direction of our business. These factors also may delay or prevent a change in our management or voting control.

Our Preferred Stock pays a quarterly stock dividend that is dilutive to the holders of our common stock.

     Shares of our Preferred Stock carry a cumulative dividend rate of 4% per quarter, payable in additional shares of our Preferred Stock. Our shares of Preferred Stock are convertible at the option of the holder into shares of our common stock and vote as if so converted on all matters presented to the holders of our common stock for a vote. Consequently, each dividend paid in additional shares of our Preferred Stock has a dilutive effect on our shares of common stock and increases the percentage of the total voting power of equity owned by Resurgence. Preferred Stock dividends were 952.346 shares (which are convertible into 952,346 shares of our common stock) during 2009, which represents 10.1% of the current total voting power of our equity securities.

Item 2. Properties

     Our petrochemicals facility is located in Texas City, Texas, approximately 45 miles south of Houston, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. We own all of the real property which comprises our Texas City facility and we own the acetic acid and plasticizers manufacturing facilities located at the facility. We also lease a portion of our Texas City facility to Praxair, who constructed a partial oxidation unit on that land, and lease a portion of our Texas City facility to S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy, which constructed a cogeneration facility on that land. Our Texas City facility offers approximately 160 acres for future expansion by us or by other companies that could benefit from our existing infrastructure and facilities, and includes a greenbelt around the northern edge of the plant facility. We own 49 railcars and, at our Texas City facility, we have facilities to load and unload our products and raw materials in ocean-going vessels, barges, trucks and railcars. Substantially all of our Texas City facility, and the tangible properties located thereon, are subject to a lien securing our obligations under our Secured Notes. We lease the space for our principal executive offices, located at 333 Clay Street, Suite 3600 in Houston, Texas. We believe our properties and equipment are sufficient to conduct our business.

Item 3. Legal Proceedings

     On July 5, 2005, Patrick B. McCarthy, an employee of Kinder-Morgan, Inc., or Kinder-Morgan, was seriously injured at Kinder-Morgan’s facilities near Cincinnati, Ohio, while attempting to offload a railcar containing one of our plasticizers products. On October 28, 2005, Mr. McCarthy and his family filed a suit in the Court of Common Pleas, Hamilton County, Ohio (Case No. A0509 144) against us and six other defendants. During the case, five of the other defendants were dismissed. The plaintiffs sought in excess of $42 million in alleged compensatory and punitive damages from the defendants in the aggregate. On May 7, 2009, the jury found that we had not been negligent in connection with the incident and rendered a take nothing verdict in favor of the defendants. On June 24, 2009, the plaintiffs filed a motion for judgment notwithstanding the verdict or, in the alternative, a new trial. On September 4, 2009, the Court denied plaintiffs’ motion for judgment notwithstanding the verdict, but granted plaintiffs’ motion for a new trial. We and the other remaining defendant timely filed notices of appeal of that order, as well as other orders issued during the trial. We believe that all, or substantially all, of any liability imposed upon us as a result of this suit and our related out-of-pocket costs and expenses will be covered by our insurance policies, subject to a one million deductible, which was met in January 2008. We do not believe that this incident will have a material adverse effect on our business, financial condition, results of operations or cash flows, although we cannot guarantee that a material adverse effect will not occur.

     On February 21, 2007, we, several of our benefit plans and the plan administrators for those plans were sued in a class action suit, Case No. H-07-0625 filed in the United States District Court, Southern District of Texas, Houston Division. The plaintiffs are seeking to represent a proposed class of retired employees of Sterling Fibers, Inc., one of our former subsidiaries that we sold in connection with our emergence from bankruptcy in 2002. The plaintiffs are alleging that we were not permitted to increase their premiums for retiree medical insurance based on a provision contained in the asset purchase agreement between us and Cytec Industries Inc. and certain of its affiliates governing our purchase of our former acrylic fibers business in 1997. During our bankruptcy case, we specifically rejected this asset purchase agreement and the bankruptcy court approved that rejection. The plaintiffs are claiming that we violated the terms of the benefit plans and breached fiduciary duties governed by the Employee Retirement Income Security Act and are seeking damages, declaratory relief, punitive damages and attorneys’ fees. A trial for this matter was held during the second week of November 2009 but the court has not yet as issued a ruling. We are

vigorously defending this action and are unable to state at this time if a loss is probable or remote and are unable to determine the possible range of loss related to this matter, if any.

     On February 4, 2008, we filed a Petition for Declaratory Judgment in the 212th District Court of Galveston County, Texas (Case No. 08CV0108) against Marathon Petroleum Company LLC, or Marathon, in connection with a dispute between Marathon and us under a Purchase Agreement for FCC Off-Gas, or the Off-Gas Purchase Agreement. Under the Off-Gas Purchase Agreement, we purchase an amount of off-gas each month from Marathon within a stated range at Marathon’s option. Following the closure of certain production units at our Texas City facility, our demand for off-gas has been below the low-end of the stated range. On July 31, 2007, and again on November 19, 2007, we invoked the undue economic hardship clause of the Off-Gas Purchase Agreement and requested that Marathon enter into good faith negotiations to modify its terms. After Marathon disputed the applicability of the economic hardship provision and refused to renegotiate the terms of the Off-Gas Purchase Agreement, we filed a declaratory judgment action to enforce the terms of the economic hardship provision, and Marathon filed a counter-claim against us for breach of contract. Marathon contended that Sterling’s failure to take the minimum contract quantities has resulted in damages in the past, which will continue in the future through the end of the term of the Off-Gas Purchase Agreement on April 30, 2011. On February 26, 2010, we and Marathon entered into a confidential settlement agreement with respect to this matter. We do not believe that this matter will have a material adverse impact on our business, financial condition, results of operations or cash flows, although a material adverse effect could occur.

     We are subject to various other claims and legal actions that arise in the ordinary course of our business. We do not believe that any of these claims and actions, separately or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or cash flows, although we cannot guarantee that a material adverse effect will not occur.

     As of December 31, 2008, we had a receivable of $1.3 million due from our insurance carriers for reimbursement of legal costs that exceeded our insurance deductibles and were, therefore, reimbursable through our insurance carriers. For the year ended December 31, 2009, we incurred $2.1 million of legal costs that are reimbursable under our insurance policies and received $3.3 million of payments from our insurance carriers, resulting in a receivable balance of $0.1 million as of December 31, 2009.

PART II

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

     Our common stock, par value $0.01 per share, is currently quoted on the Over-the-Counter, or OTC, Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol “SCHI.” The following table contains information about the high and low sales prices per share of our common stock for the last two years. Information about OTC Electronic Bulletin Board bid quotations represents prices between dealers, does not include retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. Quotations on the OTC Electronic Bulletin Board are sporadic, and currently there is no established public trading market for our common stock.

						First				Second				Third				Fourth
						Quarter				Quarter				Quarter				Quarter
2009		High				$	11.00			$	10.00			$	11.00			$	9.50
		Low				$	8.50			$	8.25			$	8.25			$	5.00
2008		High				$	21.00			$	17.00			$	17.25			$	17.25
		Low				$	14.95			$	13.00			$	9.00			$	8.90

     The last reported sales price per share of our common stock as reported on the OTC Electronic Bulletin Board on December 31, 2009 was $7.00. As of March 5, 2010, there were 263 holders of record of our common stock. This number does not include stockholders for whom shares are held in a nominee or “street” name.

Dividend Policy

     We have not declared or paid any cash dividends with respect to our common stock since we emerged from bankruptcy in December 2002. We do not presently intend to pay cash dividends with respect to our common stock for the foreseeable future. In addition, the ability to pay dividends on our shares of common stock is limited under the indenture for our Secured Notes. The payment of cash dividends, if any, will be made only from assets legally available for that purpose, and will depend on our financial condition, results of operations, current and anticipated capital requirements, general business conditions, restrictions under our existing debt instruments and other factors deemed relevant by our Board of Directors.

Equity Compensation Plan

     Under our Amended and Restated 2002 Stock Plan, or our 2002 Stock Plan, officers, key employees and consultants, as designated by our Board of Directors or our Compensation Committee, may be issued stock options, stock awards, stock appreciation rights or stock units. Our Compensation Committee or, in the event that our Compensation Committee is not comprised solely of non-employee directors (as such term is defined in Rule 16b-3(b)(3) of the Exchange Act), our Board, administers our 2002 Stock Plan. Our 2002 Stock Plan may be amended or modified from time to time by our Board of Directors in accordance with its terms. Our Board of Directors or Compensation Committee determines the exercise price of stock options, any applicable vesting provisions and other terms and provisions of each grant in accordance with our 2002 Stock Plan. Options granted under our 2002 Stock Plan become fully exercisable in the event of the optionee’s termination of employment by reason of death, disability or retirement, and may become fully exercisable in the event of a “change of control.” No option may be exercised after the tenth anniversary of the date of grant or the earlier termination of the option. We have reserved 1,363,914 shares of our common stock for issuance under our 2002 Stock Plan (subject to adjustment). There were options to purchase a total of 224,167 shares of our common stock outstanding under our 2002 Stock Plan as of December 31, 2009, each with an exercise price of $31.60, and an additional 1,139,747 shares of common stock available for issuance under our 2002 Stock Plan.

     The following table provides information regarding securities authorized for issuance under our 2002 Stock Plan as of December 31, 2009:

Number of securities remaining

Number of securities to

Weighted-average exercise

available for future issuance

be issued upon exercise

price of outstanding

under equity compensation

of outstanding options,

options, warrants and

plans (excluding securities

Plan Category

warrants and rights

rights

reflected in first column)

Equity compensation plans approved by security holders

224,167

$

31.60

1,139,747

Equity compensation plans not approved by security holders

—

—

—

Total

224,167

$

31.60

1,139,747

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

Overview

Business

     We were formed in 1986 to acquire a petrochemicals facility located in Texas City, Texas that was previously owned by Monsanto Company. We are a North American producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products. Our primary products are acetic acid and plasticizers.

     Our acetic acid is used primarily to manufacture vinyl acetate monomer and purified terephthalic acid, which are used in a variety of products, including adhesives, surface coatings, polyester fibers, and films and plastic bottle resins, respectively. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, that extends to 2031, all of our acetic acid production is sold to BP Amoco Chemical Company, or BP Chemicals. We are BP Chemicals’ sole source of acetic acid production in the Americas. BP Chemicals markets all of the acetic acid that we produce and pays us, among other amounts, a portion of the profits derived from its sales of our acetic acid. In addition, BP Chemicals reimburses us for 100% of our fixed and variable costs of production, other than specified indirect costs. We also jointly invest with BP Chemicals in capital expenditures related to our acetic acid facility in the same percentage as the profits from the business we receive from BP Chemicals.

     Our acetic acid facility utilizes BP Chemicals’ proprietary “Cativa” carbonylation technology, which we believe offers several advantages over competing production methods, including lower energy requirements and lower fixed and variable costs. Acetic acid production has two major raw material requirements, methanol and carbon monoxide. BP Chemicals, a producer of methanol, supplies 100% of our methanol requirements related to our production of acetic acid. All of our requirements for carbon monoxide are supplied by Praxair Hydrogen Supply, Inc., or Praxair, from a partial oxidation unit constructed by Praxair on land leased from us at our site in Texas City, Texas, or our Texas City facility.

     All of our plasticizers, which are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials, are sold to BASF Corporation, or BASF. Under our agreement with BASF, or our Plasticizers Production Agreement, BASF provides us with most of the required raw materials, markets the plasticizers that we produce and is obligated to make certain fixed quarterly payments to us and reimburse us monthly for our actual production costs and capital expenditures relating to our plasticizers facility.

     Our Texas City facility is strategically located on Galveston Bay and benefits from a deep-water dock capable of handling ships with up to a 40-foot draft, as well as four barge docks and direct access to Union Pacific and Burlington Northern Santa Fe railways with in-motion rail scales on site. Our Texas City facility also has truck loading racks, weigh scales, stainless and carbon steel storage tanks, three waste deepwells, 160 acres of available land zoned for heavy industrial use and additional land zoned for light industrial use and a supportive political environment for growth. In addition, we are in the heart of one of the largest petrochemical complexes on the Gulf Coast and, as a result, have on-site access to a number of raw material pipelines, as well as close proximity to a number of large refinery complexes. Given our under-utilized infrastructure and our management, operational and engineering expertise, as well as our ample unoccupied land, we believe that there are significant opportunities for further development of our Texas City facility. We are currently pursuing numerous initiatives to attract new manufacturing, distribution or storage related businesses to our Texas City facility. Specifically, we are seeking long-term contractual business arrangements or partnerships that will provide us with the ability to realize the value of our under-utilized assets through profit sharing or other revenue generating arrangements. For development projects that may have significant capital expenditure requirements, we are considering joint ventures or other arrangements where we would contribute certain of our assets and our management and operational expertise to minimize our share of the capital costs. In any case, we expect any new facility constructed at our Texas City facility to lower the amount of overall fixed costs allocated to each of our operating units and provide us with additional profit.

     Our rated annual production capacity is among the highest in North America for acetic acid. In mid-2009, we and BP Chemicals implemented an incremental expansion of our acetic acid plant to 1.3 billion pounds of annual capacity, which represents 17% of total North American capacity, making our acetic acid facility the third largest acetic acid production facility in North America.

     Our petrochemicals products are generally sold to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products throughout the world.

     Acetic Acid. The North American acetic acid industry has enjoyed a long period of sustained domestic demand growth, as well as substantial export demand. This has led to North American industry utilization rates above 85% over the last six years. Although slowdowns in the housing and automotive markets during 2009 resulted in reduced demand for vinyl acetate monomer, and consequently acetic acid, in North America for the short-term, Tecnon OrbiChem, or Tecnon, projects acetic acid utilization rates will increase to over 98% by 2013. The North American acetic acid industry is inherently less cyclical than many other petrochemical products due to a number of important factors. There are only four large producers of acetic acid in North America. Historically these producers have made capacity additions primarily through small expansion projects or the exploitation of debottlenecking opportunities. Finally, the North American acetic acid industry tends to sell most of its products through long-term sales agreements having formula based pricing mechanisms, eliminating much of the volatility seen in other petrochemicals products and resulting in more stable and predictable earnings and profit margins.

     Global production capacity of acetic acid as of December 31, 2009 was approximately 31 billion pounds per year, with current North American production capacity at approximately six billion pounds per year. The North American acetic acid industry is mature and well developed, with the four major acetic acid producers accounting for approximately 94% of production capacity in North America. Demand for acetic acid is linked to the demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Vinyl acetate monomer is the largest derivative of acetic acid, representing over 35% of global demand. Although slowdowns in the housing and automotive markets over the last year have reduced global demand for vinyl acetate monomer in the short-term, annual global production of vinyl acetate monomer is expected to increase from 10.3 billion pounds in 2008 to 14.2 billion pounds in 2013.

     Several acetic acid capacity additions have occurred globally since 1998, including an expansion of our acetic acid unit from 800 million pounds of rated annual production capacity to 1.1 billion pounds during 2005 and from 1.1 billion pounds to 1.3 billion pounds of rated annual production capacity in 2009. These capacity additions were somewhat offset by reductions of approximately 1.6 billion pounds in annual global capacity from the shutdown of various outdated acetic acid plants from 1999 through 2001 and the closure by BP Chemicals of two of its outdated acetic acid production units in Hull, England in 2006 that had a combined annual capacity of approximately 500 million pounds (which had been sold primarily in Europe and South America).

     In 1986, we entered into the initial version of our Acetic Acid Production Agreement with BP Chemicals, which has since been amended several times. We sell all of our acetic acid production to BP Chemicals under our Acetic Acid Production Agreement and we are BP Chemicals’ sole source of acetic acid production in the Americas. BP Chemicals markets all of the acetic acid that we produce and pays us, among other amounts, a portion of the profits derived from its sales of the acetic acid we produce. In addition, BP Chemicals reimburses us for 100% of our fixed and variable costs of production (other than specified indirect costs). Revenues from our acetic acid segment were $87.3 million and $129.7 million for the years ended December 31, 2009 and 2008, respectively, representing approximately 76% and 80%, respectively, of our total revenues for such period. Other than our Acetic Acid Production Agreement, we do not have any material relationships with BP Chemicals.

     Plasticizers. Plasticizers are produced from either ethylene-based linear alpha-olefins feedstocks or propylene-based non-linear technology. We produce both linear and non-linear plasticizers used to make flexible plastics such as shower curtains, floor coverings, automotive parts and construction materials. Feedstocks for plasticizers consist of PA and oxo-alcohols. Linear plasticizers have historically received a premium over competing propylene-based branched products for customers that require enhanced performance properties. Although we have not been exposed to fluctuations in costs or market conditions due to the contract terms in our Plasticizers Production Agreement with BASF, the markets for competing plasticizers may be affected by the cost of the underlying raw materials, especially when the cost of one olefin rises faster than the other or by the introduction of new products. Over the last several

years, the price of linear alpha-olefins increased sharply, which caused many consumers to switch to lower cost branched products such as propylene-based plasticizers, despite the loss of some performance properties. As a result, we modified our plasticizer production facilities during the third quarter of 2006 to include branched plasticizers production. Ultimately, we expect branched plasticizers to replace linear plasticizers for most applications, although recently some branched plasticizers products have been the subject of health related concerns. Following termination of the Plasticizers Production Agreement, we may face greater cost fluctuations or exposure to market conditions if we continue to operate the plasticizers business. For a further description of our agreement with BASF, see “Plasticizers-BASF” under “Contracts” and see “Risk Factors”.

     Our plasticizers business is comprised of two separate products: phthalate esters and phthalic anhydride, together commonly referred to as plasticizers. Since 1986, we have sold all of our plasticizers production exclusively to BASF pursuant to our Plasticizers Production Agreement, which has been amended several times. We also previously produced PA for BASF under the Plasticizers Production Agreement. Under our Plasticizers Production Agreement, BASF provides us with most of the required raw materials and markets the plasticizers we produce, and is obligated to make certain fixed quarterly payments to us and to reimburse us monthly for our actual production costs and capital expenditures relating to our plasticizers facility. Effective as of April 1, 2008, our Plasticizers Production Agreement was amended and restated in connection with BASF’s nomination of zero pounds of PA in response to deteriorating market conditions, ultimately resulting in the closure of our PA unit. The closure of our PA unit did not, however, impact our continued production of plasticizers for BASF. In exchange for being relieved of its obligations related to our PA manufacturing unit, BASF paid us an aggregate amount of approximately $3.2 million. However, we are obligated to refund 25% of this amount if we restart our PA manufacturing unit during 2010. The $3.2 million payment from BASF was made in exchange for the termination of BASF’s obligations under our Plasticizers Production Agreement with respect to the operation of our PA manufacturing unit and, consequently, is recognized using the straight-line method over the restricted period from April 1, 2008 through December 31, 2010. In addition, during the first half of 2008, BASF paid us approximately $3.7 million for reimbursement of certain direct fixed and variable costs associated with the shutdown and decontamination of our PA manufacturing unit, which amounts are not subject to refund. All direct fixed and variable costs associated with the shutdown and decontamination of our PA manufacturing unit have been incurred and expensed, and the $3.7 million in cost reimbursements was recognized as revenue in the first half of 2008.

     On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective December 31, 2010, at which time we will no longer produce plasticizers for BASF. We will not be subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement. BASF, on the other hand, will be required to pay us an early termination fee of $9.8 million on December 31, 2010. In December 2010, in connection with the termination of our Plasticizers Production Agreement, we will be required to refund BASF’s $1.0 million pre-payment deposit previously paid by BASF. If we continue to operate our plasticizers business after the termination of our Plasticizers Production Agreement, we will be required to make payments to BASF for its undepreciated capital expenditures, related to past capital projects paid by BASF, over the remaining balance of the original term of our Plasticizers Agreement, based on a straight line, 8-year life. As of December 31, 2010, we expect the total amount of these undepreciated capital expenditures to be approximately $2.6 million, with approximately $1.0 million, $0.7 million, $0.6 million, and $0.3 million potentially to be paid in 2011, 2012, 2013, and 2014, respectively. If within 90 days after the termination of our Plasticizers Production Agreement, we provide written notice to BASF of our election to permanently close our plasticizers facility, the undepreciated capital expenditures paid by BASF for all capital projects is deemed to be zero, and we will not be required to make any payments to BASF. In the event we discontinue the plasticizers operations in 2011, we expect to incur approximately $3.0 million in shutdown and decontamination costs, and the costs and timing for dismantling are unknown at this time; however, they are not expected to be significant.

     Revenues from our plasticizers segment were $26.0 million and $31.0 million for the years ended December 31, 2009 and 2008, respectively, representing approximately 23% and 19%, respectively, of our total revenues for such period. Gross profits from our plasticizers operations were $5.9 million in 2009 and $4.1 million in 2008, representing approximately 53% and 14% of our total gross profits in 2009 and 2008, respectively. Under our Plasticizers Production Agreement, BASF reimburses us for certain costs, including fixed costs, which are allocated among our existing operations. In the event that we do not continue to operate our plasticizers facility after December 31, 2010, the amount of our costs that will be allocated to our acetic acid operations in accordance with our Acetic Acid Production Agreement will increase, which will adversely affect our profit sharing payments under

that agreement starting January 1, 2011. In addition, some of the costs currently reimbursed by BASF under our Plasticizers Production Agreement cannot be allocated to our acetic acid operations. Consequently, to the extent we cannot reduce or eliminate these costs, these costs will adversely affect our financial results starting January 1, 2011.

     In December 2009, we performed an asset impairment analysis on our esters manufacturing unit. We analyzed the undiscounted cash flow stream from our esters business over the remaining life of the esters manufacturing unit and compared it to the $2.8 million net book carrying value of our esters manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our esters business was higher than the net book carrying value of our esters manufacturing unit. Based on this analysis, we concluded that our esters manufacturing unit was not impaired as of December 31, 2009, and that no write-down was necessary. We will, however, accelerate our depreciation on our esters manufacturing unit in 2010 to ensure that it is fully depreciated by December 31, 2010.

     We are in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business after the termination of our Plasticizers Production Agreement with BASF. Since we are in the early stages of evaluating our commercial options regarding our plasticizers business, we cannot predict the ultimate outcome or the success of continuing the plasticizers business after December 31, 2010. In the event we conclude to permanently close our plasticizers facility, we have also developed plans for restructuring our operating costs following the termination of our Plasticizers Production Agreement. If we are unable to continue the plasticizers operations through other viable commercial options for our plasticizers business or facility or restructure our operating costs, or are unable to do so at or shortly after December 31, 2010, the termination of our Plasticizers Production Agreement will likely have a material adverse effect on our financial condition, results of operations and cash flows. We have not decided whether we will continue to operate our plasticizers business following December 31, 2010. However, we do not believe that these effects will impact our ability to continue as a going concern. Other than our Plasticizers Production Agreement, we do not have any material relationships with BASF.

     We lease a portion of our Texas City site to S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., or Praxair Energy, which constructed a cogeneration facility on that land. The cogeneration facility was initially shut down in May 2007 due to the uncertain future of our styrene unit and has remained idle since that time in order to conduct an assessment of whether the future needs for the cogeneration facility justified incurring the major maintenance costs required to restart the facility. As our strategic initiatives under consideration do not require utilization of the steam produced by the cogeneration facility, we and Praxair Energy amended the Joint Venture Agreement governing S&L Cogeneration Company, or the Joint Venture Agreement, to extend its term until November 30, 2009 or upon completion of all final audits, and to address several matters related to the sale of the cogeneration facility, the distribution of S&L Cogeneration Company’s assets and the termination and winding-up of its affairs. Under the amended Joint Venture Agreement, we received distributions from S&L Cogeneration Company of $5.0 million on August 15, 2008 and one-half of the Mass Emissions Cap and Trade NOx Allowances attributed to the operation of the cogeneration facility. In October 2008, the Board of Managers of S&L Cogeneration Company accepted a bid for the cogeneration facility assets and we received a $1.0 million distribution in December 2008 from S&L Cogeneration Company for the sale of those assets. As of December 31, 2009, our investment in S&L Cogeneration Company is approximately $0.4 million and we expect to receive approximately $0.4 million from S&L Cogeneration Company upon termination of the joint venture in 2010. Therefore we do not believe our investment in S&L Cogeneration Company was impaired as of December 31, 2009.

     On September 13, 2008, Hurricane Ike struck the Texas Gulf Coast very near our Texas City facility. Our Texas City facility was shut down and secured prior to landfall and did not sustain any significant structural damage, although we did sustain some minor damage to three of our barge docks. Our Texas City facility lost all power and ancillary utilities during the storm, including our steam boilers. The resulting production outage lasted approximately 15 days, with our Texas City facility returning to normal operating levels on September 28, 2008. The losses we incurred from Hurricane Ike during 2008 totaled $2.6 million, and we incurred additional expenses of $0.2 million in 2009 related to damages caused by Hurricane Ike. Our total loss from Hurricane Ike of $2.8 million was less than the deductibles under our insurance policies and, as such, we did not recover any of these losses under our insurance policies.

Discontinued Operations

     Prior to December 3, 2007, we manufactured styrene monomer and, on September 17, 2007, we entered into a long-term exclusive styrene supply agreement and a related railcar purchase and sale agreement with NOVA Chemicals, Inc. to INEOS NOVA LLC, or INEOS NOVA. After the supply agreement became effective, INEOS NOVA nominated zero pounds of styrene under the supply agreement for the balance of 2007 and, and in response, we exercised our right to terminate the supply agreement and permanently shut down our styrene facility. Under the supply agreement, we are responsible for the closure costs of our styrene facility and are also restricted from reentering the styrene business until November 2012. The restricted period was initially eight years. However, on April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     We sold substantially all remaining styrene inventory during the first quarter of 2008. The decommissioning process was completed by the end of 2008, with $18.9 million of the $19.6 million in total costs associated with the decommissioning being incurred in 2008. We are not required to dismantle our styrene facility but may elect to do so in connection with one or more of our strategic initiatives. We believe the cost of dismantling will be minimal due to the scrap value we can receive from the equipment being dismantled. In July 2008, we announced a reduction in work force in order to reduce our staffing to a level appropriate for our existing operations and site development projects. As a result, we reduced our salaried work force by 19 people and our hourly work force by 15 people and recognized and paid $1.4 million of severance costs in 2008. In addition, as a result of the work force reduction, the accrual of defined benefits for future services of a significant number of employees was eliminated and we recorded a curtailment loss of $1.2 million for our benefit plans in 2008.

     As a result of our styrene facility being permanently shut down, we have no significant continued involvement in the styrene business and have, therefore, reported the operating results of these businesses as discontinued operations in our consolidated financial statements for the years ended December 31, 2009 and December 31, 2008.

Results of Operations

     The following table sets forth revenues, gross profit and loss from continuing operations for 2009 and 2008:

		Year ended December 31,
		2009				2008
		(Dollars in Thousands)
Revenues		$	114,334			$	161,675
Gross profit			11,134				30,146
Loss from continuing operations			(8,037	)			(254	)

Comparison of 2009 and 2008

     Revenues and loss from continuing operations

     Our revenues were $114.3 million for 2009, a 29% decrease from the $161.7 million in revenues we recorded for 2008. We had a net loss from continuing operations of $8.0 million in 2009, compared to a net loss from continuing operations of $0.3 million in 2008.

     Revenues from our acetic acid operations were $87.3 million in 2009, a 33% decrease from the $129.7 million in revenues we received from these operations in 2008. This decrease in acetic acid revenues in 2009 compared to 2008 was due to $24.1 million in decreased cost reimbursements from BP Chemicals primarily resulting from lower energy costs and reduced production of acetic acid. The reduced acetic acid production occurred as a result of the shutdown of our acetic acid unit in January 2009, due to the economy, and in June and July 2009, for scheduled maintenance. In addition, our revenues were $11.9 million lower in 2009 compared to 2008 primarily due to a decreased contribution margin and the fact that revenues for 2008 included the $6.5 million we received from BP Chemicals in connection with the settlement of a blend gas dispute under our Acetic Acid Production Agreement. Gross profit from our acetic acid operations was $5.5 million for 2009 compared to $28.1 million for 2008. This $22.6 million

decrease in gross profit was primarily due to the decreased contribution margin discussed above, increased project start-up costs, depreciation expense and overhead expenses of approximately $4.2 million in 2009 compared to 2008 and the fact that 2008 included $6.5 million for the blend gas dispute.

     Revenues from our plasticizers operations were approximately $26.0 million in 2009, a 16% decrease from the $31.0 million in revenues we received from these operations in 2008. Our revenues decreased in 2009 compared to 2008 primarily due to our 2008 revenues including $3.7 million in cost reimbursements related to the closure of our phthalic anhydride, or PA, unit, as well as $1.4 million in cost savings achieved in prior periods that was approved by BASF in the first quarter of 2008. In addition, our revenues in 2009 were lower than 2008 due to decreased cost reimbursements of $2.5 million resulting from lower energy costs in 2009 compared to 2008, offset by $0.4 million of increased revenue amortization for the payment associated with BASF’s termination of their obligations related to our oxo alcohols facility as a result of BASF terminating the Plasticizers Production Agreement effective December 31, 2010, and a $2.7 million increase in revenue due to reimbursements for the 2009 capital project to redesign our process wastewater treatment system. Gross profit from our plasticizers operations was $5.9 million in 2009 compared to $4.1 million in 2008. This increase in gross profit was primarily due to $0.9 million for favorable economic indices and contract gains applicable to various components of reimbursable costs under our Plasticizers Production Agreement the $0.4 million of additional revenue amortization discussed above and $0.1 million for cost savings recorded in 2009. In addition, gross profit for 2008 included $0.5 million of depreciation expense for the PA unit before it was written down to zero in June 2008, $0.6 million for start-up costs and $0.8 million for lawsuit expenses, offset by $1.4 million of cost savings discussed above.

     Other gross profit was a loss of $0.3 million in 2009 compared to a loss of $2.1 million in 2008. This improvement was primarily a result of reversing a previous $1.0 million litigation reserve in the third quarter of 2009 and a reduction in styrene residual costs, most of which were re-allocated to our acetic acid and plasticizers segments in 2009.

     Impairment of long-lived assets

     We recorded zero and $7.4 million for impairment of long-lived assets for the years ended December 31, 2009 and December 31, 2008, respectively. The impairments recorded in 2008 consisted of a $6.6 million write-down of our PA assets as a result of the closure of our PA unit and a $0.8 million write-down of our turbo generator units which were permanently shut down in 2008.

     Other income

     Our other income was $3.5 million for 2009 compared to $2.0 million for 2008. This increase in other income was primarily due to the receipt in 2009 of a $1.1 million previously disputed contractual payment, a $0.4 million gain on the sale of assets and a $0.3 million gain from the $23.8 million cash purchase in the fourth quarter of 2009 of $25.0 million in aggregate principal amount of our 10¹/₄% Senior Secured Notes due 2015, or our Secured Notes, net of the amortization of a pro rata portion of the related debt issue costs of $0.9 million. The increase in other income was partially offset by a $0.4 million decrease in reimbursements of legal fees related to various lawsuits during 2009.

     Interest and debt related expenses

     We recorded $15.8 million and $17.2 million of interest and debt related expenses during 2009 and 2008, respectively. The reduction in interest and debt expense in 2009 was due to $0.2 million of reduced interest related to the $23.8 million cash purchase in the fourth quarter of 2009 of $25.0 million in aggregate principal amount of our Secured Notes and a $0.3 million increase in capitalized interest as a result of the capital projects completed during the turn-around of our acetic acid facility in 2009. In addition, interest and debt related expenses for 2008 included $0.5 million of penalty interest paid on our Secured Notes prior to our exchange offer registration statement being declared effective by the Securities and Exchange Commission and a $0.3 million write-off of debt fees associated with the reduction of the commitment under our prior revolving credit facility in the second quarter of 2008.

     Interest income

     We recorded $0.7 million of interest income during 2009 compared to $4.4 million during 2008. This decrease was primarily due to significantly lower interest earned on our cash investments during 2009 compared to 2008.

     Provision (benefit) for income taxes

     During 2009, our effective tax rate was 39.5% due to a change of $0.6 million in our valuation allowance as a result of a change in tax law and a $4.6 million tax benefit in continuing operations generated by utilizing income in discontinued operations and other comprehensive income offset by a corresponding change in the valuation allowance related to continuing operations. In 2008, our continuing operations effective tax rate of 21.9% resulted from a change of less than $0.1 million in our valuation allowance. We regularly assess our deferred tax assets for recoverability based on both historical and anticipated earnings levels. A valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. As a result of our analysis at December 31, 2009, we concluded that a valuation allowance was needed against our deferred tax assets. As of December 31, 2009, our valuation allowance was $28.2 million, a decrease of $3.2 million from December 31, 2008. This decrease included a valuation allowance adjustment of $0.9 million for gains in other comprehensive income for adjustments to our benefits plans. As of December 31, 2009, our overall net deferred tax asset/liability balance was zero.

     Income (loss) from discontinued operations, net of tax

     Net income from our discontinued operations, net of tax, was $8.5 million in 2009 compared to a net loss from discontinued operations, net of tax, of $8.4 million in 2008. The difference was primarily due to the $18.9 million of costs we incurred during 2008 to complete the decommissioning of our styrene facility. In addition, we incurred tax expense of $2.7 million in 2009 compared to zero tax expense in 2008.

Liquidity and Capital Resources

General

     Our working capital was $97.7 million as of December 31, 2009, a decrease of $46.9 million from our working capital of $144.6 million as of December 31, 2008. This decrease was primarily due to the purchase of $25.0 million in aggregate principal amount of our Secured Notes for $23.8 million, increased capital expenditures of $4.1 million, a $6.1 million increase in current portion of benefit liabilities resulting from contribution requirements, turn-around costs of $3.1 million and an $11.9 million decrease in revenue accruals in 2009, partially offset by the reversal of a $1.0 million litigation reserve and a decreased property tax accrual of $0.8 million.

     Our liquidity (i.e., cash and cash equivalents plus total borrowing ability under our revolving credit facility) was $127.8 million at December 31, 2009, a decrease of $39.4 million compared to our liquidity at December 31, 2008. This decrease was primarily due to our purchase of $25.0 million in aggregate principal amount of our Secured Notes in 2009 for $23.8 million, a $7.5 million decrease in our borrowing base as a result of reduced accounts receivable compared to December 31, 2008 and $10.6 million in capital expenditures in 2009. We periodically review the balance of our cash on hand in light of our strategic objectives and the restrictions on the use of cash contained in the indenture for our Secured Notes. As opportunities arise, we intend to utilize our cash as circumstances warrant, possibly in material amounts, to fund all or a portion of the purchase price of mergers or acquisitions, engage in project development work, make contributions to our defined benefit plans or purchase our outstanding Secured Notes on the open market, in privately negotiated transactions or otherwise.

     We invest our excess cash in various investments. Our cash is invested in money market funds and certificates of deposit, however, we may invest cash in other high quality, highly liquid cash equivalents from time to time.

Debt

     On March 29, 2007, we completed a private offering of $150 million aggregate principal amount of unregistered Secured Notes pursuant to a Purchase Agreement among us, Sterling Chemicals Energy, Inc., or Sterling Energy, one of our former wholly-owned subsidiaries, and Jefferies & Company, Inc. and CIBC World Markets Corp., as initial purchasers. In connection with that offering, we entered into an indenture, dated March 29, 2007, among us, Sterling Energy, as guarantor, and U. S. Bank National Association, as trustee and collateral agent. On May 6, 2008, Sterling Energy was merged with and into us. Upon consummation of the merger, Sterling Energy no longer had independent existence and, consequently, our Secured Notes are no longer guaranteed by Sterling Energy. Pursuant to a registration rights agreement among us, Sterling Energy and the initial purchasers, we agreed to

exchange our unregistered Secured Notes for a new issue of substantially identical debt securities registered under the Securities Act, to cause the registration statement for the exchange offer to become effective by December 24, 2007, and to complete the exchange offer within 50 days of the effective date of the registration statement. On August 30, 2007, we made an initial filing of the exchange offer registration statement. However, the registration statement was not declared effective by December 24, 2007, and, as a result, the interest rate on our Secured Notes increased by 0.25% per annum on each of December 25, 2007, March 24, 2008 and June 22, 2008. The registration statement was declared effective on August 13, 2008, and the exchange offer was closed on September 19, 2008. As a result, the interest rate on our Secured Notes reverted back to the face amount of 10¹/₄% per annum when the exchange offer closed. The additional interest incurred from December 25, 2007 through the closing of the exchange offer was approximately $0.5 million and was paid on April 1 and October 1, 2008.

     Our indenture contains affirmative and negative covenants and customary events of default, including payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, other than an event of default triggered upon certain bankruptcy events, the trustee under our indenture or the holders of at least 25% in principal amount of our outstanding Secured Notes may declare our Secured Notes to be due and payable immediately. Upon an event of default, the trustee may also take actions to foreclose on the collateral securing our outstanding Secured Notes, subject to the terms of an intercreditor agreement dated March 29, 2007, among us, the trustee and The CIT Group/Business Credit, Inc, or CIT. Our indenture does not require us to maintain any financial ratios or satisfy any financial maintenance tests. We are currently in compliance with all of the covenants contained in our indenture.

     Interest is due on our outstanding Secured Notes on April 1 and October 1 of each year. Our outstanding Secured Notes, which mature on April 1, 2015, are senior secured obligations and rank equally in right of payment with all of our existing and future senior indebtedness. Subject to specified permitted liens, our outstanding Secured Notes are secured (i) on a first priority basis by all of our fixed assets and certain related assets, including, without limitation, all property, plant and equipment and (ii) on a second priority basis by our other assets, including, without limitation, accounts receivable, inventory, capital stock of our domestic restricted subsidiaries, intellectual property, deposit accounts and investment property.

     In the fourth quarter of 2009, we purchased $25.0 million in aggregate principal amount of our Secured Notes for $23.8 million in cash in the open market resulting in a $1.2 million gain. This gain was partially offset by the amortization of a pro rata portion of the related debt issue costs of $0.9 million. In February 2010, we repurchased an additional $2.0 million in aggregate principal amount of our Secured Notes for $1.9 million, and in the first quarter of 2010, we will amortize less than $0.1 million for the pro rata portion of the related debt issue costs. The $27.0 million in aggregate principal purchase of our Secured Notes in the fourth quarter of 2009 and in February 2010 is expected to reduce interest expense for 2010 by approximately $2.7 million.

     On December 19, 2002, we entered into a Revolving Credit Agreement, or our revolving credit facility, with CIT as administrative agent and a lender, and certain other lenders. On March 29, 2007, we amended and restated our revolving credit facility to, among other things, extend the term of our revolving credit facility until March 29, 2012, reduce the maximum commitment thereunder to $50 million, make certain changes to the calculation of the borrowing base and lower the interest rates and fees charged thereunder. On June 30, 2008, we reduced our commitment under our revolving credit facility to $25 million. On November 7, 2008, we further amended our revolving credit facility to substantially reduce restrictions and paid the administrative agent an amendment fee plus expenses totaling approximately $0.1 million in connection with this amendment.

     On December 10, 2009, we elected to terminate our revolving credit facility effective January 24, 2010 due to our substantial cash balances and low working capital needs. There were no penalties or termination fees payable by us in connection with the early termination of our revolving credit facility. The remaining associated debt issue costs of $0.2 million will be written off as of the effective termination date.

     As of December 31, 2009, total credit available under our revolving credit facility was $7.5 million, there were no loans outstanding and we had $3.5 million in letters of credit outstanding, resulting in borrowing availability of $4.0 million.

     On January 31, 2010, we entered into a $5 million Revolving Line of Credit for letters of credit, or our LC Facility, with JP Morgan Chase Bank, N.A. or Chase, for the issuance of commercial and standby letters of credit. Our LC Facility will expire January 31, 2014, and letters of credit issued under this facility bear an annual fee of 1%. On January 31, 2010, we also entered into an Assignment of Deposit Account Agreement with Chase providing collateral for the LC facility with a $5 million deposit account. As of February 28, 2010, there were $3.3 million in standby letters of credit issued under the LC facility.

Cash Flow

     Net cash provided by operations was $1.4 million in 2009, compared to $62.4 million in 2008. This decrease in net cash flow provided by operations during 2009 was primarily due to the monetization of our styrene working capital of approximately $67.0 million in 2008. Net cash flow used in investing activities was $9.9 million in 2009 compared to $6.4 million in 2008. This increase was primarily due to increased capital expenditures in 2009 primarily for capital projects completed during the turn-around of our acetic acid facility and a capital project related to improvements in our process wastewater treatment system. Net cash flow used in financing activities was $23.8 million in 2009 compared to zero in 2008. This increase was due to the purchase of $25.0 million aggregate principal amount of our Secured Notes in the fourth quarter of 2009 for $23.8 million.

     Distress in the financial markets during 2008 and 2009 has had an adverse impact on financial market activities including, among other things, volatility in security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. We have assessed the implications of these factors on our current business and determined that there was not a significant impact to our financial condition, results of operations or liquidity during 2009. We believe that our cash on hand and cash generated from continuing operations will be sufficient to meet our short-term and long-term liquidity needs for the reasonably foreseeable future.

Capital Expenditures

     Our capital expenditures were $10.5 million during 2009 compared to $6.4 million during 2008. Capital expenditures during 2009 were $5.0 million for our portion of acetic acid related projects, including construction of an acetic acid pipeline and other replacement and debottlenecking projects, and $1.8 million for a capital project to redesign our process wastewater treatment system. Costs incurred for routine safety, environmental, replacement capital and profit improvement projects were $3.7 million for 2009. We anticipate spending approximately $5.1 million on these types of expenditures during 2010.

Pensions

     Our projected benefit obligation under our defined benefit pension plan was $124.3 million and $121.2 million as of December 31, 2009 and 2008, respectively. This increase in 2009 was primarily due to an actuarial loss of $4.6 million, and interest costs of $7.2 million, partially offset by benefit payments of $8.7 million.

Critical Accounting Policies, Use of Estimates and Assumptions

     A summary of our significant accounting policies is included in Note 1 of the “Notes to Consolidated Financial Statements” included in Item 7, Part II of this Form 10-K. We believe that the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition. The following accounting policies are the ones we believe are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments.

Revenue Recognition

     We produce acetic acid and plasticizers and recognize revenues (and the related costs) when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable and collectability is reasonably assured.

     Acetic Acid. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, all of our acetic acid is sold to BP Amoco Chemical Company, or BP Chemicals, who takes delivery, title and risk of loss at the time the acetic acid is produced. BP Chemicals, in turn, markets and sells the acetic acid and pays us a portion of the profits derived from those sales. BP Chemicals reimburses us monthly for 100% of our fixed and variable costs of production (excluding some indirect expenses and direct depreciation associated with machinery and equipment used in the manufacturing of acetic acid) and the revenue associated with the reimbursement of these costs is included in revenue and is matched against our costs as they are incurred. We recognize revenue related to the profit sharing component under our Acetic Acid Production Agreement based on quarterly estimates received from BP Chemicals. These estimates are based on the profits from sales of acetic acid subject to our Acetic Acid Production Agreement.

     Plasticizers. We generate revenues from our plasticizers operations through our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement, with BASF Corporation, or BASF. BASF purchases all of our plasticizers and takes delivery, title and risk of loss at the time of production. We receive fixed, level quarterly payments which are recognized on a straight-line basis. In addition, BASF reimburses us monthly for our actual fixed and variable costs of production (excluding direct depreciation associated with machinery and equipment used in the manufacturing of plasticizers), and the revenue associated with the reimbursement of these costs is included in revenue and is matched against our costs as they are incurred.

     Deferred revenue. Deferred credits are amortized over the life of the contracts which gave rise to them. As of December 31, 2009, related to continuing operations, we had a balance in deferred income of approximately $4.8 million, which represents certain payments received from our oxo-alcohol and PA operations, which previously were part of our plasticizers business. The oxo alcohol payment was previously being amortized using the straight-line method over an eight year life that ended on December 31, 2013, the original termination date of our Plasticizers Production Agreement. As a result of BASF’s election to terminate our Plasticizers Production Agreement, effective December 31, 2010, the original eight year life was changed to five years and the remaining unamortized balance of $3.6 million will be recognized in 2010. The PA payment is being amortized using the straight-line method over the remaining life of our Plasticizers Production Agreement of one year, and the remaining unamortized balance of $1.2 million will be recognized in 2010. In discontinued operations, as of December 31, 2009, we had a balance in deferred income of approximately $35.4 million related to payments made to us under our exclusive styrene production agreement with NOVA Chemicals Inc. which is being amortized using the straight-line method over the contractual non-compete period of five years, of which approximately three years remain. Approximately $12.4 million will be recognized in discontinued operations in 2010.

Preferred Stock Dividends

     We record preferred stock dividends on our Preferred Stock in our consolidated statements of operations based on the estimated fair value of dividends at each dividend accrual date. Our Preferred Stock has a dividend rate of 4% per quarter of the liquidation value of the outstanding shares of our Preferred Stock, and is payable in arrears in additional shares of our Preferred Stock on the first business day of each calendar quarter. The liquidation value of each share of our Preferred Stock is $13,793 per share, and each share of our Preferred Stock is convertible into shares of our common stock (on a one to 1,000 share basis, subject to adjustment). The carrying value of our Preferred Stock in our consolidated balance sheets represents the initial fair value at original issuance in 2002 plus the initial fair value of each of the quarterly dividends paid since issuance. The fair value of our Preferred Stock

dividends is determined each quarter using valuation techniques that include a component representing the intrinsic value of the dividends (which represent the greater of the liquidation value of the shares of Preferred Stock being issued or the fair value of the common stock into which those shares could be converted) and an option component (which is determined using a Black-Scholes Option Pricing Model). These dividends are subtracted from net income in our consolidated statements of operations, and added to the balance of Redeemable Preferred Stock in our consolidated balance sheets. As we are in an accumulated deficit position, these dividends are treated as a reduction to additional paid-in capital.

Assumptions utilized in the Black-Scholes model include:		2009				2008
Risk-free interest rate			2.7	%			1.6	%
Volatility			72.2	%			63.6	%
Dividend yield			—				—
Expected term			5.0				5.0

Long-Lived Assets

     We assess our long-lived assets for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, we project undiscounted net future cash flows over the remaining life of the assets. If the projected cash flows from the assets are less than the carrying amount, an impairment is recognized. Any impairment loss would be measured based upon the difference between the carrying amount and the fair value of the relevant assets. For these impairment analyses, impairment is determined by comparing the estimated fair value of these assets, utilizing the present value of expected net cash flows, to the carrying value of these assets. In determining the present value of expected net cash flows, we estimate future net cash flows from these assets and the timing of those cash flows and then apply a discount rate to reflect the time value of money and the inherent uncertainty of those future cash flows. The discount rate we use is based on our estimated cost of capital. The assumptions we use in estimating future cash flows are consistent with our internal planning.

     In the second quarter of 2008, as a result of the permanent shutdown of our phthalic anhydride, or PA, manufacturing unit, our management determined that a triggering event, as defined in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 360, “Impairment or Disposal of Long-Lived Assets,” had occurred and, as a result, we performed an asset impairment analysis on our PA manufacturing unit. We analyzed the undiscounted cash flow stream from our PA business over the remaining life of our PA manufacturing unit and compared it to the $6.6 million net book carrying value of our PA manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our PA business was less than the net book carrying value of our PA manufacturing unit. As a result, we performed a discounted cash flow analysis and subsequently concluded that our PA manufacturing unit was impaired and should be written down to zero. This write-down caused us to record an impairment of $6.6 million in June 2008.

     In the third quarter of 2008, our management determined that a triggering event, as defined in ASC Topic 360, had occurred as a result of the decision to permanently discontinue the use of some of our turbo generator units located at our Texas City facility. This decision was based on an economic analysis of the future use of the turbo generator units. During the third quarter of 2008, we performed an asset impairment analysis on these turbo generator units and determined the best estimate of fair market value would be the anticipated sales proceeds. We estimated the anticipated sales proceeds to be approximately $1.0 million. As a result, we concluded that our turbo generator units were impaired and should be written down to $1.0 million. This write-down resulted in an impairment charge of $0.8 million during the third quarter of 2008. During 2009, one of the turbo generator units was utilized in a capital project to convert 650 pound steam to 250 pound steam and thus reduce our steam costs. We still plan to sell or utilize the remaining turbo generator, and therefore believe no further impairment is necessary at this time.

     In the fourth quarter of 2009, our management determined that a triggering event, as defined in ASC Topic 360, had occurred as a result of BASF electing to terminate our Plasticizers Production Agreement, effective December 31, 2010. In December 2009, we performed an asset impairment analysis on our esters manufacturing unit. We analyzed the undiscounted cash flow stream from our esters business over the remaining life of the esters

manufacturing unit and compared it to the $2.8 million net book carrying value of our esters manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our esters business was higher than the net book carrying value of our esters manufacturing unit. Based on this analysis, we concluded that our esters unit was not impaired as of December 31, 2009, and that no write-down is necessary. We will however accelerate our depreciation on our esters manufacturing unit in 2010 to ensure it is fully depreciated by December 31, 2010.

Income Taxes

     Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement purposes. We regularly assess deferred tax assets for recoverability based on both historical and anticipated earnings levels, and a valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. As a result of our analysis at December 31, 2009, we concluded that a valuation allowance was needed against our deferred tax assets. As of December 31, 2009, our valuation allowance was $28.2 million, a decrease of $3.2 million from December 31, 2008. The decrease included a valuation allowance adjustment of $1.4 million related to our state taxes and credits and $0.9 million due to gains in other comprehensive income for adjustments to our benefits plans. As of December 31, 2009, our overall net deferred tax asset/liability balance was zero.

Employee Benefit Plans

     We sponsor domestic defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected long-term rate of return on plan assets and health care cost increase projections. Assumptions are determined based on our historical data and appropriate market indicators, and are evaluated each year as of the plans’ measurement dates. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in our financial statements. Accounting guidance applicable to pension plans does not require immediate recognition of the current year effects of a deviation between these assumptions and actual experience. We experienced significant negative pension asset returns in 2008, the result of which materially increased our pension expense for 2009. In 2009, we were able to recover about one-half of the negative pension asset returns from 2008. The 2009 pension expense, on a pre-tax basis, is $4.4 million, however a significant portion will be reimbursed through existing contractual arrangements.

     During the third quarter of 2008, as a result of our work force reduction announced in July 2008, and in accordance with ASC Topic 715, “Compensation — Retirement Benefits”, or ASC Topic 715, we recorded plan curtailment losses in discontinued operations of $0.9 million for our defined benefit pension plans and $0.3 million for our post-retirement medical plan.

Plant Turn-around Costs

     As a part of normal recurring operations, each of our manufacturing units is completely shut down from time to time, for a period typically lasting two to four weeks, to replace catalysts and perform major maintenance work required to sustain long-term production. These periods are commonly referred to as “turn-arounds” or “shutdowns.” Costs of turn-arounds are expensed as incurred. As expenses for turn-arounds can be significant, the impact of expensing turn-around costs as they are incurred can be material for financial reporting periods during which the turn-arounds actually occur. Turn-around costs expensed during 2009 and 2008 that are included in continuing operations were $3.1 million and $0.3 million, respectively.

New Accounting Standards

     In September 2009, the FASB issued ASU No. 2009-12, an amendment to ASC Topic 820-10, “Fair Value Measurements and Disclosures — Overall,” or ASU No. 2009-12, to provide guidance on the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). ASU No. 2009-12 is effective for interim and annual reporting periods ending after December 15, 2009. We do not believe the implementation of ASU 2009-12 will have a material impact on our consolidated financial statements.

     In January 2010, the FASB issued ASU No. 2010-06, an amendment to ASC Topic 820-10, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, or ASU No. 2010-06. ASU No. 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The objective of ASU No. 2010-06 is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

	•		a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and
	•		in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity to present separately information about purchases, sales, issuances and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

	•		for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
	•		a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Early application is permitted. We do not believe the implementation of ASU 2010-06 will have a material impact on our consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

INDEX TO HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

Sterling Chemicals, Inc.

Audited Financial Statements

Report of Independent Registered Public Accounting Firm			36
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008			37
Consolidated Balance Sheets as of December 31, 2009			38
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency in Assets) for the years ended December 31, 2009 and 2008			39
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008			40
Notes to Consolidated Financial Statements			41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Sterling Chemicals, Inc.:

     We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. and its subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity (deficiency in assets) and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sterling Chemicals, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Houston, Texas
March 24, 2010

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year ended December 31,
		2009				2008
Revenues		$	114,334			$	161,675
Cost of goods sold			103,200				131,529
Gross profit			11,134				30,146
Selling, general and administrative expenses			12,875				12,331
Impairment of long-lived assets			—				7,403
Interest and debt related expenses			15,767				17,175
Interest income			(742	)			(4,408	)
Other income			(3,481	)			(2,030	)
Loss from continuing operations before income tax			(13,285	)			(325	)
Benefit for income taxes			(5,248	)			(71	)
Loss from continuing operations		$	(8,037	)		$	(254	)
Income (loss) from discontinued operations, net of tax expense of $2,679 and zero, respectively			8,472				(8,366	)
Net income (loss)		$	435			$	(8,620	)
Preferred stock dividends			16,921				17,741
Net loss attributable to common stockholders		$	(16,486	)		$	(26,361	)
(Loss) income per share of common stock attributable to common stockholders, basic and diluted:
Loss from continuing operations		$	(8.83	)		$	(6.36	)
Income (loss) from discontinued operations, net of tax			3.00				(2.96	)
Basic and diluted loss per share		$	(5.83	)		$	(9.32	)
Weighted average shares outstanding:
Basic and diluted			2,828,460				2,828,460

The accompanying notes are an integral part of the consolidated financial statements.

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	123,778			$	156,126
Accounts receivable, net of allowance of $58 and $18, respectively			14,614				25,607
Inventories, net			5,268				5,221
Prepaid expenses and other current assets			2,539				2,473
Assets of discontinued operations, net			24				166
Total current assets			146,223				189,593
Property, plant and equipment, net			68,182				67,811
Other assets, net			5,760				7,838
Total assets		$	220,165			$	265,242
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable		$	11,703			$	12,520
Accrued liabilities			24,416				20,008
Liabilities of discontinued operations			12,384				12,444
Total current liabilities			48,503				44,972
Long-term debt			125,000				150,000
Deferred credits and other liabilities			41,084				59,103
Long-term liabilities of discontinued operations			23,010				35,394
Commitments and contingencies (Note 9)
Redeemable preferred stock			134,528				117,607
Stockholders’ deficiency in assets:
Common stock, $.01 par value (shares authorized 100,000,000; shares issued and outstanding 2,828,460)			28				28
Additional paid-in capital			106,948				123,740
Accumulated deficit			(240,780	)			(241,215	)
Accumulated other comprehensive loss			(18,156	)			(24,387	)
Total stockholders’ deficiency in assets			(151,960	)			(141,834	)
Total liabilities and stockholders’ deficiency in assets		$	220,165			$	265,242

The accompanying notes are an integral part of the consolidated financial statements.

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Total
Balance, December 31, 2007			2,828			$	28			$	141,174			$	(232,595	)		$	17,253			$	(74,140	)
Comprehensive loss:
Net loss			—				—				—				(8,620	)			—
Other comprehensive loss:
Benefit adjustment, net of tax of zero			—				—				—				—				(41,640	)
Comprehensive loss																							(50,260	)
Preferred stock dividends											(17,741	)											(17,741	)
Stock-based compensation			—				—				307				—				—				307
Balance, December 31, 2008			2,828			$	28			$	123,740			$	(241,215	)		$	(24,387	)		$	(141,834	)
Comprehensive income:
Net income			—				—				—				435				—
Other comprehensive income:
Benefit adjustment, net of tax of $1,970			—				—				—				—				6,231
Comprehensive income:			—				—				—				—				—				6,666
Preferred stock dividends											(16,921	)											(16,921	)
Stock-based compensation			—				—				129				—				—				129
Balance, December 31, 2009			2,828			$	28			$	106,948			$	(240,780	)		$	(18,156	)		$	(151,960	)

The accompanying notes are an integral part of the consolidated financial statements.

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year ended December 31,
		2009				2008
Cash flows from operating activities:
Net income (loss)		$	435			$	(8,620	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock compensation expense			129				307
Blend gas deferred payments			—				(2,653	)
Bad debt expense (benefit)			64				(5	)
Benefit plans curtailment loss			—				1,197
Depreciation and amortization			9,852				9,475
Interest amortization			1,091				1,347
Unearned income amortization			(14,976	)			(13,036	)
Impairment of long-lived assets			—				7,403
Lower-of-cost-or-market adjustment			(31	)			351
Gain on disposal of property, plant and equipment			(635	)			—
Net gain on purchase of Senior Secured Notes			(291	)			—
Other			(149	)			(353	)
Change in assets/liabilities:
Accounts and other receivables			11,072				62,688
Inventories			(236	)			15,181
Prepaid expenses and other current assets			(66)				425
Other assets			92				5,377
Accounts payable			(143	)			(4,604	)
Accrued liabilities			4,348				(1,865	)
Other liabilities			(9,196	)			(10,255	)
Net cash provided by operating activities			1,360				62,360
Cash flows used in investing activities:
Capital expenditures for property, plant and equipment			(10,529	)			(6,417	)
Net proceeds from the sale of property, plant and equipment			635				—
Net cash used in investing activities			(9,894	)			(6,417	)
Cash flows used in financing activities:
Purchase of Senior Secured Notes			(23,814	)			—
Net cash used in financing activities			(23,814	)			—
Net increase (decrease) in cash and cash equivalents			(32,348	)			55,943
Cash and cash equivalents — beginning of year			156,126				100,183
Cash and cash equivalents — end of year		$	123,778			$	156,126
Supplemental disclosures of cash flow information:
Interest paid		$	15,866			$	15,849
Interest income received			742				4,408
Income taxes paid			(598	)			313

The accompanying notes are an integral part of the consolidated financial statements.

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

     Unless otherwise indicated, references to “we,” “us,” “our” and “ours” refer collectively to Sterling Chemicals, Inc. and its wholly-owned subsidiaries. We own or operate facilities at our petrochemicals complex located in Texas City, Texas, or our Texas City facility, approximately 45 miles south of Houston, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. Currently, we produce acetic acid and plasticizers and, prior to the shutdown of our styrene operations in December 2007, we also produced styrene. We own all of the real property which comprises our Texas City facility and we own the acetic acid, plasticizers and styrene manufacturing units located at the site. Our Texas City facility offers approximately 160 acres for future expansion by us or by other companies that could benefit from our existing infrastructure and facilities, and includes a greenbelt around the northern edge of the site. We also lease a portion of our Texas City facility to Praxair Hydrogen Supply, Inc., or Praxair, who constructed a partial oxidation unit on that land, and we lease a portion of our Texas City site to S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., who constructed a cogeneration facility on that land. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. As of December 31, 2009, we reported our operations in two segments: acetic acid and plasticizers.

Reclassifications and Revisions:

     During the quarter ended March 31, 2009, we determined we had incorrectly accounted for certain utility allocations at our Texas City facility, specifically accounting for the flow of water throughout our facility. In December 2009 we reviewed our basis for the proper allocation of our steam billings and determined that there were additional modifications to our steam billings. We evaluated the materiality of the misstatements from qualitative and quantitative perspectives and concluded that although the misstatements were immaterial to all prior year financial statements, their correction in fiscal 2009 would be material. Therefore, we revised the consolidated statement of operations, statement of changes in stockholder’s equity (deficiency in assets) and the statement of cash flows for the year ended December 31, 2008 and the consolidated balance sheet as of December 31, 2008, to correct the utility allocation misstatement.

     The following table summarizes the effects of the revisions on the applicable periods:

		Year Ended
		December 31, 2008
		(Dollars in Thousands,
		Except Per Share Data)
		Previously
		Reported				As Revised
Statement of Operations:
Revenues		$	161,452			$	161,675
Cost of goods sold			131,154				131,529
Gross profit			30,298				30,146
Loss from continuing operations before income tax			(173	)			(325	)
Loss from continuing operations			(102	)			(254	)
Loss from discontinued operations, net of tax of zero			(8,262	)			(8,366	)
Net loss			(8,364	)			(8,620	)
Net loss attributable to common stockholders			(26,105	)			(26,361	)
Loss per share of common stock attributable to common stockholders, basic and diluted:

		Year Ended
		December 31, 2008
		(Dollars in Thousands,
		Except Per Share Data)
		Previously
		Reported				As Revised
Loss from continuing operations		$	(6.31	)		$	(6.36	)
Loss from discontinued operations, net of tax			(2.92	)			(2.96	)
Basic and diluted loss per share		$	(9.23	)		$	(9.32	)

		Year Ended
		December 31, 2008
		(Dollars in Thousands)
		Previously
		Reported				As Revised
Statement of Cash Flows:
Net loss		$	(8,364	)		$	(8,620	)
Change in accounts and other receivables			62,911				62,688
Change in accounts payable			(5,083	)			(4,604	)

		As of December 31, 2008
		(Dollars in Thousands)
		Previously				As Revised
		Reported in				in 2009 Form
		2008 Form 10-K				10-Q’s				As Revised
Balance Sheet:
Accounts and other receivables, net of allowance		$	22,080			$	23,163			$	25,607
Prepaid expenses and other current assets			2,704				—				2,473
Total current assets			186,297				187,380				189,593
Total assets			261,946				263,029				265,242
Accounts payable			8,915				—				12,520
Total current liabilities			41,367				—				44,972
Accumulated deficit			(240,906	)			(239,823	)			(241,215	)
Total stockholders’ deficiency in assets			(141,525	)			(140,442	)			(141,834	)
Total liabilities and stockholders’ deficiency in assets			261,946				263,029				265,242

		As of December 31, 2008
		(Dollars in Thousands)
		Previously
		Reported				As Revised
Statement of Changes in Stockholder’s Equity (Deficiency in Assets):
Net loss		$	(8,364	)		$	(8,620	)
Comprehensive loss			(50,004	)			(50,260	)
Accumulated deficit			(240,906	)			(241,215	)
Total stockholders’ deficiency in assets			(141,525	)			(141,834	)

     We have reclassified certain amounts on the consolidated statement of cash flows to stock compensation expense from other adjustments to reconcile net income (loss) to net cash provided by operating activities, and between changes in other assets and other adjustments to reconcile net income (loss) to net cash provided by operating activities, for the year ended December 31, 2008.

Principles of Consolidation

     The consolidated financial statements include the accounts of our wholly-owned subsidiaries, with all significant intercompany accounts and transactions having been eliminated. Our 50% equity investment in S&L Cogeneration Company is accounted for under the equity method. Our investment in S&L Cogeneration Company was $0.4 million as of December 31, 2009 and 2008. We recognized a loss from this investment of $0.1 million and income of $1.1 million in 2009 and 2008, respectively.

Cash and Cash Equivalents

     We consider all investments having an initial maturity of three months or less to be cash equivalents. Our cash is invested in money market funds and certificates of deposit, however, we may invest cash in other high quality, highly liquid cash equivalents from time to time. We maintain balances at financial institutions which may exceed Federal Deposit Insurance Corporation limits. We have not experienced any losses in such accounts and do not believe we are exposed to any significant risks on our cash or other investments.

Allowance for Doubtful Accounts

     Accounts receivable are presented net of allowance for doubtful accounts. We regularly review our accounts receivable balances and, based on estimated collectability, adjust the allowance account accordingly. As of December 31, 2009 and December 31, 2008, the allowance for doubtful accounts for continuing operations was $0.1 million and less than $0.1 million, respectively, and less than $0.1 million and zero, respectively for discontinued operations. Bad debt expense for continuing operations was less than $0.1 million for 2009 and bad debt benefit for continuing operations was less than $0.1 million for 2008. Bad debt expense for discontinued operations was less than $0.1 million and zero for 2009 and 2008, respectively.

Inventories

     Inventories include raw materials, supplies and spare parts which are valued at average cost. Raw materials and supplies are carried at the lower-of-cost-or-market value. The comparison of cost to market value involves estimation of the market value of our products. For the years ended December 31, 2009 and December 31, 2008, this comparison led to a lower-of-cost-or-market adjustment of less than $0.1 million and $0.4 million, respectively. Spare parts are examined for obsolescence and are carried at their net realizable value. For the year ended December 31, 2009, we increased our obsolescence accrual by $0.2 million for spare parts associated with operations that have been shut down.

Property, Plant and Equipment

     Property, plant and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of equipment, are capitalized. For certain capital projects, our customers reimburse us for a portion of the project cost. For capital expenditures reimbursed by our customers, we treat the reimbursements as a reduction of our cost basis. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from five to 25 years, with the predominant life of plant and equipment being 15 years. We capitalize interest costs, which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized in continuing operations was $0.7 million and $0.2 million for 2009 and 2008, respectively.

Plant Turn-around Costs

     As a part of normal recurring operations, each of our manufacturing units is completely shut down from time to time, for a period typically lasting two to four weeks, to replace catalysts and perform major maintenance work required to sustain long-term production. These periods are commonly referred to as “turn-arounds” or “shutdowns.” Costs of turn-arounds are expensed as incurred. As expenses for turn-arounds can be significant, the impact of expensing turn-around costs as they are incurred can be material for financial reporting periods during which the turn-arounds actually occur. Turn-around costs expensed during 2009 and 2008 that are included in continuing operations were $3.1 million and $0.3 million, respectively.

Long-Lived Assets

     We assess our long-lived assets for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, we project undiscounted net future cash flows over the remaining life of the assets. If the projected cash flows from the assets are less than the carrying amount, an impairment is recognized. Any impairment loss would be measured based upon the difference between the carrying amount and the fair value of the relevant assets. For these impairment analyses, impairment is determined by comparing the estimated fair value of these assets, utilizing the present value of expected net cash flows, to the carrying value of these assets. In determining the present value of expected net cash flows, we estimate future net cash flows from these assets and the timing of those cash flows and then apply a discount rate to reflect the time value of money and the inherent uncertainty of those future cash flows. The discount rate we use is based on our estimated cost of capital. The assumptions we use in estimating future cash flows are consistent with our internal planning.

     In the second quarter of 2008, as a result of the permanent shutdown of our phthalic anhydride, or PA, manufacturing unit, our management determined that a triggering event, as defined in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 360, “Impairment or Disposal of Long-Lived Assets,” had occurred and, as a result, we performed an asset impairment analysis on our PA manufacturing unit. We analyzed the undiscounted cash flow stream from our PA business over the remaining life of our PA manufacturing unit and compared it to the $6.6 million net book carrying value of our PA manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our PA business was less than the net book carrying value of our PA manufacturing unit. As a result, we performed a discounted cash flow analysis and subsequently concluded that our PA manufacturing unit was impaired and should be written down to zero. This write-down caused us to record an impairment of $6.6 million in June 2008.

     In the third quarter of 2008, our management determined that a triggering event, as defined in ASC Topic 360, had occurred as a result of the decision to permanently discontinue the use of some of our turbo generator units located at our Texas City facility. This decision was based on an economic analysis of the future use of the turbo generator units. During the third quarter of 2008, we performed an asset impairment analysis on these turbo generator units and determined the best estimate of fair market value would be the anticipated sales proceeds. This determination of fair market value was based on Level 3 inputs that are not corroborated by observable market data. We estimated the anticipated sales proceeds to be approximately $1.0 million. As a result, we concluded that our turbo generator units were impaired and should be written down to $1.0 million. This write-down resulted in an impairment charge of $0.8 million during the third quarter of 2008. During 2009, one of the turbo generator units was utilized in a capital project to convert 650 pound steam to 250 pound steam and thus reduce our steam costs. We still plan to sell or utilize the remaining turbo generator, and therefore believe no further impairment is necessary at this time.

     In the fourth quarter of 2009, our management determined that a triggering event, as defined in ASC Topic 360, had occurred as a result of BASF electing to terminate our Plasticizers Production Agreement, effective December 31, 2010. In December 2009, we performed an asset impairment analysis on our esters manufacturing unit. We analyzed the undiscounted cash flow stream from our esters business over the remaining life of the esters manufacturing unit and compared it to the $2.8 million net book carrying value of our esters manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our esters business was higher than the net book carrying value of our esters manufacturing unit. Based on this analysis, we concluded that our esters unit was not impaired as of December 31, 2009, and that no write-down is necessary. We will however accelerate our depreciation on our esters manufacturing unit in 2010 to ensure it is fully depreciated by December 31, 2010.

Other Assets

     Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of earnings or losses from an investee company is not included in our consolidated balance sheet or consolidated statement of operations. However, any impairment charges related to an investee company would be recognized in our consolidated statement of operations, and if circumstances suggested that the value of that investee company had subsequently recovered, such recovery would not be recorded. At December 31, 2009 and 2008, we had a cost method investment of $0.5 million included in other assets in our consolidated balance sheet.

Revenue Recognition

     We produce acetic acid and plasticizers and recognize revenues (and the related costs) when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable and collectability is reasonably assured.

     Acetic Acid. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, all of our acetic acid is sold to BP Amoco Chemical Company, or BP Chemicals, who takes delivery, title and risk of loss at the time the acetic acid is produced. BP Chemicals, in turn, markets and sells the acetic acid and pays us a portion of the profits derived from those sales. BP Chemicals reimburses us monthly for 100% of our fixed and variable costs of production (excluding some indirect expenses and direct depreciation

associated with machinery and equipment used in the manufacturing of acetic acid) and the revenue associated with the reimbursement of these costs is included in revenue and is matched against our costs as they are incurred. We recognize revenue related to the profit sharing component under our Acetic Acid Production Agreement based on quarterly estimates received from BP Chemicals. These estimates are based on the profits from sales of acetic acid subject to our Acetic Acid Production Agreement.

     Plasticizers. We generate revenues from our plasticizers operations through our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement, with BASF Corporation, or BASF. BASF purchases all of our plasticizers and takes delivery, title and risk of loss at the time of production. We receive fixed, level quarterly payments which are recognized on a straight-line basis. In addition, BASF reimburses us monthly for our actual fixed and variable costs of production (excluding direct depreciation associated with machinery and equipment used in the manufacturing of plasticizers), and the revenue associated with the reimbursement of these costs is included in revenue and is matched against our costs as they are incurred.

     Deferred revenue. Deferred credits are amortized over the life of the contracts which gave rise to them. As of December 31, 2009, related to continuing operations, we had a balance in deferred income of approximately $4.8 million, which represents certain payments received from our oxo-alcohol and PA operations, which previously were part of our plasticizers business. The oxo alcohol payment was previously being amortized using the straight-line method over an eight year life that ended on December 31, 2013, the original termination date of our Plasticizers Production Agreement. As a result of BASF’s election to terminate our Plasticizers Production Agreement, effective December 31, 2010, the original eight year life was changed to five years and the remaining unamortized balance of $3.6 million will be recognized in 2010. The PA payment is being amortized using the straight-line method over the remaining life of our Plasticizers Production Agreement of one year, and the remaining unamortized balance of $1.2 million will be recognized in 2010. In discontinued operations, as of December 31, 2009, we had a balance in deferred income of approximately $35.4 million related to payments made to us under our exclusive styrene production agreement with NOVA Chemicals Inc. which is being amortized using the straight-line method over the contractual non-compete period of five years, of which approximately three years remain. Approximately $12.4 million will be recognized in discontinued operations in 2010.

Debt Issue Costs

     Debt issue costs relating to long-term debt are amortized over the term of the related debt instrument using the straight-line method, which is materially consistent with the effective interest method, and are included in other assets. Debt issue cost amortization, which is included in interest and debt-related expenses, was $1.1 million and $1.3 million for the years ended December 31, 2009 and 2008, respectively. As a result of our purchase of $25.0 million aggregate principal amount of our 10 ¹/4% Senior Secured Notes due 2015, or our Secured Notes, during the fourth quarter of 2009, we amortized $0.9 million of the debt issue costs related to our Secured Notes (See Note 5).

Income Taxes

     Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement purposes. We regularly assess deferred tax assets for recoverability based on both historical and anticipated earnings levels, and a valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. As a result of our analysis at December 31, 2009, we concluded that a valuation allowance was needed against our deferred tax assets. As of December 31, 2009, our valuation allowance was $28.2 million, a decrease of $3.2 million from December 31, 2008. The decrease included a valuation allowance adjustment of $1.4 million related to our state taxes and credits and $0.9 million due to gains in other comprehensive income for adjustments to our benefits plans. As of December 31, 2009, our overall net deferred tax asset/liability balance was zero.

Environmental Costs

     Environmental costs are expensed as incurred, unless the expenditures extend the economic useful life of the related assets. Costs that extend the economic useful life of assets are capitalized and depreciated over the

remaining book life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated.

Preferred Stock Dividends

     We record preferred stock dividends on our Preferred Stock in our consolidated statements of operations based on the estimated fair value of dividends at each dividend accrual date. Our Preferred Stock has a dividend rate of 4% per quarter of the liquidation value of the outstanding shares of our Preferred Stock, and is payable in arrears in additional shares of our Preferred Stock on the first business day of each calendar quarter. The liquidation value of each share of our Preferred Stock is $13,793 per share, and each share of our Preferred Stock is convertible into shares of our common stock (on a one to 1,000 share basis, subject to adjustment). The carrying value of our Preferred Stock in our consolidated balance sheets represents the initial fair value at original issuance in 2002 plus the initial fair value of each of the quarterly dividends paid since issuance. The fair value of our Preferred Stock dividends is determined each quarter using valuation techniques that include a component representing the intrinsic value of the dividends (which represent the greater of the liquidation value of the shares of Preferred Stock being issued or the fair value of the common stock into which those shares could be converted) and an option component (which is determined using a Black-Scholes Option Pricing Model). These dividends are subtracted from net income in our consolidated statements of operations, and added to the balance of Redeemable Preferred Stock in our consolidated balance sheets. As we are in an accumulated deficit position, these dividends are treated as a reduction to additional paid-in capital.

Earnings (Loss) Per Share

     Basic earnings per share, or EPS, is computed using the weighted-average number of shares outstanding during the year. Diluted EPS includes common stock equivalents, which are dilutive to earnings per share. For the years ending December 31, 2009 and December 31, 2008, we had no dilutive securities outstanding due to all common stock equivalents having an anti-dilutive effect during these periods.

Disclosures about Fair Value of Financial Instruments:

     In preparing disclosures about the fair value of financial instruments, we have concluded that the carrying amount approximates fair value for cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon broker quotes for private transactions or on the current interest rates available to us for debt with similar terms and remaining maturities.

Accounting Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include impairment considerations, allowance for doubtful accounts, inventory valuation, pension plan assumptions, preferred stock dividend valuation, revenue recognition related to profit sharing accruals, environmental and litigation reserves and provision and valuation allowance for income taxes.

2. Discontinued Operations

     On September 17, 2007, we entered into a long-term exclusive styrene supply agreement and a related railcar purchase and sale agreement with NOVA Chemicals Inc., or NOVA. Under this supply agreement, NOVA had the exclusive right to purchase 100% of our styrene production (subject to existing contractual commitments), the amount of styrene supplied in any particular period being at NOVA’s option. In November 2007, this supply agreement, which was subsequently assigned by NOVA to INEOS NOVA, LLC, or INEOS NOVA, received clearance under the Hart-Scott-Rodino Act. This clearance caused the supply agreement and the railcar agreement to become effective and triggered a $60 million payment to us from INEOS NOVA. In accordance with the terms of

the supply agreement, INEOS NOVA assumed substantially all of our contractual obligations for future styrene deliveries. After the supply agreement became effective, INEOS NOVA nominated zero pounds of styrene under the supply agreement for the balance of 2007 and, in response, we exercised our right to terminate the supply agreement and permanently shut down our styrene facility. Under the supply agreement, we were responsible for the closure costs of our styrene facility and are also restricted from reentering the styrene business until November 2012. The restricted period of time was initially through 2015. However, effective April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     We operated our styrene facility through early December 2007, as we completed our production of inventory and exhausted our raw materials and purchase requirements. We sold substantially all of our remaining inventory during the first quarter of 2008. The decommissioning process was completed by the end of 2008. $18.9 million of the $19.6 million in costs associated with the decommissioning were incurred in 2008. In July 2008, we announced a reduction in work force in order to reduce our staffing to a level appropriate for our existing operations and site development projects. As a result, we reduced our salaried work force by 19 people and our hourly work force by 15 people and we recognized and paid $1.4 million of severance costs. Additionally, as a result of the work force reduction, we recorded a curtailment loss of $1.2 million for our benefit plans in 2008.

     As a result of our styrene facility being permanently shut down, we have no significant continued involvement in the styrene business and have, therefore, reported the operating results of this business as discontinued operations in our condensed consolidated financial statements. The carrying amounts of assets and liabilities related to discontinued operations as of December 31, 2009 and December 31, 2008 were as follows:

		December 31,
		2009				2008
		(Dollars in Thousands)
Assets of discontinued operations:
Accounts receivable, net		$	24			$	166
Liabilities of discontinued operations:(1)
Liabilities of discontinued operations		$	12,384			$	12,444
Long-term liabilities of discontinued operations			23,010				35,394
Total		$	35,394			$	47,838

     Revenues and income (loss) before income taxes from discontinued operations for the years ended December 31, 2009 and December 31, 2008 are presented below:

		Year ended December 31,
		2009				2008
		(Dollars in Thousands)
Revenues		$	12,382			$	26,591
Income (loss) before income taxes			11,151				(8,366	)

3. Detail of Certain Balance Sheet Accounts

		December 31,
		2009				2008
		(Dollars in Thousands)
Inventories:
Raw materials		$	1,276			$	1,149
Stores and supplies (net of obsolescence reserve of $1,465 and $1,380, respectively)			3,992				4,072
		$	5,268			$	5,221
Property, plant and equipment, net:
Land		$	7,149			$	7,149
Buildings			4,824				4,824
Plant and equipment			136,418				122,563
Construction in progress			1,894				6,448
Less: accumulated depreciation			(82,103	)			(73,173	)
		$	68,182			$	67,811
Other assets, net:
Investments		$	500			$	511
Debt issuance costs			4,629				6,615
Other			631				712
		$	5,760			$	7,838
Accrued liabilities:
Employee compensation and benefits		$	11,698			$	4,885
Deferred income			5,583				2,965
Interest payable			3,868				4,368
Property taxes			1,401				2,193
Advances from customers			1,000				3,572
Other			866				2,025
		$	24,416			$	20,008
Deferred credits and other liabilities:
Accrued postretirement, pension and post employment benefits		$	39,031			$	51,319
Deferred income			—				5,165
Advances from customers			—				1,000
Other			2,053				1,619
		$	41,084			$	59,103

4. Valuation and Qualifying Accounts

     Below is a summary of valuation and qualifying accounts for the years ended December 31, 2009 and 2008:

		December 31,
		2009				2008
		(Dollars in Thousands)
Continuing Operations
Allowance for doubtful accounts:
Balance at beginning of year		$	18			$	39
Add: bad debt expense (benefit)			40				(5	)
Deduct: written-off accounts			—				(16	)
Balance at end of year		$	58			$	18
Reserve for inventory obsolescence:
Balance at beginning of year		$	1,380			$	1,472
Add: obsolescence accrual			256				36
Deduct: disposal of inventory			(171	)			(128	)
Balance at end of year		$	1,465			$	1,380
Discontinued Operations
Allowance for doubtful accounts:
Balance at beginning of year		$	—			$	—
Add: bad debt expense (benefit)			24				—
Deduct: written-off accounts			—				—
Balance at end of year		$	24			$	—

5. Long-Term Debt

     On March 29, 2007, we completed a private offering of $150.0 million aggregate principal amount of our unregistered Secured Notes pursuant to a Purchase Agreement among us, Sterling Chemicals Energy, Inc., or Sterling Energy, one of our former wholly-owned subsidiaries, and Jefferies & Company, Inc. and CIBC World Markets Corp., as initial purchasers. In connection with that offering, we entered into an indenture dated March 29, 2007 among us, Sterling Energy, as guarantor, and U. S. Bank National Association, as trustee and collateral agent. On May 6, 2008, Sterling Energy was merged with and into us. Upon consummation of the merger, Sterling Energy no longer had independent existence and, consequently, our Secured Notes are no longer guaranteed by Sterling Energy. Pursuant to a registration rights agreement among us, Sterling Energy and the initial purchasers, we agreed to exchange our unregistered Secured Notes for a new issue of substantially identical debt securities registered under the Securities Act of 1933, as amended, or the Securities Act, to cause the registration statement for the exchange offer to become effective by December 24, 2007, and to complete the exchange offer within 50 days of the effective date of the registration statement. On August 30, 2007, we made an initial filing of the exchange offer registration statement. However, the registration statement was not declared effective by December 24, 2007, and, as a result, the interest rate on our Secured Notes increased by 0.25% per annum on each of December 25, 2007, March 24, 2008 and June 22, 2008. The registration statement was declared effective on August 13, 2008, and the exchange offer was closed on September 19, 2008. As a result, the interest rate on our Secured Notes reverted back to the face amount of 10¹/₄% per annum when the exchange offer closed. The additional interest incurred from December 25, 2007 through the closing of the exchange offer was approximately $0.5 million and was paid on April 1, 2008 and October 1, 2008.

     Our indenture contains affirmative and negative covenants and customary events of default, including payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, other than an event of default triggered upon certain bankruptcy events, the trustee under our indenture or the holders of at least 25% in principal amount of our outstanding Secured Notes may declare our Secured Notes to be due and payable immediately. Upon an event of default, the trustee may also take actions to foreclose on the collateral securing our outstanding Secured Notes. Our indenture does not require us to maintain any financial ratios or satisfy any financial maintenance tests. We are currently in compliance with all of the covenants contained in our indenture.

     Interest is due on our outstanding Secured Notes on April 1 and October 1 of each year. Our outstanding Secured Notes, which mature on April 1, 2015, are senior secured obligations and rank equally in right of payment with all of our existing and future senior indebtedness. Subject to specified permitted liens, our outstanding Secured Notes are secured (i) on a first priority basis by all of our fixed assets and certain related assets, including, without limitation, all of our property, plant and equipment and (ii) on a second priority basis by our other assets, including, without limitation, accounts receivable, inventory, capital stock of our domestic restricted subsidiaries, intellectual property, deposit accounts and investment property.

     In the fourth quarter of 2009, we purchased $25.0 million in aggregate principal amount of our Secured Notes for $23.8 million in cash in the open market resulting in a $1.2 million gain. This gain was partially offset by the amortization of a pro rata portion of the related debt issue costs of $0.9 million. In February 2010, we repurchased an additional $2.0 million in aggregate principal amount of our Secured Notes for $1.9 million, and in the first quarter of 2010, we will amortize less than $0.1 million for the pro rata portion of the related debt issue costs.

     On December 19, 2002, we entered into a Revolving Credit Agreement, or our revolving credit facility, with The CIT Group/Business Credit, Inc, or CIT as administrative agent and a lender, and certain other lenders. Under our revolving credit facility, we and Sterling Energy were co-borrowers and were jointly and severally liable for any indebtedness thereunder. After the merger of Sterling Energy with and into us, Sterling Energy ceased to be a co-borrower under our revolving credit facility. Our revolving credit facility was secured by first priority liens on all of our accounts receivable, inventory and other specified assets. On March 29, 2007, we amended and restated our revolving credit facility to, among other things, extend the term of our revolving credit facility until March 29, 2012, reduce the maximum commitment thereunder to $50.0 million, make certain changes to the calculation of the

borrowing base and lower the interest rates and fees charged thereunder. In response to the expected continued lower levels of accounts receivable and inventory, as well as our lesser need for a working capital facility, we reduced our commitment under our revolving credit facility to $25.0 million on June 30, 2008. On November 7, 2008, we further amended our revolving credit facility to substantially reduce restrictions, subject to minimum liquidity requirements, on investment of cash and other assets, payment of cash dividends, repurchase of debt and equity securities, modification of preferred stock terms, entry into affiliated transactions, disposition of assets and engagement in certain business activities. We paid the administrative agent an amendment fee plus expenses totaling approximately $0.1 million in connection with this amendment. On December 10, 2009, we elected to terminate our revolving credit facility effective January 24, 2010 due to our substantial cash reserves and low working capital needs. There were no penalties or termination fees payable by us in connection with the early termination of our revolving credit facility. The remaining associated debt issue costs of $0.2 million will be written off as of the effective termination date.

     As of December 31, 2009, total credit available under our revolving credit facility was limited to $7.5 million, there were no loans outstanding and we had $3.5 million in letters of credit outstanding, resulting in borrowing availability of $4.0 million. As our revolving credit facility included both a subjective acceleration clause and a lock-box arrangement, any balances outstanding under our revolving credit facility would have been classified as a current portion of long-term debt.

     On January 31, 2010, we entered into a $5 million Revolving Line of Credit for letters of credit, or our LC Facility, with JP Morgan Chase Bank, N.A. or Chase, for the issuance of commercial and standby letters of credit. Our LC Facility will expire January 31, 2014, and letters of credit issued under this facility bear an annual fee of 1%. On January 31, 2010, we also entered into an Assignment of Deposit Account Agreement with Chase providing collateral for the LC facility with a $5 million deposit account. As of February 28, 2010, there were $3.3 million in standby letters of credit issued under the LC facility.

Debt Maturities

     Our Secured Notes, which had an aggregate principal balance of $125.0 million outstanding as of December 31, 2009, are due on April 1, 2015.

6. Income Taxes

     A reconciliation of federal statutory income taxes to our effective tax benefit is as follows:

		Year Ended December 31,
		2009				2008
		(Dollars in Thousands)
Benefit for income taxes at statutory rates		$	(4,650	)		$	(113	)
Non-deductible expenses			11				19
State income taxes			—				—
Change in valuation allowance			4,041				29
Limitation on tax benefit of continuing operations			(4,650	)			—
Other			—				(6	)
Effective tax benefit		$	(5,248	)		$	(71	)

     The income tax benefit for continuing operations and all other components is shown below:

		Year Ended December 31,
		2009				2008
		(Dollars in Thousands)
Tax benefit — continuing operations		$	(5,248	)		$	(71	)
Tax expense — all other components			4,650				—
Total tax benefit		$	(598	)		$	(71	)

     The income tax benefit in continuing operations is composed of the following:

		Year Ended December 31,
		2009				2008
		(Dollars in Thousands)
Current federal		$	(598	)		$	(71	)
Deferred federal			(4,650	)			—
Current and deferred state			—				—
Total tax benefit		$	(5,248	)		$	(71	)

     The components of our deferred income tax assets and liabilities are summarized below:

		December 31,
		2009				2008
		(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities		$	1,985			$	1,163
Accrued postretirement cost			1,144				1,048
Accrued pension cost			12,145				14,096
Tax loss and credit carry forwards			22,511				25,319
State deferred taxes			64				185
Unearned revenue			1,658				2,566
Other			940				670
Subtotal		$	40,447			$	45,047
Less: valuation allowance		$	(28,244	)		$	(31,451	)
Total deferred tax assets		$	12,203			$	13,596
Deferred tax liabilities:
Property, plant and equipment		$	(12,203	)		$	(13,596	)
Total deferred tax liabilities		$	(12,203	)		$	(13,596	)
Net deferred tax assets		$	—			$	—

     As of December 31, 2009, we had an available U.S. federal income tax net operating loss, or NOL, of approximately $94.8 million, which expires during the years 2023 through 2029. Under the provisions of the revised Texas Franchise Tax, our existing State of Texas net operating loss carry-forwards, or State NOLs, were converted into state tax temporary credits. As of December 31, 2009, we had state tax temporary credits of $4.5 million and state carry-forward investment tax credits of $0.1 million resulting in a state valuation allowance of $1.4 million. As of December 31, 2008, we had state tax temporary credits of $4.6 million and state carry-forward investment tax credits of $0.3 million resulting in a state valuation allowance of $2.7 million. The $1.3 million change in our state valuation allowance was due to expired or utilized state tax credits and current year activity.

     We regularly assess our deferred tax assets for recoverability based on both historical and anticipated earnings levels, and a valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. As a result of our analysis at December 31, 2009, we concluded that a valuation allowance was needed against our deferred tax assets for $28.2 million, including a valuation allowance of $13.7 million for cumulative losses in other comprehensive income due to adjustments to our benefit plans, resulting in an overall net deferred tax asset/liability balance of zero as of December 31, 2009.

     At January 1, 2008, we had a $3.7 million contingent tax liability relating to tax positions taken in previous tax returns. We concluded that these deductions do not meet the more likely than not recognition threshold. Our accounting policy is to recognize any accrued interest or penalties associated with unrecognized tax benefits as a component of income tax expense. Due to significant net operating losses incurred during the tax periods associated with our uncertain tax positions, no amount for penalties or interest has been recorded in our financial statements.

We do not believe the total amount of unrecognized tax benefits will change significantly within the next twelve months. In addition, future changes in the unrecognized tax benefit will have no impact on the effective tax rate due to the existence of the valuation allowance. As of December 31, 2009, there were no changes to our uncertain tax positions.

     A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance, January 1, 2008		$	3,685
Additions for tax positions of the current year			—
Additions for tax positions of prior years			18
Reductions for tax positions of prior years for			—
Changes in judgment			—
Settlements during the period			—
Lapses of applicable statute of limitation			—
Balance, December 31, 2008		$	3,703
Balance, January 1, 2009		$	3,703
Additions for tax positions of the current year			—
Additions for tax positions of prior years
Reductions for tax positions of prior years for
Changes in judgment			—
Settlements during the period			—
Lapses of applicable statute of limitation			—
Balance, December 31, 2009		$	3,703

     We file income tax returns in the United States federal jurisdiction and file income and franchise tax returns in the State of Texas. We remain subject to federal examination for tax years ended December 31, 2003 and subsequent years, and we remain subject to examination by the State of Texas for tax years ended December 31, 2005 and subsequent years.

7. Employee Benefits

     We have established the following benefit plans:

Retirement Benefit Plans

     We have non-contributory pension plans which cover our salaried and hourly wage employees who were employed by us on or before June 1, 2004. Under our hourly plan, the benefits are based primarily on years of service and an employee’s pay as of the earlier of the employee’s retirement or July 1, 2007. Under our salaried plan, the benefits are based primarily on years of service and an employee’s pay as of the earlier of the employee’s retirement or January 1, 2005. Our funding policy is consistent with the funding requirements of federal law and regulations.

     Pension plan assets are invested in a balanced portfolio managed by an outside investment manager. Our benefits plans committee has established an investment policy detailing the plans guidelines and investment strategies, and regularly monitors the performance of the funds and portfolio managers. Our investment guidelines address the following items: governance, general investment beliefs and principles, investment objectives, specific investment goals, process for determining and maintaining the asset allocation policy, long-term asset allocation, rebalancing, investment restrictions and prohibited transactions (the use of derivatives and the use of leverage as types of investments are generally prohibited), portfolio manager structure and diversification (which addresses limits on the amount of investments held by any one manager to minimize risk), portfolio manager selection criteria, plan evaluation, portfolio manager performance review and evaluation, and risk management (including various measures used to evaluate risk tolerance). Pension plan assets are invested as follows:

		As of December 31,
		2009				2008
Equities			61.4	%			56.0	%
Bonds			35.6	%			30.0	%
Other			3.0	%			14.0	%
Total			100.0	%			100.0	%

     Our investment strategy with respect to pension assets is to invest the assets in accordance with applicable laws and regulations. The long-term primary objectives for our pension assets are to: (1) provide for a reasonable amount of long-term growth of capital, with prudent exposure to risk; and protect the assets from erosion of purchasing power; (2) provide investment results that meet or exceed the plans’ actuarially assumed long-term rate of return; and (3) move to matching the duration of the liabilities and assets of the plans to reduce the potential risk of large employer contributions being necessary in the future. The plans strive to meet these objectives by employing a consultant to advise the benefits plans committee on plans’ investments, portfolio managers to manage assets within the guidelines and strategies set forth by the benefits plans committee. Performance of these managers is compared to applicable benchmarks.

     Information concerning the pension obligation, plan assets, amounts recognized in our financial statements and underlying actuarial assumptions is stated below:

		December 31,
		2009				2008
		(Dollars in Thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year		$	121,167			$	123,165
Interest cost			7,191				7,188
Actuarial loss (gain)			4,628				(1,575	)
Curtailment loss			—				907
Benefits paid			(8,731	)			(8,518	)
Benefit obligation at end of year		$	124,255			$	121,167

		December 31,
		2009				2008
		(Dollars in Thousands)
Change in plan assets:
Fair value at beginning of year		$	77,807			$	118,383
Actual return on plan assets			17,483				(35,247	)
Employer contributions			213				3,189
Benefits paid			(8,731	)			(8,518	)
Fair value at end of year			86,772				77,807
Funded status		$	(37,483	)		$	(43,360	)

		December 31,
		2009				2008
		(Dollars in Thousands)
Amounts recognized in the balance sheet consist of:
Current liabilities		$	(6,299	)		$	(212	)
Non-current liabilities			(31,184	)			(43,148	)
Net amount recognized in financial position		$	(37,483	)		$	(43,360	)

		December 31,
		2009				2008
		(Dollars in Thousands)
Amount recognized in accumulated other comprehensive loss consists of (pre-tax):
Net loss		$	(28,022	)		$	(38,098	)
Net amount recognized in accumulated other comprehensive loss (1)		$	(28,022	)		$	(38,098	)

		December 31,
		2009				2008
Weighted-average assumptions to determine benefit obligations:
Discount Rate			5.75	%			6.25	%
Rates of increase in salary compensation level			—				—

     All plans have projected benefit obligations in excess of plan assets as of December 31, 2009. The total accumulated benefit obligation was $124.3 million and $121.2 million as of December 31, 2009 and 2008, respectively. Contributions expected to be paid in 2010 are estimated to be approximately $6.3 million. The expected pension expense for 2010 is $4.1million.

     During the third quarter of 2008, as a result of our work force reduction announced in July 2008, and in accordance with ASC Topic 715 “Compensation – Retirement Benefits”, or ASC Topic 715, we recorded plan curtailment losses in discontinued operations of $0.9 million for our defined benefit pension plans.

     Net periodic pension costs (benefit) consist of the following components:

		Year Ended December 31,
		2009				2008
		(Dollars in Thousands)
Components of net pension costs (benefit):
Interest on prior year’s projected benefit obligation			7,191				7,188
Expected return on plan assets			(5,613	)			(8,352	)
Net amortization of actuarial loss			2,832				31
Curtailment loss			—				907
Net pension costs (benefit)		$	4,410			$	(226	)

		December 31,
		2009				2008
		(Dollars in Thousands)
Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss (pre-tax):
Net loss		$	(28,022	)		$	(38,098	)
Total		$	(28,022	)		$	(38,098	)

		December 31,
		2009				2008
		(Dollars in Thousands)
Weighted-average assumptions to determine net periodic benefit cost:
Discount Rate			6.25	%			6.00	%
Expected long-term rate of return on plan assets			7.50	%			7.50	%

     A discount rate is used to determine the present value of our future benefit obligations. The discount rate for our pension plans was determined by matching the expected cash flows to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date.

     The assumption for expected long-term rate of return on plan assets for our pension plans was developed using a long-term projection of returns for each asset class, and taking into consideration our target asset allocation. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations. In addition, we compare the expected return on asset assumption with the average historical rate of return these plans have been able to generate.

     The fair values of our pension benefit plan assets by asset category as of December 31, 2009 are presented below (in thousands), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.

																		Percentage of				Target
		Level 1				Level 2				Level 3				Total Assets				Plan Assets				Allocation 2010
Asset Category:
Cash and cash equivalents		$	2,611			$	—			$	—			$	2,611				3	%			0-10	%
Mutual Funds
International			13,562				—				—				13,562				16	%			10-20	%
Large-Cap Value			13,966				—				—				13,966				16	%			10-20	%
Small-Cap Growth			2,570				—				—				2,570				3	%			0-5	%
Emerging Markets			4,444				—				—				4,444				5	%			0-10	%
Mid-Cap Growth			1,818				—				—				1,818				2	%			0-5	%
All Cap			11,159				—				—				11,159				13	%			10-15	%
Small-Cap Value			3,536				—				—				3,536				4	%			0-5	%
Mid-Cap Value			2,224				—				—				2,224				2	%			0-5	%
Intermediate Fixed Income/Core			20,738				—				—				20,738				24	%			20-40	%
Long Duration Fixed Income			2,519				—				—				2,519				3	%			0-15	%
Total Mutual Funds			76,536				—				—				76,536				88	%
Guaranteed Deposit Account			—				—				7,625				7,625				9	%			0	%
Total Plan Assets		$	79,147			$	—			$	7,625			$	86,772				100	%