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.

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

     The aggregate market value of the registrant’s common stock, par value $.01 per share, held by non-affiliates at June 30, 2010 (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 Bulletin Board maintained by the Financial Industry Regulatory Authority, Inc. was $6,897,678.

     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, 2011, Sterling Chemicals, Inc. had 2,828,460 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement relating to the 2011 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		11
Item 2.		Properties		17
Item 3.		Legal Proceedings		17
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		19
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 8.		Financial Statements and Supplementary Data		33
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		64
Item 9A.		Controls and Procedures		64
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance		66
Item 11.		Executive Compensation		66
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		66
Item 13.		Certain Relationships and Related Transactions, and Director Independence		66
Item 14.		Principal Accountant Fees and Services		66
		PART IV
Item 15.		Exhibits and Consolidated Financial Statement Schedules		67
EX-10.12
EX-10.16
EX-10.19.C
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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.

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 are a Delaware Corporation formed in 1986 to acquire a petrochemicals facility located in Texas City, Texas, or our Texas City facility, that was previously owned by Monsanto Company, or Monsanto. We are a North American producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products. Until 2011, our primary products included acetic acid and plasticizers. All of our plasticizers were historically sold to BASF Corporation, or BASF, pursuant to the terms of our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement. However, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. As our plasticizers facility is currently idle, acetic acid is currently our only primary product.

     The acetic acid we produce is used primarily to manufacture vinyl acetate monomer which is used in a variety of products related to construction materials and automotive parts such as adhesives, surface coatings, polyester fibers and films, and to manufacture purified terephthalic acid which is used to produce plastic bottle resins. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, that extends to 2031, BP Amoco Chemical Company, or BP Chemicals, takes title and risk of loss of our acetic acid production at the time the acetic acid is produced. 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 portion of the profits 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 Texas City facility.

     Previously, our plasticizers business was comprised of two separate products: phthalate esters and phthalic anhydride, or PA, together commonly referred to as plasticizers. The types of plasticizers we produced are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials. Since our formation in 1986, we sold all of our plasticizers production exclusively to BASF pursuant to our Plasticizers Production Agreement, which was amended several times. Under our Plasticizers Production Agreement, BASF provided us with most of the required raw materials, marketed the plasticizers that we produced, made certain fixed quarterly payments to us and reimbursed us monthly for our actual production costs and capital expenditures related 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, which ultimately resulted in the closure of our PA unit and a payment of $3.2 million to us from BASF. Under the prior version of our Plasticizers Production Agreement, we were not permitted to produce PA for anyone other than BASF. The $3.2 million payment 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, was recognized using the straight-line method over the period from April 1, 2008, the date of the amendment, through December 31, 2010, the effective termination date of our Plasticizers Production Agreement.

     As mentioned above, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective as of December 31, 2010. We were not subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement, although the termination of our Plasticizers Production Agreement did result in our refunding to BASF in January 2011, a $1.0 million deposit it previously made to ensure prompt payment of amounts due under our Plasticizers Production Agreement. In addition, if we continue to operate our plasticizers business after March 31, 2011, we will be required to make payments to BASF for the undepreciated portion of past capital expenditures paid by BASF, determined as of the end of the original term of our Plasticizers Production Agreement, based on a straight line, 8-year life. 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. However, if we provide written notice to BASF of our election to permanently close our plasticizers facility on or before March 31, 2011, the undepreciated capital expenditures paid by BASF for all capital projects will be deemed to be zero, and we will not be required to make any payments to BASF. BASF, on the other hand, was required to pay us an early termination fee of $9.8 million, which we received on December 30, 2010.

     We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. As our plasticizers facility is currently idle, we have begun implementing our plans for restructuring our operating costs to reflect the reduction in our operations. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people and recognized $1.3 million of severance costs. Additionally, we expect to incur approximately $0.6 million in shutdown and decontamination costs during the first six months of 2011. The costs and timing for dismantling our plasticizers facility are unknown at this time, but we do not expect these costs to be significant. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition,

results of operations and cash flows. However, due to our expected operating cash flow from our acetic acid business and our current cash balance, 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 manufactured styrene monomer as one of our primary 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 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 was initially eight years. However, on April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     The revenues and gross profit from our plasticizers and styrene operations, both of which are reflected in discontinued operations, including $12.4 million of deferred income from the INEOS 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,
		2010				2009
		(Dollars in Thousands)
Revenues		$	46,381			$	38,426
Gross profit			29,952				18,630

     We own the acetic acid, plasticizers and styrene manufacturing units located at our Texas City facility. We lease a portion of our Texas City facility to Praxair, which 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, in June 2008, we and Praxair Energy elected to terminate the joint venture and the related joint venture agreement governing S&L Cogeneration Company, or the Joint Venture Agreement, and the term of the Joint Venture Agreement was extended until completion of all final audits. We expect the joint venture to be terminated and wound-up during 2011. The cogeneration facility constructed by S&L Cogeneration Company has been dismantled and removed from the site. We lease space for our principal offices located in Houston, Texas.

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 and other alternatives;
	•		optimized capital structure; and
	•		top-quality human resource management, development and utilization

     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 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 each of our salaried employees’ performance goals, which affect their annual incentive compensation and annual salary increases, have specific metrics tied to our health, safety and environmental performance. We regularly report to our Board of Directors, or our Board, on our safety, health and environmental performance and our progress towards maintaining and improving our process safety programs, including, at a minimum, quarterly presentations to the Environmental, Health & Safety Committee of our Board and our Board as a whole.

     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 and 2010 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 evaluate the growth of 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, 160 acres of available land zoned for heavy industrial use, 30 acres of 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, operating fees 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 our operating unit and provide us with additional profit. In the third quarter of 2010, we entered into a contract involving the terminaling of methanol as a part of our strategy which we expect to begin producing revenues in the third quarter of 2011, although we do not expect this transaction to have a material affect on our business, financial results or cash flows.

     Pursue Economic Mergers and Acquisitions and Other Opportunities. We continuously evaluate various transactions to enhance stakeholder value as opportunities arise. We are pursuing strategic acquisitions, and other strategic alternatives. Our acquisition strategy focuses 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 strategic alternatives and has provided an ideal situation for us to acquire businesses, or enter into other business combination transactions, joint ventures or other similar transactions, on favorable terms. There can be no assurance that we will pursue any particular transaction or that any such transaction will be successful.

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. Slowdowns in the housing and automotive markets during 2009 and 2010 resulted in reduced demand for vinyl acetate monomer and, consequently, acetic acid causing capacity utilization rates to fall to the low to mid 80s during this period. However, Tecnon OrbiChem projects acetic acid capacity utilization to increase to over 92% by 2014. The North American acetic acid industry is inherently less cyclical than many other petrochemical products due to a number of important factors. One of these factors is the limited number of producers, with 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 low cost debottlenecking opportunities. In addition, the North American acetic acid industry tends to sell most of its products through long-term sales agreements containing formula based pricing mechanisms, which eliminates much of the volatility seen in other petrochemicals products and results in more stable and predictable earnings and profit margins.

     Global production capacity of acetic acid as of December 31, 2010 was approximately 35.5 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 90% 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 used primarily in construction materials and automotive parts, among other products. Vinyl acetate monomer is the largest derivative of acetic acid, representing over 45% of North American demand. Although slowdowns in the housing and automotive markets over the last couple of years have reduced global demand for vinyl acetate monomer in the short-term, annual North American production of vinyl acetate monomer is expected to increase from 2.7 billion pounds in 2009 to 3.2 billion pounds in 2014.

     Plasticizers. Plasticizers are produced from either ethylene-based linear alpha-olefins feedstocks or propylene-based non-linear technology. In 2010, we produced 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. 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. 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. Although we were not previously exposed to fluctuations in costs or market conditions for plasticizers due to the structure of our Plasticizers Production Agreement, if we elect to remain in the plasticizers business, we may face greater cost fluctuations or exposure to market conditions. 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 primary products through December 31, 2010, 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, 2010, 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 and Lyondell Basell Chemical Company
Plasticizers (200 million pounds per year of phthalate esters)		Flexible polyvinyl chloride		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 which is used in a variety of products related to construction materials and automotive parts such as adhesives, surface coatings, polyester fibers and films, and to manufacture purified terephthalic acid which is used to produce plastic bottle resins. 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 approximately 20% of total North American capacity, making our acetic acid facility the second largest acetic acid production facility in North America. All of the acetic acid we produce is sold by BP Chemicals, and we are BP Chemicals’ sole source of production in the Americas. We dedicate all of the acetic acid production 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. Historically, our plasticizers business has involved the production of phthalate esters, commonly referred to as plasticizers, from PA and oxo-alcohols. The types of plasticizers we have produced are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials. Since our formation in 1986, we have sold all of our plasticizers production exclusively to BASF pursuant to our Plasticizers Production Agreement. We also previously produced PA for BASF under the Plasticizers Production Agreement. As previously noted, our Plasticizers Production Agreement terminated effective as of December 31, 2010.

Sales and Marketing

     Our products are generally produced for 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, until December 31, 2010, our Plasticizers Production Agreement provided 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 were reimbursed for our manufacturing costs and also received a quarterly “facility fee” for the production unit included in our plasticizers business, but did 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. BP Chemicals takes title and risk of loss of our acetic acid production at the time the acetic acid is produced 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). 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 was amended several times. We also previously produced PA for BASF under the Plasticizers Production Agreement. Under our Plasticizers Production Agreement, BASF provided us with most of the required raw materials and marketed the plasticizers we produced, and was 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, which ultimately resulted in the closure of our PA unit and a $3.2 million payment to us from BASF. Under the prior version of our Plasticizers Production Agreement, we were not permitted to produce PA for anyone other than BASF. The $3.2 million payment 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, was recognized using the straight-line method over the period from April 1, 2008, the date of the amendment, through December 31, 2010, the effective termination date of our Plasticizers Production Agreement.

     As mentioned above, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. We were not subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement, although the termination of our Plasticizers Production Agreement did result in our refunding to BASF in January 2011 a $1.0 million deposit it previously made to ensure prompt payment of amounts due under our Plasticizers Production Agreement. In addition, if we continue to operate our plasticizers business after March 31, 2011, we will be required to make payments to BASF for the undepreciated portion of past capital expenditures paid by BASF, determined as of the end of the original term of our Plasticizers Production Agreement, based on a straight line, 8-year life. 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. However, if we provide written notice to BASF of our election to permanently close our plasticizers facility on or before March 31, 2011, the undepreciated capital expenditures paid by BASF for all capital projects will be deemed to be zero, and we will not be required to make any payments to BASF. BASF, on the other hand, was required to pay us an early termination fee of $9.8 million, which we received on December 30, 2010.

     We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. As our plasticizers facility is currently idle, we have begun implementing our plans for restructuring our operating costs to reflect the reduction in our operations. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people and recognized $1.3 million of severance costs. Additionally, we expect to incur approximately $0.6 million in shutdown and decontamination costs during the first six months of 2011. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition, results of operations and cash flows. However, due to our expected operating cash flow from our acetic acid business and our current cash balance, we do not believe these effects will impact our ability to continue as a going concern. The revenues and gross profit from our plasticizers operations, included in discontinued operations, are summarized below:

		Year ended December 31,
		2010				2009
		(Dollars in Thousands)
Revenues		$	33,999			$	26,044
Gross profit			17,903				7,727

     Other than our Plasticizers Production Agreement, we do not have any material relationships with BASF.

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 facility. 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

were supplied by BASF under our Plasticizers Production Agreement until December 31, 2010. 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. 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. Phthalate esters are 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 $12.0 million and $14.5 million in 2010 and 2009, respectively. During 2010 and 2009, we spent less than $0.1 million and $1.8 million, respectively, for environmentally-related capital projects and anticipate spending approximately $0.7 million for capital projects related to waste management, incident prevention and environmental compliance during 2011.

     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, liabilities for investigation and cleanup of waste or contamination at our own facilities or we could incur liabilities 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 located in the Houston-Galveston-Brazoria eight county area, or HGB area, which the Environmental Protection Agency, or EPA, has classified as a “severe” non-attainment area relative to the March 12, 2008 National Ambient Air Quality Standard, or NAAQS, for ozone (8-hour basis). The mandated compliance date for attainment of the 8-hour ozone standard in severe non-attainment areas is June 15, 2019. In January 2010, the EPA announced its intent to set a new, lower 8-hour ozone standard. However, in December 2010, the EPA announced that it needed additional time to allow for further evaluation by a federal committee of scientific experts. The EPA has indicated that it expects to make a final decision regarding the revision of the 8-hour ozone standard by July 29, 2011. Once a new ozone standard is finalized, the Texas Commission on Environmental Quality, or TCEQ, will then develop a revised State Implementation Plan, or SIP, designed to achieve compliance with the new standard by the deadline applicable to each area’s non-attainment classification. We anticipate that this revised SIP will be submitted by TCEQ to the EPA in 2013 or 2014, with compliance with the revised SIP being required within the first two years after approval by the EPA.

     Historically, the TCEQ has chosen to achieve reductions in atmospheric ozone by SIP-mandated reduction of emissions of volatile organic compounds, or VOCs, and nitrogen oxide, or NOx. The requirements of the new SIP are not currently known, so the future cost of compliance cannot be determined at this time. However, if the TCEQ continues to use a cap-and-trade approach to controlling NOx emissions, the new SIP would not likely have any meaningful impact on us due to large amount of excess NOx emission allowances we currently possess under the Mass Emission Cap and Trade program. However, capital investment could be required if more stringent NOx emission control technologies are required under the new SIP.

     In late 2009, EPA issued an endangerment finding for greenhouse gases, or GHGs, which brought GHGs under the provisions of the Clean Air Act. On December 29, 2009, GHG monitoring rules adopted by the EPA became effective and we began monitoring GHG emissions. Further regulation of GHGs through required controls or a cap-and-trade program have been discussed in the United States Congress and the EPA has issued “white papers” summarizing the present state of GHG mitigation technology. However, regulations governing the emission of GHGs have not yet been proposed and, consequently, we cannot predict what impact, if any, these rules may have on us.

Employees

     As of December 31, 2010, we had 155 full time employees, of whom approximately 32% (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. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people.

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.

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

We have only one primary product which is produced exclusively for a single customer.

     On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. Revenues and gross profit generated from our plasticizers operations in 2010 were $34.0 million and $17.9 million (both including a $9.8 million early termination payment), respectively, and in 2009 were $26.0 million and $7.7 million, respectively. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition, results of operations and cash flows. We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. Furthermore, as a result of the termination of our Plasticizers Production Agreement, we now have one primary product, acetic acid, which is produced for BP Chemicals, a single customer. In 2010 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. In the event that our Acetic Acid Production Agreement was terminated, we could then sell acetic acid directly into the market (rather than through BP Chemicals). However, in order to do so, we would need to develop a marketing department and establish relationships with acetic acid customers, neither of which currently exists. If this event were to occur, we would expect our overall business, financial condition, results of operations and cash flows to suffer in the near term.

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 facility. 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:

	•		severe weather and natural disasters;
	•		mechanical failures, unscheduled downtimes, labor difficulties and transportation interruptions;
	•		environmental remediation complications;
	•		chemical spills and discharges or releases of toxic or hazardous substances or gases; and
	•		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 plan may reduce our profitability and adversely impact current funding levels.

     We sponsor a defined benefit pension plan for our employees. Effective July 1, 2007 and January 1, 2005, we froze all benefit accruals under our defined benefit pension plan for our hourly and salaried employees, respectively. The cash contributions made to our defined benefit pension plan 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 plan as of December 31, 2010 were $130.3 million and $93.3 million, respectively. The difference between plan obligations and assets, or the funded status of the plan, is a significant factor in determining pension expense and the ongoing funding requirements to the plan. 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 plan, as was experienced in 2008, will increase the funding requirements under the plan if the actual asset returns do not recover these declines in value in the near term. Additionally, the liabilities of our defined benefit pension plan are sensitive to changes in interest rates. As interest rates decrease, the liabilities of the plan 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 plan. 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 plan 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 our facility, we could lose the production and sales from our facility, and the facility itself, 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.

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

     The risk of a terrorist attack on a chemical manufacturing facility may be greater than that for other potential targets in the United States. Our plant is located directly on the Port of Texas City waterfront, and is therefore regulated by the Maritime Transportation Security Act, or MTSA, which is enforced by the United States Coast Guard, or USCG. We use trained professionals to assess risk, implement countermeasures, and otherwise comply with these requirements. As an MTSA facility, we currently are exempt from the requirements of the Chemical Facility Anti-Terrorism Standards, or CFATS. However, regulators are evaluating ways to harmonize the requirements of CFATS and MTSA. While it is currently not possible to predict the impact, if any, that this harmonization will have on us, such legislation and regulation could result in increased costs to operate and maintain our facilities, as well as capital outlays for new equipment. Our business, or our customers’ businesses, could be affected adversely by the cost of complying with these and any future regulatory requirements.

The enactment of regulations governing greenhouse gas emissions or climate change could increase our costs or adversely affect our ability to operate.

     Our operations emit GHGs. Proposed U.S. Federal legislation and regulations to address GHG 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 our costs to operate and maintain our facilities, as well as capital outlays for new emission control equipment. In addition, any regulation limiting GHG 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 32% 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, 2010, we had approximately 155 full time employees, of whom approximately 32% (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 an 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.

     We believe that our outstanding stock options do not currently provide any meaningful incentive to remain with us due to the extremely high exercise price relative to historical trading prices, the dilutive effect on our common stock caused by the quarterly paid-in-kind dividends declared 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 Financial Industry Regulatory Authority, Inc. on the Over-the-Counter, or OTC, 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 those acquired through the exercise of stock options or other equity awards, could find it difficult to dispose of, or obtain accurate quotations as to the market value of, such securities.

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 able 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:

	•		potential disruption of our ongoing business and distraction of management;
	•		unexpected loss of key employees or customers of an acquired business;
	•		conforming an acquired business’ standards, processes, procedures or controls with our operations;
	•		coordinating new product and process development;
	•		hiring additional management or other critical personnel;
	•		encountering unknown contingent liabilities which could be material; and
	•		increasing the scope, geographic diversity and complexity of our operations.

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. If we are unable to successfully prevent all errors or instances of fraud through 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, 2010, we had total long-term debt of $119.4 million (outstanding principal on our 10¹/4% Senior Secured Notes due 2015, or our Secured Notes). The terms and conditions governing 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 Financial Industry Regulatory Authority, Inc. on the OTC 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 over 87% 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 our equity owned by Resurgence. Preferred Stock dividends were 1,114.110 shares (which are convertible into 1,114,110 shares of our common stock) during 2010, which represents 10.6% 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, plasticizers and styrene 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. However, in June 2008, we and Praxair Energy elected to terminate the joint venture and the Joint Venture Agreement governing S&L Cogeneration Company and the term of the Joint Venture Agreement was extended until completion of all final audits. We expect the joint venture to be terminated and wound-up during 2011. The cogeneration facility constructed by S&L Cogeneration Company has been dismantled and removed from 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 plant facility. We own 48 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 appealed that order, as well as other orders issued during the trial. On February 25, 2011, the appeals court rendered its decision reversing the order of the trial court granting a new trial and reinstating the jury’s verdict in our favor. We do not know whether the plaintiffs will appeal the appellate court’s decision to the Ohio Supreme Court. 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 $1.0 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, three retired employees of Sterling Fibers, Inc., one of our former subsidiaries, sued us, several of our benefit plans and the plan administrators for those plans in a class action suit, filed in the United States District Court, Southern District of Texas, Houston Division (Case No. H-07-0625). The plaintiffs allege that we were not permitted to increase their premiums for retiree medical insurance based on a provision contained in an asset purchase agreement between us, Sterling Fibers, Inc. and Cytec Industries Inc. and certain of its affiliates, or Cytec, that governed the purchase by Sterling Fibers, Inc. of Cytec’s acrylic fibers business in 1997. During our bankruptcy case in 2002, we and Sterling Fibers, Inc. specifically rejected this asset purchase agreement and the bankruptcy court approved that rejection. The plaintiffs claimed that we violated the terms of our benefit plans, breached fiduciary duties governed by the Employee Retirement Income Security Act and failed to comply with sections of the Bankruptcy Code dealing with retiree benefits, and sought damages, declaratory relief, punitive damages and attorneys’ fees. A trial for this matter was held during the second week of November 2009. On July 1, 2010, the judge ruled for us on the merits and dismissed all of the plaintiffs’ claims. The plaintiffs filed an appeal on July 16, 2010. Briefing for this appeal is scheduled to be completed in February 2011 and we do not expect oral arguments for the appeal. We are vigorously seeking affirmation of the trial judge’s rulings. We 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.

     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.

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 OTC Bulletin Board maintained by the Financial Industry Regulatory Authority, 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 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 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
2010		High				$	—	(1)		$	18.00			$	10.50			$	6.00
		Low				$	—	(1)		$	5.00			$	5.00			$	1.50
2009		High				$	11.00			$	10.00			$	11.00			$	9.50
		Low				$	8.50			$	8.25			$	8.25			$	5.00

     The last reported sales price per share of our common stock as reported on the OTC Bulletin Board on December 31, 2010 was $2.75. As of January 28, 2011, 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.

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 or the Compensation Committee of our Board, 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 in accordance with its terms. Our Board 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 172,500 shares of our common stock outstanding under our 2002 Stock Plan as of December 31, 2010, each with an exercise price of $31.60, and an additional 1,191,414 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, 2010:

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

172,500

$

31.60

1,191,414

Equity compensation plans not approved by security holders

—

—

—

Total

172,500

$

31.60

1,191,414

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

Overview

Business

Business Overview

     We are a Delaware Corporation formed in 1986 to acquire a petrochemicals facility located in Texas City, Texas that was previously owned by Monsanto Company, or Monsanto. We are a producer of select petrochemicals used to manufacture a wide array of consumer goods and industrial products. Until 2011, our primary products included acetic acid and plasticizers. All of our plasticizers were historically sold to BASF Corporation, or BASF, pursuant to the terms of our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement. However, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. As our plasticizers facility is currently idle, acetic acid is currently our only primary product.

     Our site in Texas City, Texas, or 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. Our Texas City facility also has truck loading racks, weigh scales, stainless and carbon steel storage tanks, 160 acres of available land zoned for heavy industrial use, 30 acres of 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, operating fees 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 our acetic acid operations and provide us with additional profit. In the third quarter of 2010, we entered into a contract involving the terminaling of methanol as a part of our strategy which we expect to begin producing revenues in the third quarter of 2011, although we do not expect this transaction to have a material affect on our business, financial results or cash flows.

     The acetic acid we produce is used primarily to manufacture vinyl acetate monomer which is used in a variety of products related to construction materials and automotive parts such as adhesives, surface coatings, polyester fibers and films, and to manufacture purified terephthalic acid which is used to produce plastic bottle resins. Pursuant to our 2008 Amended and Restated Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, that extends through 2031, BP Amoco Chemical Company, or BP Chemicals takes title and risk of loss of our acetic acid production at the time the acetic acid is produced. We entered into the initial version of our Acetic Acid Production Agreement with BP Chemicals in 1986, which has since been amended several times. 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 portion of the profits we receive from BP Chemicals.

     Our rated annual production capacity for acetic acid is among the highest in North America. 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 approximately 20% of total North American capacity, making our acetic acid facility the second largest acetic acid production facility in North America. Our acetic acid facility utilizes BP Chemicals’ proprietary “Cativa” methanol 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 Texas City facility.

     Previously, our plasticizers business was comprised of two separate products: phthalate esters and phthalic anhydride, or PA, together commonly referred to as plasticizers. The types of plasticizers we produced are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials. Since our formation in 1986, we sold all of our plasticizers production exclusively to BASF Corporation, or BASF, pursuant to our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement, which was amended several times. Under our Plasticizers Production Agreement, BASF provided us with most of the required raw materials, marketed the plasticizers that we produced, made certain fixed quarterly payments to us and reimbursed us monthly for our actual production costs and capital expenditures related to our plasticizers facility.

     On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. We were not subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement, although the termination of our Plasticizers Production Agreement did result in our refunding to BASF, in January 2011, a $1.0 million deposit it previously made to ensure prompt payment of amounts due under our Plasticizers Production Agreement. In addition, if we continue to operate our plasticizers business after March 31, 2011, we will be required to make payments to BASF for the undepreciated portion of past capital expenditures paid by BASF, determined as of the end of the original term of our Plasticizers Production Agreement, based on a straight line, 8-year life. 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. However, if we provide written notice to BASF of our election to permanently close our plasticizers facility on or before March 31, 2011, the undepreciated capital expenditures paid by BASF for all capital projects will be deemed to be zero, and we will not be required to make any payments to BASF. BASF, on the other hand, was required to pay us an early termination fee of $9.8 million, which we received on December 30, 2010.

     We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. As our plasticizers facility is currently idle, we have begun implementing our plans for restructuring our operating costs to reflect the reduction in our operations. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people and recognized $1.3 million of severance costs. Additionally, we expect to incur approximately $0.6 million in shutdown and decontamination costs during the first six months of 2011. The costs and timing for dismantling our plasticizers facility are unknown at this time but we do not expect these costs to be significant. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition, results of operations and cash flows. However, due to our expected operating cash flow from our acetic acid business and our current cash balance, 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.”

     On May 7, 2010, our Board authorized us to pursue the acquisition of companies or assets with the goals of materially diversifying our cash flow streams and creating strong long-term growth opportunities. After an extensive review with our Board of a wide range of acquisition targets and financing alternatives, we have been focusing our search for acquisition candidates on companies or assets involved in chemical distribution, specialty chemical manufacture or bulk, petroleum or chemical storage or logistics and whose existing business would benefit from our available acreage and infrastructure at our Texas City facility. We anticipate that the structure of the financing for any such acquisition will be determined by, among other things, the characteristics of the acquisition target, and may involve a cash purchase, a merger, an exchange of stock or another financing mechanism, or may involve the formation of a joint venture or other business partnership.

     In January 2010, we announced and completed a reduction in our work force in order to reduce our staffing to a level appropriate for our existing operations. As a result, we reduced our salaried work force by ten people and our hourly work force by seven people, and we recognized and paid $0.9 million of severance costs. Additionally, as a result of our work force reduction, we recorded a curtailment gain of $0.1 million under our retiree medical plans in the first quarter of 2010.

     Acetic Acid. The North American acetic acid industry has enjoyed a long period of sustained domestic demand growth, as well as substantial export demand. Slowdowns in the housing and automotive markets during 2009 and 2010 resulted in reduced demand for vinyl acetate monomer and, consequently, acetic acid causing capacity utilization rates to fall to the low to mid 80s during this period. However, Tecnon OrbiChem projects acetic acid capacity utilization to increase to over 92% by 2014. The North American acetic acid industry is inherently less cyclical than many other petrochemical products due to a number of important factors. One of these factors is the limited number of producers, with 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 low cost debottlenecking opportunities. In addition, the North American acetic acid industry tends to sell most of its products through long-term sales agreements containing formula based pricing mechanisms, which eliminates much of the volatility seen in other petrochemicals products and results in more stable and predictable earnings and profit margins.

     Global production capacity of acetic acid as of December 31, 2010 was approximately 35.5 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 90% 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 used primarily in construction materials and automotive parts, among other products. Vinyl acetate monomer is the largest derivative of acetic acid, representing over 45% of North American demand. Although slowdowns in the housing and automotive markets over the last couple of years have reduced global demand for vinyl acetate monomer in the short-term, annual North American production of vinyl acetate monomer is expected to increase from 2.7 billion pounds in 2009 to 3.2 billion pounds in 2014.

     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).

     Plasticizers. Plasticizers are produced from either ethylene-based linear alpha-olefins feedstocks or propylene-based non-linear technology. In 2010, we produced 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 phthalic anhydride, or PA and oxo-alcohols. Linear plasticizers have historically received a premium over competing propylene-based branched products for customers that require enhanced performance properties. 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. 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. Although we were not previously exposed to fluctuations in costs or market conditions for plasticizers due to the structure of our Plasticizers Production Agreement, if we elect to remain in the plasticizers business, we may face greater cost fluctuations or exposure to market conditions. For a further description of our agreement with BASF, see “Plasticizers-BASF” under “Contracts” and see “Risk Factors.”

     We 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, in June 2008, we and Praxair Energy elected to terminate the joint venture and the related joint venture

agreement governing S&L Cogeneration Company, or the Joint Venture Agreement, and the term of the Joint Venture Agreement was extended until completion of all final audits. We expect the joint venture to be terminated and wound-up during 2011. The cogeneration facility constructed by S&L Cogeneration Company has been dismantled and removed from the site. As of December 31, 2010, our investment in S&L Cogeneration Company was approximately $0.3 million and we expect to receive approximately $0.3 million from S&L Cogeneration Company upon termination of the joint venture in 2011. Therefore, we do not believe our investment in S&L Cogeneration Company was impaired as of December 31, 2010.

Discontinued Operations

     As mentioned above, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. We were not subject to any early termination penalties in connection with BASF’s termination of our Plasticizers Production Agreement, although the termination of our Plasticizers Production Agreement did result in our refunding to BASF in January 2011, a $1.0 million deposit it previously made to ensure prompt payment of amounts due under our Plasticizers Production Agreement. In addition, if we continue to operate our plasticizers business after March 31, 2011, we will be required to make payments to BASF for the undepreciated portion of past capital expenditures paid by BASF, determined as of the end of the original term of our Plasticizers Production Agreement, based on a straight line, 8-year life. 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. However, if we provide written notice to BASF of our election to permanently close our plasticizers facility on or before March 31, 2011, the undepreciated capital expenditures paid by BASF for all capital projects will be deemed to be zero, and we will not be required to make any payments to BASF. BASF, on the other hand, was required to pay us an early termination fee of $9.8 million, which we received on December 30, 2010.

     We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. As our plasticizers facility is currently idle, we have begun implementing our plans for restructuring our operating costs to reflect the reduction in our operations. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people and recognized $1.3 million of severance costs. Additionally, we expect to incur approximately $0.6 million in shutdown and decontamination costs during the first six months of 2011. The costs and timing for dismantling our plasticizers facility are unknown at this time but we do not expect these costs to be significant. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition, results of operations and cash flows. However, due to our expected operating cash flow from our acetic acid business and our current cash balance, we do not believe that these effects will impact our ability to continue as a going concern.

     The revenues and gross profit from our plasticizers operations, as reflected in discontinued operations, are summarized below:

		Year ended December 31,
		2010				2009
		(Dollars in Thousands)
Revenues		$	33,999			$	26,044
Gross profit			17,903				7,727

     Under our Plasticizers Production Agreement, BASF reimbursed us for certain costs, including fixed costs, which are allocated among our existing operations. As a result of the closure of our plasticizers facility, the amount of our costs that will be allocated to our acetic acid operations under 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 previously reimbursed by BASF under our Plasticizers Production Agreement cannot be allocated to our acetic acid operations. Consequently, to the extent we are unable to 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 plasticizers manufacturing unit. We analyzed the undiscounted cash flow stream from our plasticizers business over the remaining life of our plasticizers manufacturing unit and compared it to the $2.8 million net book carrying value of our plasticizers manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our plasticizers business was higher than the net book carrying value of our plasticizers manufacturing unit. Based on this analysis, we concluded that our plasticizers manufacturing unit was not impaired as of December 31, 2009, and that no write-down was necessary. We did, however, accelerate the depreciation of our plasticizers manufacturing unit in 2010, resulting in a net book value of zero as of December 31, 2010.

     Prior to 2008, we manufactured styrene monomer 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 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 was initially eight years. However, on April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     The revenues and gross profit from our styrene operations, as reflected in discontinued operations, are summarized below:

		Year ended December 31,
		2010				2009
		(Dollars in Thousands)
Revenues		$	12,382			$	12,382
Gross profit			12,049				10,903

     As a result of the closure of our plasticizers and styrene facilities, we have no current significant continued involvement in the plasticizers or styrene businesses and have, therefore, reported the operating results of these businesses as discontinued operations in our consolidated financial statements for the years ended December 31, 2010 and 2009.

Results of Operations

     The following table sets forth key information about our financial results:

		Year ended December 31,
		2010				2009
		(Dollars in Thousands)
Revenues		$	99,744			$	88,290
Cost of goods sold			89,143				84,883
Gross profit (loss)			10,601				3,407
Selling, general and administrative expenses			10,309				12,875
Impairment of long-lived assets			375				—
Interest and debt related expenses			13,659				15,767
Interest income			(335	)			(742	)
Other income			(473	)			(3,481	)
Benefit for income taxes			(4,527	)			(7,952	)
Loss from continuing operations			(8,407	)			(13,060	)
Income from discontinued operations, net of tax expense of $5,515 and $5,383, respectively			24,416				13,495

Comparison of 2010 and 2009

     Revenues and gross profit (loss)

     Our revenues from continuing operations increased by $11.5 million, or 13%, from 2009 to 2010. This increase in revenues was primarily due to higher contribution margins and sales volume from our acetic acid operations in 2010 compared to 2009. In addition, our cost reimbursements under our Acetic Acid Production Agreement were higher in 2010 than 2009, primarily due to higher production volumes and natural gas prices in 2010 and the lower production volumes and associated variable cost reimbursements resulting from the 42 day shutdown of our acetic acid unit in 2009 for scheduled maintenance work. These factors were partially offset by increased fixed cost reimbursements for shutdown costs in 2009.

     Our gross profit from continuing operations increased $7.2 million, or greater than 100%, from 2009 to 2010. This increase in gross profit was primarily due to higher contribution margins and higher sales volume from our acetic acid operations in 2010 compared to 2009.

     Selling, general and administrative expenses

     Our selling, general and administrative expenses decreased by $2.6 million, or 20%, from 2009 to 2010. This decrease was primarily due to a $2.1 million decrease in legal fees and a $0.9 million decrease in engineering and other costs.

     Impairment of long-lived assets

     The impairment recorded in 2010 consisted of a $0.4 million impairment charge to reduce the carrying value of one of our turbo generator units, which we have classified as a spare, to its net realizable value of $0.3 million. The net realizable value was determined based on the anticipated sales proceeds expected from a sales contract executed in early 2011.

     Interest and debt related expenses

     Our interest and debt related expenses decreased by $2.1 million, or 13%, from 2009 to 2010. This decrease was primarily due to interest savings of $2.7 million arising out of our purchase of $30.6 million in aggregate principal amount of our Senior Secured Notes, or our Secured Notes, over the period November 2009 through December 2010, offset to some extent by a $0.6 million decrease in capitalized interest due to the completion of capital projects during the turn-around of our acetic acid facility in 2009.

     Interest income

     Interest income decreased $0.4 million, or 55%, from 2009 to 2010. This decrease was primarily due to lower interest earned on our cash investments and a lower cash balance in 2010 compared to 2009.

      Other income

     Other income decreased by $3.0 million, or 86%, from 2009 to 2010. This decrease was primarily due to the receipt in 2009 of a $1.1 million previously disputed contractual payment, decreased reimbursement of legal fees in 2010 compared to 2009 of $1.3 million and a loss on extinguishment of debt of $0.2 million in 2010 compared to a gain on extinguishment of debt of $0.3 million in 2009, both related to the purchase of our Secured Notes in 2010 and 2009.

     Provision (benefit) for income taxes

     During 2010, our effective tax rate was 35.0% due to a $4.5 million tax benefit in continuing operations generated by utilizing the net income in discontinued operations and other comprehensive income to offset the valuation allowance that otherwise would have been recorded in continuing operations. In 2009, our effective tax rate was 37.8% due to a change of $0.6 million in our valuation allowance as a result of a change in tax law and an $7.4 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. 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, 2010, we concluded that a valuation allowance was needed against our deferred tax assets. As of December 31, 2010, our valuation allowance was $23.8 million, a decrease of $4.4 million from December 31, 2009. This decrease included a valuation allowance adjustment of $2.4 million related to our state taxes and credits and $0.9 million for losses in other comprehensive income for adjustments to our benefits plans. As of December 31, 2010, our overall net deferred tax asset/liability balance was zero.

     Income from discontinued operations, net of tax

     Income from our discontinued operations, net of tax, increased $10.9 million, or 81%, from 2009 to 2010. The difference was primarily due to the $9.8 million early termination payment received from BASF in December 2010, the impact of $0.8 million of increased reimbursements for various components of reimbursable costs under our Plasticizers Production Agreement and $2.1 million from increased amortization of the BASF payment we received in connection with the termination by BASF of its obligations related to our oxo alcohols facilities under our Plasticizers Production Agreement. Due to the termination of our Plasticizers Production Agreement by BASF effective December 31, 2010, the original 8-year life used to amortize this payment was accelerated to coincide with the termination of our Plasticizers Production Agreement. These increases were offset by a $2.2 million increase in depreciation expense in 2010 related to the acceleration of depreciation on our plasticizers manufacturing unit, which resulted in a net book value of zero as of December 31, 2010.

Liquidity and Capital Resources

General

     Our working capital was $107.7 million as of December 31, 2010, an increase of $9.9 million from our working capital of $97.8 million as of December 31, 2009. This increase was primarily due to a $24.8 million accrual for profit sharing, the $9.8 million receipt of BASF’s early termination payment in December 2010, $4.7 million for revenue amortization which decreased our accrual for deferred revenue and the receipt of four fixed quarterly payments from BASF. Partially offsetting this increase was $12.6 million in accrued interest, the purchase of $5.6 million in aggregate principal amount of our Secured Notes during 2010 for $5.6 million, $5.7 million in net benefit payments and contributions, a $4.2 million increase in the variable compensation accrual during 2010, a $1.2 million increase in the property tax accrual, a $3.5 million decrease in prepaid insurance due to expense recognition and capital expenditures of $1.5 million.

     Our liquidity was $130.3 million at December 31, 2010, an increase of $2.5 million compared to our liquidity of $127.8 million at December 31, 2009. This increase was primarily due to the $9.8 million early termination payment received from BASF in December 2010 and $2.7 million of interest savings in 2010 resulting from the purchase of $30.6 million in aggregate principal amount of our Secured Notes over the period November 2009 through December 2010. These factors were partially offset by our purchase of $5.6 million in aggregate principal amount of our Secured Notes in 2010 and a $4.0 million reduction in borrowing base capacity due to the termination of our revolving credit facility.

     On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement, effective as of December 31, 2010. Revenues and gross profit generated from our plasticizers operations in 2010 were $34.0 million and $17.9 million (both including a $9.8 million early termination payment), respectively, and in 2009 were $26.0 million and $7.7 million, respectively. The termination of our Plasticizers Production Agreement, will likely have an adverse effect on our liquidity, however, we believe that our expected operating cash flow from our acetic acid business and our current cash balance will provide adequate liquidity in the future.

     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.

     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 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 expense from writing off a pro rata portion of the related debt issue costs of $0.9 million. In 2010, we purchased $5.6 million in aggregate principal amount of our Secured Notes for $5.6 million in cash in the open market resulting in a loss of less than $0.1 million. Additionally, we expensed $0.2 million for the pro rata portion of the related debt issue costs. The $30.6 million in aggregate principal amount of our Secured Notes that we purchased over the period November 2009 through December 2010 is expected to reduce our interest expense for 2011 by approximately $3.1 million. In February 2011, we purchased an additional $1.0 million in aggregate principal amount of our Secured Notes for $1.0 million in cash in the open market, and in the first quarter of 2011, we will expense 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., 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. 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 $0.2 million of debt issue costs associated with our revolving credit facility were written off as of the effective termination date of our revolving credit facility.

     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 initially had a one year term. Under our LC Facility, we pay Chase a fee of 1% per annum of the face amount of each outstanding letter of credit and an issuance fee of $500 for each letter of credit. Since its inception, our LC Facility has been and continues to be secured by $5.0 million in cash under an Assignment of Deposit Account Agreement between us and Chase. On September 20, 2010, we amended our LC facility to extend the initial term to April 30, 2011, and, concurrently therewith, entered into a Security Agreement and a Pledge

Agreement with Chase, pursuant to which we granted Chase first priority liens on all of our accounts receivable, inventory and other specified assets to secure our obligations under our LC Facility. As of February 24, 2011, there were $3.3 million in standby letters of credit issued under the LC facility.

     As part of our strategic goals, we are seeking to consummate strategic transactions, including, but not limited to, acquisitions of assets or businesses and the formation of joint ventures or other business combinations. Although we do not currently have any commitments with respect to any strategic transactions, we may enter into such commitments in the future, which could result in a material expansion of our existing operations or result in our entering into new lines of business. In addition, a strategic transaction could result in the expenditure of a material amount of our funds or the issuance by us of a material amount of debt or equity securities.

Cash Flow

     Net cash provided by operations was $13.4 million in 2010, compared to $2.0 million in 2009. This increase in net cash flow provided by operations during 2010 was primarily due to the $9.8 million early termination payment received from BASF in December 2010 and $2.7 million in interest savings in 2010 resulting from the purchase of $30.6 million in aggregate principal amount of our Secured Notes over the period November 2009 through December 2010. Net cash flow used in investing activities was $10.3 million in 2010 compared to $10.6 million in 2009. This decrease in net cash flow used in investing activities was primarily due to higher capital expenditures in 2009 offset by the purchase of a short-term investment for $9.0 million in 2010. Capital expenditures in 2009 included $5.0 million for acetic acid related projects, $1.8 million for a process wastewater treatment system and $4.4 million for routine safety environmental, replacement capital and profit improvement projects in 2009. Although significantly reduced capital spending occurred in 2010, capital projects included $0.5 million for our turbo generator steam project, $0.5 million for our methanol terminaling project and $0.5 million for routine safety environmental, replacement capital and profit improvement projects in 2010. Net cash flow used in financing activities was $5.6 million in 2010 compared to $23.8 million in 2009. This decrease in net cash flows used in financing activities was primarily due to the purchase of $5.6 million in aggregate principal amount of our Secured Notes for $5.6 million during 2010 compared to the purchase of $25.0 million in aggregate principal amount of our Secured Notes in the fourth quarter of 2009 for $23.8 million.

Capital Expenditures

     Our capital expenditures were $1.5 million during 2010 compared to $11.2 million during 2009. Capital expenditures during 2009 consisted of $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 $4.4 million for 2009. Although significantly reduced capital spending occurred in 2010, capital expenditures in 2010 consisted of $0.5 million for our turbo generator steam project, $0.5 million for our methanol terminaling project, and $0.5 million for routine safety environmental, replacement capital and profit improvement projects. We anticipate spending approximately $8.6 million on capital expenditures during 2011.

Pensions

     Our projected benefit obligation under our defined benefit pension plan was $130.3 million and $122.5 million as of December 31, 2010 and 2009, respectively. This increase in 2010 was primarily due to an actuarial loss of $9.4 million and interest costs of $6.9 million, partially offset by benefit payments of $8.5 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 8, 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 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. Until 2011, our primary products included acetic acid and plasticizers. All of our plasticizers were historically sold to BASF pursuant to the terms of our Plasticizers Production Agreement. However, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. As our plasticizers facility is currently idle, acetic acid is currently our only primary product.

     Acetic Acid. Pursuant to our Acetic Acid Production Agreement, BP Chemicals takes title and risk of loss of our acetic acid production at the time the acetic acid is produced. BP Chemicals, in turn, markets and sells the acetic acid we produce 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. Prior to the effective termination date of our Plasticizers Production Agreement, we generated revenues from our plasticizers operations through our Plasticizers Production Agreement with BASF. BASF purchased all of our plasticizers and took title and risk of loss at the time of production. We received fixed, level quarterly payments which were recognized on a straight-line basis. In addition, BASF reimbursed 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 was included in revenue and was matched against our costs as they were incurred.

     Deferred revenue. Deferred credits are amortized over the life of the contracts which gave rise to them. In discontinued operations, as of December 31, 2010, we had a balance in deferred income of approximately $23.0 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 two years remain. We will recognize approximately $12.4 million of income in discontinued operations in 2011 related to this payment. During 2010, we fully amortized certain payments received from our oxo-alcohol and phthalate anhydride 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 8-year life was changed to five years and the remaining unamortized balance of $3.6 million was recognized in 2010. The PA payment was amortized using the straight-line method over a three year life that ended December 2010.

Preferred Stock Dividends

     We record stock dividends on our Series A Convertible Preferred Stock, or our Preferred Stock, in our consolidated statements of operations based on the estimated fair value of the 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.

		Year Ended December 31,
		2010				2009
Weighted average assumptions utilized in the Black-Scholes model include:
Risk-free interest rate			2.0	%			2.7	%
Volatility			111.2	%			72.2	%
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 third quarter of 2008, our management determined that a triggering event, as defined in Accounting Standards Codification Topic 360, or 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. One of the turbo generator units was utilized in a capital project that was completed in 2010 to convert 650 pound steam to 250 pound steam and thus reduce our steam costs. The remaining turbo generator is under contract to be sold in early 2011 with expected sales proceeds to be approximately $0.3 million. As a result, we concluded that the remaining turbo generator was impaired and should be written down to $0.3 million, the anticipated sales proceeds. This write-down resulted in an impairment charge of $0.4 million during 2010.

     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 plasticizers manufacturing unit. We analyzed the undiscounted cash flow stream from our plasticizers business over the remaining life of the plasticizers manufacturing unit and compared it to the $2.8 million carrying value of our plasticizers manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our plasticizers business was higher than the carrying value of our plasticizers manufacturing unit. Based on this analysis, we concluded that our plasticizers unit was not impaired as of December 31, 2009, and that no write-down was necessary. We did, however, accelerate our depreciation on our plasticizers manufacturing unit in 2010, resulting in a net book value of zero for our plasticizers manufacturing unit as of 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, 2010, we concluded that a

valuation allowance was needed against our deferred tax assets. As of December 31, 2010, our valuation allowance was $23.8 million, a decrease of $4.4 million from December 31, 2009. The decrease included a valuation allowance adjustment of $2.4 million related to our state taxes and credits and $0.9 million was due to an other comprehensive loss for adjustments to our benefits plans. As of December 31, 2010, 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 and 2010. Our 2010 pension expense, on a pre-tax basis, was $3.1 million. However, a significant portion of our pension expense is reimbursed through existing contractual arrangements.

     During the first quarter of 2010, as a result of our work force reduction announced in January 2010, and in accordance with Accounting Standards Codification Topic 715, “Compensation — Retirement Benefits,” we recorded a plan curtailment gain in continued operations of $0.1 million for our postretirement medical plan.

Plant Turn-around Costs

     As a part of normal recurring operations, chemical manufacturing units are 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 2010 and 2009 that are included in continuing operations were $0.4 million and $3.1 million, respectively.

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			34
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009			35
Consolidated Balance Sheets as of December 31, 2010 and 2009			36
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency in Assets) for the years ended December 31, 2010 and 2009			37
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009			38
Notes to Consolidated Financial Statements			39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Sterling Chemicals, Inc.

     We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. and its subsidiaries (the “Company”) as of December 31, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Houston, Texas
March 1, 2011

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share Data)

		Year ended December 31,
		2010				2009
Revenues		$	99,744			$	88,290
Cost of goods sold			89,143				84,883
Gross profit			10,601				3,407
Selling, general and administrative expenses			10,309				12,875
Impairment of long-lived assets			375				—
Interest and debt related expenses			13,659				15,767
Interest income			(335	)			(742	)
Other income			(473	)			(3,481	)
Loss from continuing operations before income tax			(12,934	)			(21,012	)
Benefit for income taxes			(4,527	)			(7,952	)
Loss from continuing operations		$	(8,407	)		$	(13,060	)
Income from discontinued operations, net of tax expense of $5,515 and $5,383, respectively			24,416				13,495
Net income		$	16,009			$	435
Preferred stock dividends			18,194				16,921
Net loss attributable to common stockholders		$	(2,185	)		$	(16,486	)
(Loss) income per share of common stock attributable to common stockholders, basic and diluted:
Loss from continuing operations		$	(9.40	)		$	(10.60	)
Income from discontinued operations, net of tax			8.63				4.77
Basic and diluted loss per share		$	(0.77	)		$	(5.83	)
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
(Dollars in Thousands, Except Share Data)

		December 31,
		2010				2009
Current assets:
Cash and cash equivalents		$	121,281			$	123,778
Short-term investments			9,000				—
Accounts and other receivables, net of allowance of $18 and $58, respectively			10,981				12,788
Inventories, net			3,756				3,881
Prepaid expenses and other current assets			2,424				2,656
Assets of discontinued operations, net			306				3,237
Total current assets			147,748				146,340
Property, plant and equipment, net			55,743				65,384
Other assets, net			3,908				5,643
Assets of discontinued operations, net			—				2,798
Total assets		$	207,399			$	220,165
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable		$	8,832			$	11,584
Accrued liabilities			18,850				17,633
Liabilities of discontinued operations			12,382				19,286
Total current liabilities			40,064				48,503
Long-term debt			119,428				125,000
Long-term liabilities			42,678				41,084
Long-term liabilities of discontinued operations			10,628				23,010
Commitments and contingencies (Note 9)
Redeemable preferred stock			152,722				134,528
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			89,153				106,948
Accumulated deficit			(224,771	)			(240,780	)
Accumulated other comprehensive loss			(22,531	)			(18,156	)
Total stockholders’ deficiency in assets			(158,121	)			(151,960	)
Total liabilities and stockholders’ deficiency in assets		$	207,399			$	220,165

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

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
(Amounts in Thousands)

										Additional								Accumulated Other
		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income (Loss)				Total
Balance, December 31, 2008			2,828			$	28			$	123,740			$	(241,215	)		$	(24,387	)		$	(141,834	)
Other Comprehensive Income:
Net income			—				—				—				435				—
Benefit adjustment, net of tax of $1,970			—				—				—				—				6,231
Total Other 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	)
Other Comprehensive Income:
Net income			—				—				—				16,009				—				—
Benefit adjustment, net of tax of ($988)			—				—				—				—				(4,375	)
Total Other Comprehensive Income																							11,634
Preferred stock dividends			—				—				(18,194	)			—				—				(18,194	)
Stock-based compensation			—				—				399				—				—				399
Balance, December 31, 2010			2,828			$	28			$	89,153			$	(224,771	)		$	(22,531	)		$	(158,121	)

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

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

		Year ended December 31,
		2010				2009
Cash flows from operating activities:
Net income		$	16,009			$	435
Adjustments to reconcile net income to net cash provided by operating activities:
Stock compensation expense			399				129
Bad debt (benefit) expense			(10	)			64
Benefit plan curtailment gain			(115	)			—
Depreciation and amortization			12,974				9,852
Interest amortization			1,049				1,091
Amortization of deferred revenue			(17,119	)			(14,976	)
Impairment of long-lived assets			375				—
Lower-of-cost-or-market adjustment			—				(31	)
Gain on disposal of property, plant and equipment			(68	)			(635	)
Loss (gain) on purchase of Senior Secured Notes			198				(291	)
Other			1,289				540
Change in assets/liabilities:
Accounts and other receivables			3,361				11,072
Inventories			585				(236	)
Prepaid expenses and other current assets			232				51
Other assets			514	)			(25	)
Accounts payable			(2,823	)			(143	)
Accrued liabilities			(5,568	)			4,348
Long-term liabilities			2,071				(9,196	)
Net cash provided by operating activities			13,353				2,049
Cash flows used in investing activities:
Capital expenditures for property, plant and equipment			(1,494	)			(11,218	)
Net proceeds from the sale of property, plant and equipment			242				635
Purchase of short-term investment			(9,000	)			—
Net cash used in investing activities			(10,252	)			(10,583	)
Cash flows used in financing activities:
Purchase of Senior Secured Notes			(5,598	)			(23,814	)
Net cash used in financing activities			(5,598	)			(23,814	)
Net decrease in cash and cash equivalents			(2,497	)			(32,348	)
Cash and cash equivalents — beginning of year			123,778				156,126
Cash and cash equivalents — end of year		$	121,281			$	123,778
Supplemental disclosures of cash flow information:
Interest paid		$	12,915			$	15,866
Interest income received			335				742
Cash received for income taxes			598				—

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. Until 2011, our primary products included acetic acid and plasticizers. All of our plasticizers were historically sold to BASF Corporation, or BASF, pursuant to the terms of our Third Amended and Restated Plasticizers Production Agreement, or our Plasticizers Production Agreement. However, on November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. As our plasticizers facility is currently idle, acetic acid is currently our only primary product. Prior to the shutdown of our styrene operations in December 2007, we also produced styrene monomer. 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 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, who constructed a cogeneration facility on that land. However, in June 2008, we and Praxair Energy elected to terminate the joint venture and the related joint venture agreement governing S&L Cogeneration Company, or the Joint Venture Agreement, and the term of the Joint Venture Agreement was extended until completion of all final audits. We expect the joint venture to be terminated and wound-up during 2011. The cogeneration facility constructed by S&L Cogeneration Company has been dismantled and removed from the site. We generally produce our petrochemicals products for 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, 2010, as a result of the termination of our Plasticizers Production Agreement and the inclusion of our plasticizers business in discontinued operations, we now have one reportable segment. Segment information for the year ended December 31, 2009, has been revised to conform with the current year’s presentation. See further discussion in Note 11.

Reclassifications and Revisions:

     We have reclassified certain amounts on the consolidated balance sheet between other assets and prepaid expenses and other current assets as of December 31, 2009. We have reclassified amounts on the consolidated statement of cash flows between other assets and prepaid expenses and other current assets and between capital expenditures for property, plant and equipment in investing activities and other in operating activities for the year ended December 31, 2009.

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, and is considered immaterial. Our investment in S&L Cogeneration Company of $0.3 million and $0.4 million as of December 31, 2010 and 2009, respectively, is included in prepaid expenses and other current assets. We recognized a loss from this investment of $0.1 million in 2010 and 2009. As of December 31, 2010, we expect to receive approximately $0.3 million from S&L Cogeneration Company upon termination of the joint venture in 2011. Therefore, we do not believe our investment in S&L Cogeneration Company was impaired as of December 31, 2010.

Cash and Cash Equivalents and Short-term Investments

     We consider all investments having an initial maturity of three months or less to be cash equivalents. Our cash is generally invested in money market instruments and certificates of deposit, although we do from time to time invest our cash in other high quality, highly liquid cash equivalents. 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.

     Our short-term investment consists of a certificate of deposit with an original term of nine months. As of December 31, 2010, the carrying value of our short-term investment, which approximated fair value, was $9.0 million. We do not have any investments that are considered available-for-sale securities.

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, 2010 and December 31, 2009, our allowance for doubtful accounts for continuing operations was less than $0.1 million and $0.1 million, respectively, and zero and less than $0.1 million, respectively for discontinued operations. For continuing operations, our bad debt benefit was less than $0.1 million for 2010 and our bad debt expense was less than $0.1 million for 2009. For discontinued operations, our bad debt expense was less than $0.1 million for both 2010 and 2009.

Inventories

     Inventories include raw materials, supplies and spare parts. Raw materials and supplies are carried at the lower-of-cost-or-market value and spare parts are valued at average cost. The comparison of cost to market value involves estimations of the market value of our products. For the years ended December 31, 2010 and December 31, 2009, this comparison led to a lower-of-cost-or-market adjustment for continuing operations of zero and less than $0.1 million, respectively.

     Spare parts are examined for obsolescence and are carried at their net realizable value. For the year ended December 31, 2010, our obsolescence expense was $0.3 million for spare parts associated with continuing operations and $0.3 million of spare parts were written off against the continuing operations obsolescence accrual. For the year ended December 31, 2010, our obsolescence expense was $0.6 million for spare parts associated with operations that have been discontinued and $1.1 million of spare parts were written off against the discontinued operations obsolescence accrual. For the year ended December 31, 2009, our obsolescence expense was less than $0.1 million for spare parts associated with continuing operations and less than $0.1 million of spare parts were written off against the continuing operations obsolescence accrual. For the year ended December 31, 2009, our obsolescence expense was $0.2 million for spare parts associated with operations that have been discontinued and $0.1 million of spare parts were written off against the discontinued operations obsolescence accrual.

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 recognized 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 $0.1 million and $0.7 million for 2010 and 2009, respectively.

Plant Turn-around Costs

     As a part of normal recurring operations, chemical manufacturing units are 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 2010 and 2009 that are included in continuing operations were $0.4 million and $3.1 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 third quarter of 2008, our management determined that a triggering event, as defined in Accounting Standards Codification Topic 360, or 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. One of the turbo generator units was utilized in a capital project that was completed in 2010 to convert 650 pound steam to 250 pound steam and thus reduce our steam costs. The remaining turbo generator is under contract to be sold in early 2011 with the expected sales proceeds to be approximately $0.3 million. As a result, we concluded that the remaining turbo generator was impaired and should be written down to $0.3 million, the anticipated sales proceeds. This write-down resulted in an impairment charge of $0.4 million during 2010.

     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 plasticizers manufacturing unit. We analyzed the undiscounted cash flow stream from our plasticizers business over the remaining life of the plasticizers manufacturing unit and compared it to the $2.8 million carrying value of our plasticizers manufacturing unit. This analysis showed that the undiscounted projected cash flow stream from our plasticizers business was higher than the carrying value of our plasticizers manufacturing unit. Based on this analysis, we concluded that our plasticizers unit was not impaired as of December 31, 2009, and that no write-down was necessary. We did, however, accelerate our depreciation on our plasticizers manufacturing unit in 2010, bringing the net book value of the plasticizers manufacturing unit to zero as of 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, 2010 and 2009, we had a $0.5 million cost method investment in a related party who provides liability insurance coverage to us. This cost method investment is included in other assets in our consolidated balance sheet.

Revenue Recognition

     We 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. Until 2011, our primary products included acetic acid and plasticizers. All of our plasticizers were historically sold to BASF pursuant to the terms of our Plasticizers Production Agreement. However, on November 11, 2009, BASF elected to terminate our

Plasticizers Production Agreement effective as of December 31, 2010. As our plasticizers facility is currently idle, acetic acid is our only primary product.

     Acetic Acid. Pursuant to our Acetic Acid Production Agreement, BP Chemicals takes title and risk of loss of our acetic acid production at the time the acetic acid is produced. BP Chemicals, in turn, markets and sells the acetic acid we produce 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. Prior to the effective termination date of our Plasticizers Production Agreement, we generated revenues from our plasticizers operations through our Plasticizers Production Agreement with BASF. BASF purchased all of our plasticizers and took title and risk of loss at the time of production. We received fixed, level quarterly payments which were recognized on a straight-line basis. In addition, BASF reimbursed 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 was included in revenue and was matched against our costs as they were incurred.

     Deferred revenue. Deferred credits are amortized over the life of the contracts which gave rise to them. In discontinued operations, as of December 31, 2010, we had a balance in deferred income of approximately $23.0 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 two years remain. We will recognize approximately $12.4 million of income in discontinued operations in 2011 related to this payment. During 2010, we fully amortized certain payments received from our oxo-alcohol and phthalate anhydride, or 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 8-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 8-year life was changed to five years and the remaining unamortized balance of $3.6 million was recognized in 2010. The PA payment was amortized using the straight-line method over a three year life that ended December 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 $1.0 million and $1.1 million for the years ended December 31, 2010 and 2009, respectively. As a result of our purchase of $5.6 million and $25.0 million aggregate principal amount of our 10 ¹/4% Senior Secured Notes due 2015, or our Secured Notes, during 2010 and 2009, respectively, we amortized $0.2 million and $0.9 million during 2010 and 2009, respectively, which represented a pro rata portion of the debt issue costs related to our purchased 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, 2010, we concluded that a valuation allowance was needed against our deferred tax assets. As of December 31, 2010, our valuation allowance was $23.8 million, a decrease of $4.4 million from December 31, 2009. The decrease included a valuation allowance adjustment of $2.4 million related to our state taxes and credits and $0.9 million was due to an other comprehensive loss for adjustments to our benefits plans. As of December 31, 2010, 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 stock dividends on our Series A Convertible Preferred Stock, or our Preferred Stock, in our consolidated statements of operations based on the estimated fair value of the 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, 2010 and December 31, 2009, 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, short-term investments, 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 November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement effective as of December 31, 2010. We were not subject to any early termination penalties in connection with BASF’s termination

of our Plasticizers Production Agreement, although the termination of our Plasticizers Production Agreement did result in our refunding to BASF, in January 2011, a $1.0 million deposit it previously made to ensure prompt payment of amounts due under our Plasticizers Production Agreement. In addition, if we continue to operate our plasticizers business after March 31, 2011, we will be required to make payments to BASF for the undepreciated portion of past capital expenditures paid by BASF, determined as of the end of the original term of our Plasticizers Production Agreement, based on a straight line, 8-year life. 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. However, if we provide written notice to BASF of our election to permanently close our plasticizers facility on or before March 31, 2011, the undepreciated capital expenditures paid by BASF for all capital projects will be deemed to be zero, and we will not be required to make any payments to BASF. BASF, on the other hand, was required to pay us an early termination fee of $9.8 million, which we received on December 30, 2010.

     We are still in the process of exploring and evaluating our commercial options with respect to continuing our plasticizers business but cannot currently predict the ultimate outcome or the success of continuing our plasticizers business. As our plasticizers facility is currently idle, we have begun implementing our plans for restructuring our operating costs to reflect the reduction in our operations. On January 7, 2011, as a result of the idled state of our plasticizers facility, together with additional reductions resulting from a sustainable cost management study, we announced and subsequently implemented a reduction of our salaried work force by 22 people and our hourly work force by 16 people and recognized $1.3 million of severance costs. Additionally, we expect to incur approximately $0.6 million in shutdown and decontamination costs during the first six months of 2011. The costs and timing for dismantling our plasticizers facility are unknown at this time but we do not expect these costs to be significant. The loss of our Plasticizers Production Agreement will likely have an adverse effect on our financial condition, results of operations and cash flows. However, due to our expected operating cash flow from our acetic acid business and our current cash balance, 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 manufactured styrene monomer as one of our primary 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 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 was initially eight years. However, on April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to five years.

     As a result of our plasticizers and styrene facilities being shut down, we have no current significant continued involvement in these businesses and have, therefore, reported the operating results from these businesses as discontinued operations in our consolidated financial statements. The carrying amounts of assets and liabilities related to discontinued operations as of December 31, 2010 and 2009 are as follows:

		December 31,
		2010				2009
		(Dollars in Thousands)
Assets of discontinued operations:
Accounts receivable, net		$	306			$	1,850
Inventories			—				1,387
Property, plant and equipment, net			—				2,798
Total assets of discontinued operations		$	306			$	6,035
Liabilities of discontinued operations:
Accounts payable		$	—			$	119
Liabilities of discontinued operations(1)			12,382				19,167
Long-term liabilities of discontinued operations(1)			10,628				23,010
Total liabilities of discontinued operations		$	23,010			$	42,296

     Revenues and income before income taxes from discontinued operations for the years ended December 31, 2010 and December 31, 2009 are presented below:

		Year ended December 31,
		2010				2009
		(Dollars in Thousands)
Revenues		$	46,381			$	38,426
Income before income taxes			29,931				18,878

3. Detail of Certain Balance Sheet Accounts

		December 31,
		2010				2009
		(Dollars in Thousands)
Accounts and other receivables:
Trade accounts receivable, (net of allowance of $18 and $58, respectively)		$	10,126			$	11,419
Interest receivable			827				641
Tax refund receivable			—				598
Other receivables			28				130
		$	10,981			$	12,788
Inventories, net:
Raw materials		$	592			$	489
Stores and supplies (net of obsolescence reserve of zero each year)			3,164				3,392
		$	3,756			$	3,881
Property, plant and equipment, net:
Land		$	7,193			$	7,149
Buildings			4,544				4,824
Plant and equipment			116,116				114,438
Construction in progress			797				1,894
Less: accumulated depreciation			(72,907	)			(62,921	)
		$	55,743			$	65,384
Other assets, net:
Investments		$	500			$	500
Debt issuance costs			3,407				4,629
Other			1				514
		$	3,908			$	5,643
Accrued liabilities:
Accrued employee compensation and current portion of postretirement, pension and post employment benefits		$	13,295			$	11,698
Interest payable			3,858				3,868
Property taxes			1,222				1,401
Other			475				666
		$	18,850			$	17,633
Long-term liabilities:
Accrued postretirement, pension and post employment benefits		$	39,925			$	39,031
Other			2,753				2,053
		$	42,678			$	41,084

4. Valuation and Qualifying Accounts

     Below is a summary of valuation and qualifying accounts for the years ended December 31, 2010 and 2009:

		December 31,
		2010				2009
		(Dollars in Thousands)
Continuing Operations
Allowance for doubtful accounts:
Balance at beginning of year		$	58			$	18
Add: bad debt expense (benefit)			(30	)			40
Deduct: written-off accounts			(10	)			—
Balance at end of year		$	18			$	58
Discontinued Operations
Allowance for doubtful accounts:
Balance at beginning of year		$	24			$	—
Add: bad debt expense (benefit)			20				24
Deduct: written-off accounts			(44	)			—
Balance at end of year		$	—			$	24
Continuing Operations
Inventory obsolescence:
Balance at beginning of year		$	—			$	—
Add: obsolescence expense			287				36
Deduct: disposal of inventory			(287	)			(36	)
Balance at end of year		$	—			$	—
Discontinued Operations
Inventory obsolescence:
Balance at beginning of year		$	1,465			$	1,380
Add: obsolescence expense			639				220
Deduct: disposal of inventory			(1,140	)			(135	)
Balance at end of year		$	964			$	1,465

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.

     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 expense from writing off a pro rata portion of the related debt issue costs of $0.9 million. In 2010, we purchased an additional $5.6 million in aggregate principal amount of our Secured Notes for $5.6 million in cash in the open market resulting in a loss of less than $0.1 million. Additionally, we expensed $0.2 million for the pro rata portion of the related debt issue costs. In February 2011, we purchased an additional $1.0 million in aggregate principal amount of our Secured Notes for $1.0 million in cash in the open market, and in the first quarter of 2011, we will expense 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. 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. 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 $0.2 million of debt issue costs associated with our revolving credit facility were written off as of the effective termination date of our revolving credit facility.

     On January 31, 2010, we entered into a $5.0 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 initially had a one year term. Under our LC Facility, we pay Chase a fee of 1% per annum of the face amount of each outstanding letter of credit and an issuance fee of $500 for each letter of credit. Since its inception, our LC Facility has been and continues to be secured by $5.0 million in cash under an Assignment of Deposit Account Agreement between us and Chase. On September 20, 2010, we amended our LC facility to extend the initial term to April 30, 2011, and, concurrently therewith, entered into a Security Agreement and a Pledge Agreement with Chase, pursuant to which we granted Chase first priority liens on all of our accounts receivable, inventory and other specified assets to secure our obligations under our LC Facility. As of February 28, 2011, 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 $119.4 million outstanding as of December 31, 2010, 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,
		2010				2009
		(Dollars in Thousands)
Benefit for income taxes at statutory rates		$	(4,527	)		$	(7,354	)
Non-deductible expenses			7				11
Change in valuation allowance			4,520				6,745
Limitation on tax benefit of continuing operations			(4,527	)			(7,354	)
Effective tax benefit		$	(4,527	)		$	(7,952	)

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

		Year Ended December 31,
		2010				2009
		(Dollars in Thousands)
Tax benefit — continuing operations		$	(4,527	)		$	(7,952	)
Tax expense — all other components			4,527				7,354
Total tax benefit		$	—			$	(598	)

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

		Year Ended December 31,
		2010				2009
		(Dollars in Thousands)
Current federal		$	—			$	(598	)
Deferred federal			(4,527	)			(7,354	)
Current and deferred state			—				—
Total tax benefit		$	(4,527	)		$	(7,952	)

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

		December 31,
		2010				2009
		(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities		$	2,464			$	1,985
Accrued postretirement cost			996				1,144
Accrued pension cost			11,866				12,145
Tax loss and credit carry forwards			17,084				22,511
State deferred taxes			222				64
Unearned revenue			1,658				1,658
Other			726				940
Subtotal		$	35,016			$	40,447
Less: valuation allowance		$	(23,841	)		$	(28,244	)
Total deferred tax assets		$	11,175			$	12,203
Deferred tax liabilities:
Property, plant and equipment		$	(11,175	)		$	(12,203	)
Total deferred tax liabilities		$	(11,175	)		$	(12,203	)
Net deferred tax assets		$	—			$	—

     As of December 31, 2010, we had an available U.S. federal income tax net operating loss, or NOL, of approximately $94.5 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, 2010, we had state tax temporary credits of $4.4 million resulting in a state valuation allowance of $2.4 million. The $1.0 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, 2010, we concluded that a valuation allowance was needed against our deferred tax assets for $23.8 million, resulting in an overall net deferred tax asset/liability balance of zero as of December 31, 2010.

     At December 31, 2009, 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. Within the next twelve months, our unrecognized tax benefits may decrease due to the expiration of the statute of limitations on the time for the taxing authorities to make an assessment of income taxes. Due to the existence of the valuation allowance, future changes in the unrecognized tax benefit will have no impact on the effective tax rate. As of December 31, 2010, 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, 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
Balance, January 1, 2010		$	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, 2010		$	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, 2006 and subsequent years.

7. Employee Benefits

     We have established the following benefit plans:

Retirement Benefit Plans

     We have a non-contributory pension plan which covers our salaried and hourly wage employees who were employed by us on or before June 1, 2004. Prior to January 1, 2011, this plan was two separate plans, one of which covered our hourly-paid employees and one of which covered our salaried employees. Effective 11:59 p.m. on December 31, 2010, our hourly pension plan was merged into our salaried pension plan and the merged plans were renamed The Sterling Chemicals, Inc. Amended and Restated Pension Plan, or our pension plan. Under our pension plan, the benefits paid to hourly-paid participants are based primarily on years of service and the employee’s pay as of the earlier of the employee’s retirement or July 1, 2007. The benefits paid to our salaried participants are based primarily on years of service and the 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 plan’s 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,
		2010				2009
Equities			52.4	%			61.4	%
Bonds			44.6	%			35.6	%
Other			3.0	%			3.0	%
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; (2) provide investment results that meet or exceed the plan’s actuarially assumed long-term rate of return; and (3) move to matching the duration of the liabilities and assets of the plan to reduce the potential risk of large employer contributions being necessary in the future. Our employee benefits plans committee seeks to meet these objectives by employing a consultant to advise it on the plan’s investments and the portfolio managers selected to manage assets within the guidelines and strategies set forth by employee benefits plans committee. Performance of these managers is compared to applicable benchmarks.

     We also have two non-qualified pension plans that do not have pension plan assets, and for which the pension obligations are considered immaterial. We have, however, included these obligations in the tables below where appropriate.

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

		December 31,
		2010				2009
		(Dollars in Thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year		$	124,255			$	121,167
Interest cost			6,981				7,191
Actuarial loss			9,564				4,628
Benefits paid			(8,720	)			(8,731	)
Benefit obligation at end of year		$	132,080			$	124,255

		December 31,
		2010				2009
		(Dollars in Thousands)
Change in plan assets:
Fair value at beginning of year		$	86,772			$	77,807
Actual return on plan assets			10,519				17,483
Employer contributions			4,700				213
Benefits paid			(8,720	)			(8,731	)
Fair value at end of year			93,271				86,772
Funded status		$	(38,809	)		$	(37,483	)

		December 31,
		2010				2009
		(Dollars in Thousands)
Current liabilities		$	(6,254	)		$	(6,299	)
Non-current liabilities			(32,555	)			(31,184	)
Net amount recognized in statement of financial position		$	(38,809	)		$	(37,483	)

		December 31,
		2010				2009
		(Dollars in Thousands)
Net loss		$	(30,943	)		$	(28,022	)
Net amount recognized in accumulated other comprehensive loss(1)		$	(30,943	)		$	(28,022	)

		December 31,
		2010				2009
Weighted-average assumptions to determine benefit obligations:
Discount Rate			5.16	%			5.75	%
Rates of increase in salary compensation level			—				—

     As of December 31, 2010, all plans have projected benefit obligations in excess of plan assets, with the exception of the non-qualified plans, which have no plan assets. The total accumulated benefit obligation was $132.1 million and $124.3 million as of December 31, 2010 and 2009, respectively. Contributions of $6.1 million expected to be paid in 2011 were paid during the first quarter of 2011. The expected pension expense for 2011 is $2.3 million.

     Net periodic pension costs consist of the following components:

		Year Ended December 31,
		2010				2009
		(Dollars in Thousands)
Components of net pension costs:
Interest on prior year’s projected benefit obligation			6,981				7,191
Expected return on plan assets			(4,639	)			(5,613	)
Net amortization of actuarial loss			764				2,832
Net pension costs		$	3,106			$	4,410

		December 31,
		2010				2009
		(Dollars in Thousands)
Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss (pre-tax):
Net loss		$	(30,943	)		$	(28,022	)
Total		$	(30,943	)		$	(28,022	)

		December 31,
		2010				2009
		(Dollars in Thousands)
Weighted-average assumptions to determine net periodic benefit cost:
Discount Rate			5.75	%			6.25	%
Expected long-term rate of return on plan assets			5.50	%			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, 2010 and 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.

		As of December 31, 2010
																		Percentage				Target
																		of Plan				Allocation
		Level 1				Level 2				Level 3				Total Assets				Assets				2011
Asset Category:
Cash and cash equivalents		$	2,752			$	—			$	—			$	2,752				3	%			0-20	%
Mutual Funds
International			11,627				—				—				11,627				13	%			0-20	%
Large-Cap Value			12,513				—				—				12,513				13	%			10-20	%
Small-Cap Growth			2,301				—				—				2,301				3	%			0-5	%
Emerging Markets			4,277				—				—				4,277				5	%			0-10	%
Mid-Cap Growth			1,620				—				—				1,620				2	%			0-5	%
All Cap			11,220				—				—				11,220				12	%			10-15	%
Small-Cap Value			3,007				—				—				3,007				3	%			0-5	%
Mid-Cap Value			2,326				—				—				2,326				2	%			0-5	%
Intermediate Fixed Income/Core			27,391				—				—				27,391				29	%			20-40	%
Long Duration Fixed Income			14,237				—				—				14,237				15	%			0-30	%
Total Mutual Funds			90,519				—				—				90,519				97	%
Total Plan Assets		$	93,271			$	—			$	—			$	93,271				100	%