10-K

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

For the fiscal year ended December 31, 2005

or

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

For the transition period from            to

Commission File Number 000-50132

Sterling Chemicals, Inc.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 of 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 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. o.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer þ

     The aggregate market value of the registrant’s common stock, par value $.01 per share, held by non-affiliates at June 30, 2005 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the value of the last sales price of these shares as reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., was $45,895,059.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o.

     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, 2006, Sterling Chemicals, Inc. had 2,828,460 shares of common stock outstanding.

     Portions of the definitive Proxy Statement relating to the 2006 Annual Meeting of Stockholders of Sterling Chemicals, Inc. are incorporated by reference in Part III of this Form 10-K.

IMPORTANT INFORMATION REGARDING THIS FORM 10-K

     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.

     Readers should consider the following information as they review this Form 10-K.

Forward-Looking Statements

     Certain written and oral statements made or incorporated by reference from time to time by us or our representatives are “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 statements about the following subjects:

• the cyclicality of the petrochemicals industry;

• current and future industry conditions;

• the extent and timing of expansions of production capacity of our products, by us or by our competitors;

• the potential effects of market and industry conditions and cyclicality on our business strategy, results of operations or financial position;

• the level of expected savings from our cost reduction initiatives;

• the adequacy of our liquidity;

• our environmental management programs and safety initiatives;

• our market sensitive financial instruments;

• future uses of and requirements for financial resources;

• future contractual obligations;

• future amendments or renewals of existing contractual relationships;

• business strategies;

• growth opportunities;

• competitive position;

• expected financial position;

• future cash flows;

• future dividends;

• financing plans;

• budgets for capital and other expenditures;

• plans and objectives of management;

• outcomes of legal proceedings;

• compliance with applicable laws; and

• adequacy of insurance coverage or indemnification rights.

Such statements are based upon current information and expectations and inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those expected or expressed in forward-looking statements. Such risks and uncertainties include, among others, the following:

• the timing and extent of changes in commodity prices;

• petrochemicals industry production capacity and operating rates;

• market conditions in the petrochemicals industry, including the supply-demand balance for our products;

• competition, including competitive products and pricing pressures;

• obsolescence of product lines;

• the timing and extent of changes in global economic and business conditions;

• increases in raw materials and energy costs, including the cost of natural gas;

• our ability to obtain raw materials, energy and ocean-going vessels at acceptable prices, in a timely manner and on acceptable terms;

• regulatory initiatives and compliance with governmental regulations;

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• compliance with environmental laws and regulations;

• customer preferences;

• our ability to attract or retain high quality employees;

• operating hazards attendant to the petrochemicals industry;

• casualty losses, including those resulting from weather related events;

• changes in foreign, political, social and economic conditions;

• risks of war, military operations, other armed hostilities, terrorist acts and embargoes;

• changes in technology, which could require significant capital expenditures in order to maintain competitiveness;

• effects of litigation;

• cost, availability and adequacy of insurance;

• adequacy of our sources of liquidity; and

• various other matters, many of which are beyond our control.

     The risks included here are not exhaustive. Other sections of this report, and our other filings with the Securities and Exchange Commission, include additional factors that could adversely affect our business, results of operations and financial performance. See “Risk Factors” contained in Item 1A of Part I of this Form 10-K. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this Form 10-K speak 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 have been incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Subsequent Events

     All statements and information contained in this Form 10-K, including the forward-looking statements discussed above, are made as of March 15, 2006, unless those statements or information are expressly made as of another date. We disclaim any responsibility for the correctness of any statement or information contained in this Form 10-K to the extent such statement or information is affected or impacted by events, circumstances or developments occurring after March 15, 2006 or by the passage of time after such date. Except to the extent required by applicable securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any statement or information contained in this Form 10-K, including the forward-looking statements discussed above, to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement or information is based.

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.

Fiscal Year

     In December 2002, we changed our fiscal year-end from September 30 to December 31. In this Form 10-K:

• “2005” refers to the 12-month period ended December 31, 2005;

• “2004” refers to the 12-month period ended December 31, 2004;

• “2003” and “fiscal 2003” refer to the 12-month period ended December 31, 2003;

• “fiscal 2002” refers to the 12-month period ended September 30, 2002; and

• the “Transition Period” refers to the three-month period from October 1, 2002 through December 31, 2002.

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TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		2
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		18
Item 2.	Properties		18
Item 3.	Legal Proceedings		18
Item 4.	Submission of Matters to a Vote of Security Holders		19
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		20
Item 6.	Selected Financial Data		22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		34
Item 8.	Financial Statements and Supplementary Data		35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		61
Item 9A.	Controls and Procedures		61
Item 9B.	Other Information		62
PART III
Item 10.	Directors and Executive Officers of the Registrant		63
Item 11.	Executive Compensation		63
Item 12.	Security Ownership of Certain Beneficial Owners and Management		63
Item 13.	Certain Relationships and Related Transactions		63
Item 14.	Principal Accountant Fees and Services		63
PART IV
Item 15.	Exhibits and Consolidated Financial Statement Schedules		64
Bonus Plan
Amended and Restated Plasticizers Production Agreement
Subsidiaries of Sterling Chemicals, Inc.
Consent of Deloitte & Touche LLP
Rule 13a-14(a) Certification of CEO
Rule 13a-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO
Amended and Restated Audit Committee Charter

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PART I

Item 1. Bussiness

     We are a leading North American producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products throughout the world. Our primary products are styrene, acetic acid and plasticizers. Styrene is a commodity chemical used to produce intermediate products such as polystyrene, expandable polystyrene resins and ABS plastics, which are used in a wide variety of products such as household goods, foam cups and containers, disposable food service items, toys, packaging and other consumer and industrial products. Approximately 50% of our styrene capacity is currently committed for sales in North America under long-standing customer relationships, and the balance of our capacity is available to produce styrene for sales throughout the world when market conditions warrant, including the high growth Asian markets. Acetic acid is used primarily to produce vinyl acetate monomer, which is used in a variety of products, including adhesives and surface coatings. All of our acetic acid production is sold to BP Amoco Chemical Company (“BP Chemicals”) pursuant to a long-term contract that expires in 2016, which has provided us with a stable, steadily increasing source of income since the inception of this relationship in 1986. All of our plasticizers, which are used to make flexible plastics, such as shower curtains, floor coverings, automotive parts and construction materials, are sold to BASF Corporation (“BASF”) pursuant to a long-term production agreement that expires in 2013, subject to some limited early termination rights held by BASF.

     We manufacture all of our petrochemicals products at our world scale facility in Texas City, Texas. This facility is strategically located on a deepwater port, and also has truck and railcar loading and unloading facilities. As set forth below, our rated annual production capacity as of December 31, 2005 is among the highest in North America for styrene and acetic acid.

		Percent of
		Total North
	Rated Annual	American			North American		Global
Product	Production Capacity	Capacity			Market Position		Production Capacity
Styrene	1.7 billion pounds		11	%		4	60 billion pounds
Acetic Acid	1.1 billion pounds		17	%		3	22 billion pounds

     We own the styrene, acetic acid and plasticizers manufacturing units located at our Texas City facility. We have also leased portions of our Texas City site to Praxair Hydrogen Supply, Inc. (“Praxair”) and S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., which constructed a partial oxidation unit and a cogeneration facility, respectively, on that land. We lease the space for our principal offices, which are in Houston, Texas.

     On September 16, 2005, we announced that we were exiting the acrylonitrile business and related derivative operations, which includes sodium cyanide and disodium iminodiacetic acid (“DSIDA”). Our decision was based on a history of operating losses incurred by our acrylonitrile and derivatives businesses, and was made after a full review and analysis of our strategic alternatives. Our acrylonitrile and derivatives businesses, which sustained gross losses of $7 million during the first six months of 2005 and $28 million and $36 million during 2004 and 2003, respectively, had been shut down since February of 2005 following a force majeure event involving the availability of propylene.

     On July 16, 2001, Sterling Chemicals Holdings, Inc., and most of its U.S. subsidiaries, including us (collectively, the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors’ plan of reorganization (our “Plan of Reorganization”) was confirmed on November 20, 2002 and, on December 19, 2002, the Debtors emerged from bankruptcy pursuant to the terms of our Plan of Reorganization. On December 29, 2005, the Bankruptcy Court entered a final decree officially closing the two remaining bankruptcy cases of the Debtors.

Business Strategy

     Our objectives are to be a premier producer of petrochemicals, to maintain a strong market position, to achieve first quartile cost performance in all of our major products and to provide superior customer service. Our management team has adopted the following strategies in pursuit of these objectives.

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     Optimize Capacity Utilization Rates Through Long-Term Supply Contracts. We attempt to improve our profitability by arranging a constant base production volume for each of our production units under long-term supply agreements. Currently, we sell all of our acetic acid production to BP Chemicals and all of our plasticizers production to BASF under this type of contract. We also dedicate a significant portion of our styrene production under long-term arrangements. By optimizing capacity utilization rates, we can lower our selling, general and administrative expenses, reduce our working capital requirements and insulate our operations, to some extent, from the effects of declining markets and changes in raw material prices. We also market a significant portion of our products and generate a significant portion of our revenues under conversion agreements. Under our conversion agreements, the customer furnishes raw materials that we process into finished products. In exchange, we receive a fee typically designed to cover our fixed and variable costs of production and to generally provide an element of profit depending on the existing market conditions for the product. Our conversion agreements are designed to insulate us, to some extent, from the effects of declining markets and changes in raw materials prices, while allowing us to share in the benefits of favorable market conditions for most of the products sold under these arrangements.

     Balance Benefits of Long-Term Contracts Versus Product Availability During Peak Markets. While we seek to improve our profitability by entering into long-term agreements which provide a reasonable base level of cash flow and production rates, we have also positioned ourselves to take advantage of strong cash flow opportunities during positive cyclical periods in the styrene markets. We have significant capacity for styrene, 50% of which is not committed under long-term arrangements and can be sold at higher market prices during positive cyclical periods. We periodically seek to rebalance the portion of our styrene capacity available for spot sales and the portion of our styrene capacity committed under long term arrangements based upon our short-term and long-term views of the styrene markets. Under this strategy, we seek to have higher levels of uncommitted styrene capacity available during peak market conditions and have higher levels of our styrene capacity dedicated to long-term arrangements during the intervals between peak market periods.

     Improve Organization Efficiency and Cost Structure. We continually seek to improve our cost competitiveness through organizational efficiencies, productivity enhancements, operating controls and general cost reductions. During the last half of 2004, we developed an organizational efficiency project involving the design, development and implementation of uniform and standardized systems, processes and policies to improve our production, maintenance, process efficiency, logistics and materials management and procurement functions. During 2005, we reduced our fixed costs by more than $20 million, representing a 15% reduction in our annual fixed costs. Approximately 10% to 15% of these cost savings accrue to the benefit of some of our customers under the cost reimbursement provisions of our production agreements. Our actual future level of savings from our cost reduction initiatives may be impacted by a variety of factors, including operating rates of our production units and sales volumes of our products, and may be lower than our expectations.

     Attract New Businesses to Our Site. Our Texas City site offers approximately 135 acres for future expansion by us or by other companies that can benefit from our existing infrastructure and facilities, and includes a greenbelt around the northern edge of the plant site. We continuously explore opportunities for further construction of facilities at our site. We believe that the construction of a new facility at our site by another company would lower our overall fixed costs for each of our operating units and provide us with additional revenue.

Industry Overview

     Styrene. Global production capacity of styrene at December 31, 2005 was approximately 60 billion pounds per year, with current total North American production capacity at approximately 16 billion pounds per year. As is the case with most petrochemicals, markets for styrene from time to time experience periods of strong demand, resulting in tight supply and higher prices and profit margins. Inevitably, favorable market conditions will prompt increases in supply. In most cases, increases in supply are achieved through the construction of new facilities or major expansions of existing facilities. Typically, these types of projects result in large increases in production capacity and supply and cause available supply to greatly exceed demand for an extended period.

     During 2000, styrene prices and margins increased significantly from levels experienced in the preceeding few years. These improvements were driven by a combination of stronger market demand, operating problems experienced at several of our competitors and generally low inventory levels worldwide. Styrene margins hit their highest level in April 2000 and then decreased over the second half of 2000. During 2001, U.S. and world economies experienced a general slowdown that negatively impacted demand for most petrochemicals, including styrene. Raw material and energy costs spiked upward during the first half of 2001, increasing significantly from the prior year, primarily due to the sharp increase in natural gas prices. As a result, U.S. Gulf Coast petrochemicals producers experienced significant margin erosion for most of their products. Demand for styrene, relative to supply, increased late in the second quarter

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of fiscal 2002 due to a variety of factors, including economic improvements in the United States manufacturing sector, global restocking of low inventory levels and styrene plant shutdowns attributable to scheduled maintenance and operating problems at several of our competitors. During the first half of 2003, styrene demand and margins were depressed due to high energy and raw materials costs and uncertainties associated with the war with Iraq. Energy and raw materials costs declined during the second half of 2003 and, coupled with improved economic conditions in the United States and the rest of the world, resulted in improved margins for styrene sales.

     Styrene prices were fairly high, from a historical perspective, during 2004 and 2005. However, over the last two years, the styrene industry has experienced significant changes, with these historically high styrene prices being driven by higher benzene costs, and to a lesser extent higher natural gas and ethylene costs, rather than improved margins on styrene sales. In April 2004, prices for benzene, one of the primary raw materials in the production of styrene, escalated to then historical highs for both spot and contract volumes. Prices for benzene continued to rise over the course of the second and third quarters of 2004 and, since that time, prices have been extremely volatile but have continued to remain above historical norms. As the combined cost of raw materials and energy resources is far greater than the total of all other costs of styrene production, with the cost of benzene having the greatest impact on overall styrene manufacturing costs, these historically high raw material costs have made it difficult for United States styrene producers to realize meaningful margins on their styrene sales. While styrene margins have been compressed, absolute styrene sales prices continue to be very high, from a historical perspective resulting in negative impacts on demand growth for styrene.

     Many industry experts had been forecasting that the balance of supply and demand for styrene would favor producers over the near-term, especially in the Asian markets. Over the last five years, China has been the driver for growth in styrene demand, representing around 75% of the world’s new styrene demand in that period. Historically, we have positioned ourselves to take advantage of peaks in the Chinese styrene markets, with only 50% of our styrene capacity being committed under long-term arrangements. However, over the last two years, relatively high benzene and natural gas prices have significantly limited our ability to sell styrene into the Chinese markets, and we expect these dynamics to continue throughout 2006. Further complicating our ability to sell styrene into the Chinese markets is the announcement by several of our competitors of their intention to build new styrene production units outside the United States during the late 2006 to 2008 time frame. Several of these facilities appear likely to startup during this period, although it is not uncommon for announced construction to be delayed or abandoned. In addition, most of this new capacity is being constructed in politically unstable regions of the world, such as the Middle East, which may impact the start-up of this new capacity. If and when these new units are completed, we would anticipate more difficult market conditions, especially in the export markets, until the additional supply is absorbed by growth in market demand.

     Given the market conditions in the Chinese markets and the high domestic raw materials and energy costs we have been experiencing, approximately 85% of our styrene sales over the last two years have been made to customers in NAFTA countries and South America. We expect that most our styrene sales in the next three to five years will continue to be in these areas. Consequently, we intend to focus our efforts on increasing market share in these areas, with periodic Asian styrene sales on an opportunistic basis, until market conditions in Asia become more viable for North American styrene producers. We cannot, however, guarantee that we will be successful in increasing our market share in these areas during that period or guarantee when, or if, market conditions for North American styrene producers will improve in Asia.

     Acetic Acid. Global production capacity of acetic acid at December 31, 2005 was approximately 22 billion pounds per year, with current North American production capacity at approximately 6.6 billion pounds per year. The North American acetic acid market is mature and well developed, and is dominated by three major producers of acetic acid that account for over 87% of the sales of acetic acid in North America. Demand for acetic acid is linked to the demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Vinyl acetate monomer is the largest derivative of acetic acid, representing over 40% of total demand. From 2005 to 2009, global production of vinyl acetate monomer is expected to increase from 7.3 billion pounds to 8.3 billion pounds. The acetic acid industry tends to sell most of its products through long term sales agreements having “cost plus” pricing mechanisms, which eliminates much of the volatility seen in other petrochemicals products and results in more stable and predictable earnings and profit margins.

     Several acetic acid capacity additions occurred in 1998 and 1999, including an expansion of our acetic acid unit from 800 million pounds of rated annual production capacity to one billion pounds. In late 2000, BP Chemicals and Celanese AG (the two largest producers of acetic acid in the world) began operating 880 million-pound and 1.1 billion-pound acetic acid production units in Malaysia and Singapore, respectively. These capacity additions were somewhat offset by reductions of approximately 1.6 billion pounds in global capacity from the shutdown of various outdated acetic acid plants from 1999 through 2001. In addition, BP Chemicals has announced that it will close two of its outdated production units at its Hull, England acetic acid production facilities by the end of 2006, which account for an

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annual production capacity of approximately 500 million pounds of acetic acid, some of which is currently being sold in the European and South American markets. During 2005, we expanded the capacity of our acetic acid plant to approximately 1.1 billion pounds rated annually.

     Plasticizers. Plasticizers are produced from either ethylene-based linear alpha-olefins feedstocks or propylene-based technology. Linear plasticizers typically receive a premium over competing branched propylene-based products for customers that require enhanced performance properties. However, the markets for competing plasticizers can 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. In 2005, BP Chemicals announced the permanent closure of its linear alpha-olefins production facility in Pasadena, Texas, the primary source of supply of this feedstock to the oxo-alcohols production unit at our plasticizers facility. Due to the limited supply and the high price of linear alpha-olefins feedstocks, branched propylene-based products, or possibly C4-based products, will probably replace linear plasticizers for most applications over the long-term. We are currently in the process of modifying our plasticizers facilities, and BASF is also modifying its own Pasadena, Texas plasticizers facilities, to produce lower cost-branched plasticizers products.

Product Summary

     The following table summarizes our principal products, including our capacity, primary end uses, raw materials and major competitors for each product. “Capacity” represents rated annual production capacity at December 31, 2005, which is calculated by estimating the number of days in a typical year a production facility is capable of operating after allowing for downtime for regular maintenance, and multiplying that number 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
Styrene (1.7 billion pounds per year)	Polystyrene, ABS/SAN resins, styrene butadiene latex and unsaturated polyester resins	Building products, boat and automotive components, disposable cups and trays, packaging and containers, housewares, tires, audio and video cassettes, luggage, children’s toys, paper coating, appliance parts and carpet backing	Benzene and Ethylene	Lyondell Chemical Company, Ineos, PLC, Chevron Phillips Chemical Company, Shell Chemical Company, Cos-Mar (a joint venture of General Electric Company and FINA Inc.), Nova Corporation, SABIC, Samsung Corporation and Mitsubishi Corporation
Acetic Acid (1.1 billion pounds per year)	Vinyl acetate, terephthalic acid, and acetate solvents	Adhesives, PET bottles, fibers and surface coatings	Methanol and Carbon Monoxide	Celanese AG, Eastman Chemical Company and Lyondell Chemical Company
Plasticizers (280 million pounds per year)	Flexible polyvinyl chloride (“PVC”)	Flexible plastics, such as shower curtains and liners, floor coverings, cable insulation, upholstery and plastic molding	Alpha-olefins, Carbon Monoxide, Hydrogen and Orthoxylene	ExxonMobil Corporation, Eastman Chemical Company and BASF Corporation

Products

     Styrene. Styrene is a commodity chemical used to produce intermediate products such as polystyrene, expandable polystyrene resins and ABS plastics, which are used in a wide variety of products such as household goods, foam cups and containers, disposable food service items, toys, packaging and other consumer and industrial products. We have the fourth largest production capacity for styrene in North America. Our styrene unit is one of the largest in the world and has a rated annual production capacity of approximately 1.7 billion pounds, which represents approximately 11% of total North American capacity. Approximately 50% of our styrene capacity is currently committed for sales in North America under long-standing customer relationships, and the balance of our capacity is available to produce styrene for sales throughout the world when market conditions warrant.

     Our styrene facilities consist of two trains, a north train and a south train. On September 22, 2005, during a shut down of our plant in anticipation of Hurricane Rita, the superheater in the south train of our styrene facilities was

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significantly damaged in a fire, forcing a closure of the south train until repairs could be completed. In addition, the north train of our styrene facilities sustained internal damage as a result of this incident and, although still capable of producing product, the damage caused significant raw material yield and energy inefficiencies. On January 12, 2006, we shut down the north train of our styrene facilities to make repairs to the reactor and replace the existing catalyst. We re-started the north train of our styrene facilities in mid–February and re-started the south train of our styrene facility in early March. During the shutdowns, we fully met our supply obligations to our contract styrene customers through the operation of the north train of our styrene facilities, supplemented by open market purchases of styrene.

     Acetic Acid. Acetic acid is used primarily to produce vinyl acetate monomer, which is used in a variety of products, including adhesives and surface coatings. We have the third largest production capacity for acetic acid in North America. Our acetic acid unit has a rated annual production capacity of approximately 1.1 billion pounds, which represents approximately 17% of total North American capacity. All of our acetic acid production is sold to BP Chemicals pursuant to a long-term production agreement that extends until at least 2016, which has provided us with a stable, steadily increasing source of income since the inception of this relationship in 1986. For a further explanation of this agreement, please refer to “Acetic Acid-BP Chemicals” under “Contracts” in Item 1 of Part 1. We are the sole supplier of acetic acid in the Americas to BP Chemicals, which is widely recognized as a technological leader in the manufacture of acetic acid and is the second largest producer of acetic acid in the world. In 2003, we and BP Chemicals installed a new larger reactor at our acetic acid unit, which is designed to permit additional low cost expansions of the acetic acid unit in the future.

     Plasticizers. Our plasticizers business is comprised of three separate products; plasticizers esters, phthalic anhydride and oxo-alcohols, which we commonly refer to together as plasticizers. Our plasticizers esters are made from phthalic anhydride and oxo-alcohols, and phthalic anhydride is also occasionally sold as a separate product. All of our plasticizers, which are used to make flexible plastics such as shower curtains, floor coverings, automotive parts and construction materials, are sold to BASF pursuant to a long-term production agreement that extends until 2013, subject to some limited early termination rights held by BASF. For a further explanation of this agreement, please refer to “Plasticizers-BASF” under “Contracts”, in Item 1 of Part 1. Our rated annual production capacity of plasticizers is approximately 280 million pounds.

Sales and Marketing

     We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products throughout the world. We compete on the basis of product price, quality and deliverability. We sell our petrochemicals products pursuant to:

• multi-year contracts;

• conversion agreements; and

• spot transactions in both the domestic and export markets.

     Prices for styrene are determined by global market factors that are largely beyond our control and we generally sell styrene at prevailing market prices. From time to time, we may resell raw materials we purchased from others, purchase styrene for resale or sell ethylbenzene that we have produced from our own purchased benzene and ethylene or from customer supplied materials.

     We market a significant portion of our volumes of styrene and generate a significant portion of our revenues under our conversion agreements. Under our conversion agreements, the customer furnishes raw materials that we process into finished products. In exchange, we receive a fee typically designed to cover our fixed and variable costs of production and to generally provide an element of profit depending on the existing market conditions for styrene. These conversion agreements are intended to help us maintain lower levels of working capital and, in some cases, gain access to certain improvements in manufacturing process technology. Our conversion agreements are designed to insulate us, to some extent, from the effects of declining markets and changes in raw materials prices, while allowing us to share in the benefits of favorable market conditions for most of the products sold under these arrangements. The balance of our styrene is sold by our direct sales force or sales agents.

     We also have long-term agreements that provide for the dedication of 100% of our production of acetic acid and plasticizers, each to one customer. The acetic acid agreement provides for cost recovery plus an agreed share of the profits earned from this business. The plasticizers agreement provides for cost recovery plus an agreed “facility fee” for each production unit subject to the agreement. These agreements are intended to:

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• optimize capacity utilization rates;

• lower our selling, general and administrative expenses;

• reduce our working capital requirements;

• insulate our operations, to some extent, from the effects of declining markets and changes in raw materials prices; and

• in some cases, gain access to certain improvements in manufacturing process technology.

     For information regarding our export sales, see Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Form 10-K.

Contracts

     Our key multi-year contracts, which collectively accounted for 20% of our revenues in 2005, are described below. Our customers that accounted for more than 10% of our revenues over the last three years are as follows:

Customer	2005			2004			2003
BP Chemicals		13	%		12	%		14	%
Customer A		15	%		15	%		12	%
Customer B		19	%		14	%		—
Customer C		12	%		—			—

No other single customers accounted for more than 10% of our revenues in any of the last 3 years.

     Acetic Acid-BP Chemicals

     In 1986, we entered into a long-term acetic acid Production Agreement with BP Chemicals, which has since been amended several times. Under this Production Agreement, BP Chemicals has the exclusive right to purchase all of our acetic acid production until at least August 2016. BP Chemicals markets all of the acetic acid we produce and pays us, among other amounts, a portion of the profits earned from their sales of our acetic acid. In addition, BP Chemicals reimburses us for our operating costs and, until August 2006, makes certain monthly payments to us.

     Plasticizers-BASF

     Since 1986, we have sold all of our plasticizers production to BASF pursuant to a production agreement, which has been amended several times. Under the production agreement, BASF provides us with most of the required raw materials and markets the plasticizers we produce, and is obligated to make certain quarterly payments to us and to reimburse us monthly for our actual production costs. Effective as of January 1, 2006, we substantially amended the production agreement to extend the term of the agreement until 2013, subject to some limited early termination rights held by BASF, increase the fixed periodic payments made to us by BASF and eliminate our participation in the profits and losses realized by BASF in connection with the sale of the plasticizer we produce. Additionally, BASF paid us a one-time fee for the right to terminate their obligations under the agreement related to the production of oxo-alcohols at anytime on or before December 31, 2007.

Raw Materials for Products and Energy Resources

     For most of our products, the combined cost of raw materials and energy resources is far greater than the total of all other costs of production combined. As a result, an adequate supply of raw materials and utilities at reasonable prices and on acceptable terms is critical to the success of our business. Most of the raw materials we use are global commodities, which are made by a large number of producers. Prices for many of these raw materials are subject to wide fluctuations for a variety of reasons beyond our control. Although we believe that we will continue to be able to secure adequate supplies of our raw materials and energy, we may be unable to do so at acceptable prices or payment terms. See “Risk Factors” included in Item 1A of this Part I of this Form 10-K.

     Styrene. We manufacture styrene by converting ethylene and benzene into ethylbenzene, which we then process into styrene. Ethylene and benzene are both commodity petrochemicals and prices for each can fluctuate widely due to significant changes in the availability of these products. We currently purchase benzene requirements on the spot market. We have multi-year arrangements with several major ethylene suppliers that provide a significant percentage of

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our estimated requirements for purchased ethylene at generally prevailing and competitive market prices. Our conversion agreements require that the other parties to these agreements furnish us with the ethylene or benzene necessary to fulfill our conversion obligations. If various customers for whom we manufacture styrene under conversion agreements were to cease furnishing their own raw materials, our requirements for purchased benzene and ethylene could significantly increase.

     Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and methanol. Praxair supplies us with all of the carbon monoxide we require for the production of acetic acid from a partial oxidation unit constructed by Praxair on land leased from us at our Texas City facility. Currently, our methanol requirements are supplied by BP Chemicals.

     Plasticizers. The primary raw materials for plasticizers are alpha-olefins and orthoxylene, which are supplied by BASF under our long-term product sales agreement, and carbon monoxide and hydrogen, which are supplied by Praxair.

Technology and Licensing

     In 1986, Monsanto Company (“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 of our Texas City facility from Monsanto. We use these licenses in the production of styrene, acetic acid and plasticizers.

     During 1991, BP Chemicals Ltd. (“BPCL”) purchased the acetic acid technology from Monsanto, subject to existing licenses. Under an Acetic Acid 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 during the term of such agreement or pursuant to the research and development program provided by BPCL under the terms of such agreement.

     Although we do not engage in alternative process research with respect to our Texas City facility, we do monitor new technology developments and, when we believe it is necessary, we typically seek to obtain licenses for process improvements.

Competition

     The petrochemical industry is highly competitive. Many of our competitors are larger and have substantially greater financial resources than we have. Among our competitors are some of the world’s largest chemical companies that, in contrast to us, have their own raw materials resources or their own internal uses for the products we produce. A significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity could have a negative impact on our ability to maintain existing market share or maintain or increase profit margins, even during periods of increased demand for our products. You can find a list of our principal competitors in the “Product Summary” table above.

     Historically, profitability of the styrene industry has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. Our styrene business is impacted by changes in the world economy, including changes in currency exchange rates. In general, weak economic conditions, either in the United States or worldwide, tend to reduce demand and profit margins for our styrene.

     Foreign markets for our styrene can be affected by import laws and regulations. A significant portion of our styrene is sold in North America, but we also make significant sales in Asia when market conditions are favorable. In 2005, our export sales accounted for approximately 22% of our total revenues, with 12% of our total sales being made in Asian markets, 8% in Mexican markets, 1% in European markets and 1% in South American markets.

Environmental Matters

     Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste 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 can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing,

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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 can 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 generally are operated in compliance with all 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 and their employees and 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, mostly waste management and compliance, were $20 million in 2005 and $26 million in 2004. We also spent $2 million for environmentally-related capital projects in 2005 and $8 million for these types of capital projects in 2004. In 2006, we anticipate spending approximately $2 million for capital projects related to waste management, incident prevention and environmental compliance. We do not expect to make any capital expenditures in 2006 related to remediation of environmental conditions.

     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 and 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, liability for investigation and cleanup of waste or contamination at our own facilities or at facilities operated by third parties where we have disposed of waste. We continually review all estimates of potential environmental liabilities, but we may not have identified or fully assessed all potential liabilities arising out of our past or present operations or the amount necessary to investigate and remediate any conditions that may be significant to us. It is our policy to make safety, environmental and replacement capital expenditures a priority in order to ensure adequate safety and compliance at all times. In the event we should not have available to us, at any time, liquidity sources sufficient to fund any of these expenditures, prudent business practice might require that we cease operations at the affected facility to avoid exposing our employees and contract workers, the surrounding community or the environment to potential harm.

     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 an area that the Environmental Protection Agency (“EPA”) has classified as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds and nitrogen oxide. Our Texas City facility is also subject to the federal government’s June 1997 National Ambient Air Quality Standards, which lower the ozone and particulate matter threshold for attainment. The Texas Commission for Environmental Quality (“TCEQ”) has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve the ambient air quality standards for ozone. Local authorities also may impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future nitrogen oxide, volatile organic compounds and particulate matter control costs, the amount and full impact of which cannot be determined at this time.

     On December 13, 2002, the TCEQ adopted a revised State Implementation Plan (“SIP”) for compliance with the ozone provisions (1 hour standard) of the Clean Air Act. The EPA has recently proposed to approve this “1 hour” SIP, which calls for reduction of emissions of nitrogen oxides at our Texas City facility by approximately 80% by the end of 2007. The current SIP rules also require monitoring of emissions of highly reactive volatile organic carbons (“HRVOCs”), such as ethylene and propylene. Additional control measures will probably be required as plans for meeting the 8-hour ozone standard are developed (the “8 hour” SIP) over the next few years, including possibly increasing the required level of reductions of nitrogen oxides emissions from 80% to 90%. Previously, we estimated the total cost of the capital improvements required to enable us to comply with the current “1 hour” SIP, and also provide improved energy efficiency, to be between $22 million and $24 million. However, as a result of our decision to exit the acrylonitrile and derivatives businesses, we now estimate this total cost to be between $12 million to $14 million (which includes our share of capital required by S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc.). To date we have spent $9.3 million in capital on nitrogen oxide emission improvements, with $2.5 million of that amount being spent in 2005. If the TCEQ ultimately requires a 90% reduction of emissions of nitrogen oxides at our Texas City facility, we estimate that an additional $8 million to $10 million in capital improvements would be required. We anticipate that the balance of the capital expenditures, and other expenses

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required to comply with the 1 hour SIP, will be incurred through December 31, 2008. We expect to recover a small portion of these costs from the other parties to our production agreements.

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

Employees

     As of December 31, 2005, we had 294 employees. All of our hourly employees at our Texas City facility, a total of 108 people, are covered by a collective bargaining agreement with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas (the “Union”). Our current collective bargaining agreement with the Union expires on May 1, 2007. Although we believe our relationship with our hourly employees is generally good, we did lock out our employees for 16 weeks in 2002 and our hourly employees engaged in a strike for one week in 2004, in both cases in connection with efforts to reach new collective bargaining agreements.

Insurance

     We maintain insurance at levels that we believe are reasonable and that are typical for our industry’s insurance coverages, a portion of which are provided by a captive insurance company maintained by us and a few 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 one or more of our facilities 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. Due to the 2005 hurricane season and the recent fire in our styrene unit, as well as other general market driven reasons, we may not be able to maintain our existing coverage and our premiums may increase substantially. As a result of the terrorist attacks of September 11, 2001 and other events, our insurance carriers have created exclusions for losses from terrorism from our “all risk” property insurance policies. While separate terrorism insurance coverage is available, premiums for such coverage are very expensive, especially for chemical facilities, and the policies are subject to very high deductibles. Available terrorism coverage typically excludes coverage for losses from acts of foreign governments as well as nuclear, biological and chemical attacks. We have determined that it is not economically prudent to obtain terrorism insurance, especially given the significant risks that are not covered by such insurance, and we do not carry terrorism insurance on our property at this time.

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 Securities and Exchange Commission 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). Our website provides a hyperlink to a third-party website where these reports may be viewed and printed at no cost as soon as reasonably practicable after we have electronically filed such material with the Securities and Exchange Commission. The contents of our website are not, and shall not be deemed to be, incorporated into this report.

Item 1A. Risk Factors

     In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial conditions or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known by us, or that we deem immaterial, may also impair our business and operations.

Risks Related to our Business

Cyclicality in the styrene markets has in the past and may in the future result in reduced operating margins or operating losses.

     Styrene, one of our principal products, is a commodity that exhibits wide swings in demand, prices and margins based upon current and anticipated levels of supply and demand. Demand for our styrene is largely influenced by the

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rate of growth in the world’s economy, with the growth rate of the economy in Asia becoming increasingly more important. Our historical operating results reflect the cyclical and volatile nature of the styrene markets and the petrochemicals industry generally. These cycles are characterized by periods of tight supply, leading to higher operating rates and margins, followed by periods of oversupply leading to reduced operating rates and lower margins. In most cases, increases in supply are achieved through the construction of new capacity or major expansions of existing facilities. Typically, these types of projects result in large increases in production capacity and supply, and cause available supply to greatly exceed demand for an extended period. In addition, profitability in the styrene industry is affected by the worldwide level of demand growth, along with vigorous price competition, which may intensify due to, among other things, new domestic and foreign styrene capacity. In general, weak economic conditions, either in the United States or in the world, tend to reduce the rate of demand growth and margins for styrene.

     While the markets for styrene roughly follow a repetitive cycle, and general trends in the supply and demand balance for styrene may be observed over time, it is difficult, if not impossible, to definitively predict when market conditions will be favorable or unfavorable. Historically, the “peaks” in the market cycles for styrene tend to occur every seven to ten years, with prolonged periods of depressed market conditions between the peaks. Since our inception, a part of our business strategy has been to take advantage of the high margins that can be realized during periods when the balance of supply and demand for styrene favors producers. Consequently, a large portion of our capacity for styrene has historically been left uncommitted and available for sale in the spot markets. While having available uncommitted capacity can lead to dramatically improved financial performance during periods when the balance of supply and demand favors producers, it also causes negative market conditions to affect us more severely than most of our competitors in terms of sales volumes and margins. Future growth in demand for styrene may not be sufficient to alleviate any existing or future conditions of excess industry capacity, and such conditions may not be sustained or may be further aggravated by anticipated or unanticipated capacity additions or other events.

Our level of indebtedness could adversely affect our ability to react to changes in our business, and we may be limited in our ability to use debt to fund future capital needs.

     As of December 31, 2005, our total debt was $101 million. Our level of indebtedness could adversely affect our financial condition and make it more difficult for us to satisfy our obligations. Our indebtedness could:

• require us to dedicate a substantial portion of our cash flow from operations to payments with respect to our indebtedness, 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;

• limit our flexibility in planning for, or reacting to, competition or changes in our business or our industry:

• limit our ability to borrow additional funds;

• restrict us from making strategic acquisitions, introducing new products or services or exploiting business opportunities;

• make it more difficult for us to satisfy our obligations with respect to our indebtedness, including our 10% Senior Secured Notes due 2007 (our “Secured Notes”); and

• place us at a competitive disadvantage relative to competitors that have less debt or greater financial resources.

The covenants in the indenture for our Secured Notes and in our Revolving Credit Agreement dated December 19, 2002 with The CIT Group/Business Credit, Inc., as administrative agent and a lender, and certain other lenders (our “Revolver”), also limit our flexibility by restricting our ability to incur indebtedness, pay dividends and make other restricted payments or investments, sell assets, make capital expenditures, engage in certain mergers and acquisitions and refinance existing indebtedness.

     Our ability to make payments on and refinance our indebtedness, including our Secured Notes, will depend on our ability to generate cash from our future operations. Our ability to generate cash from future operations is subject, in large part, to general economic, competitive, legislative and regulatory factors and other factors that are beyond our control. We may not be able to generate enough cash flow from operations or be able to obtain enough capital to service our debt or fund our planned capital expenditures. In addition, we may need to refinance some or all of our indebtedness on or before maturity. We may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we cannot service or refinance our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments or alliances. We may not be able to take such actions, if necessary, on commercially reasonable terms or at all. If we are unable to make scheduled debt payments or comply with the other provisions of our debt instruments, our various lenders will be

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permitted under certain circumstances to accelerate the maturity of the indebtedness owing to them and exercise other remedies provided for in those instruments and under applicable law.

Despite our level of indebtedness, we and our subsidiaries may be able to incur substantially more debt; which may impact our ability to meet our debt service requirements.

     We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indenture governing our Secured Notes and our other debt instruments and financing arrangements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. To the extent new debt is added to our currently anticipated debt levels, the substantial risks described in this Form 10-K would increase. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness.

Natural gas prices have a significant impact on our competitiveness. High natural gas prices can have the effect of closing markets to our products where we are not competitive.

     Our production costs are impacted by the price of natural gas in a variety of ways. We use significant amounts of natural gas as fuel in the production of our products, so any increase in the price for natural gas leads to a direct increase in our production costs. In addition, most of our suppliers use significant amounts of natural gas in the production of the raw materials we need to produce our products, which causes our raw materials costs to also increase when the price for natural gas increases. Prices for natural gas are largely based on regional factors, which can result in wide disparities in natural gas prices in different parts of the world. Prices for styrene, on the other hand, tend to be more consistent throughout the world, after taking into account transportation costs. Consequently, when prices for natural gas rise in the United States but not in other parts of the world, we may not be able to recover these increased costs through higher sales prices, and our ability to compete with producers elsewhere in the world would be diminished. In addition, many producers in other parts of the world use oil-based processes rather than natural gas based processes. Consequently, the relationship between the price of crude oil and the price of natural gas can also affect our competitiveness and our ability to recover increases in the price of natural gas through higher sales prices. Over the last few years, we have experienced periods when our cost for natural gas was at levels that resulted in our being unable to sell styrene in Europe or Asia at prices above our variable costs of production, essentially closing those markets to sales of our styrene. In the future, we may not be able to obtain natural gas at prices that do not adversely impact our competitiveness.

Our financial performance may be adversely affected if we are unable to obtain raw materials at reasonable prices or on acceptable terms.

     For most of our products, the combined cost of raw materials and energy resources is far greater than the total of all other costs of production combined. As a result, an adequate supply of raw materials at reasonable prices and on acceptable terms is critical to the success of our business. We may not be able to secure adequate supplies of any of our raw materials or energy resources at reasonable prices or on acceptable terms. If we are unable to obtain raw materials at reasonable prices and on acceptable terms, our results of operations are negatively affected. Most of the raw materials necessary for our production of styrene are commodities and, consequently, are subject to wide fluctuations in prices for a variety of reasons beyond our control. Several factors may impact the cost or supply of our raw materials and energy resources, including regional and global balances of supply and demand, the availability and pricing for crude oil and the occurrence of plant outages and other supply disruptions. While the markets for our products are generally global, prices and availability for most of our raw materials are influenced by regional factors. As a result, we may pay higher prices for raw materials than our competitors in other parts of the world or be unable to obtain raw materials at times when they are available to our competitors, both of which may negatively impact our competitiveness and our financial performance.

     All of our primary raw materials are supplied by others pursuant to long-term contracts or spot market purchases. While we frequently enter into supply agreements, as is the general practice in our industry, these agreements typically provide for market-based pricing. Consequently, our supply agreements provide only limited protection against price volatility. In addition, the commodity markets for our raw materials may be subject to disruptions. If our suppliers are unable to meet their obligations under applicable supply agreements or we are otherwise unable to obtain reasonably priced raw materials, our business may be disrupted. For example, we rely on Praxair as our sole supplier of carbon monoxide, which is a necessary raw material for our production of acetic acid, and any disruption in the supply of carbon monoxide from Praxair will disrupt our production of acetic acid. In the case of either raw material price increases or supply disruptions, we could incur significant additional costs. While we attempt to match cost increases with corresponding product price increases, we are not always able to immediately raise product prices and, ultimately,

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our ability to pass on underlying cost increases to our customers is greatly dependent upon market conditions. Any underlying cost increase that we are not able to pass on to our customers could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our financial performance may be adversely affected by our inability to secure ocean-going vessels.

     When market conditions are favorable, a large portion of our styrene sales are made to customers in foreign countries, particularly in Asia. As a result, securing adequate shipping space at acceptable prices is critical to the success of our business during these periods. We may not be able to secure adequate shipping space at reasonable prices or on acceptable terms. If we are unable to obtain adequate shipping space at reasonable prices and on acceptable terms, our results of operations are negatively affected. Recently, there has been a severe shortage of cargo space on chemical tankers serving foreign markets, which has caused shipping rates to escalate dramatically and, at times, resulted in our inability to secure shipping space at all. Higher shipping rates increase our costs relative to producers located in close proximity to foreign customers and reduce our overall competitiveness in those markets. If we are unable to secure adequate shipping space at acceptable prices, we may be unable to make sales in foreign countries, even during periods of increased demand for our products.

We may be unable to compete successfully with integrated and larger competitors.

     We compete with some of the world’s largest chemical companies, most of whom are engaged in much broader businesses and either supply significant portions of the raw materials they need to produce styrene, or internally use significant amounts of the styrene they produce to make derivative products. We do not make any of the primary raw materials required for styrene production or convert any of our styrene into other products. Consequently, our production costs can be higher than those of our competitors during periods when demand for these raw materials exceeds supply and, in more extreme cases, we may not be able to obtain these raw materials in the market at times when our competitors are supplying their own raw materials. In addition, as production costs are highly influenced by production rates, the absence of internal uses for our styrene typically results in lower production rates, and consequently higher production costs, at our facilities during periods when the balance of supply and demand for styrene favors consumers, while production rates and costs at our competitors, who internally consume significant amounts of styrene, are less volatile.

Our industry is highly competitive and our results are significantly impacted by manufacturing costs.

     We compete with some of the world’s largest chemical companies on the basis of product price, quality and deliverability. However, prices for our styrene are determined by global market factors that are largely beyond our control. Except with respect to a number of our long-term contracts, we generally sell our styrene at prevailing market prices. As a result, our financial performance relative to our competitors, most of whom are larger than us, is greatly influenced by our manufacturing costs.

The loss of a long-term contract or a significant customer could adversely affect us.

     We sell significant portions of our styrene production, and all of our acetic acid and plasticizers production, under long-term contracts and arrangements. In 2005, BP Chemicals accounted for 100% of our acetic acid sales and BASF accounted for 100% of our plasticizers sales. In addition, 34% of our styrene sales in 2005 were made to two customers. The loss of one or more of these contracts or customers, or a material reduction in the amount of product purchased under one or more of these contracts or by one or more of these customers, could have a material adverse effect on us. Our acetic acid business is largely dependent on our contractual relationship with BP Chemicals. A termination of our relationship with BP Chemicals would have severe negative implications for that business, which could have a material adverse effect on our overall business, results of operations, cash flows and financial condition. We enter into long-term styrene contracts to secure purchase commitments over extended periods at levels that will enable us to produce styrene at adequate operating rates throughout the styrene market cycle. At the same time, a large portion of our styrene production capacity is currently uncommitted for sales in the spot market. We may not be able to secure or maintain adequate commitments to purchase styrene over any period and we may not be able to maintain a balance between our contract sales and spot sales at any particular level or at a level that will result in favorable financial performance for any period.

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The petrochemicals industry has experienced several years of depressed conditions and many of our styrene customers are in troubled financial condition.

     The petrochemicals industry is highly volatile and has experienced several years of depressed conditions. As a result, many of our styrene customers have suffered prolonged losses and seen their liquidity diminish. While we attempt to manage our credit exposure to our styrene customers on a case-by-case basis through a variety of methods, including requiring letters of credit, establishing credit limits or, in extreme cases, requiring cash-on-delivery for our products, we cannot be sure that our styrene customers will not default on their obligations to us. A default by one or more of our styrene customers on their payment obligations to us would have a negative effect on our financial condition, cash flows and results of operations, which effect could be material.

Our technology is widely available and could become obsolete.

     Most of our competitors have significantly greater financial resources than us and engage in substantial research and development activities. If any of our current or future competitors develop proprietary technology that enables them to produce products at a significantly lower cost or produce products with enhanced performance characteristics, our technology could be rendered uneconomical or obsolete. Currently, a competing technology exists to produce styrene monomer in conjunction with the production of propylene oxide, which allows for the production of styrene monomer with lower overall production economics than the technology we utilize based on historical market prices for propylene oxide and other feedstock costs utilized in that technology. If this technology becomes a more predominant method for producing styrene monomer, our financial condition, cash flows and results of operations could be negatively impacted, which effect could be material. In addition, a significant portion of our business is based upon widely available technology. Accordingly, barriers to entry, apart from capital availability, are low in certain product segments of our business, and the entrance of new competitors into the industry may reduce our ability to capture improving profit margins in circumstances where capacity utilization in the industry is increasing.

We face risks related to our export sales of products that may negatively affect our business.

     We sell a significant portion of styrene to international customers. Our international operations are subject to risks of doing business abroad, including fluctuations in current exchange rates, transportation delays and interruptions, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory environments. These events could have an adverse effect on our international sales in the future by reducing the demand for our products, decreasing the prices at which we can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot guarantee that we will not be found to be operating in noncompliance with applicable customs, currency exchange control regulations, transfer pricing regulations or other laws or regulations to which we may be subject.

     Further, the markets for our products, and the prices we receive for our products, are based on international supply and demand. In recent years, demand for supply, and capacity expansion in Asia, particularly China, have driven price trends. China has pursued an aggressive economic expansion in recent years. If such expansion were to cease, or significantly slow, the markets for our products could be materially adversely affected. Countries in Asia and in the Middle East have also completed or announced significant capacity increases for most of the products we produce, and may expand production in the future. Most of this capacity has been or is being built in areas that are in close proximity to the markets where we sell a significant part of our production of petrochemicals. These developments could have a significant negative impact on our ability to maintain existing market share or may adversely impact our profit margins.

Our business activities in the People’s Republic of China subject us to certain risks.

     When market conditions are favorable, we export significant quantities of our styrene to China. Consequently, our business may be adversely affected by the political, social and economic environment in China, including changes in such environment. Under its current leadership, China has been pursuing economic reform policies, including the encouragement of private economic activity and greater economic decentralization. However, the Chinese government may not continue to pursue such policies, such policies may not be successful even if continued to be pursued and such policies may be significantly altered from time to time. Moreover, economic reforms and growth in China have been more successful in certain provinces than others, and the continuation or increase of such disparities could affect the political or social stability of China.

     China does not have a well developed, consolidated body of law governing foreign investment enterprises. As a result, the administration of laws and regulations by governmental agencies may be subject to considerable discretion and variation. In addition, the legal system of China relating to foreign investments is both new and continually evolving, and currently there can be no certainty as to the application of its laws and regulations in particular instances. If for any reason we were required to discontinue exporting to China, our competitiveness and market position could be

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materially jeopardized, and we may not be able to secure alternative commitments to purchase our products. Furthermore, our activities in China are by law subject, in some circumstances, to administrative review and approval by various national and local agencies of the Chinese government. The inability to obtain such approvals could have a material adverse effect on our business, financial condition and results of operations.

We depend upon the continued operation of our Texas City facility and any significant downtime at our facility would affect our operations.

     All of the products we produce are made at our Texas City facility. Significant unscheduled downtime at our Texas City facility could have a material adverse effect on our results. 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, this insurance does not provide coverage for business interruptions of less than 45 days and is limited in overall coverage.

Our operations involve risks that may not be covered by our insurance or may increase our operating costs.

     A business risk inherent in all chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. In addition, some risk of environmental costs and liabilities is inherent in our operations and products. Risks of this nature that we may face include:

• pipeline leaks and ruptures, explosions and fires;

• severe weather and natural disasters;

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

• remediation complications;

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

• storage tank leaks.

Some of these events can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties and liabilities. We may also face expenses and liabilities as a result of past or future operations relating to these risks. Furthermore, we are subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters.

     We maintain insurance at levels that we believe are reasonable and that are typical for our industry’s insurance coverages, a portion of which are provided by a captive insurance company maintained by us and a few other chemical companies, but we are not fully insured against all potential hazards incident to our business. Accordingly, our insurance coverages may be inadequate for any given risk or liability, such as a loss of the 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 were 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 and results of operations.

Losses as a result of the September 22, 2005 incident may not be fully covered by insurance

     On September 22, 2005, during a shutdown of our Texas City plant in anticipation of Hurricane Rita, the south train superheater of our styrene production facilities was damaged in a fire. The damages and lost production caused by this event are covered under our property damage and business interruption insurance policies. We met our deductible requirements under these policies during the fourth quarter of 2005, and we expect to receive an initial payment of approximately $3 million by March 31, 2006 from the insurance carriers. We anticipate receiving additional reimbursements from our insurance carriers. However, we cannot guarantee that all of our losses from this event above our deductible limits will be recovered under our insurance policies.

Terrorist attacks, the current military action in Iraq, general instability in various OPEC member nations and other attacks or acts of war in the United States and abroad may adversely affect the markets in which we operate, our operations and our profitability.

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     The attacks of September 11, 2001 and subsequent events, including the current military action in Iraq, have caused instability in the United States and other financial markets and have led, and may continue to lead, to further armed hostilities, prolonged military action in Iraq or further acts of terrorism in the United States or abroad, which could cause further instability in financial markets. Current regional tensions and conflicts in various OPEC member nations, including the current military action in Iraq, have caused, and may continue to cause, increased raw material costs, specifically raising the prices of oil and gas, which are used in our operations or affect the price of our raw materials. Furthermore, the terrorist attacks, subsequent events or future developments in any of these areas may result in reduced demand from our customers for our products. These developments could subject our operations to increased risks and, depending on their magnitude, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our property insurance does not cover acts of terrorism and, in the event of a terrorist attack, we could lose net sales and our facilities.

     As a result of the terrorist attacks of September 11, 2001 and other events, our insurance carriers have created exclusions for losses from terrorism from our “all risk” property insurance policies. While separate terrorism insurance coverage is available, premiums for such coverage are very expensive, especially for chemical facilities, and the policies are subject to very high deductibles. Available terrorism coverage typically excludes coverage for losses from acts of foreign governments, as well as from nuclear, biological and chemical attacks. We have determined that it is not economically prudent to obtain terrorism insurance, especially given the significant risks that are not covered by such insurance, and we do not carry terrorism insurance on our property at this time. In the event of a terrorist attack impacting one or more of our facilities, we could lose the net sales from the facilities, and the facilities themselves, and could become liable for contamination or personal or property damage from exposure to hazardous materials caused by a terrorist attack.

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

     Targets such as chemical manufacturing facilities may be at greater risk of future terrorist attacks than other targets in the United States. As a result, the chemical industry has responded to the issues surrounding the terrorist attacks of September 11, 2001 by starting new initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States. Simultaneously, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Our business or our customers’ businesses could be adversely affected because of the cost of complying with new regulations.

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 to 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 or from disposal activities that pre-dated the purchase of our businesses. Based on available information, we believe that the costs to investigate and remediate known contamination will not have a material adverse effect on our business, financial condition, results of operations or cash flows. However, if significant previously unknown contamination is discovered, 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 can 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

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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. The Texas Commission for Environmental Quality (“TCEQ”) has enacted regulations requiring significant reductions of nitrogen oxide, which apply to our Texas City facility. The TCEQ also proposed similar regulations requiring the reduction of particulate matter, which apply to our Texas City facility. Under these regulations, we are required to reduce emissions of nitrogen oxide at our Texas City facility by up to 80% by the end of 2007. During 2005, we incurred approximately $2.5 million of capital on nitrogen oxide emission improvements, and we expect to incur an additional $8 million to $10 million in capital improvements for this purpose over the next three years. The nitrogen oxide regulations covering the Houston/Galveston Area State Implementation Plan have not yet been approved by the Environmental Protection Agency (“EPA”). At the conclusion of its review of these regulations, the EPA may require further control measures, including possibly increasing the total amount of reductions of nitrogen oxide emissions required from 80% to 90% which would increase the amount of capital required to achieve compliance with these regulations.

Future problems with labor relations may negatively affect our business.

     As of December 31, 2005, we had 294 employees, 37% of whom are covered by a collective bargaining agreement with the Union, which covers all of our hourly employees at our Texas City facility. Our current collective bargaining agreement with the Union expires on May 1, 2007. Although we believe our relationship with our hourly employees is generally good, we did lock out our employees for 16 weeks in 2002, and our hourly employees engaged in a strike for one week in 2004, in both cases in connection with efforts to reach a new collective bargaining agreement. A strike in the future by the Union representing our hourly employees could have a material adverse effect on our financial condition, results of operations or cash flows.

Transactions consummated pursuant to our plan of reorganization could result in the imposition of material tax liabilities.

     Prior to our emergence from bankruptcy, we eliminated our holding company structure by merging Sterling Chemicals Holdings, Inc. with and into us. We believe that this merger qualifies as a tax-free reorganization pursuant to Section 368(a)(1)(G) of the Internal Revenue Code (commonly referred to as a “G Reorganization”) for United States federal income tax purposes. However, if the Internal Revenue Service determines that the merger does not so qualify, we could incur additional federal income taxes of a material amount, either as a result of the merger or the consummation of the plan of reorganization. If the Internal Revenue Service successfully challenged our position, the additional tax liability would have a material adverse effect on our business, cash flows and financial condition. The Internal Revenue Service may not agree with our position and may challenge it.

Our securities are thinly traded and control of our equity is concentrated in a few holders.

     Our preferred stock and warrants are not registered under the Exchange Act and our common stock is not listed on any national or regional securities exchange. Quotations for shares of our common stock are listed by certain members of the National Association of Securities Dealers, Inc. on the OTC Electronic Bulletin Board. However, our common stock has been traded infrequently, in transactions arranged through brokers or otherwise, and reliable market quotations for shares of our common stock may or may not be available. As a result, we cannot give any assurances that an active trading market will exist for any of 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.

     Ownership of our equity is significantly concentrated. Resurgence Asset Management, L.L.C. and its affiliates’ managed funds and accounts own in excess of 98% of our preferred stock and over 60% of our common stock, representing ownership of over 80% of the total voting power of our equity. Each share of our preferred stock is convertible at the option of the holder thereof at any time into 1,000 shares of our common stock, subject to adjustments. The holders of our preferred stock are entitled to designate a number of our Directors roughly proportionate to their overall equity ownership, but in any event not less than a majority of our Directors as long as they hold in the aggregate at least 35% of the total voting power of our equity. As a result, these holders have the ability to control our management, policies and financing decisions, elect a majority of our Board and control the vote on most matters presented to a vote of our stockholders. In addition, our shares of preferred stock carry a cumulative dividend rate of 4% per quarter, payable in additional shares of preferred stock. 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

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total voting power of our equity owned by Resurgence Asset Management, L.L.C. and its affiliates’ managed funds and accounts. In 2005, we issued an additional 508.465 shares of our preferred stock (convertible into 508,465 shares of our common stock) in dividends, which represents approximately 8% of the current total voting power of our equity securities. The concentration of ownership of our equity may depress the market value of our equity securities and the dilutive effect of dividends on our shares of preferred stock may further depress the market value of our shares of common stock.

     Our Secured Notes are not registered under the Exchange Act and are not listed on any national or regional securities exchange. Our Secured Notes are traded infrequently, in transactions arranged through brokers or otherwise, and reliable market quotations for our Secured Notes may or may not be available. A debt security with a small outstanding principal amount available for trading (commonly referred to as a small “float”), such as our Secured Notes, may command a lower price than would a comparable debt security with a greater float. We cannot give any assurances that an active trading market in our Secured Notes will exist or as to the prices at which our Secured Notes may trade.

Item 1B. Unresolved Staff Comments

     None.

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. Currently, there are facilities to produce six petrochemicals products at the Texas City, Texas site: styrene, acetic acid, plasticizers, acrylonitrile, sodium cyanide and DSIDA. We own all of the real property which comprises our Texas City facility and we own the styrene, acrylonitrile, acetic acid and plasticizers manufacturing units located at the site. We have permanently shutdown our acrylonitrile, sodium cyanide and DSIDA facilities. The sodium cyanide and DSIDA facilities are currently being dismantled and we are exploring options for the acrylonitrile facility, which may include selling the facility for relocation to Asia or selling significant parts of the facility to other producers. We have also leased portions of the site to Praxair and S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., which constructed a partial oxidation unit and a cogeneration facility, respectively, on that land. Our Texas City site offers approximately 135 acres for future expansion by us or by other companies that can benefit from our existing infrastructure and facilities, and includes a greenbelt around the northern edge of the plant site. We continuously explore opportunities for further construction of facilities at our site. The construction of a new facility at our site by another company typically lowers our overall fixed costs for each of our operating units and provides us with additional revenue. We own 149 railcars and, at our Texas City site, we have facilities to load our products in ocean-going vessels, barges, trucks and railcars for shipment to customers throughout the world.

     Substantially all of our Texas City, Texas site, and the tangible properties located thereon, are subject to liens securing our obligations under our Senior Notes.

     We lease 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 16, 2001, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. Our Plan of Reorganization was confirmed on November 20, 2002 and, on December 19, 2002, the Debtors emerged from bankruptcy pursuant to the terms of our Plan of Reorganization. On December 29, 2005, the Bankruptcy Court entered a final decree officially closing the two remaining bankruptcy cases of the Debtors.

     On July 5, 2005, Patrick B. McCarthy, an employee of Kinder-Morgan, was seriously injured at Kinder-Morgan, Inc.’s facilities near Cincinnati, Ohio while attempting to offload a railcar containing one of our plasticizers products. An investigation into the incident is in its preliminary stages and the underlying cause of the accident is not yet known. On October 28, 2005, Mr. McCarthy and his family filed a suit in the Court of Common Pleas, Hamilton County, Ohio (Case No. A0509144) against us, BASF Corporation and five other defendants seeking over $500,000 in damages related to medical expenses and loss of earnings and earnings capacity, among other things, and punitive damages. At this time, it is impossible to determine what, if any, liability we will have for this incident and we will vigorously defend the suit. We believe that all, or substantially all, of any liability imposed upon us as a result of this suit and our

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related out-of-pocket costs and expenses will be covered by our insurance policies, subject to a $1 million deductible. We do not believe that this incident will have a material adverse affect on our business, financial position, results of operations or cash flows, although we cannot guarantee that a material adverse effect will not occur.

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

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

     No matters were submitted to a vote of security holders during the fourth quarter of 2005.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     Our common stock, par value $.01 per share, is currently quoted on the Over-the-Counter (“OTC”) Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol “SCHI.” The following table contains information about the high and low sales prices per share of our common stock for the last two years. Information about OTC Electronic Bulletin Board bid quotations represents prices between dealers, does not include retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. Quotations on the OTC Electronic Bulletin Board are sporadic, and currently there is no established public trading market for our common stock.

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2005 High	$	46.50	$	41.00	$	37.00	$	25.50
Low	$	35.05	$	26.00	$	22.00	$	11.77
2004 High	$	29.00	$	26.00	$	25.00	$	37.00
Low	$	25.00	$	21.00	$	23.00	$	23.50

     The last reported sale price per share of our common stock as reported on the OTC Electronic Bulletin Board on March 3, 2006 was $10.02. As of March 3, 2006, there were 334 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, we cannot pay dividends on our shares of common stock under the indenture for our Secured Notes or our Revolver. The payment of cash dividends, if any, will be made only from assets legally available for that purpose, and will depend on our financial condition, results of operations, current and anticipated capital requirements, general business conditions, restrictions under our existing debt instruments and other factors deemed relevant by our Board of Directors.

Equity Compensation Plan

     Under our 2002 Stock Plan, officers, key employees and consultants, as designated by our Board of Directors or Compensation Committee, may be issued stock options, stock awards, stock appreciation rights or stock units. Our 2002 Stock Plan is administered by our Board of Directors, in consultation with our Compensation Committee, and may be amended or modified from time to time by our Board of Directors in accordance with its terms. Our Board of Directors or Compensation Committee determines the exercise price of stock options, any applicable vesting provisions and other terms and provisions of each grant in accordance with our 2002 Stock Plan. Options granted under our 2002 Stock Plan become fully exercisable in the event of the optionee’s termination of employment by reason of death, disability or retirement, and may become fully exercisable in the event of a “change of control.” No option may be exercised after the tenth anniversary of the date of grant or the earlier termination of the option. We have reserved 363,914 shares of our common stock for issuance under the 2002 Stock Plan (subject to adjustment). On February 11, 2003, we granted certain of our officers and key employees options to purchase 326,000 shares of our common stock under the 2002 Stock Plan at an exercise price of $31.60 per share, 15,833 of which have been exercised and 59,167 of which have lapsed or expired without being exercised. On November 5, 2004, we granted one of our officers options to purchase 27,500 shares of our common stock under the 2002 Stock Plan at an exercise price of $31.60 per share. We have not made any other awards under the 2002 Stock Plan.

     The following table provides information regarding securities authorized for issuance under our 2002 Stock Plan as of December 31, 2005:

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					Number of securities
					remaining available for
	Number of securities to		Weighted-average		future issuance under equity
	be issued upon exercise		exercise price of		compensation plans
	of outstanding options,		outstanding options,		(excluding securities
Plan Category	warrants and rights		warrants and rights		reflected in first column
Equity compensation plans approved by security holders(1)		278,500	$	31.60		85,414
Equity compensation plans not approved by security holders		—		—		—
Total		278,500	$	31.60		85,414

⁽¹⁾ Our 2002 Stock Plan was authorized and established under our Plan of Reorganization, which became effective on December 19, 2002. Our Plan of Reorganization provided that, without any further act or authorization, confirmation of our Plan of Reorganization and entry of the confirmation order was deemed to satisfy all applicable federal and state law requirements and all listing standards of any securities exchange for approval by the board of directors or the stockholders of our 2002 Stock Plan. No additional stockholder approval of our 2002 Stock Plan has been obtained.

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Item 6. Selected Financial Data

     The following table sets forth selected financial data with respect to our consolidated financial condition and consolidated results of operations and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements and Supplementary Data included in Item 8 of this Form 10-K.

     On July 16, 2001, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. Our Plan of Reorganization was confirmed on November 20, 2002 and, on December 19, 2002 the Debtors emerged from bankruptcy pursuant to the terms of our Plan of Reorganization. On December 29, 2005, the Bankruptcy Court entered a final decree officially closing the two remaining bankruptcy cases of the Debtors. During the period from July 16, 2001 through December 19, 2002, the Debtors operated their respective businesses as debtors-in-possession pursuant to the Bankruptcy Code. Due to the Debtors’ emergence from bankruptcy and the implementation of fresh-start accounting, we refer to ourselves as “Predecessor Sterling” for periods on or before December 19, 2002 and “Reorganized Sterling” for periods after December 19, 2002. Prior to December 6, 2002, all issued and outstanding shares of Predecessor Sterling’s capital stock were held by Sterling Chemicals Holdings, Inc. and, accordingly, per share data prior to December 19, 2002 is not presented.

     The consolidated statements of operations information for the years ended December 31, 2005, 2004 and 2003 and the transition period from December 20, 2002 to December 31, 2002, and the consolidated balance sheet information at December 31, 2005, 2004, 2003 and 2002, reflect the financial position and operating results after giving effect to our Plan of Reorganization and the application of the principles of fresh-start accounting in accordance with the provisions of Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Accordingly, such financial information is not comparable to the historical financial information before December 20, 2002. During 2002, we changed our year end from September 30 to December 31.

	Reorganized Sterling												Predecessor Sterling
	Year ended			Year ended			Year ended			December 20 to			October 1 to
	December 31,			December 31,			December 31,			December 31,			December 19,		Fiscal Year Ended September 30,
	2005			2004			2003			2002			2002		2002			2001
	(In Thousands, Except Per Share Data)
Operating Data:
Revenues	$	641,886		$	655,353		$	518,772		$	12,211		$	98,575	$	375,095		$	381,670
Gross profit (loss)		(11,248	)		22,344			23,790			1,494			6,471		47,530			(22,398	)
Income (loss) from continuing operations(1)		(18,508	)		(39,881	)		1,270			(553	)		230,145		(32,685	)		(105,511	)
Income (loss) from discontinued operations(2)		(11,060	)		(22,763	)		(15,469	)		(991	)		188,466		(3,301	)		(76,199	)
Per Share Data:
Net loss attributable to common stockholders		(12.94	)		(24.30	)		(6.84	)		(0.61	)		¾		¾			¾
Net income (loss) from continuing operations attributable to common stockholders		(9.03	)		(16.24	)		(1.36	)		(0.26	)		¾		¾			¾
Cash dividends		¾			¾			¾			¾			¾		¾			¾

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	Reorganized Sterling								Predecessor Sterling
	Year ended		Year ended		Year ended		December 20 to		October 1 to
	December 31,		December 31,		December 31,		December 31,		December 19,		Fiscal Year Ended September 30,
	2005		2004		2003		2002		2002		2002			2001
	(In Thousands, Except Per Share Data)
Balance Sheet Data:
Working capital(3)	$	76,605	$	106,767	$	137,412	$	149,518	$	163,638	$	154,988		$	218,107
Total assets		386,594		473,553		550,503		547,170		546,014		489,648			511,850
Long-term debt (excluding current portion of long-term debt)(4)		100,579		100,579		100,579		94,275		94,275		¾			42,270
Stockholders’ equity (deficiency in assets)		80,285		120,083		189,436		209,011		210,725		(611,477	)		(563,582	)

(1)	During 2004, we recorded a $48.5 million goodwill impairment charge. Also during 2004, we recorded a pension curtailment gain of $13 million. The period from October 1, 2002 through December 19, 2002 includes a net loss on fresh-start adjustments of $203 million along with a net gain on debt restructuring of $458 million. During fiscal 2002, we recorded $56.8 million of deferred tax expense to reflect a full valuation allowance on our U.S. deferred tax assets.
(2)	During 2005, we announced that we were exiting the acrylonitrile business and related derivatives operations. On December 19, 2002, pursuant to our Plan of Reorganization, the Debtors’ pulp chemicals business was sold to Superior Propane, Inc. for approximately $373 million and the Debtors’ acrylic fibers business was sold to local management of that business for nominal consideration. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment and Disposal of Long Lived Assets,” we reported the operating results of these businesses as discontinued operations in the consolidated statement of operations and cash flows, and the assets and liabilities of these businesses have been presented separately as assets and liabilities related to discontinued operations in our consolidated balance sheet. During 2004, we recorded a $22 million pre-tax impairment charge related to our acrylonitrile long-lived assets.
(3)	Working capital at December 31, 2005, 2004, 2003, 2002 and September 30, 2002 and 2001 includes net assets (liabilities) of discontinued operations of $(2) million, $55 million, $57 million, $27 million, $164 million and $178 million, respectively. Working capital at September 30, 2002 and 2001 excludes pre-petition liabilities.
(4)	Excludes long-term debt of $418.4 million and $295.0 million, classified as pre-petition liabilities – subject to compromise and pre-petition liabilities – not subject to compromise, respectively for September 30, 2002 and 2001.

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

Overview

Business

     We are a leading North American producer of selected petrochemicals used to manufacture a wide array of consumer goods and industrial products throughout the world. Our primary products are styrene, acetic acid and plasticizers. Styrene is a commodity chemical used to produce intermediate products such as polystyrene, expandable polystyrene resins and ABS plastics, which are used in a wide variety of products such as household goods, foam cups and containers, disposable food service items, toys, packaging and other consumer and industrial products. Approximately 50% of our styrene capacity is currently committed for sales in North America under long-standing customer relationships, and the balance of our capacity is available to produce styrene for sales throughout the world when market conditions warrant, including the high growth Asian markets. Acetic acid is used primarily to produce vinyl acetate monomer, which is used in a variety of products, including adhesives and surface coatings. All of our acetic acid production is sold to BP Amoco Chemical Company (“BP Chemicals”) pursuant to a long-term contract that expires in 2016, which has provided us with a stable, steadily increasing source of income since the inception of this relationship in 1986. All of our plasticizers, which are used to make flexible plastics, such as shower curtains, floor

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coverings, automotive parts and construction materials, are sold to BASF Corporation (“BASF”) pursuant to a long-term production agreement that expires in 2013, subject to some limited early termination rights held by BASF.

     We manufacture all of our petrochemicals products at our world scale facility in Texas City, Texas. This facility is strategically located on a deepwater port, and also has truck and railcar loading and unloading facilities, giving us the ability to accept shipment of our major raw materials in the most efficient manner and load shipments of our petrochemicals products for delivery throughout the world. As set forth below, our rated annual production capacity at December 31, 2005 is among the highest in North America for styrene and acetic acid.

		Percent of
		Total North
	Rated Annual	American			North American		Global
Product	Production Capacity	Capacity			Market Position		Production Capacity
Styrene	1.7 billion pounds		11	%		4	60 billion pounds
Acetic Acid	1.1 billion pounds		17	%		3	22 billion pounds

     We own the styrene, acetic acid and plasticizers manufacturing units located at our Texas City facility. We have also leased portions of our Texas City site to Praxair Hydrogen Supply, Inc. (“Praxair”) and S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., which constructed a partial oxidation unit and a cogeneration facility, respectively, on that land. We lease the space for our principal offices, which are in Houston, Texas.

     We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products throughout the world. Styrene is a commodity and exhibits wide swings in prices and profit margins based upon current and anticipated levels of supply and demand. The acetic acid industry tends to sell most of its products through long-term sales agreements having “cost plus” pricing mechanisms, which eliminates much of the volatility seen in other petrochemicals products and results in more stable and predictable earnings and profit margins. Although exceptions occasionally occur, as a general rule, if styrene profit margins are favorable, our overall financial performance is good, but our overall financial performance suffers when styrene margins are unfavorable. The market for styrene roughly follows repetitive cycles, and general trends in the supply and demand balance may be observed over time. However, it is difficult, if not impossible, to definitively predict when market conditions will be favorable or unfavorable.

     The financial performance of each of our products is primarily a function of sales prices, the cost of raw materials and energy and sales volumes. While changes in the prices for our products may be tracked through a variety of sources, a change in price does not necessarily result in a corresponding change in our financial performance. When the prices of our products increase or decrease, our overall financial performance may improve, decline or stay roughly the same depending upon the extent and direction of changes in our costs for raw materials and energy and our production rates. For most of our products, the combined cost of raw materials and energy resources is far greater than all other costs of production combined. We use significant amounts of natural gas as fuel in the production of our products, and the producers of most of our raw materials use significant amounts of natural gas in their production. As a result, our production and raw materials costs increase or decrease based upon changes in the price for natural gas. Natural gas and most of our raw materials are commodities and, consequently, are subject to wide fluctuations in prices, which can, and often do, move independently of changes in the prices for our products. Prices for, and the availability of, natural gas and many of our raw materials are largely based on regional factors, which can result in wide disparities in prices in different parts of the world or shortages or unavailability in some regions at the same time when these products are plentiful in other parts of the world. Prices for styrene, on the other hand, tend to be more consistent throughout the world, after taking into account transportation costs. Consequently, changes in prices for natural gas and raw materials tend to impact the margin on our sales rather than the price of our products, with margins increasing when natural gas and raw materials costs decline and vice versa. In addition, many producers in other parts of the world use oil-based processes rather than natural gas-based processes. Consequently, the relationship between the price of crude oil and the price of natural gas can either increase or decrease our competitiveness depending on their relative values at any particular point in time. Sales volumes influence our overall financial performance in a variety of ways. As a general rule, increases in sales volumes will result in an increase in overall revenues and vice versa, although this is not necessarily the case since the prices for some of our products can change dramatically from month-to-month. More importantly, changes in production rates impact the average cost per pound of the products produced. If more pounds are produced, our fixed costs are spread over a greater number of pounds resulting in a lower average cost to produce

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each pound. In addition, our production rates influence the overall efficiency of our manufacturing unit and the yields we receive from our raw materials.

     Styrene. Styrene prices were fairly high, from a historical perspective, during 2004 and 2005. However, over the last two years, the styrene industry has experienced significant changes, with these historically high styrene prices being driven by higher benzene costs rather than improved margins on styrene sales. In April 2004, prices for benzene, one of the primary raw materials in the production of styrene, escalated to historical highs for both spot and contract volumes. Prices for benzene continued to rise over the course of the second and third quarters of 2004 and, since that time, prices have been extremely volatile but have continued to remain above historical norms. As the combined cost of raw materials and energy resources is far greater than the total of all other costs of styrene production, with the cost of benzene having the greatest impact on overall styrene manufacturing costs, these historically high raw material costs have made it difficult for United States styrene producers to realize meaningful margins on their styrene sales. While styrene margins have been compressed, absolute styrene sales prices continue to be very high, from a historical perspective resulting in negative impacts on demand growth for styrene.

     Many industry experts had been forecasting that the balance of supply and demand for styrene would favor producers over the near-term, especially in the Asian markets. Over the last five years, China has been the driver for growth in styrene demand, representing around 75% of the world’s new styrene demand in that period. Historically, we have positioned ourselves to take advantage of peaks in the Chinese styrene markets, with only 50% of our styrene capacity being committed under long-term arrangements. However, over the last two years, relatively high benzene and natural gas prices have significantly limited our ability to sell styrene into the Chinese markets, and high styrene prices have reduced styrene demand growth rates. We expect these dynamics to continue throughout 2006. Further complicating our ability to sell styrene into the Chinese markets is the announcement by several of our competitors of their intention to build new styrene production units outside the United States during the late 2006 to 2008 time frame. Several of these facilities appear likely to startup during this period, although it is not uncommon for announced construction to be delayed or abandoned. In addition, most of this new capacity is being constructed in politically unstable regions of the world, such as the Middle East, which may impact the start-up of this new capacity. If and when these new units are completed, we would anticipate more difficult market conditions, especially in the export markets, until the additional supply is absorbed by growth in market demand.

     Given the market conditions in the Chinese markets and the high domestic raw materials and energy costs we have been experiencing, most of our styrene sales over the last two years have been made to customers in NAFTA countries and South America. We expect that most our styrene sales in the next three to five years will continue to be in these areas. Consequently, we intend to focus our efforts on increasing market share in these areas, with periodic Asian styrene sales on an opportunistic basis, until market conditions in Asia become more viable for North American styrene producers. We cannot, however, guarantee that we will be successful in increasing our market share in these areas during that period or guarantee when, or if, market conditions for North American styrene producers will improve in Asia.

     Our styrene facilities consist of two trains, a north train and a south train. On September 22, 2005, during a shut down of our plant in anticipation of Hurricane Rita, the superheater in the south train of our styrene facilities was significantly damaged in a fire, forcing a closure of the south train until repairs could be completed. In addition, the north train of our styrene facilities sustained internal damage as a result of this incident and, although still capable of producing product, the damage caused significant raw material yield and energy inefficiencies. On January 12, 2006, we shut down the north train of our styrene facilities to make repairs to the reactor and replace the existing catalyst. We re-started the north train of our styrene facilities in mid–February and re-started the south train of our styrene facility in early March. During the shutdowns, we fully met our supply obligations to our contract styrene customers through the operation of the north train of our styrene facilities, supplemented by open market purchases of styrene. We estimate the cost for repairs to be approximately $10 million.

     Acetic Acid. Margins for acetic acid have grown steadily over the past several years, with our profitability for acetic acid reaching record levels in 2004 and continuing strong in 2005, despite a scheduled one-month maintenance turnaround. The North American acetic acid market is mature and well developed, with demand being linked to the demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Vinyl acetate monomer is the largest derivative of acetic acid, representing just over 40% of total demand. From 2005 to 2009, global production of vinyl acetate monomer is expected to increase from 7.3 billion pounds to 8.3 billion pounds. The acetic acid industry tends to sell most of its products through long term sales agreements having “cost plus” pricing mechanisms, which eliminates much of the volatility seen in other petrochemicals products and results in more stable and predictable earnings and profit margins. All of our acetic acid production is sold to BP Chemicals under a long-term production agreement that extends until at least 2016. Under the production agreement, BP Chemicals markets all

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of the acetic acid we produce and pays us, among other amounts, a portion of the profits earned from their sales of our acetic acid.

     Several acetic acid capacity additions occurred in 1998 and 1999, including an expansion of our acetic acid unit from 800 million pounds of rated annual production capacity to one billion pounds. In late 2000, BP Chemicals and Celanese AG (the two largest producers of acetic acid in the world) began operating 880 million-pound and 1.1 billion-pound acetic acid production units in Malaysia and Singapore, respectively. These capacity additions were somewhat offset by reductions of approximately 1.6 billion pounds in global capacity from the shutdown of various outdated acetic acid plants from 1999 through 2001. In addition, BP Chemicals has announced that it will close two of its outdated production units at its Hull, England acetic acid production facilities in 2006, which account for an annual production capacity of approximately 500 million pounds of acetic acid, some of which is currently sold in the European and South American markets. During 2005, we expanded the capacity of our acetic acid plant to approximately 1.1 billion pounds rated annually.

     Plasticizers. Historically we have produced only linear plasticizers, which typically receive a premium over competing branched propylene-based products for customers that require enhanced performance properties. However, the markets for competing plasticizers can 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. In 2005, BP Chemicals announced the permanent closure of its linear alpha-olefins production facility in Pasadena, Texas, the primary source of supply of this feedstock to the oxo-alcohols production unit at our plasticizers facility. Due to the limited supply and the high price of linear alpha-olefins feedstocks, branched propylene-based products, or possibly C4-based products, will probably replace linear plasticizers for most applications over the long-term. We are currently in the process of modifying our plasticizers facilities, and BASF is also modifying its own Pasadena, Texas plasticizers facilities, to produce lower cost-branched plasticizers products.

Discontinued Operations

     On September 16, 2005, we announced that we were exiting the acrylonitrile business and related derivative operations, which includes sodium cyanide and DSIDA. Our decision was based on a history of operating losses incurred by our acrylonitrile and derivatives businesses, and was made after a full review and analysis of our strategic alternatives. Our acrylonitrile and derivatives businesses, which sustained gross losses of $7 million during the first six months of 2005 and $28 million and $36 million during 2004 and 2003, respectively, had been shut down since February of 2005 following a force majeure event involving the availability of propylene.

     The closure of these facilities is expected to result in cash costs of between $10 million and $12 million (before taxes). These costs include payment of contractual obligations, employee severance and decommissioning costs. Approximately $6 million of these cash costs were expensed in 2005, with the balance expected to be expensed during the first half of 2006. In addition, during the third quarter of 2005, there was an approximately $3 million (before taxes) impairment charge related to our acrylonitrile and derivatives operations and a curtailment gain totaling $1.2 million due to workforce reductions.

     We plan to reduce our workforce by 20 employees in connection with our exit from these businesses, which will result in a charge to operating income during 2006 of approximately $0.4 million for severance payments. After this workforce reduction, we will have reduced our total headcount in connection with the exit from these businesses by approximately 50 people. We intend to seek alternative uses of the space and infrastructure that was associated with the acrylonitrile and derivatives operations, although we cannot guarantee that we will be able to develop any alternative uses for that space or infrastructure.

Results of Operations

     The following table sets forth revenues, gross profit (loss), operating income (loss) from continuing operations and net income (loss) from continuing operations for 2005, 2004 and 2003:

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	Year ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Revenues:	$	641,886		$	655,353		$	518,772
Gross profit (loss):		(11,248	)		22,344			23,790
Operating income (loss) from continuing operations:		(19,059	)		(22,192	)		11,757
Income (loss) from continuing operations		(18,508	)		(39,881	)		1,270

Comparison of 2005 to 2004

  Revenues, Gross Profit (Loss) and Net Income (Loss) from continuing operations

     Our revenues were $642 million in 2005, a decrease of 2% from the $655 million in revenues we recorded in 2004. This decrease in revenues resulted primarily from a reduction in styrene revenues due to a change in customer mix and lost volumes of styrene following the fire that occurred in our styrene unit in September 2005. As a result of this curtailed ability to produce styrene, we sold a larger percentage of our overall styrene sales under conversion arrangements during 2005. We recorded a net loss from continuing operations of $19 million for 2005, compared to a net loss of $40 million recorded in 2004. This reduction in net loss was primarily due to the absence of the impairment of $48 million for goodwill which occurred in 2004, partially offset by a reduction in gross profit in 2005 due to the impact of Hurricane Rita and the resulting fire in our styrene facility mentioned above.

     Revenues from our styrene operations were $514 million in 2005, a decrease of 3% from the $530 million in revenues we recorded in 2004. Direct sales prices for styrene increased 6% from those realized during 2004. Spot prices for styrene, a component of our direct sales prices, ranged from $0.44 to $0.62 per pound during 2005, compared to $0.37 to $0.63 per pound during 2004. Our total sales volumes for styrene in 2005 were 1% lower than 2004. During 2005, prices for benzene, one of the primary raw materials required for styrene production, increased 2% over the prices we paid for benzene in 2004, and prices for ethylene, the other primary raw material required for styrene production, were 35% higher than the prices we paid for ethylene in 2004. Average costs for natural gas, another major component in the cost of manufacturing styrene, increased 23% during 2005 compared to average natural gas costs during 2004. Margins on our styrene sales in 2005 decreased from those realized in 2004, primarily as a result of higher raw materials costs and the impact of Hurricane Rita and the resulting fire in our styrene facility mentioned above.

     Revenues from acetic acid and plasticizers were $128 million in 2005, a slight increase from the $126 million in revenues we recorded in 2004. This slight increase in revenues resulted from a 7% increase in acetic acid revenues offset by a 6% decrease in plasticizers revenues. We achieved record monthly production rates in our acetic acid business during 2005.

Organizational efficiency project

     During the last half of 2004, we developed an organizational efficiency project involving the design, development and implementation of uniform and standardized systems, processes and policies to improve our production, maintenance, process efficiency, logistics and materials management and procurement functions. During 2005, we reduced our fixed costs by more than $20 million, representing a 15% reduction in our annual fixed costs. Approximately 10% to 15% of these cost savings accrue to the benefit of some of our customers under the cost reimbursement provisions of our production agreements. Our actual future level of savings from our cost reduction initiatives may be impacted by a variety of factors, including operating rates of our production units and sales volumes of our products, and may, consequently, be lower than our expectations.

SG&A Expenses

     Our SG&A expense from continuing operations was $8 million in 2005 compared to $11 million in 2004. This reduction was primarily due to a $2 million reduction in our allowance for doubtful accounts resulting from a decrease in total accounts receivable, as well as a decrease in balances with customers having greater credit risk.

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Provision (benefit) for income taxes

     During 2005, our effective tax rate was 37% compared to 16% in 2004. This difference in the effective rate was a result of the $48.5 million impairment of goodwill recorded during 2004, which was a non-tax deductible charge.

Loss from Discontinued Operation, net of tax

     We recorded a net loss from discontinued operations of $11 million in 2005 compared to a loss of $23 million in 2004. The loss of $11 million in 2005 includes costs of $9 million related to our exit from the acrylonitrile and related derivatives businesses. These costs included accruals for contractual obligations due in 2006 and asset impairments. The loss of $23 million in 2004 includes a pre-tax impairment charge of our long-lived acrylonitrile assets of $22 million.

Comparison of 2004 to 2003

  Revenues, Gross Profit (Loss) and Net Income (Loss) from continuing operations

     Our revenues were $655 million in 2004, an increase of 26% from the $519 million in revenues we received in 2003. This increase in revenues resulted primarily from higher styrene sales prices during 2004. We recorded a net loss from continuing operations of $40 million for 2004, compared to net income of $1 million recorded in 2003. This increase in net loss was primarily due to the impairment of $48 million of goodwill recorded in 2004.

     Revenues from our styrene operations were $530 million in 2004, an increase of 30% from the $409 million in revenues we recorded in 2003. Direct sales prices for styrene in 2004 increased 49% from those realized during 2003. Spot prices for styrene, a component of our direct sales prices, ranged from $0.37 to $0.63 per pound during 2004, compared to $0.26 to $0.37 per pound during 2003. However, our total sales volumes for styrene in 2004 were 11% lower than 2003. The decrease in sales volumes during 2004 was primarily attributable to the one-month scheduled maintenance turnaround that we completed during the first quarter of 2004. During 2004, prices for benzene, one of the primary raw materials required for styrene production, were 92% higher than the prices we paid for benzene in 2003, and prices for ethylene, the other primary raw material required for styrene production, were 35% higher than the prices we paid for ethylene in 2003. Average costs for natural gas, another major component in the cost of manufacturing styrene, increased 11% during 2004 compared to average natural gas costs during 2003. Margins on our styrene sales in 2004 decreased from those realized in 2003, as the increases in our raw materials and energy costs more than offset the increases in our styrene sales prices. Towards the end of 2004, spot prices for benzene sharply declined from the historically high levels seen during the third quarter of 2004. At the end of December 2004, spot prices for benzene dropped to approximately $2.60 per gallon from their historical high in the third quarter of 2004 of around $4.00 per gallon. As benzene prices have the greatest impact on the variable manufacturing costs of styrene, the decrease in benzene prices resulted in downward pressure on styrene sales prices, which in turn resulted in a lower-of-cost-or-market adjustment to the carrying values of our December 31, 2004 ending inventories of styrene and its raw materials by approximately $14 million.

     Revenues from our other petrochemicals operations, primarily acetic acid, plasticizers and methanol, were $126 million in 2004, a slight increase from $123 million in revenues in 2003. This slight increase in revenues primarily consisted of an 18% increase in acetic acid revenues and a 12% increase in plasticizers revenues, which were mostly offset by the absence of revenues derived from our prior methanol contract with Methanex Corporation, which expired on December 31, 2003.

Organizational efficiency project

     In implementing our cost savings initiatives during 2004, we incurred approximately $5.9 million in costs related to these projects, including $3.9 million for employee severance and benefit costs, of which $2.4 million was incurred during the fourth quarter of 2004.

SG&A Expenses

     Our SG&A expense from continuing operations was $11 million in 2004 compared to $16 million in 2003. This reduction in SG&A expense was largely due to the absence of bankruptcy-related professional fees incurred in 2003.

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Impairment of long-lived assets

     During the second quarter of 2004, we performed an assessment of the carrying value of our long-lived assets to be held and used, including goodwill. This assessment was performed because of negative industry and economic trends affecting both our existing operations and expected future margins, primarily driven by high raw materials and energy prices. At the conclusion of this assessment, we recorded an impairment of our goodwill of $48.5 million.

     For the impairment analysis, recoverability was determined by comparing the estimated fair value of the assets, utilizing the present value of expected net cash flows, to the carrying value of the assets. In determining the present value of expected net cash flows, we estimated future net cash flows from the assets and the timing of those cash flows and then applied a discount rate to reflect the time value of money and the inherent uncertainty of those future cash flows. The discount rate we used was based on independently calculated risks for a composite group of commodity chemical companies, our target capital mix and an estimated market risk premium. The assumptions we used in estimating future cash flows were consistent with our internal planning.

Gain on pension curtailment

     Effective as of January 1, 2005, we froze all accruals under our defined benefit pension plan for our salaried employees, which resulted in a plan curtailment under Statement of Financial Accounting Standards (“SFAS”) No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” As a result, we recorded a pretax curtailment gain of $13 million in the fourth quarter of 2004. At the time we froze accruals under our defined benefit pension plan, we also increased the company match for employee contributions under our 401(k) plan.

Gain on sale of methanol plant

     On December 29, 2004, we completed the sale of our idled methanol plant to Sigma Investment Holdings, L.L.C. (“Sigma”). Sigma is in the process of dismantling the methanol plant, and they have indicated that they intend to reassemble the methanol plant in Asia. Under our Methanol Production Agreement with BP Chemicals, BP Chemicals is entitled to a portion of the net proceeds from the sale of our methanol plant. After taking into account sales commissions and various costs and estimated expenses we will be required to incur in connection with dismantling the methanol plant, as well as the distribution to BP Chemicals, we generated a pre-tax gain of $2.4 million during the fourth quarter of 2004 from the sale of our methanol plant.

Other Expense (Income)

     We recorded no other income in 2004 compared to the $4 million in other income we recorded in 2003, which primarily consisted of a $3.7 million sales tax refund we received from the State of Texas.

Provision (benefit) for income taxes

     During 2004, our effective tax rate was 22% compared to 37% in 2003. The difference from the statutory rate in 2004 was a result of the $48.5 million impairment of goodwill of recorded during 2004, which was a non-tax deductible charge.

Loss from Discontinued Operations, net of tax

     We recorded a net loss from discontinued operations of $23 million in 2004 compared to a loss of $15 million in 2003. The loss of $23 million in 2004 includes a pre-tax impairment charge of our long-lived acrylonitrile assets of $22 million.

Liquidity and Capital Resources

     On December 19, 2002, we issued $94.3 million in original principal amount of our Secured Notes. Our Secured Notes are senior secured obligations and rank equally in right of payment with all of our other existing and future senior indebtedness, and senior in right of payment to all of our existing and future subordinated indebtedness. Our Secured Notes are guaranteed by Sterling Chemicals Energy, Inc. (“Sterling Energy”), our only wholly owned subsidiary. Sterling Energy’s guaranty ranks equally in right of payment with all of its existing and future senior indebtedness, and senior in right of payment to all of its existing and future subordinated indebtedness. Our Secured Notes and Sterling Energy’s guaranty are secured by a first priority lien on all of our production facilities and related assets.

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     Our Secured Notes bear interest at an annual rate of 10%, payable semi-annually on June 15 and December 15 of each year. Until December 19, 2004, we were permitted under certain circumstances to pay interest on our Secured Notes through the issuance of additional Secured Notes rather than the payment of cash at an interest rate of 13 3 / 8 % per annum. In December 2003, we made an interest payment on our Secured Notes at the higher rate through the issuance of $6.3 million in original principal amount of additional Secured Notes, increasing the aggregate principal amount of outstanding Secured Notes to $100.6 million. We have made all other interest payments on our Secured Notes in cash. We may redeem our Secured Notes at any time at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest, subject to compliance with the terms of our Revolver. In addition, in the event of a specified change of control or the sale of our facility in Texas City, Texas, we are required to offer to repurchase our Secured Notes at 101% of the outstanding principal amount thereof plus accrued and unpaid interest. Under certain circumstances, we are also required to use the proceeds of other asset sales to repurchase those Secured Notes tendered by the holders at a price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest.

     The indenture governing our Secured Notes contains numerous covenants and conditions, including, but not limited to, restrictions on our ability to incur indebtedness, create liens, sell assets, make investments, make capital expenditures, engage in mergers and acquisitions and pay dividends. The indenture also includes various circumstances and conditions that would, upon their occurrence and subject in certain cases to notice and grace periods, create an event of default thereunder. However, the indenture does not require us to satisfy any financial ratios or maintenance tests.

     On December 19, 2002, we also established our Revolver, which provides up to $100 million in revolving credit loans, subject to borrowing base limitations. Our Revolver has an initial term ending on September 19, 2007. Under our Revolver, we and Sterling Energy are co-borrowers and are jointly and severally liable for any indebtedness thereunder. Our Revolver is secured by first priority liens on all of our accounts receivable, inventory and other specified assets, as well as all of the issued and outstanding capital stock of Sterling Energy.

     Borrowings under our Revolver bear interest, at our option, at an annual rate of either the Alternate Base Rate plus 0.75% or the “LIBO Rate” (as defined in our Revolver) plus 2.75%. The “Alternate Base Rate” is equal to the greater of the “Base Rate” as announced from time to time by JPMorgan Chase Bank in New York, New York or 0.50% per annum above the latest “Federal Funds Rate” (as defined in our Revolver). The average borrowing rate under our Revolver for the year ended December 31, 2005 was 6.22%. Under our Revolver, we are also required to pay an aggregate commitment fee of 0.50% per year (payable monthly) on any unused portion. Available credit is subject to a monthly borrowing base of 85% of eligible accounts receivable plus the lesser of $50 million and 65% of eligible inventory. In addition, the borrowing base for our Revolver must exceed outstanding borrowings thereunder by $8 million at all times. As of December 31, 2005, total credit available under our Revolver was limited to $46 million due to these borrowing base limitations. As of December 31, 2005, there were no loans outstanding under our Revolver, and we had $2 million in letters of credit outstanding.

     Our Revolver contains numerous covenants and conditions, including, but not limited to, restrictions on our ability to incur indebtedness, create liens, sell assets, make investments, make capital expenditures, engage in mergers and acquisitions and pay dividends. Our Revolver also contains a covenant that requires us to earn a specified amount of earnings before interest, income taxes, depreciation and amortization (as defined in our Revolver) on a monthly basis if, for 15 consecutive days, unused availability under our Revolver plus cash on hand is less than $20 million. Our Revolver includes various circumstances and conditions that would, upon their occurrence and subject in certain cases to notice and grace periods, create an event of default thereunder.

     Our liquidity (i.e., cash and cash equivalents plus total credit available under our Revolver) was $86 million at December 31, 2005, an increase of $30 million compared to our liquidity at December 31, 2004. Our liquidity increased primarily due to the reduction in working capital that followed the shutdown of our acrylonitrile facility in February 2005 and subsequent exit from the acrylonitrile and derivatives businesses. We expect our liquidity to be lower by the end of the first quarter of 2006, as the cost of the turnaround of our styrene unit, including maintenance expense, catalyst installation and capital projects, is expected to be approximately $20 million during this period. We also expect to receive insurance proceeds related to the fire in our styrene facility of approximately $3 million, which we expect to receive by March 31, 2006. We believe that our cash on hand, together with credit available under our Revolver, will be sufficient to meet our short-term and long-term liquidity needs for the reasonably foreseeable future, although we cannot guarantee that our liquidity will be adequate during any particular period.

Working Capital

     Our working capital, excluding assets and liabilities from discontinued operations, was $79 million at December 31, 2005, an increase of $28 million from our working capital at December 31, 2004, excluding discontinued

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operations. This increase in working capital resulted primarily from a reduction in our accounts receivable and inventories, partially offset by a decrease in accounts payable.

     Our working capital relating to discontinued operations was a net liability of $2 million at December 31, 2005 compared to a net asset of $55 million at December 31, 2004. This reduction was primarily due to the monetization of the accounts receivable and inventories associated with the acrylonitrile business and related derivative operations.

Cash Flow

     Net cash provided by our operations was $68 million in 2005, compared to net cash used in our operations of $47 million in 2004. This improvement in net cash flow in 2005 was primarily driven by a reduction in inventories and accounts receivable offset by a decrease in accounts payable. These reductions were primarily due to our exit from the acrylonitrile and related derivative businesses.

     Net cash flow used in our investing activities was $10 million in 2005 and $11 million in 2004, primarily relating to capital expenditures.

     Net cash flow used in financing activities was $18 million in 2005, consisting of a repayment of $18 million borrowed under our Revolver in 2004.

Capital Expenditures

     Our capital expenditures were $9 million in 2005, $15 million in 2004 and $16 million in 2003. Capital expenditures are expected to be approximately $20 million in 2006. These capital expenditures will primarily be for projects associated with the styrene turnaround during the first quarter of 2006, including capital expenditures related to the damages caused by the fire in our styrene unit, routine safety, environmental and replacement capital and the continuation of capital projects related to the reduction of emissions of nitrogen oxide and highly volatile organic compounds required under the State Implementation Plan adopted by the Texas Commission for Environmental Quality related to compliance with the ozone provisions of the Clean Air Act.

     Our capital expenditures for environmentally related prevention, containment and process improvements were approximately $2 million in 2005 and $8 million in 2004. We anticipate spending approximately $2 million on these types of expenditures during 2006.

Contractual Cash Obligations

     The following table summarizes our significant contractual obligations at December 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

	Less than 1						More than
	year (1)		1-3 years		4-5 years		5 years		Total
	(Dollars in Thousands)
Long-term debt	$	—	$	100,579	$	—	$	—	$	100,579
Interest payments on long-term debt		10,058		10,058		—		—		20,116
Operating leases		293		879		586		513		2,271
Purchase obligations (2)		80,000		135,000		59,000		149,000		423,000
Pension and other postretirement benefits		9,472		17,856		8,142		30,491		65,961
Contractual obligations of discontinued operations		3,800		—		—		—		3,800
Total	$	103,623	$	264,372	$	67,728	$	180,004	$	615,727

⁽¹⁾ Payment obligations under our Revolver are not presented because there were no outstanding borrowings at December 31, 2005 and interest payments fluctuate depending on the interest rate and outstanding balance under our Revolver at any point in time.

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⁽²⁾ For the purposes of this table, we have considered contractual obligations for the purchase of goods or services as agreements involving more than $1 million that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. Most of the purchase obligations identified include variable pricing provisions. We have estimated the future prices of these items, utilizing forward curves where available. The pricing estimated for use in this table is subject to market risk.

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 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 and require our most difficult, subjective or complex judgments.

Revenue Recognition

We generally recognize revenue from sales in the open market, raw material conversion agreements and long-term supply contracts at the time the products are shipped. Some of our contractual arrangements include a profit sharing component, and we estimate and accrue our expected revenues from these profit sharing arrangements on a monthly basis. Shipping and handling costs associated with the delivery of our products to customers are included in cost of goods sold.

Inventories

     Inventories are carried at the lower-of-cost-or-market value. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies, which are valued at average cost. The comparison of cost to market value involves estimation of the market value of our products. As of December 31, 2005 and 2004, this comparison led to a lower-of-cost-or-market adjustment of $3 million and $16 million, respectively. We enter into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by us in connection with these exchange agreements are included in inventory.

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 these assets. If these projected cash flows from these assets are less than the carrying amount of these assets, an impairment would be 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, recoverability 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 independently calculated risks for a composite group of commodity chemical companies, our target capital mix and an estimated market risk premium. The assumptions we use in estimating future cash flows are consistent with our internal planning.

Income Taxes

     Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement purposes. Deferred tax assets are regularly assessed 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.

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 return on plan assets and health care cost increase projections. Assumptions are determined based on our historical data and appropriate market indicators,

32

and are evaluated each year as of the plans’ measurement date. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in our financial statements.

Plant Turnaround Costs

     As a part of normal recurring operations, each of our manufacturing units is completely shut down from time to time, for a period typically lasting two to four weeks, to replace catalysts and perform major maintenance work required to sustain long-term production. These periods are commonly referred to as “turnarounds” or “shutdowns.” While actual timing is subject to a number of variables, turnarounds of our styrene unit typically occur every two to three years. We currently expense the costs of turnarounds as the associated expenses are incurred. Prior to our adoption of fresh-start accounting, we had accrued these costs over the expected period between turnarounds. As expenses for turnarounds can be significant, the impact of expensing turnaround costs as they are incurred can be material for financial reporting periods during which the turnarounds actually occur.

New Accounting Standards

     In November 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) in an effort to conform U.S. accounting standards for inventories to International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are currently evaluating the impact of this standard on our consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 123-Revised 2004 (“SFAS 123(R)”), “Share-Based Payment.” This is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” As noted in the notes to financial statements, we do not record compensation expense for stock-based compensation. Under SFAS 123(R), we will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. This is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The pro forma table in Note 2 of the Notes to the Consolidated Financial Statements illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123.

     In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment.” SAB No. 107 announces the position of the staff of the Securities and Exchange Commission regarding the application of SFAS No. 123(R). SAB No. 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain rules and regulations of the Securities and Exchange Commission, as well as providing the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 also highlights the importance of disclosures related to the accounting for share-based payment transactions. We are currently evaluating the effect of SAB No. 107 on our consolidated financial statements.

     In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations,” to clarify the term “conditional asset retirement” as used in SFAS 143, “Accounting for Asset Retirement Obligations.” Under FIN 47, a liability for the fair value of a conditional asset retirement obligation is recognized when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be factored into the measurement of the liability when sufficient information exists. This interpretation did not have a material impact on our consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement changes the accounting for and reporting of a change in accounting principles. Under SFAS No. 154, a company that makes a voluntary change in accounting principles must apply that change retrospectively to prior period financial statements, unless that application would be impracticable. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005.

33

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     The table below provides information about our market sensitive financial instruments and constitutes a “forward-looking statement.”

															Fair Value
															December 31,
Expected Maturity Dates	2006		2007		2008		2009		2010		Thereafter		Total		2005
	(Dollars in Thousands)
Secured Notes		—		100,579		—		—		—		—		100,579		95,625

     Our Secured Notes bear interest at an annual rate of 10%, payable semi-annually on June 15 and December 15 of each year. The fair value of our Secured Notes is based on their quoted price.

34

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Sterling Chemicals, Inc.
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003	36
Consolidated Balance Sheets as of December 31, 2005 and 2004	37
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency in Assets) for the years ended December 31, 2005, 2004 and 2003	38
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	39
Notes to Consolidated Financial Statements	40
Report of Independent Registered Public Accounting Firm	60

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2005			2004			2003
	(Dollars in Thousands, Except Share Data)
Revenues	$	641,886		$	655,353		$	518,772
Cost of goods sold		653,134			633,009			494,982
Gross profit (loss)		(11,248	)		22,344			23,790
Selling, general and administrative expenses		7,811			11,413			15,553
Impairment of long-lived assets		—			48,463			—
Gain on pension curtailment		—			(12,944	)		—
Gain on sale of methanol plant		—			(2,396	)		—
Other expense (income)		—			—			(3,520	)
Interest and debt related expenses, net of interest income		10,090			10,427			9,729
Income (loss) from continuing operations before income tax		(29,149	)		(32,619	)		2,028
Provision (benefit) for income taxes		(10,641	)		7,262			758
Income (loss) from continuing operations		(18,508	)		(39,881	)		1,270
Loss from discontinued operations, net of tax		(11,060	)		(22,763	)		(15,469	)
Net loss		(29,568	)		(62,644	)		(14,199	)
Preferred stock dividends		7,014			5,994			5,125
Net loss attributable to common stockholders	$	(36,582	)	$	(68,638	)	$	(19,324	)
Income (loss) per share of common stock, basic and diluted:
Income (loss) from continuing operations	$	(9.03	)	$	(16.24	)	$	(1.36	)
Loss from discontinued operations		(3.91	)		(8.06	)		(5.48	)
Earnings per share, basic and diluted	$	(12.94	)	$	(24.30	)	$	(6.84	)
Weighted average shares outstanding:
Basic and diluted		2,827,795			2,825,000			2,825,000

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

36

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
	(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	42,197		$	1,901
Accounts receivable, net of allowance of $953 and $3,092, respectively		57,261			63,603
Inventories, net		39,094			77,226
Prepaid expenses and other current assets		4,888			4,198
Deferred tax asset		2,802			3,655
Assets of discontinued operations		1,791			64,915
Total current assets		148,033			215,498
Property, plant and equipment, net		230,018			248,076
Other assets, net		8,543			9,979
Total assets	$	386,594		$	473,553
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	43,912		$	57,773
Accrued liabilities		23,690			23,787
Current portion of long-term debt		—			17,684
Liabilities of discontinued operations		3,826			9,487
Total current liabilities		71,428			108,731
Long-term debt		100,579			100,579
Deferred income tax liability		8,196			28,407
Deferred credits and other liabilities		77,804			74,464
Redeemable preferred stock		48,302			41,289
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $.01 par value		28			28
Additional paid-in capital		192,551			199,408
Accumulated deficit		(107,955	)		(78,387	)
Accumulated other comprehensive loss		(4,339	)		(966	)
Total stockholders’ equity		80,285			120,083
Total liabilities and stockholders’ equity	$	386,594		$	473,553

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

37

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF

CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)

											Accumulated
					Additional						Other
	Common Stock				Paid-In			Accumulated			Comprehensive
	Shares		Amount		Capital			Deficit			Loss			Total
	(Amounts in Thousands)
Balance, December 31, 2002		2,825	$	28	$	210,527		$	(1,544	)	$	—		$	209,011
Comprehensive loss:
Net loss		—		—		—			(14,199	)		—
Other comprehensive loss:
Pension adjustment		—		—		—			—			(251	)
Comprehensive loss															(14,450	)
Preferred stock dividends		—		—		(5,125	)		—			—			(5,125	)
Balance, December 31, 2003		2,825	$	28	$	205,402		$	(15,743	)	$	(251	)	$	189,436
Comprehensive loss:
Net loss		—		—		—			(62,644	)		—
Other comprehensive loss:
Pension adjustment		—		—		—			—			(715	)
Comprehensive loss															(63,359	)
Preferred stock dividends		—		—		(5,994	)		—			—			(5,994	)
Balance, December 31, 2004		2,825	$	28	$	199,408		$	(78,387	)	$	(966	)	$	120,083
Comprehensive loss:
Net loss		—		—		—			(29,568	)		—
Other comprehensive loss:
Pension adjustment		—		—		—			—			(3,373	)
Comprehensive loss															(32,941	)
Preferred stock dividends		—		—		(7,014	)		—			—			(7,014	)
Exercised stock options		3				157									157
Balance, December 31, 2005		2,828	$	28	$	192,551		$	(107,955	)	$	(4,339	)	$	80,285

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

38

STERLING CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Cash flows from operating activities:
Net income (loss)	$	(29,568	)	$	(62,644	)	$	(14,199	)
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		33,342			28,693			27,656
Interest amortization		400			398			383
Impairment of long-lived assets		—			70,498			—
Gain on pension curtailment		—			(12,944	)		—
Lower-of-cost-or-market adjustment		2,738			16,407			—
Gain on sale of methanol plant		—			(2,396	)		—
Deferred tax benefit (expense)		(18,905	)		(16,529	)		(7,986	)
Other		156			1			(252	)
Change in assets/liabilities:
Accounts receivable		54,850			(25,509	)		(45,750	)
Inventories		45,772			(42,804	)		(30,572	)
Prepaid expenses		(690	)		2,232			(1,869	)
Other assets		(1,003	)		(3,650	)		2,127
Accounts payable		(23,348	)		2,427			31,688
Accrued liabilities		4,396			(1,879	)		3,714
Other liabilities		(33	)		286			(6,725	)
Net cash provided by operating activities		68,107			(47,413	)		(41,785	)
Cash flows from investing activities:
Capital expenditures		(9,460	)		(14,771	)		(15,649	)
Cash used for the methanol dismantling		(667	)		—			—
Net proceeds from the sale of methanol fixed assets assets		—			4,017			—
Net cash used in investing activities		(10,127	)		(10,754	)		(15,649	)
Net cash provided by (used in) financing activities — net borrowings (repayments) under the Revolver		(17,684	)		17,684			—
Net increase in cash		40,296			(40,483	)		(57,434	)
Cash and cash equivalents beginning of period		1,901			42,384			99,818
Cash and cash equivalents end of year	$	42,197		$	1,901		$	42,384
Supplement disclosures of cash flow information:
Interest paid, net of interest income received received	$	10,726		$	10,957		$	3,575
Cash paid for reorganization items		—			—			13,115
Cash paid for income taxes		59			50			175

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

39

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, approximately 45 miles south of Houston, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. Currently, we produce styrene, acetic acid and plasticizers. We own all of the real property which comprises our Texas City facility and we own the styrene, acrylonitrile, acetic acid and plasticizers manufacturing units located at the site. Our Texas City site offers approximately 135 acres for future expansion by us or by other companies that can benefit from our existing infrastructure and facilities, and includes a greenbelt around the northern edge of the plant site. We have also leased portions of the site to Praxair Hydrogen Supply, Inc. (“Praxair”) and S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc., which constructed a partial oxidation unit and a cogeneration facility, respectively, on that land. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products.

Principles of Consolidation

     The consolidated financial statements include the accounts of all of our wholly-owned and majority-owned subsidiaries, with all significant intercompany accounts and transactions having been eliminated. Our 50% equity investment in a cogeneration joint venture is not material to our financial position or results of operations.

Cash and Cash Equivalents

     We consider all investments having an initial maturity of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

     Accounts receivable is presented net of allowance for doubtful accounts. We regularly review our accounts receivable balances and, based on estimated collectibility, adjust the allowance account accordingly. As of December 31, 2005 and 2004, the allowance for doubtful accounts was $1.0 million and $3.0 million, respectively. Bad debt expense (benefit) for 2005, 2004 and 2003, was ($2.1 million), $0.4 million and $0.5 million, respectively. The decrease of $2 million in the allowance for doubtful accounts as of December 31, 2005 primarily resulted from a decrease in total accounts receivable, as well as a reduction in receivable balances of several large higher-risk accounts.

Inventories

     Inventories are stated at the lower-of-cost-or-market. As of December 31, 2005 and 2004, a lower-of-cost-or-market adjustment of approximately $3 and $16 million, respectively, was recorded. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies, which are valued at average cost.

     We enter into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by us are included in inventory.

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. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from five to 25 years, with the predominant life of plant and equipment being 15 years. We capitalize interest costs, which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for 2005, 2004 and 2003 was $1.0 million, $0.9 million and $0.6 million, respectively.

40

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plant Turnaround Costs

     As a part of normal recurring operations, each of our manufacturing units is completely shut down from time to time, for a period typically lasting two to four weeks, to replace catalysts and perform major maintenance work required to sustain long-term production. These periods are commonly referred to as “turnarounds” or “shutdowns.” While actual timing is subject to a number of variables, turnarounds of our styrene unit typically occur every two to three years. Costs of turnarounds are expensed as incurred. As expenses for turnarounds can be significant, the impact of expensing the costs of turnarounds can be material for financial reporting periods during which the turnarounds actually occur.

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 these assets. If these projected cash flows from these assets are less than the carrying amount of these assets, an impairment would be 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, recoverability 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 independently calculated risks for a composite group of commodity chemical companies, our target capital mix and an estimated market risk premium. The assumptions we use in estimating future cash flows are consistent with our internal planning. During 2004, we recorded a pre-tax impairment charge of $22 million relating to our long-lived acrylonitrile assets, which is included in loss from discontinued operations.

Goodwill

     As of December 31, 2005 and 2004, there is no goodwill recorded on our consolidated balance sheets. During 2004, we recorded an impairment charge of $48 million to write-off our then-existing goodwill. This impairment was determined by comparing the estimated fair value, utilizing the present value of expected net cash flows, to the carrying value of our goodwill. In determining the present value of expected net cash flows, we estimated our future net cash flows and the timing of the cash flows and then applied a discount rate to reflect the time value of money and the inherent uncertainty of those future cash flows. The discount rate we used was based on independently calculated risks for a composite group of commodity chemical companies, our target capital mix and an estimated market risk premium. The assumptions we used in estimating future cash flows were consistent with our internal planning.

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 $0.4 million, $0.4 million and $0.3 million for 2005, 2004 and 2003, respectively.

Income Taxes

     Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement purposes. Deferred tax assets are regularly assessed 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.

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 life of assets are capitalized and depreciated over the remaining life of those

41

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated.

Revenue Recognition

     We generate revenues through sales in the open market, raw material conversion agreements and long-term supply contracts. In addition, we have entered into profit sharing arrangements with respect to some of our petrochemicals products. We recognize revenue from sales in the open market, raw material conversion agreements and long-term supply contracts when the products are shipped. Revenues from profit sharing arrangements are estimated and accrued monthly. Deferred credits are amortized over the life of the contracts which gave rise to them.

Earnings (Loss) Per Share

     Basic earnings per share (“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, 2005, 2004 and 2003, we had no dilutive securities outstanding.

Disclosures about Fair Value of Financial Instruments

     In preparing disclosures about the fair value of financial instruments, we have assumed that the carrying amount approximates fair value for cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) 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, revenue recognition related to profit sharing accruals, environmental and litigation reserves and provision for income taxes.

Reclassifications

     Certain amounts reported in the consolidated financial statements for the prior periods have been reclassified to conform with the current consolidated financial statement presentation with no effect on net loss or stockholders’ equity (deficiency in assets).

2. STOCK-BASED COMPENSATION PLAN

     On December 19, 2002, we adopted our 2002 Stock Plan and reserved 379,747 shares of our common stock for issuance under the plan (subject to adjustment). Under our 2002 Stock Plan, officers and key employees, as designated by our Board of Directors, may be issued stock options, stock awards, stock appreciation rights or stock units. There are currently options to purchase a total of 278,500 shares of our common stock outstanding under our 2002 Stock Plan, all at an exercise price of $31.60, and an additional 85,414 shares of common stock available for issuance under our 2002 Stock Plan.

     We account for our stock-based compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. Under APB No. 25, if the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. All stock options issued under our 2002 Stock Plan were granted with exercise prices at estimated fair value at the time of grant. Therefore, no compensation expense was recognized under APB No. 25. During March 2005, we issued 3,474 shares

42

STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of our common stock pursuant to the exercise of options by two former employees and, through the use of “net exercise elections,” an additional 12,359 shares subject to the options held by these two former employees were used to pay the exercise price and withholding taxes related to the option exercises. The net exercise elections required variable accounting and resulted in compensation expense of $0.2 million during the first quarter of 2005.

     The fair value of each grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions (no options were granted in 2005):

	2004			2003
Expected life (years)		10.0			10.0
Expected volatility		42.0	%		42.0	%
Expected dividend yield		—			—
Risk-free interest rate		3.85	%		3.85	%
Weighted-average fair value of options granted during the year	$	12.95		$	18.58

     The following table illustrates the effect on our net loss and loss per share attributable to common stockholders if compensation costs for stock options issued under our 2002 Stock Plan had been recorded pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” for the years ended December 31, 2005 and 2004. There were no options outstanding under our 2002 Stock Plan prior to February 11, 2003.

	For the Year Ended December 31,
	2005			2004
	(Dollars in Thousands, Except Share Data)
Net loss attributable to common stockholders, as reported	$	(36,582	)	$	(68,638	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		157			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(606	)		(1,147	)
Pro forma net loss	$	(37,031	)	$	(69,785	)
Loss per share attributable to common stockholders:
As reported	$	(12.94	)	$	(24.30	)
Pro forma		(13.10	)		(24.70	)

3. DISCONTINUED OPERATIONS

     On September 16, 2005, we announced that we were exiting the acrylonitrile business and related derivative operations, which includes sodium cyanide and disodium iminodiacetic acid (“DSIDA”). Our decision was based on a history of operating losses incurred by our acrylonitrile and derivatives businesses, and was made after a full review and analysis of our strategic alternatives. Our acrylonitrile and derivatives businesses, which sustained gross losses of $7 million during the first six months of 2005 and $28 million and $36 million during 2004 and 2003, respectively, had been shut down since February of 2005 following a force majeure event involving the availability of propylene.

     The closure of these facilities is expected to result in cash costs of between $10 million and $12 million (before taxes). These costs include payment of contractual obligations, employee severance and decommissioning costs. Approximately $6 million of these cash costs were expensed in 2005, with the balance expected to be expensed during the first half of 2006. In addition, during the third quarter of 2005, there was an approximately $3 million (before taxes)

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impairment charge related to our acrylonitrile and derivatives operations and a curtailment gain totaling $1.2 million due to workforce reductions.

     We plan to reduce our workforce by 20 employees in connection with our exit from these businesses, which will result in a charge to operating income during 2006 of approximately $0.4 million for severance payments. After this workforce reduction, we will have reduced our total headcount in connection with the exit from these businesses by approximately 50 people. We intend to seek alternative uses of the space and infrastructure that was associated with the acrylonitrile and derivatives operations, although we cannot guarantee that we will be able to develop any alternative uses for that space or infrastructure.

     In accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of Long Lived Assets,” we have reported the operating results of these businesses as discontinued operations in the consolidated statement of operations and cash flows, and the assets and liabilities of these businesses have been presented separately in our consolidated balance sheet.

     The carrying amounts of the major classes of assets and liabilities related to discontinued operations as of December 31, 2005 and 2004 were as follows:

	Year ended December 31,
	2005		2004
	(Dollars in Thousands)
Assets of discontinued operations:
Accounts receivable, net	$	963	$	49,471
Inventories		376		10,754
Deferred tax asset		—		453
Property, plant and equipment, net		—		522
Other assets		452		3,715
Total	$	1,791	$	64,915
Liabilities of discontinued operations:
Accounts payable	$	—		9,487
Accrued liabilities		3,826		—
Total	$	3,826	$	9,487

     Revenues and pre-tax losses from discontinued operations for the years ended December 31, 2005, 2004 and 2003 are presented below:

	Year ended December 31,
	2005		2004		2003
	(Dollars in Thousands)
Revenues	$	43,374	$	196,309	$	74,019
Loss before income taxes		17,420		42,025		23,135

     Current severance and contractual obligations are detailed below:

						Accrued as of
	Accrued in 2005		Cash payments			December 31, 2005
	(Dollars in Thousands)
Severance accrual	$	568	$	(91	)	$	477
DSIDA contractual obligation		2,853		—			2,853
DSIDA dismantling costs		496		—			496
Totals	$	3,917	$	(91	)	$	3,826

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Prior to our decision to exit the acrylonitrile and derivative businesses, on May 31, 2005, we entered into a Separation Agreement with O&D USA LLC (d/b/a Innovene Chemicals), ANEXCO, LLC and BP Amoco Chemical Company (“BP Chemicals”). Under the Separation Agreement:

• a prior force majeure dispute among the parties was settled;

• most of the acrylonitrile-related agreements between the parties were terminated as of May 31, 2005, including the Amended and Restated Production Agreement dated March 31, 1998, the Joint Venture Agreement dated March 31, 1998, the Acrylonitrile Expanded Relationship and Master Modification Agreement dated June 19, 2003 and the European Distribution Agreement dated March 31, 1998;

• we assigned our interest in ANEXCO, LLC to Innovene Chemicals; and

• we and Innovene Chemicals entered into amended and restated versions of our acrylonitrile License Agreement and Catalyst Sales Contract.

In addition, on May 31, 2005, Innovene Chemicals made a one-time payment to us of $0.7 million; ANEXCO, LLC made an initial distribution to us of $4.8 million and we made a few small payments to Innovene Chemicals and ANEXCO, LLC for services performed prior to the termination of the agreements. ANEXCO, LLC made a subsequent distribution to us of $1.5 million on July 15, 2005, and we received a final distribution of $1.2 million on November 30, 2005. These cash payments are reflected in discontinued operations. No other payments were or are required in connection with the settlement of the force majeure dispute or the termination of the acrylonitrile-related agreements.

     The Separation Agreement did not impact any other commercial relationships between any of the parties, such as the acetic acid production agreement between BP Chemicals and us. In addition, we expect to continue purchasing raw materials related to our styrene business from Innovene Chemicals or BP Chemicals.

     During the second quarter of 2005, we provided Monsanto with notice of termination of our DSIDA-related agreements and provided E.I. du Pont de Nemours & Company with notice of termination of our Sodium Cyanide Supply Agreement.

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

	December 31,
	2005			2004
	(Dollars in Thousands)
Inventories:
Finished products	$	30,162		$	56,404
Raw materials		7,974			14,178
Inventories at lower-of-cost-or-market		38,136			70,582
Inventories under exchange agreements		(2,807	)		1,517
Stores and supplies (net of obsolescence reserve of $2,573 and $1,938, respectively)		3,765			5,127
	$	39,094		$	77,226
Property, plant and equipment, net:
Land	$	7,149		$	7,149
Buildings		4,497			4,497
Plant and equipment		287,061			274,706
Construction in progress		11,555			14,915
Less: accumulated depreciation		(80,244	)		(53,191	)
	$	230,018		$	248,076
Accrued liabilities:
Employee compensation and benefits	$	12,164		$	11,135
Property taxes		5,236			5,694
Other		6,290			6,958
	$	23,690		$	23,787

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2005		2004
	(Dollars in Thousands)
Deferred credits and other liabilities:
Accrued postretirement, pension and post employment benefits	$	62,885	$	68,298
Deferred revenue		9,000		—
Other		5,919		6,166
	$	77,804	$	74,464

5. LONG-TERM DEBT

     On December 19, 2002, we issued $94.3 million in original principal amount of our 10% Senior Secured Notes due December 2007 (our “Secured Notes”). Our Secured Notes are senior secured obligations and rank equally in right of payment with all of our other existing and future senior indebtedness, and senior in right of payment to all of our existing and future subordinated indebtedness. Our Secured Notes are guaranteed by Sterling Chemicals Energy, Inc. (“Sterling Energy”), our only wholly-owned subsidiary. Sterling Energy’s guaranty ranks equally in right of payment with all of its existing and future senior indebtedness, and senior in right of payment to all of its existing and future subordinated indebtedness. Our Secured Notes and Sterling Energy’s guaranty are secured by a first priority lien on all of our production facilities and related assets.

     Our Secured Notes bear interest at an annual rate of 10%, payable semi-annually on June 15 and December 15 of each year. Until December 19, 2004, we were permitted under certain circumstances to pay interest on our Secured Notes through the issuance of additional Secured Notes rather than the payment of cash at an interest rate of 13 3/8% per annum. In December 2003, we made an interest payment on our Secured Notes at the higher rate through the issuance of $6.3 million in original principal amount of additional Secured Notes, increasing the aggregate principal amount of outstanding Secured Notes to $100.6 million. We have made all other interest payments on our Secured Notes in cash.

     We may redeem our Secured Notes at any time at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest, subject to compliance with the terms of our Revolving Credit Agreement dated December 19, 2002 with The CIT Group/Business Credit, Inc., as administrative agent and a lender, and certain other lenders (our “Revolver”). In addition, in the event of a specified change of control or the sale of our facility in Texas City, Texas, we are required to offer to repurchase our Secured Notes at 101% of the outstanding principal amount thereof plus accrued and unpaid interest. Under certain circumstances, we are also required to use the proceeds of other asset sales to repurchase those Secured Notes tendered by the holders at a price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest.

     The indenture governing our Secured Notes contains numerous covenants and conditions, including, but not limited to, restrictions on our ability to incur indebtedness, create liens, sell assets, make investments, make capital expenditures, engage in mergers and acquisitions and pay dividends. The indenture also includes various circumstances and conditions that would, upon their occurrence and subject in certain cases to notice and grace periods, create an event of default thereunder. However, the indenture does not require us to satisfy any financial ratios or maintenance tests.

     On December 19, 2002, we also established our Revolver, which provides up to $100 million in revolving credit loans, subject to borrowing base limitations. Our Revolver has an initial term ending on September 19, 2007. Under our Revolver, we and Sterling Energy are co-borrowers and are jointly and severally liable for any indebtedness thereunder. Our Revolver is secured by first priority liens on all of our accounts receivable, inventory and other specified assets, as well as all of the issued and outstanding capital stock of Sterling Energy.

     Borrowings under our Revolver bear interest, at our option, at an annual rate of either the Alternate Base Rate plus 0.75% or the “LIBO Rate” (as defined in our Revolver) plus 2.75%. The “Alternate Base Rate” is equal to the greater of the “Base Rate” as announced from time to time by JPMorgan Chase Bank in New York, New York or 0.50% per annum above the latest “Federal Funds Rate” (as defined in our Revolver). The average borrowing rate under our Revolver for the year ended December 31, 2005 was 6.22%. There were no outstanding borrowings under our Revolver as of December 31, 2005. Under our Revolver, we are also required to pay an aggregate commitment fee of 0.50% per year (payable monthly) on any unused portion of our Revolver. Available credit under our Revolver is subject to a

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

monthly borrowing base of 85% of eligible accounts receivable plus the lesser of $50 million and 65% of eligible inventory. In addition, the borrowing base for our Revolver must exceed outstanding borrowings thereunder by $8 million at all times. As of December 31, 2005, total credit available under our Revolver was limited to $46 million due to these borrowing base limitations. As of December 31, 2005, there were no loans outstanding under our Revolver, and we had $2 million in outstanding letters of credit issued pursuant to our Revolver. Pursuant to Emerging Issues Task Force Issue No. 95-22, “Balance Sheet Classification of Borrowings under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement,” any balances outstanding under our Revolver are classified as a current portion of long-term debt.

     Our Revolver contains numerous covenants and conditions, including, but not limited to, restrictions on our ability to incur indebtedness, create liens, sell assets, make investments, make capital expenditures, engage in mergers and acquisitions and pay dividends. Our Revolver also contains a covenant that requires us to earn a specified amount of earnings before interest, income taxes, depreciation and amortization (as defined in our Revolver) on a monthly basis if, for 15 consecutive days, unused availability under our Revolver plus cash on hand is less than $20 million. Our Revolver includes various circumstances and conditions that would, upon their occurrence and subject in certain cases to notice and grace periods, create an event of default thereunder.

Debt Maturities

     The Secured Notes, which had an aggregate principal balance of $100.6 million outstanding as of December 31, 2005, are due on December 19, 2007.

6. INCOME TAXES

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

	Year Ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Benefit for income taxes at statutory rates	$	(16,299	)	$	(26,125	)	$	(7,387	)
Non-deductible expenses		19			26			65
Non-deductible goodwill impairment		—			16,962			—
State income taxes		(956	)		(1,933	)		(361	)
Other		235			(930	)		(201	)
Effective tax benefit	$	(17,001	)	$	(12,000	)	$	(7,884	)

     The provision (benefit) for income taxes is comprised of a tax provision (benefit) for continuing operations and a tax provision (benefit) for discontinued operations as shown below:

	Year Ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Tax expense — continuing operations	$	(10,641	)	$	7,262		$	758
Tax expense — discontinued operations		(6,360	)		(19,262	)		(8,642	)
Total tax benefit	$	(17,001	)	$	(12,000	)	$	(7,884	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The provision (benefit) for income taxes is composed of the following:

	Year Ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Current federal	$	—		$	—		$	—
Deferred federal		(16,066	)		(10,105	)		(7,323	)
State income taxes		(935	)		(1,895	)		(561	)
Total tax benefit	$	(17,001	)	$	(12,000	)	$	(7,884	)

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

	December 31,
	2005			2004
	(Dollars in Thousands)
Deferred tax assets:
Accrued liabilities	$	787		$	3,737
Accrued postretirement cost		12,552			13,916
Accrued pension cost		10,770			8,377
Tax loss carry forwards		46,734			27,475
Other		2,385			1,137
Total deferred tax assets	$	73,228		$	54,642
Deferred tax liabilities:
Property, plant and equipment	$	(66,571	)	$	(70,680	)
State deferred taxes		(3,219	)		(2,166	)
Subtotal		(69,790	)		(72,846	)
Less: valuation allowance		(8,832	)		(6,096	)
Total deferred tax liabilities		(78,622	)		(78,942	)
Net deferred tax liabilities	$	(5,394	)	$	(24,300	)

     As of December 31, 2005, we had an available U.S. operating loss carryforward of approximately $101 million, which expires during the years 2023, 2024 and 2025. Deferred tax assets are regularly assessed 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. A portion of our state operating loss carry forwards originated prior to our emergence from Chapter 11. Our valuation allowance at December 31, 2005 and 2004 reflects a 100% valuation taken against these pre-Chapter 11 emergence state operating loss carry forwards. Future recognition of any significant operating loss carry forwards would be recorded as an increase in our paid-in capital rather than as a reduction in our provision for income taxes. As of December 31, 2005, we have a state operating loss carryforward, tax effected, of $10 million, with a valuation allowance of $8 million.

7. EMPLOYEE BENEFITS

     We have established the following benefit plans:

Retirement Benefit Plans

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

     The expected long-term rate of return on pension plan assets is a market-related value currently equal to 7.5%. Sterling’s actual annualized return for the past 10 years is approximately 10.5%.

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

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Pension plan assets are invested in a balanced portfolio managed by an outside investment manager. Our investment policy is to generate a total return that, over the long term, provides sufficient assets to fund its liabilities, reduces risk through diversification of investments within asset classes and complies with the Employee Retirement Income Security Act of 1974 (“ERISA”) by investing in a manner consistent with ERISA’s fiduciary standards. Within this balanced fund, assets are invested as follows:

	As of December 31,
	2005			2004
Asset Category
Equities		57	%		55	%
Bonds		38	%		40	%
Other		5	%		5	%
Total		100	%		100	%

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

	December 31,
	2005			2004
	(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	119,682		$	124,704
Service cost		622			3,466
Interest cost		6,993			7,561
Plan amendment/curtailment		—			(14,472	)
Actuarial loss		6,259			5,600
Benefits paid		(7,862	)		(7,177	)
Benefit obligation at end of year	$	125,694		$	119,682

	December 31,
	2005			2004
	(Dollars in Thousands)
Change in plan assets:
Fair value at beginning of year	$	89,250		$	77,709
Actual return on plan assets		7,643			8,511
Employer contributions		6,659			10,207
Benefits paid		(7,862	)		(7,177	)
Fair value at end of year	$	95,690		$	89,250
Development of net amount recognized:
Funded status	$	(30,004	)	$	(30,432	)
Actuarial loss		6,874			1,626
Net amount recognized	$	(23,130	)	$	(28,806	)
Amounts recognized in the statement of financial position:
Accrued pension cost	$	(29,959	)	$	(30,415	)
Accumulated other comprehensive income (pre-tax)		6,829			1,609
Net amount recognized	$	(23,130	)	$	(28,806	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2005			2004
Weighted-average assumptions:
Discount rate		5.75	%		6.25	%
Rates of increase in salary compensation level		5.00	%		5.00	%

     All plans have projected benefit obligations and accumulated benefit obligation in excess of plan assets at December 31, 2005. The total accumulated benefit obligation was $125.7 million as of December 31, 2005. Estimated contributions for 2006 are expected to be approximately $8 million, a portion of which are above the minimum funding requirements.

     Effective as of January 1, 2005, we froze all accruals under our defined benefit pension plan for our salaried employees, which resulted in a plan curtailment under SFAS No. 88 “Employers’ Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” As a result, we recorded a pretax curtailment gain of $13 million in the fourth quarter of 2004. At the time we froze accruals under our defined benefit pension plan, we also increased the company match for employee contributions under our 401(k) plan.

     Net periodic pension costs consist of the following components:

	Year ended December 31,
	2005			2004			2003
	(Dollars In Thousands)
Components of net pension costs:
Service cost-benefits earned during the year	$	622		$	3,466		$	3,312
Interest on prior year’s projected benefit obligation		6,993			7,561			7,634
Expected return on plan assets		(6,641	)		(5,934	)		(5,205	)
Net amortization of actuarial loss (gain)		8			—			—
Settlement/curtailment		—			(12,944	)		—
Net pension costs	$	982		$	(7,851	)	$	5,741
Weighted-average assumptions:
Discount Rate		5.75	%		6.25	%		6.75	%
Rates of increase in salary compensation level		5.00	%		5.00	%		5.00	%
Expected long-term rate of return on plan assets		7.50	%		7.50	%		8.00	%

Postretirement Benefits Other than Pensions

     We provide certain health care benefits and life insurance benefits for retired employees. Substantially all of our employees become eligible for these benefits at early retirement age. We accrue the cost of these benefits during the period in which the employee renders the necessary service.

     Health care benefits are currently provided to employees hired prior to June 7, 2004, who retire from us with ten or more years of credited service. Some of our employees are eligible for postretirement life insurance, depending on their hire date. Postretirement health care benefits plans are contributory. Benefit provisions for most hourly employees are subject to collective bargaining. In general, retiree health care benefits are paid as covered expenses are incurred.

     In September 2005, we recorded a curtailment gain totaling $1.2 million due to workforce reductions related to our exit from the acrylonitrile and related derivatives businesses. We also recorded a curtailment gain of $0.5 million attributable to a reduction in our workforce that occurred in late 2004.

     In June 2004, we had a reduction in force at our Texas City plant. This reduction in force led to a curtailment of our postretirement benefit plan resulting in a $1.4 million curtailment gain, with $1.3 million of the gain reflected in cost of goods sold and $0.1 million reflected in selling, general and administrative expenses. In addition, our plan was

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amended as of June 1, 2004 as follows: employees hired after this date are not eligible for retiree medical benefits, our contribution rates for retiree medical coverage are frozen at the 2004 level and prescription drug co-pays were increased. This amendment reduced the accumulated postretirement benefit obligation by $9.2 million, which is being amortized over the average remaining service period to full eligibility of the active plan participants (which is 8.5 years).

     On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was passed. The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, the Financial Accounting Standards Board (the “FASB”) issued Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003” (“FAS 106-1”), which is effective for interim or annual financial statements of fiscal years ending after December 7, 2003 and permits a one-time election to defer accounting for the effects of the Act. In May 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FAS 106-2”), which supercedes FAS 106-1. FAS 106-2 provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement heath care plans that provide prescription drug benefits, and requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided under the Act. FAS 106-2 applied to us effective July 1, 2004. We measured the effects of the Act on our accumulated postretirement benefit obligation and determined that, based on the regulatory guidance currently available, benefits provided by our postretirement plan are at least actuarially equivalent to Medicare Part D, and accordingly, we expect to be entitled to the federal subsidy in the years 2006 through 2009. We estimate that this subsidy will be approximately 20% of the net benefits under our plan, or $0.2 million annually.

     Information concerning the plan obligation, the funded status, amounts recognized in our financial statements and underlying actuarial assumptions are stated below:

	December 31,
	2005			2004
	(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	27,745		$	34,870
Service cost		208			310
Interest cost		1,558			1,864
Plan amendments		46			(9,541	)
Actuarial loss (gain)		1,392			4,404
Benefits paid		(3,115	)		(4,162	)
Benefit obligation at end of year	$	27,834		$	27,745
Funded plan assets	$	—		$	—
Development of net amount recognized:
Funded status	$	(27,834	)	$	(27,745	)
Unrecognized cost:
Actuarial loss		6,048			5,204
Plan amendment		(15,691	)		(19,164	)
Net amount recognized	$	(37,477	)	$	(41,705	)
Prepaid OPEB cost	$	—		$	—
Accrued OPEB liability		(37,477	)		(41,705	)
Net amount recognized	$	(37,477	)	$	(41,705	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net periodic plan costs consist of the following components:

	Year ended December 31,
	2005			2004			2003
	(Dollars in Thousands)
Components of net plan costs:
Service cost	$	208		$	310		$	460
Interest cost		1,558			1,864			2,336
Net amortization:
Actuarial loss		333			21			—
Plan amendment		(1,484	)		(1,223	)		(477	)
Curtailment and special termination benefits		(1,727	)		(1,418	)		—
Net plan costs	$	(1,112	)	$	(446	)	$	2,319
Weighted-average assumptions:
Discount rate		5.75	%		5.75	%		6.25	%

     The weighted-average annual assumed health care trend rate is assumed to be 9% for 2005. The rate is assumed to decrease gradually to 4.5% in 2013 and remain level thereafter. Based on plan changes enacted, assumed health care cost trend rates no longer have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:

	1% Increase		1% Decrease
	(Dollars in Thousands)
Effect on total of service and interest cost components	$	35	$	(31	)
Effect on post-retirement benefit obligation		638		(562	)

Estimated Future Benefits Payable

     We estimate that the future benefits payable under our pension and other post-retirement benefits as of December 31, 2005 are as follows:

					Other
	Pensions-		Pensions-		postretirement
	hourly		salaried		benefits		Total
	(Dollars in Thousands)
2006	$	3,781	$	4,106	$	1,572	$	9,459
2007		3,590		3,953		1,476		9,019
2008		3,439		3,991		1,417		8,847
2009		3315		4,119		1,363		8,797
2010		3103		4,293		2,399		9,795
2011-2015		16,272		24,361		11,177		51,810
Total	$	33,500	$	44,823	$	19,404	$	97,727

Savings and Investment Plan

     Our Sixth Amended and Restated Savings and Investment Plan covers substantially all employees, including executive officers. This Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing us to contribute a percentage of such earnings to the Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code. A participant’s contributions become distributable upon the termination of his or her employment. Such contributions amounted to $1.1 million in 2005, $0.8 million in 2004, and $0.8 million in 2003. Beginning January 1, 2005, we began matching 100% of salaried employees’ contributions, to the

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extent such contributions do not exceed 6% of such participant’s base compensation (excluding bonuses, profit sharing and similar types of compensation).

Bonus Plan and Gain Sharing Plan

     In February 2002, our Board of Directors, upon recommendation of its Compensation Committee, approved the establishment of a Bonus Plan and a Gain Sharing Plan. The Bonus Plan is designed to benefit all qualified salaried employees, while the Gain Sharing Plan is designed to benefit all qualified hourly employees. Both plans provide our qualified employees the opportunity to earn bonuses depending on, among other things, our annual financial performance. Although we did not meet the minimum financial threshold of these plans for 2004, on February 11, 2005, our Board authorized the payment of $0.9 million in bonuses related to our performance in 2004, and we accrued that amount in 2004. In addition, although we did not meet the minimum financial threshold of these plans for 2005, on February 24, 2006, our Compensation Committee authorized the payment of $725,000 in bonuses based upon our achieving our target goal of $20 million in fixed cost savings during 2005, and we accrued that amount in 2005. There was no expense incurred pursuant to these plans during 2003.

     In January 2006, our Compensation Committee amended our Bonus Plan in a manner that allows each of our salaried employees the ability to earn a bonus each year based on their individual performance, irrespective of our overall financial performance. However, if a bonus is paid for any year based upon our financial performance, no additional bonus is paid under the new provision of the Plan. Our Chief Executive Officer and each of our four Senior Vice Presidents is excluded from this portion of our Bonus Plan. Whether a bonus will be paid to our Chief Executive Officer or any of our Senior Vice Presidents in any year when a bonus is not paid based on our financial performance, and if so, the amount to be paid, will be determined at that time by our Compensation Committee.

Key Employee Protection Plan

     On January 26, 2000, we instituted our Key Employee Protection Plan, which has subsequently been amended several times. We established this Plan to help us retain certain of our employees and motivate them to continue to exert their best efforts on our behalf during periods when we may be susceptible to a change of control, and to assure their continued dedication and objectivity during those periods. Our Compensation Committee has designated a select group of management or highly compensated employees as participants under our Key Employee Protection Plan, and has established their respective applicable multipliers and other variables for determining benefits. Our Compensation Committee is also authorized to designate additional management or highly compensated employees as participants under our Key Employee Protection Plan and set their applicable multipliers. Our Compensation Committee may also terminate any participant’s participation under this Plan on 60 days’ notice if it determines that the participant is no longer one of our key employees.

     Under our Key Employee Protection Plan, any participant under the Plan that terminates his or her employment for “Good Reason” or is terminated by us for any reason other than “Misconduct” or “Disability” within his or her “Protection Period” is entitled to benefits under the Plan. A participant’s Protection Period commences 180 days prior to the date on which a specified change of control occurs and ends either two years or 18 months after the date of that change of control, depending on the size of the participant’s applicable multiplier. A participant may also be entitled to receive payments under this Plan in the absence of a change of control if he or she terminates his or her employment for “Good Reason” or is terminated by us for any reason other than “Misconduct” or “Disability,” but in these circumstances his or her applicable multiplier is reduced by 50%. If a participant becomes entitled to benefits under our Key Employee Protection Plan, we are required to provide the participant with a lump sum cash payment that is determined by multiplying the participant’s applicable multiplier by the sum of the participant’s highest annual base compensation during the last three years plus the participant’s targeted bonus for the year of termination, and then deducting the sum of any other separation, severance or termination payments made by us to the participant under any other plan or agreement or pursuant to law.

     In addition to the lump sum payment, the participant is entitled to receive any accrued but unpaid compensation, compensation for unused vacation time and any unpaid vested benefits earned or accrued under any of our benefit plans (other than qualified plans). Also, for a period of 24 months (including 18 months of COBRA coverage), the participant will continue to be covered by all of our life, health care, medical and dental insurance plans and programs (other than disability), as long as the participant makes a timely COBRA election and pays the regular employee premiums required under our plans and programs and by COBRA. In addition, our obligation to continue to provide coverage under our

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plans and programs to any participant ends if and when the participant becomes employed on a full-time basis by a third party which provides the participant with substantially similar benefits.

     If any payment or distribution under our Key Employee Protection Plan to any participant is subject to excise tax pursuant to Section 4999 of the Internal Revenue Code, the participant is entitled to receive a gross-up payment from us in an amount such that, after payment by the participant of all taxes on the gross-up payment, the amount of the gross-up payment remaining is equal to the excise tax imposed under Section 4999 of the Internal Revenue Code. However, the maximum amount of any gross-up payment is 25% of the sum of the participant’s highest annual base compensation during the last three years plus the participant’s targeted bonus for the year of payment.

     We may terminate our Key Employee Protection Plan at any time and for any reason but any termination does not become effective as to any participant until 90 days after we give the participant notice of the termination of the Plan. In addition, we may amend our Key Employee Protection Plan at any time and for any reason, but any amendment that reduces, alters, suspends, impairs or prejudices the rights or benefits of any participant in any material respect does not become effective as to that participant until 90 days after we give him or her notice of the amendment of the Plan. No termination of our Key Employee Protection Plan, or any of these types of amendments to the Plan, can be effective with respect to any participant if the termination or amendment is related to, in anticipation of or during the pendency of a change of control, is for the purpose of encouraging or facilitating a change of control or is made within 180 days prior to any change of control. Finally, no termination or amendment of our Key Employee Protection Plan can affect the rights or benefits of any participant that are accrued under the Plan at the time of termination or amendment or that accrue thereafter on account of a change of control that occurred prior to the termination or amendment or within 180 days after such termination or amendment. We expensed $0.4 million, $0.3 million and zero in 2005, 2004 and 2003, respectively, pursuant to this Plan.

Severance Pay Plan

     On March 8, 2001, our Board of Directors approved our Severance Pay Plan, which has subsequently been amended. This Plan covers all of our non-unionized employees and was established to help us retain these employees by assuring them that they will receive some compensation in the event that their employment is adversely affected in specified ways. Under our Severance Pay Plan, any participant that terminates his or her employment for “Good Reason” or is terminated by us for any reason other than “Misconduct” or “Disability” is entitled to benefits under our Severance Pay Plan. If a participant becomes entitled to benefits under our Severance Pay Plan, we are required to provide the participant with a lump sum cash payment in an amount equivalent to two weeks of such participant’s base salary for each credited year of service, with a maximum payment of one year’s base salary. The amount of this lump sum payment is reduced, however, by the amount of any other separation, severance or termination payments made by us to the participant under any other plan or agreement, including our Key Employee Protection Plan, or pursuant to law.

     In addition to the lump sum payment, for a period of six months after the participant’s termination date, the COBRA premium required to be paid by such participant for coverage under our medical and dental plans may not be increased beyond that required to be paid by active employees for similar coverage under those plans, as long as the participant makes a timely COBRA election and pays the regular employee premiums required under those plans and otherwise continues to be eligible for coverage under those plans.

     We may terminate or amend our Severance Pay Plan at any time and for any reason but no termination or amendment of our Severance Pay Plan can affect the rights or benefits of any participant that are accrued under the plan at the time of termination or amendment. We expensed less than $0.1 million under this Plan in 2005 for continued operations. In 2004, we expensed $2.4 million under this Plan, with approximately $2 million paid out in 2005.

     Due to the exit from our acrylonitrile and derivatives businesses and subsequent workforce reduction, we expensed $0.5 million in 2005 pursuant to this Plan, of which $0.1 million was paid in 2005, with the balance to be paid in 2006.

Supplemental Pay Plan

     On March 8, 2001, our Board of Directors approved our Supplemental Pay Plan. Historically, we have paid our senior level employees below-market salaries with the opportunity to earn above-market compensation through stock based incentives and significant bonuses in years when we achieve targeted levels of financial performance. Due to our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

financial difficulties at that time, the opportunity to earn additional compensation through these programs was significantly reduced, if not entirely eliminated. As a result, we established this plan to address the concern that the overall compensation provided to our senior level employees would always be below-market and, consequently, not adequate to retain these employees or attract new highly-qualified employees. A select group of management or highly compensated employees was designated as participants under this Plan and their respective benefits were established. Each payment under this Plan was a specified percentage of the participant’s annual base salary for fiscal 2001, and payments were made on or before the tenth day after the last day of each calendar quarter. Payments of $2 million were made pursuant to this Plan before the Plan was terminated effective June 30, 2003.

Outstanding Stock Options

     A summary of our stock option activity for the years ended December 31, 2005 and 2004 are presented below:

	December 31, 2005					December 31, 2004
				Weighted-					Weighted-
				average					average
	Shares			exercise price		Shares			exercise price
Outstanding at beginning of year		294,334		$	31.60		326,000		$	31.60
Granted		—			31.60		27,500			31.60
Exercised		(15,834	)		31.60		(59,166	)		31.60
Outstanding at end of year		278,500		$	31.60		294,334		$	31.60
Options exercisable at end of year		176,500					99,500

     We account for our stock-based compensation arrangements using the intrinsic value method in accordance with the provisions of APB 25, and related interpretations. All stock options issued under our 2002 Stock Plan were granted with exercise prices at estimated fair value at the time of the grant. Therefore no compensation expense has been recognized under APB 25.

8. COMMITMENTS AND CONTINGENCIES

Product Contracts

     We have certain long-term agreements, which provide for the dedication of 100% of our production of acetic acid and plasticizers, each to one customer. We also have various sales and conversion agreements, which dedicate significant portions of our production of styrene to various customers. Some of these agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price.

Lease Commitments

     We have entered into various non-cancelable long-term operating leases. Future minimum lease commitments at December 31, 2005, are as follows: 2006— $0.3 million; 2007 — $0.3 million; 2008 — $0.3 million; 2009 — $0.3 million; 2010 — $0.3 million and thereafter — $0.8 million.

Environmental and Safety

     Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste 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 can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, 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 can 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.

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     Our operating expenditures for environmental matters, mostly waste management and compliance of our continuing operations, were $20 million in 2005 and $26 million in 2004. We also spent $2 million for environmentally related capital projects in 2005 and $8 million for these types of capital projects in 2004.

     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 an area that the Environmental Protection Agency (“EPA”) has classified as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds and nitrogen oxide. Our Texas City facility is also subject to the federal government’s June 1997 National Ambient Air Quality Standards, which lower the ozone and particulate matter threshold for attainment. The Texas Commission for Environmental Quality (“TCEQ”) has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve the ambient air quality standards for ozone. Local authorities also may impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future nitrogen oxide, volatile organic compounds and particulate matter control costs, the amount and full impact of which cannot be determined at this time.

     On December 13, 2002, the TCEQ adopted a revised State Implementation Plan (“SIP”) for compliance with the ozone provisions (1 hour standard) of the Clean Air Act. The EPA has recently proposed to approve this “1 hour” SIP, which calls for reduction of emissions of nitrogen oxides at our Texas City facility by approximately 80% by the end of 2007. The current SIP rules also require monitoring of emissions of highly reactive volatile organic carbons (“HRVOCs”), such as ethylene and propylene. Additional control measures will probably be required as plans for meeting the 8-hour ozone standard are developed (the “8 hour” SIP) over the next few years, including possibly increasing the required level of reductions of nitrogen oxides emissions from 80% to 90%. Previously, we estimated the total cost of the capital improvements required to enable us to comply with the current “1 hour” SIP, and also provide improved energy efficiency, to be between $22 million and $24 million. However, as a result of our decision to exit the acrylonitrile and derivatives businesses, we now estimate this total cost to be between $12 million to $14 million (which includes our share of capital required by S&L Cogeneration Company, a 50/50 joint venture between us and Praxair Energy Resources, Inc.). To date we have spent $9.3 million in capital on nitrogen oxide emission improvements, with $2.5 million of that amount being spent in 2005. If the TCEQ ultimately requires a 90% reduction of emissions of nitrogen oxides at our Texas City facility, we estimate that an additional $8 million to $10 million in capital improvements would be required. We anticipate that the balance of the capital expenditures, and other expenses required to comply with the 1 hour SIP, will be incurred through December 31, 2008. We expect to recover a small portion of these costs from the other parties to our production agreements.

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

Legal Proceedings

     On July 16, 2001, Sterling Chemicals Holdings, Inc., and most of its U.S. subsidiaries, including us (collectively, the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. The Debtors’ plan of reorganization (our “Plan of Reorganization”) was confirmed on November 20, 2002 and, on December 19, 2002, the Debtors emerged from bankruptcy pursuant to the terms of our Plan of Reorganization. On December 29, 2005, the Bankruptcy Court entered a final decree officially closing the two remaining bankruptcy cases of the Debtors.

     On July 5, 2005, Patrick B. McCarthy, an employee of Kinder-Morgan, was seriously injured at Kinder-Morgan, Inc.’s facilities near Cincinnati, Ohio while attempting to offload a railcar containing one of our plasticizers products. An investigation into the incident is in its preliminary stages and the underlying cause of the accident is not yet known. On October 28, 2005, Mr. McCarthy and his family filed a suit in the Court of Common Pleas, Hamilton County, Ohio (Case No. A0509144) against us, BASF Corporation and five other defendants seeking over $500,000 in damages related to medical expenses and loss of earnings and earnings capacity, among other things, and punitive damages. At this time, it is impossible to determine what, if any, liability we will have for this incident and we will vigorously defend the suit. 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 million deductible.

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     We do not believe that this incident will have a material adverse affect on our business, financial position, results of operations or cash flows, although we cannot guarantee that a material adverse effect will not occur.

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

9. SALES INFORMATION

     Sales to major customers constituting 10% or more of total revenues and export sales from continuing operations were as follows:

	Year ended December 31,
	2005			2004			2003
				(Dollars in Thousands)
Major customers:
BP p.l.c. and subsidiaries	$	86,625		$	81,069		$	70,108
Customer A		93,752			127,956			69,533
Customer B		124,149			116,912			*
Customer C		77,570			*			*
Export sales:
Export revenues	$	143,448		$	152,211		$	179,958
Percentage of total revenues		22	%		23	%		35	%

* Does not comprise more than 10% of total revenue for the periods indicated, therefore not presented.

10. FINANCIAL INSTRUMENTS

Concentrations of Risk

     We sell our products primarily to companies involved in the petrochemicals industry. We perform ongoing credit evaluations of our customers and generally do not require collateral for accounts receivable. However, letters of credit are required by us on many of our export sales. Historically, our credit losses have been minimal.

     We maintain cash deposits with major banks, which from time to time may exceed federally insured limits. We periodically assess the financial condition of these institutions and believe that the likelihood of any possible loss is minimal.

Fair Value of Financial Instruments

     The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, certain accrued liabilities and amounts due under our Revolver approximate fair value due to the short maturities of these instruments. As of December 31, 2005, the fair value of our Senior Notes was $96 million based on its quoted price.

11. CAPITAL STOCK

     Under our Certificate of Incorporation, we are authorized to issue 20,125,000 shares of capital stock, consisting of 20,000,000 shares of common stock, par value $0.01 per share, and 125,000 shares of preferred stock, par value $0.01 per share. In connection with our Plan of Reorganization and the merger of Sterling Chemicals Holdings, Inc. into us, we issued a total of 2,825,000 shares of common stock. Subject to applicable law and the provisions of our Certificate of Incorporation, the indenture governing our Secured Notes and the Revolver, dividends may be declared on our shares of capital stock at the discretion of our Board of Directors and may be paid in cash, in property or in shares of our capital stock.

     Upon the effective date of our Plan of Reorganization, we authorized 25,000 shares and issued 2,175 shares of our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Series A Convertible Preferred Stock (“Series A Preferred Stock”). Each share of Series A Preferred Stock is convertible at the option of the holder thereof at any time into 1,000 shares of our common stock, subject to adjustments. The Series A Preferred Stock has a cumulative dividend rate of 4% per quarter, payable in additional shares of Series A Preferred Stock in arrears on the first Business Day of each calendar quarter. As our shares of Series A Preferred Stock are convertible into shares of our common stock (currently on a one to 1,000 share basis), each dividend paid in additional shares of our Series A Preferred Stock has a dilutive effect on our shares of common stock. Since the initial issuance of Series A Preferred Stock, we have issued an additional 1,326.929 shares of our Series A Preferred Stock (convertible into 1,326,929 shares of our common stock) in dividends.

     Our Series A Preferred Stock carries a liquidation preference of $13,793.11 per share, subject to adjustments. We may redeem all or any number of our shares of Series A Preferred Stock at any time after December 19, 2005, at a redemption price determined in accordance with Certificate of Designations, Preferences, Rights and Limitations of our Series A Preferred Stock, provided that the current equity value of our capital stock issued on the effective date of our Plan of Reorganization exceeds specified levels. The holders of our Series A Preferred Stock may elect to have us redeem all or any of their shares of Series A Preferred Stock following a specified change of control at a redemption price equal to the greater of:

• the liquidation preference for such shares (plus accrued and unpaid dividends);

• in the event of a merger or consolidation, the fair market value of the consideration that would have been received in such merger or consolidation in respect of the shares of our common stock into which such shares of Series A Preferred Stock were convertible immediately prior to such merger or consolidation had such shares of Series A Preferred Stock been converted prior thereto; or

• in the event of some other specified change of control, the current market value of the shares of our common stock into which such shares of Series A Preferred Stock were convertible immediately prior to such change of control had such shares of Series A Preferred Stock been convertedve prior thereto (plus accrued and unpaid dividends).

Upon the effective date of our Plan of Reorganization, we also issued warrants (the “Warrants”) to purchase, in the aggregate, 949,367 shares of common stock. Each Warrant represents the right, at any time on or before December 19, 2008, to purchase one share of our common stock at an exercise price of $52 per share (subject to adjustments).

12. RELATED PARTY TRANSACTIONS

     Resurgence Asset Management, L.L.C. (“Resurgence”) has beneficial ownership of a substantial majority of the voting power of our equity securities due to its investment and disposition authority over securities owned by its and its affiliates’ managed funds and accounts. Currently, Resurgence has beneficial ownership of over 98% of our Series A Preferred Stock and over 60% of our common stock, representing ownership of over 80% of the total voting power of our equity. Each share of our Series A Preferred Stock is convertible at the option of the holder thereof at any time into 1,000 shares of our common stock, subject to adjustments. The holders of our Series A Preferred Stock are entitled to designate a number of our directors roughly proportionate to their overall equity ownership, but in any event not less than a majority of our directors as long as they hold in the aggregate at least 35% of the total voting power of our equity. As a result, these holders have the ability to control our management, policies and financing decisions, elect a majority of our Board and control the vote on most matters presented to a vote of our stockholders. In addition, our shares of Series A Preferred Stock, almost all of which are beneficially owned by Resurgence, carry a cumulative dividend rate of 4% per quarter, payable in additional shares of Series A Preferred Stock. Each dividend paid in additional shares of our Series A Preferred Stock has a dilutive effect on our shares of common stock and increases the percentage of the total voting power of our equity beneficially owned by Resurgence. Series A Preferred Stock dividends were 508.465 shares and 434.638 shares during 2005 and 2004, respectively. Two of our directors, Messrs. Byron J. Haney and Philip M. Sivin, are employed by Resurgence. Pursuant to established policies of Resurgence, all director compensation earned by Messrs Haney and Sivin was paid to Resurgence. During 2005, we paid Resurgence an aggregate amount equal to $177,500 related to director compensation for Messrs. Haney and Sivin and Marc S. Kirschner, Keith R. Whittaker and Robert T. Symington, three of our former directors who were employees of Resurgence at the time such compensation was earned, along with reimbursement of an immaterial amount of direct, out-of-pocket expenses incurred in connection with services as directors.

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13. NEW ACCOUNTING STANDARDS

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) in an effort to conform U.S. accounting standards for inventories to International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are currently evaluating the impact of this standard on our consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 123-Revised 2004 (“SFAS 123(R)”), “Share-Based Payment.” This is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, “Accounting for Stock Issued to Employees.” As noted in the notes to financial statements, we do not record compensation expense for stock-based compensation. Under SFAS 123(R), we will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. This is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The pro forma table in Note 2 of the Notes to the Consolidated Financial Statements illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123.

     In March 2005, the Securities and Exchange Commission released SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment.” SAB No. 107 announces the position of the staff of the Securities and Exchange Commission regarding the application of SFAS No. 123(R). SAB No. 107 contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain rules and regulations of the Securities and Exchange Commission, as well as providing the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 also highlights the importance of disclosures related to the accounting for share-based payment transactions. We are currently evaluating the effect of SAB No. 107 on our consolidated financial statements.

     In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations,” to clarify the term “conditional asset retirement” as used in SFAS 143, “Accounting for Asset Retirement Obligations.” Under FIN 47, a liability for the fair value of a conditional asset retirement obligation is recognized when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be factored into the measurement of the liability when sufficient information exists. This interpretation did not have a material impact on our consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement changes the accounting for and reporting of a change in accounting principles. Under SFAS No. 154, a company that makes a voluntary change in accounting principles must apply that change retrospectively to prior period financial statements, unless that application would be impracticable. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005.

59

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity (deficiency in assets), and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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 audits 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas
March 16, 2006

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STERLING CHEMICALS, INC. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

QUARTERLY FINANCIAL DATA (unaudited)

			First			Second			Third			Fourth
	Year		Quarter			Quarter			Quarter			Quarter
	(Dollars in Thousands, Except Per Share Data)
Revenues		2005	$	180,207		$	163,515		$	148,733		$	149,431
		2004		122,504			140,924			189,916			202,009
Gross profit (loss)		2005		14,370			(17,124	)		4,854			(13,348	)
		2004		(995	)		11,337			19,927			(7,925	)
Income (loss) from continuing operations (1)		2005		5,645			(12,965	)		115			(11,303	)
		2004		(4,727	)		(45,490	)		8,867			1,469
Income (loss) from discontinued operations, net of tax (2)		2005		(3,839	)		(885	)		(9,164	)		2,828
		2004		(5,133	)		(5,094	)		(3,338	)		(9,198	)
Net income (loss) attributable to common stockholders		2005		154			(15,569	)		(10,835	)		(10,332	)
		2004		(11,272	)		(52,052	)		4,002			(9,316	)
Net income (loss) per share of common stock:
Basic		2005		0.05			(5.50	)		(3.83	)		(3.66	)
		2004		(3.99	)		(18.43	)		1.42			(3.30	)
Diluted		2005		0.05			(5.50	)		(3.83	)		(3.66	)
		2004		(3.99	)		(18.43	)		0.99			(3.30	)

(1)	In the second quarter of 2004, we recorded a $48.5 million non-cash goodwill impairment charge. In the fourth quarter of 2004, we recorded a pension curtailment gain of $13 million.
(2)	In the fourth quarter of 2004, we recorded a pre-tax impairment charge of $22 million related to our acrylonitrile long-lived assets.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

Item 9A. Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

     We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of the end of the fiscal period covered by this report on Form 10-K. Based upon that evaluation, each of our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information

61

relating to us (including our consolidated subsidiaries) required to be disclosed in our Exchange Act reports. In connection with our evaluation, no change was identified in our internal controls over financial reporting that occurred during the fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

     Beginning with our annual report on Form 10-K for 2007, we will be subject to the provisions of Section 404 of the Sarbanes-Oxley Act that require an annual management assessment of our internal control over financial reporting and related attestation by our independent registered public accounting firm.

Item 9B. Other Information

     None.

        .

62

PART III

Item 10. Directors and Executive Officers of the Registrant

     Reference is made to the information responsive to Item 10 of this Part III contained in our definitive proxy statement for our 2006 Annual Meeting of Stockholders which is hereby incorporated herein by reference in response to this item.

Item 11. Executive Compensation

     Reference is made to the information responsive to Item 11 of this Part III contained in our definitive proxy statement for our 2006 Annual Meeting of Stockholders which is hereby incorporated herein by reference in response to this item.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Reference is made to the information responsive to Item 12 of this Part III contained in our definitive proxy statement for our 2006 Annual Meeting of Stockholders which is hereby incorporated herein by reference in response to this item.

Item 13. Certain Relationships and Related Transactions

     Reference is made to the information responsive to Item 13 of this Part III contained in our definitive proxy statement for our 2006 Annual Meeting of Stockholders which is hereby incorporated herein by reference in response to this item.

Item 14. Principal Accountant Fees and Services

     Reference is made to the information responsive to Item 14 of this Part III contained in our definitive proxy statement for our 2006 Annual Meeting of Stockholders which is hereby incorporated herein by reference in response to this item.

63

PART IV

Item 15. Exhibits and Consolidated Financial Statement Schedules

     (a) Financial Statements, Financial Statement Schedules and Exhibits.

1.	Consolidated Financial Statements. See “Item 8. Financial Statements and Supplementary Data – Index to Financial Statements.”
2.	Consolidated Financial Statement Schedules. All schedules for which provision is made in Regulation S-X either are not required under the related instruction or are inapplicable and, therefore, have been omitted.
3.	Exhibits. See the Exhibit Index for a list of those exhibits filed herewith, which index also includes and identifies management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

     (b) Exhibit index.

Exhibit
Number		Description of Exhibit
2.1	–	Certificate of Ownership and Merger merging Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 2.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
2.2	–	Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et. al., Debtors, dated October 14, 2002 (incorporated herein by reference from Exhibit 2.1 to our Form 8-K filed on November 26, 2002).
2.3	–	First Modification to Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et. al., Debtors, dated November 18, 2002 (incorporated herein by reference from Exhibit 2.2 to our Form 8-K filed on November 26, 2002).
3.1	–	Amended and Restated Certificate of Incorporation of Sterling Chemicals, Inc. (conformed copy) (incorporated herein by reference from Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005).
3.2	–	Restated Certificate of Designations, Preferences, Rights and Limitations of Series A Convertible Preferred Stock of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
3.3	–	Restated Bylaws of Sterling Chemicals, Inc. (conformed copy) (incorporated herein by reference from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
4.1	–	Warrant Agreement dated as of December 19, 2002 by and between Sterling Chemicals, Inc., and Wells Fargo Bank Minnesota, N.A., as warrant agent (incorporated herein by reference from Exhibit 5 to our Form 8-A filed on December 19, 2002).
4.2	–	Registration Rights Agreement dated as of December 19, 2002 by and between Sterling Chemicals, Inc. and Resurgence Asset Management, L.L.C. (incorporated herein by reference from Exhibit 7 to our Form 8-A filed on December 19, 2002).
4.3	–	Tag Along Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc., Resurgence Asset Management, L.L.C. and the Official Committee of the Unsecured Creditors (incorporated herein by reference from Exhibit 8 to our Form 8-A filed on December 19, 2002).
4.4	–	Indenture dated December 19, 2002 by and among Sterling Chemicals, Inc., as Issuer, Sterling Chemicals Energy, Inc., as Guarantor, and National City Bank, as Trustee, governing the 10% Senior Secured Notes due 2007 of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit T3-C to Amendment No. 3 to our Form T-3 filed on December 19, 2002).

64

Exhibit
Number		Description of Exhibit
4.5	–	Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated December 19, 2002 made by Sterling Chemicals, Inc., as Trustor, to Thomas S. Henderson, as Individual Trustee for the benefit of National City Bank, in its capacity as described therein, as Beneficiary (incorporated herein by reference from Exhibit 4.2 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
4.6	–	Security Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Assignors, National City Bank, as Collateral Agent, and National City Bank, as Indenture Trustee for the benefit of the holders the 10% Senior Secured Notes due 2007 of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 4.3 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.1	–	Revolving Credit Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Borrowers, the various financial institutions as are or may become parties thereto from time to time, as the Lenders, and The CIT Group/Business Credit, Inc., as the Administrative Agent for the Lenders (incorporated herein by reference from Exhibit 4.4 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.1(a)	–	First Amendment to Revolving Credit Agreement dated as of February 12, 2003 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Borrowers, the various financial institutions party thereto, as the Lenders, and The CIT Group/Business Credit, Inc., as the Administrative Agent for the Lenders (incorporated herein by reference from Exhibit 4.8 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.2	–	Security Agreement dated as of December 19, 2002 made by Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Grantors, in favor of The CIT Group/Business Credit, Inc., as Administrative Agent for the Secured Parties (incorporated herein by reference from Exhibit 4.5 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.3	–	Pledge Agreement dated as of December 19, 2002 made by Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Pledgors, in favor of The CIT Group/Business Credit, Inc., as Administrative Agent for the Secured Parties (incorporated herein by reference from Exhibit 4.6 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.4*	–	Sterling Chemicals, Inc. 2002 Stock Plan (incorporated herein by reference to Exhibit 6 to our Form 8-A filed on December 19, 2002).
10.5*	–	Fourth Amended and Restated Key Employee Protection Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004).
10.6*	–	Third Amended and Restated Severance Pay Plan (incorporated herein by reference from Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.7*	–	Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of May 1, 1996) (incorporated herein by reference from Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(a)*	–	First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of January 31, 1997) (incorporated herein by reference from Exhibit 10.4(a) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(b)*	–	Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of January 1, 1997) (incorporated herein by reference from Exhibit 10.4(b) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(c)*	–	Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of November 1, 1998) (incorporated herein by reference from Exhibit 10.4(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(d)*	–	Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of December 31, 1998) (incorporated herein by reference from Exhibit 10.4(d) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).

65

Exhibit
Number		Description of Exhibit
10.7(e)*	–	Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of April 1, 1999) (incorporated herein by reference from Exhibit 10.4(e) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(f)*	–	Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of May 14, 1999) (incorporated herein by reference from Exhibit 10.4(f) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(g)*	–	Seventh Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.1 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.7(h)*	–	Eighth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.7(i)*	–	Ninth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.7(j)*	–	Tenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
10.7(k)*	–	Eleventh Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.8(k) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.7(l)*	–	Twelfth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.7(m)*	–	Thirteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.7(n)*	–	Fourteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.8(n) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.7(o)*	–	Fifteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005).
10.8*	–	Sterling Chemicals, Inc. Pension Benefit Equalization Plan (incorporated herein by reference from Exhibit 10.10 to our Registration Statement on Form S-1 (Registration No. 33-24020)).
10.8(a)*	–	First Amendment to Sterling Chemicals, Inc. Pension Benefit Equalization Plan (incorporated herein by reference from Exhibit 10.9(a) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.9*	–	Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan (incorporated herein by reference from Exhibit 10.34 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (SEC File Number 1-10059)).
10.9(a)*	–	First Amendment to Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan (incorporated herein by reference from Exhibit 10.10(a) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.10	–	Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of May 1, 1996) (incorporated herein by reference from Exhibit 10.3(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (SEC File Number 333-04343-01)).
10.10(a)	–	First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of December 31, 1998) (incorporated herein by reference from Exhibit 10.7(a) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).

66

Exhibit
Number		Description of Exhibit
10.10(b)	–	Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of December 17, 1998) (incorporated herein by reference from Exhibit 10.7(b) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.10(c)	–	Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of September 20, 1999) (incorporated herein by reference from Exhibit 10.7(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.10(d)	–	Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.4 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.10(e)	–	Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.5 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.10(f)	–	Sixth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
10.10(g)	–	Seventh Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.11(g) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.10(h)	–	Eighth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.10(i)	–	Ninth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005).
10.11*	–	Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000 (incorporated herein by reference from Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.11(a)*	–	First Amendment to the Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000 (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2001).
10.11(b)*	–	Second Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.6 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.11(c)*	–	Third Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.7 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.11(d)*	–	Fourth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
10.11(e)*	–	Fifth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.11(f)*	–	Sixth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004).
10.11(g)*	–	Seventh Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.12(g) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
**10.12*	–	Bonus Plan

67

Exhibit
Number		Description of Exhibit
10.13	–	Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, May 27, 2004 to May 1, 2007. (incorporated herein by reference from Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.14*	–	Form of Indemnity Agreement with each of its officers and directors (incorporated herein by reference from Exhibit 10.17 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (SEC File Number 333-04343-01)).
10.15*	–	Employment Agreement dated as of January 23, 2001 among David G. Elkins, Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
10.16*	–	Severance Agreement dated effective as of January 2, 2003 between David G. Elkins and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.10 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.17	–	Separation Agreement effective as of May 31, 2005 by and among Sterling Chemicals, Inc., O&D USA LLC (d/b/a Innovene Chemicals), ANEXCO, LLC and BP Amoco Chemical Company (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 31, 2005).
+10.18	–	Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. (predecessor in interest to BP Amoco Chemical Company) and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (SEC File Number 333-04343-01)).
+10.18(a)	–	Amendment to Second Amended and Restated Production Agreement dated as of March 1, 2001 between BP Chemicals Inc. (predecessor in interest to BP Amoco Chemical Company) and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001).
++10.19	–	Second Amended and Restated Plasticizers Production Agreement dated effective as of January 1, 2006 between BASF Corporation and Sterling Chemicals, Inc.
10.20	–	License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.25 to our Registration Statement on Form S-1 (Registration No. 33-24020)).
14.1	–	Sterling Chemicals, Inc. Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated herein by reference from Exhibit 14.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
**21.1	–	Subsidiaries of Sterling Chemicals, Inc.
**23.1	–	Consent of Deloitte & Touche LLP.
**31.1	–	Rule 13a-14(a) Certification of the Chief Executive Officer
**31.2	–	Rule 13a-14(a) Certification of the Chief Financial Officer
**32.1	–	Section 1350 Certification of the Chief Executive Officer
**32.2	–	Section 1350 Certification of the Chief Financial Officer
**99.1	–	Amended and Restated Audit Committee Charter of Sterling Chemicals, Inc.
99.2	–	Amended and Restated Corporate Governance Committee Charter of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005).

*	Management contracts or compensatory plans or arrangements.
**	Filed or furnished herewith.
+	Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
++	Filed herewith. Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

68

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STERLING CHEMICALS, INC. (Registrant)
By:	/s/ RICHARD K. CRUMP
	Richard K. Crump President, Chief Executive Officer and Director
By:	/s/ PAUL G. VANDERHOVEN
	Paul G. Vanderhoven Senior Vice President—Finance and Chief Financial Officer

Date: March 15, 2006

     Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
Principal Executive Officer:
/s/ RICHARD K. CRUMP Richard K. Crump	President, Chief Executive Officer and Director	March 15, 2006
Principal Financial Officer:
/s/ PAUL G. VANDERHOVEN Paul G. Vanderhoven	Senior Vice President—Finance and Chief Financial Officer	March 15, 2006
Principal Accounting Officer:
/s/ JOHN R. BEAVER John R. Beaver	Vice President, Corporate Controller	March 15, 2006
/s/ JOHN W. GILDEA John W. Gildea	Director	March 15, 2006
/s/ BYRON J. HANEY Byron J. Haney	Director	March 15, 2006
Karl W. Schwarzfeld	Director	March 15, 2006
/s/ PHILIP M. SIVIN Philip M. Sivin	Director	March 15, 2006
/s/ DR. PETER TING KAI WU Dr. Peter Ting Kai Wu	Director	March 15, 2006

69

EXHIBIT INDEX

Exhibit
Number		Description of Exhibit
2.1	–	Certificate of Ownership and Merger merging Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 2.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
2.2	–	Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et. al., Debtors, dated October 14, 2002 (incorporated herein by reference from Exhibit 2.1 to our Form 8-K filed on November 26, 2002).
2.3	–	First Modification to Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et. al., Debtors, dated November 18, 2002 (incorporated herein by reference from Exhibit 2.2 to our Form 8-K filed on November 26, 2002).
3.1	–	Amended and Restated Certificate of Incorporation of Sterling Chemicals, Inc. (conformed copy) (incorporated herein by reference from Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005).
3.2	–	Restated Certificate of Designations, Preferences, Rights and Limitations of Series A Convertible Preferred Stock of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
3.3	–	Restated Bylaws of Sterling Chemicals, Inc. (conformed copy) (incorporated herein by reference from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
4.1	–	Warrant Agreement dated as of December 19, 2002 by and between Sterling Chemicals, Inc., and Wells Fargo Bank Minnesota, N.A., as warrant agent (incorporated herein by reference from Exhibit 5 to our Form 8-A filed on December 19, 2002).
4.2	–	Registration Rights Agreement dated as of December 19, 2002 by and between Sterling Chemicals, Inc. and Resurgence Asset Management, L.L.C. (incorporated herein by reference from Exhibit 7 to our Form 8-A filed on December 19, 2002).
4.3	–	Tag Along Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc., Resurgence Asset Management, L.L.C. and the Official Committee of the Unsecured Creditors (incorporated herein by reference from Exhibit 8 to our Form 8-A filed on December 19, 2002).
4.4	–	Indenture dated December 19, 2002 by and among Sterling Chemicals, Inc., as Issuer, Sterling Chemicals Energy, Inc., as Guarantor, and National City Bank, as Trustee, governing the 10% Senior Secured Notes due 2007 of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit T3-C to Amendment No. 3 to our Form T-3 filed on December 19, 2002).
4.5	–	Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated December 19, 2002 made by Sterling Chemicals, Inc., as Trustor, to Thomas S. Henderson, as Individual Trustee for the benefit of National City Bank, in its capacity as described therein, as Beneficiary (incorporated herein by reference from Exhibit 4.2 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
4.6	–	Security Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Assignors, National City Bank, as Collateral Agent, and National City Bank, as Indenture Trustee for the benefit of the holders the 10% Senior Secured Notes due 2007 of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 4.3 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.1	–	Revolving Credit Agreement dated as of December 19, 2002 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Borrowers, the various financial institutions as are or may become parties thereto from time to time, as the Lenders, and The CIT Group/Business Credit, Inc., as the Administrative Agent for the Lenders (incorporated herein by reference from Exhibit 4.4 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).

70

Exhibit
Number			Description of Exhibit
10.1(a)	–	First Amendment to Revolving Credit Agreement dated as of February 12, 2003 by and among Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Borrowers, the various financial institutions party thereto, as the Lenders, and The CIT Group/Business Credit, Inc., as the Administrative Agent for the Lenders (incorporated herein by reference from Exhibit 4.8 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.2	–	Security Agreement dated as of December 19, 2002 made by Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Grantors, in favor of The CIT Group/Business Credit, Inc., as Administrative Agent for the Secured Parties (incorporated herein by reference from Exhibit 4.5 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.3	–	Pledge Agreement dated as of December 19, 2002 made by Sterling Chemicals, Inc. and Sterling Chemicals Energy, Inc., as Pledgors, in favor of The CIT Group/Business Credit, Inc., as Administrative Agent for the Secured Parties (incorporated herein by reference from Exhibit 4.6 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.4*	–	Sterling Chemicals, Inc. 2002 Stock Plan (incorporated herein by reference to Exhibit 6 to our Form 8-A filed on December 19, 2002).
10.5*	–	Fourth Amended and Restated Key Employee Protection Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004).
10.6*	–	Third Amended and Restated Severance Pay Plan (incorporated herein by reference from Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.7*	–	Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of May 1, 1996) (incorporated herein by reference from Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(a)*	–	First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of January 31, 1997) (incorporated herein by reference from Exhibit 10.4(a) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(b)*	–	Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of January 1, 1997) (incorporated herein by reference from Exhibit 10.4(b) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(c)*	–	Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of November 1, 1998) (incorporated herein by reference from Exhibit 10.4(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(d)*	–	Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of December 31, 1998) (incorporated herein by reference from Exhibit 10.4(d) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(e)*	–	Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of April 1, 1999) (incorporated herein by reference from Exhibit 10.4(e) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(f)*	–	Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (Effective as of May 14, 1999) (incorporated herein by reference from Exhibit 10.4(f) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.7(g)*	–	Seventh Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.1 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.7(h)*	–	Eighth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.7(i)*	–	Ninth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).

71

Exhibit
Number		Description of Exhibit
10.7(j)*	–	Tenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
10.7(k)*	–	Eleventh Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.8(k) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.7(l)*	–	Twelfth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.7(m)*	–	Thirteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.7(n)*	–	Fourteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.8(n) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.7(o)*	–	Fifteenth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005).
10.8*	–	Sterling Chemicals, Inc. Pension Benefit Equalization Plan (incorporated herein by reference from Exhibit 10.10 to our Registration Statement on Form S-1 (Registration No. 33-24020)).
10.8(a)*	–	First Amendment to Sterling Chemicals, Inc. Pension Benefit Equalization Plan (incorporated herein by reference from Exhibit 10.9(a) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.9*	–	Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan (incorporated herein by reference from Exhibit 10.34 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (SEC File Number 1-10059)).
10.9(a)*	–	First Amendment to Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan (incorporated herein by reference from Exhibit 10.10(a) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.10	–	Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of May 1, 1996) (incorporated herein by reference from Exhibit 10.3(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (SEC File Number 333-04343-01)).
10.10(a)	–	First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of December 31, 1998) (incorporated herein by reference from Exhibit 10.7(a) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.10(b)	–	Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of December 17, 1998) (incorporated herein by reference from Exhibit 10.7(b) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.10(c)	–	Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (Effective as of September 20, 1999) (incorporated herein by reference from Exhibit 10.7(c) to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.10(d)	–	Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.4 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.10(e)	–	Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.5 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.10(f)	–	Sixth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).

72

Exhibit
Number		Description of Exhibit
10.10(g)	–	Seventh Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.11(g) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.10(h)	–	Eighth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.10(i)	–	Ninth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees’ Pension Plan (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005).
10.11*	–	Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000 (incorporated herein by reference from Exhibit 10.8 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
10.11(a)*	–	First Amendment to the Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000 (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2001).
10.11(b)*	–	Second Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.6 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.11(c)*	–	Third Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.7 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.11(d)*	–	Fourth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
10.11(e)*	–	Fifth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.11(f)*	–	Sixth Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004).
10.11(g)*	–	Seventh Amendment to the Sixth Amended and Restated Savings and Investment Plan (incorporated herein by reference from Exhibit 10.12(g) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
**10.12*	–	Bonus Plan
10.13	–	Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, May 27, 2004 to May 1, 2007. (incorporated herein by reference from Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
10.14*	–	Form of Indemnity Agreement with each of its officers and directors (incorporated herein by reference from Exhibit 10.17 to our Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (SEC File Number 333-04343-01)).
10.15*	–	Employment Agreement dated as of January 23, 2001 among David G. Elkins, Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
10.16*	–	Severance Agreement dated effective as of January 2, 2003 between David G. Elkins and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.10 to our Transition Report on Form 10-Q for the transition period ended December 31, 2002).
10.17	–	Separation Agreement effective as of May 31, 2005 by and among Sterling Chemicals, Inc., O&D USA LLC (d/b/a Innovene Chemicals), ANEXCO, LLC and BP Amoco Chemical Company (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 31, 2005).

73

Exhibit
Number		Description of Exhibit
+10.18	–	Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. (predecessor in interest to BP Amoco Chemical Company) and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (SEC File Number 333-04343-01)).
+10.18(a)	–	Amendment to Second Amended and Restated Production Agreement dated as of March 1, 2001 between BP Chemicals Inc. (predecessor in interest to BP Amoco Chemical Company) and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001).
++10.19	–	Amended and Restated Plasticizers Production Agreement dated effective as of January 1, 2006 between BASF Corporation and Sterling Chemicals, Inc.
10.20	–	License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 10.25 to our Registration Statement on Form S-1 (Registration No. 33-24020)).
14.1	–	Sterling Chemicals, Inc. Code of Ethics for the Chief Executive Officer and Senior Financial Officers (incorporated herein by reference from Exhibit 14.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003).
**21.1	–	Subsidiaries of Sterling Chemicals, Inc.
**23.1	–	Consent of Deloitte & Touche LLP.
**31.1	–	Rule 13a-14(a) Certification of the Chief Executive Officer
**31.2	–	Rule 13a-14(a) Certification of the Chief Financial Officer
**32.1	–	Section 1350 Certification of the Chief Executive Officer
**32.2	–	Section 1350 Certification of the Chief Financial Officer
**99.1	–	Amended and Restated Audit Committee Charter of Sterling Chemicals, Inc.
99.2	–	Amended and Restated Corporate Governance Committee Charter of Sterling Chemicals, Inc. (incorporated herein by reference from Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005).

*	Management contracts or compensatory plans or arrangements.
**	Filed or furnished herewith.
+	Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
++	Filed herewith. Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

74

EX-10.12

Exhibit 10.12

Sterling Chemicals, Inc.

Bonus Plan

     Our Bonus Plan is comprised of two programs that provide eligible employees with opportunities to receive cash compensation in addition to their salaries. One of these programs pays bonuses based, in part, on our attainment of specified levels of EBITDA (the “Corporate Performance Bonus Program”), while the second program pays bonuses based on individual performance, irrespective of the amount of EBITDA we earn during the year (the “Individual Performance Bonus Program”).

Eligibility.

     All of our salaried personnel, both exempt and non-exempt, may be paid bonuses under our Corporate Performance Bonus Program and our Individual Performance Bonus Program. In order to be paid a bonus, an employee must be employed by us at the time bonuses are paid, unless the employee has retired, died or become disabled, in which event a pro rata bonus payment will be made based on full months of service for the relevant year.

Corporate Performance Bonus Program.

     Our Compensation Committee has set three separate corporate EBITDA hurdles under the Corporate Performance Bonus Program; a Threshold Amount ($35 million), a Target Amount ($70 million) and a Maximum Payment Amount ($140 million). In order for any bonus to be paid under our Corporate Performance Bonus Program, we must attain at least the Threshold Amount of EBITDA. If we earn at least the Threshold Amount of EBITDA for any year, the maximum bonus that can be earned by an employee for that year under our Corporate Performance Bonus Program is determined by the actual amount of EBITDA earned, the employee’s base salary for that year and the employee’s “Bonus Target” (which is assigned in March of each year and is expressed as a percentage of the employee’s base salary), on the following basis:

EBITDA Earned	Maximum Bonus Payment
$35 million (Threshold)	Base Salary X Bonus Target X 50%
$70 million (Target)	Base Salary X Bonus Target X 100%
$140 million (Maximum)	Base Salary X Bonus Target X 200%

If our EBITDA is between the Threshold Amount and the Target Amount, or between the Target Amount and the Maximum Payment Amount, the maximum bonus that can be paid to an employee for that year is pro-rated between the two levels on a straight-line basis.

     Once the maximum amount of bonus for an employee is set, the actual bonus earned by that employee is determined based on his or her performance. The actual amount of bonus paid to our Chief Executive Officer and each of our Senior Vice Presidents is determined by our Compensation Committee. For each of our other eligible employees, if the employee’s rating for the year for which the bonus is being paid is SE, OE or FS, that employee will receive a bonus of between 51% and 100% of the maximum bonus that could have been paid to that employee for that year under our Corporate Performance Bonus Program, with the exact percentage to be determined by the employee’s ranking within his or her employee group. Any employee whose rating for the year for which the bonus is being paid is GM will be paid a bonus equal to 50% of the maximum bonus that could have been paid to that employee for that year under our Corporate Performance Bonus Program. However, if the amount of bonus to be paid to any employee whose rating is SE, OE, FS or GM is less than the amount paid to each hourly employee under our Gainsharing Program, then the amount of that employee’s bonus will be increased to match the amount paid under our Gainsharing Program. Any employee whose rating for the year for which the bonus is being paid is DM will not be paid a bonus for that year, irrespective of the amount of EBITDA we earned for the year.

Individual Performance Bonus Program.

     In any year when we do not attain the Threshold Amount of EBITDA, each of our salaried employees has the ability to earn a bonus under our Individual Performance Bonus Program of up to 50% of his or base salary for that year times his or her Bonus Target. In any year when do earn at least the Threshold Amount of EBITDA under our Corporate Performance Bonus Program, no bonus is paid under our Individual Performance Bonus Program. The actual bonus earned by each employee under our Individual Performance Bonus Program is based on his or her performance. Any employee whose rating for the year for which the bonus is being paid is SE, OE or FS will receive a bonus of between 40% and 100% of the maximum bonus that could have been paid to that employee for that year under our Individual Performance Bonus Program, the exact percentage to be determined by the employee’s ranking within his or her employee group. Any employee whose rating for the year for which the bonus is being paid is GM or DM will not be paid a bonus for that year under our Individual Performance Bonus Program. Our Chief Executive Officer and each of our Senior Vice Presidents are not eligible for bonuses under the Individual Performance Bonus Program. Whether a bonus will be paid to our Chief Executive Officer or any of our Senior Vice Presidents for any year when we do not attain the Threshold Amount of EBITDA, and if so, the amount to be paid, will be determined on an annual basis by our Compensation Committee.

Payment.

     At the end of each year, our financial statements are audited and presented to our Audit Committee for approval. The results of the audit will determine whether we have earned

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the Threshold Amount of EBITDA and, consequently, whether bonuses will be paid under our Corporate Performance Bonus Program or our Individual Performance Bonus Program. Once our Audit Committee has approved the audit for the year, bonus amounts for each employee for that year will be determined, and the bonus payments will be made in any event on or before March 14. Bonuses are paid in a single lump sum after all taxes have been withheld. The payment of a bonus does not, however, affect the employee’s base pay in any manner and has no impact on the amount or level of benefits under any of our other benefit plans.

Payment Reductions.

     The amount of bonus paid to an employee under our Corporate Performance Bonus Program or our Individual Performance Bonus Program assumes continued employment with us in active status throughout the year. For purposes of our Bonus Plan, active status is made up of regular hours worked, vacation time, jury duty, service as a witness under court subpoena, funeral leave and military leave. Non-active status includes all other absences from work for any reason, including illness, injury, personal business, doctor’s appointment, excused absence, family illness, leave of absences and personal leave, etc. Once the amount of bonus to be paid to each employee is determined, an employee’s bonus may be reduced if the employee has accumulated absences totaling at least 44 working days (352 hours for shift workers) during the year for which the bonus is being paid. The amount of reduction will be 16.67% for the first 44 working days (352 hours for shift workers) of non-active status plus an additional 8.33% reduction for each additional 22 working days (176 hours for shift workers) of non-active status during the year for which the bonus is being paid.

     The amount of bonus paid to any employee who was hired after July 1 of the year for which the bonus is being paid will be pro rated based on the number of full months of service during that year. The amount of bonus paid to any employee who became eligible under our Bonus Plan in the middle of a year due to a promotion or change in job classification will not be pro rated due to such promotion or job classification (i.e., all months of service with us during that year will be treated as if they were performed in the employee’s most recent position).

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EX-10.19

Exhibit 10.19

* THE CONFIDENTIAL PORTIONS OF THIS EXHIBIT, WHICH HAVE BEEN REMOVED AND REPLACED WITH ONE OR MORE ASTERISKS, HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

Second Amended And Restated
Plasticizers Production Agreement

Between

Sterling Chemicals, Inc.

and

BASF Corporation

January 1, 2006

Second Amended And Restated
Plasticizers Production Agreement

Table of Contents

	Page
Article I — Definitions and Interpretation	1
Section 1.01. Certain Defined Terms	1
Section 1.02. Interpretation	14
Article II — Production and Delivery of Product	15
Section 2.01. Production and Delivery	15
Section 2.02. Raw Materials and Ancillary Raw Materials	19
Section 2.03. Deliveries; Title and Risk of Loss	19
Section 2.04. Warranties	20
Section 2.05. Quality Testing	21
Section 2.06. Quantity Measurement and Testing	22
Section 2.07. Storage of Raw Materials and Products	23
Section 2.08. Hours of Operation	23
Section 2.09. Option to Terminate Obligations With Respect to the Oxo Unit	23
Article III — Payments; Capital Expenditures	24
Section 3.01. Option Price for Early Termination of Oxo Unit; Profit Sharing Payment	24
Section 3.02. Payments	26
Section 3.03. Facility Fees	28
Section 3.04. Capital Expenditures and Expansion Capital Expenditures	28
Section 3.05. Maintenance Expenditures	31
Section 3.06. Cost Savings; Manpower Reductions	32
Section 3.07 Taxes	35
Section 3.08 Wire Transfers, Etc.	35
Section 3.09 Late Payments	35
Article IV — Operation of the Plasticizers Complex and Related Matters	36
Section 4.01. Operational Practices	36
Section 4.02. Plant Visits; BASF Liaison	36
Section 4.03. Insurance	37
Section 4.04. Damage or Destruction	37
Section 4.05 Hazards	39
Section 4.06 Compliance with Laws	39

i

	Page
Article V — Additional Agreements	39
Section 5.01. Title	39
Section 5.02. Sale or Transfer of Interest in the Plasticizers Complex	40
Section 5.03. Books and Records; Audits	41
Section 5.04 Meetings	41
Section 5.05. Technical Advice	42
Section 5.06. Confidentiality	42
Section 5.07 Restriction on Transfer of Information	44
Section 5.08 Public Statements	44
Section 5.09 SEC Reports	45
Article VI — Indemnification; Limitation of Liability; Remedies	45
Section 6.01 Indemnification	45
Section 6.02 Force Majeure	47
Section 6.03 Limitations on Damages	49
Section 6.04 Remedies	50
Article VII — Term; Effect of Termination	50
Section 7.01. Term and Termination	50
Section 7.02. Effect of Termination	51
Article VIII — Miscellaneous	51
Section 8.01. Notices	51
Section 8.02. Counterparts	52
Section 8.03. Benefit and Burden	52
Section 8.04. No Third Party Rights	52
Section 8.05. No Partnership or Agency	53
Section 8.06. Amendments and Waiver	53
Section 8.07 Assignments	53
Section 8.08 Severability	53
Section 8.09 Dispute Resolution Procedures	53
Section 8.10 Applicable Law	56
Section 8.11 Submission to Jurisdiction	56
Section 8.12 Prevailing Party Costs	57
Section 8.13 Entire Agreement	57

Exhibits:

Exhibit A	—	Esters Unit and PA Unit Fixed Costs Categories
Exhibit B	—	Variable Costs Categories
Exhibit C	—	Marine Provisions
Exhibit D		Specified Equipment — PA Unit

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Exhibit E	—	Old Switch Condensers Action Items
Exhibit F	—	2006 Capital Budget
Exhibit G	—	Rail Cars

-iii-

Second Amended and Restated
Plasticizers Production Agreement

          This Second Amended and Restated Plasticizers Production Agreement dated as of January 1, 2006 is by and between Sterling Chemicals, Inc., a Delaware corporation (“Sterling”), and BASF Corporation, a Delaware corporation (“BASF” and, together with Sterling, the “Parties”).

Preliminary Statements

1.	Sterling and BASF are parties to that certain Amended and Restated Product Sales Agreement dated as of November 4, 1997 (the “Existing Agreement”).
2.	The Parties desire to amend the Existing Agreement in certain respects and to restate the Existing Agreement, as so amended, in its entirety.

          Now, Therefore, in consideration of their mutual promises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, effective as of the Effective Date, the Existing Agreement is amended and restated in its entirety to read as follows:

Article I

Definitions and Interpretation

     Section 1.01. Certain Defined Terms. Capitalized terms used in this Agreement shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require:

     “AAA” has the meaning specified in Section 8.09(c).

     “Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such Person. The term “control” (including, with correlative meaning, the terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; provided, however, that in no event shall either Party be deemed an Affiliate of the other Party.

     “Agreement” means this Second Amended and Restated Plasticizers Production Agreement, as amended, supplemented or modified from time to time in accordance with the terms hereof.

     “Allocated Fixed Costs” means the Fixed Costs for the Esters Unit and the PA Unit included in the Allocated Fixed Costs Table.

     “Allocated Fixed Costs Amount” means (i) with respect to any Year, the aggregate of all amounts listed under the column “Initial Annual Amount” in the Allocated Fixed Costs Table; provided, however, that:

(A)	with respect to each General Category of Allocated Fixed Costs that are also PPI Adjusted Fixed Costs, as of December 31 of each Year, beginning with December 31, 2006, the amount specified in such column for such General Category of Allocated Fixed Costs shall be deemed to be (1) the amount for such General Category of Allocated Fixed Costs then in effect plus (2) the amount, if any, by which (x) the amount for such General Category of Allocated Fixed Costs then in effect times the PPI Factor exceeds (y) the amount for such General Category of Allocated Fixed Costs then in effect;
(B)	with respect to Insurance Premium Charges, the amount specified in such column shall be deemed to be the amount determined for such Year under the definition thereof; and
(C)	with respect to the Environmental General Category of Allocated Fixed Costs, the amount determined under clause (A) above shall also be increased by an amount equal to any additional costs or expenses incurred by Sterling in connection with any Environmental Law adopted or amended after the Effective Date that is not exclusively applicable to the manufacture or handling of products at the Site that are not Products hereunder and is allocated on a fair and reasonable basis to the Plasticizers Complex; and

(ii) with respect to any Month, (A) 1/12 of the Allocated Fixed Costs Amount for the Year in which such Month occurs (excluding Insurance Premium Charges) plus (B) the Insurance Premium Charges for such Month.

     “Allocated Fixed Costs Table” means the table on Exhibit A titled “Allocated Fixed Costs”.

     “Ancillary Raw Materials” means any materials (other than Raw Materials), including utilities and other services required in the manufacture of Products, which are to be provided by Sterling pursuant to the terms of this Agreement, in each case, meeting the applicable Raw Materials Specifications in effect from time to time pursuant to this Agreement.

     “Applicable Interest Rate” means, with respect to any Day, an annual rate equal to the lesser of (i) 2% over the rate of interest in effect for such Day as most recently publicly announced or established by The Chase Manhattan Bank (National Association) in New York, New York as its “prime rate” and (ii) the

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maximum non-usurious rate of interest which may charged under Laws applicable to the Person to whom such interest is payable.

     “Arbitrator” has the meaning specified in Section 8.09(e).

     “BASF” has the meaning specified in the introductory paragraph hereof.

     “BASF Indemnified Persons” has the meaning specified in Section 6.01(a).

     “BASF Liaison” has the meaning specified in Section 4.02(b).

     “Bulk Storage Tanks” means the bulk storage tanks at the Site that have historically been used in connection with the storage of Raw Materials and Products numbered 48T13-1, 48T13-4, 66T909-1, 66T909-2, 66T906-1, 66T906-2, 56T501-1, 56T501-2, 56T502, 56T504, 56T506, 56T507, 53T702, 53T-001 and 53T703.

     “Business Day” means any day that is not a Saturday, Sunday or legal holiday or a day on which banking institutions in Houston, Texas are authorized or required by Law to close.

     “Capital Budget” has the meaning specified in Section 3.04(a).

     “Capacity” means (i) with respect to the Esters Unit, *** pounds per year, as such capacity may be increased as a result of any Expansion Project, (ii) with respect to the PA Unit, the lesser of (A) the actual annual production capability of the PA Unit without utilizing the Old Switch Condensers and (B) *** pounds per year, as such capacity may be increased as a result of any Expansion Project, and (iii) with respect to the Oxo Unit, its rated annual production capacity as of the Effective Date; provided, however, that (i) BASF acknowledges and agrees that the relative mix of Products nominated by BASF during any Year may cause the actual production capacity for one or more Products for such Year to be less than the stated Capacity for such Product, in which event, the Capacity for each affected Product for such Year shall be reduced to such actual production capacity, (ii) in the event that the production capacity for any Product is limited due to the failure of BASF to invest capital in the relevant Unit to the extent such investment of capital is required under this Agreement, the Capacity for such Product shall automatically be reduced to the effective capacity for such Product at such time, and (iii) in the event that the production capacity for any Product is increased through any expansion, upgrade or change in design, layout or configuration, including any change in catalyst, the Capacity for such Product shall be increased by an amount equal to the increase in annual production capacity for such Product realized from such expansion, upgrade or change.

     “Capital Expenditure” means any expenditure with respect to the Plasticizers Complex in excess of $5,000 which, in accordance with GAAP (consistently applied), should be classified as a capital expenditure.

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     “Capital Project” means a project that requires Capital Expenditures.

     “Car Service Contract” means that certain Car Service Contract dated March 16, 1994 between the parties, as the same may be amended, supplemented or modified from time to time in accordance with the terms thereof.

     “Claim” means any claim, demand, investigation, cause of action, suit, default, assessment, litigation, third party action, arbitral proceeding or proceeding by or before any Governmental Authority or any other Person.

     “Commissioning Date” means the last Day of the Commissioning Period.

     “Commissioning Period” means, with respect to the Plasticizers Complex Reconfiguration, the period commencing with the first Day on which (i) the Esters Unit and the PA Unit have been converted to produce Products at Capacity pursuant to Section 3.02(c), (ii) each Product to be produced in the Esters Unit and the PA Unit after the Plasticizers Complex Reconfiguration has been produced in conformance with the applicable Product Specifications, (iii) BASF has exercised its right to terminate its obligations under this Agreement with respect to the operation of the Oxo Unit pursuant to Section 2.09(a) and (iv) Sterling’s existing manufactured Oxo-Alcohols storage tanks and other designated storage tanks have been converted to use for delivered Oxo-Alcohols storage, and continuing thereafter for six Months plus, if the entire Esters Unit is shut down for more than seven consecutive Days during such six-Month period due to operational problems, one Day for each Day that the Esters Unit was so shut down.

     “Competitor” means a manufacturer or marketer of phthalate esters or phthalic plasticizers.

     “Component Fixed Costs” has the meaning specified in Section 3.02(d).

     “Cost Savings” has the meaning specified in Section 3.06(a).

     “Damages” means any and all Claims, Liabilities, Losses, clean-up or remedial costs, shut-down costs, repairs or reconstruction costs, costs of investigation and operating, extraordinary or business interruption losses (including any such matters arising from Spills or Releases Requiring Response Action).

     “Day” means a 24-hour period commencing at 7:00 a.m. Houston, Texas time on a calendar day and ending at 7:00 a.m. Houston, Texas time on the following calendar day, with the date of such Day being the calendar day on which such Day commenced.

     “Delivery, Shipment and Storage Instructions” has the meaning specified in Section 2.01(b).

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     “Dependent Facility” means any facility, operating unit, pipe line, service or other thing or matter on which the Plasticizers Complex depends for its operation to the extent that its absence or impairment would cause any Unit to be incapable of operating or to be only capable of operating at or below 50% of Capacity.

     “Dispute” has the meaning specified in Section 8.09(a).

     “Early Termination Fee” means (i) with respect to any termination of this Agreement at the election of BASF pursuant to Section 3.02(d) or Section 7.01(b) on or before December 31, 2010, ***, (ii) with respect to any termination of this Agreement at the election of BASF pursuant to Section 3.02(d) or Section 7.01(b) after December 31, 2010 but on or before December 31, 2011, ***, (iii) with respect to any termination of this Agreement at the election of BASF pursuant to Section 3.02(d) or Section 7.01(b) after December 31, 2011 but on or before December 31, 2012, *** and (iv) with respect to any other termination or expiration of this Agreement, ***.

     “Effective Date” means January 1, 2006 at 12:01 A.M. (Central Standard Time).

     “Environmental Laws” means any and all Laws, including any judgment, permit, approval, decision or determination, pertaining to the environment now or hereafter in effect, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., as amended by the Superfund Amendment and Reauthorization Act of 1986 and as further amended, the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq., as amended, the Solid Waste Disposal Act of 1976, 42 U.S.C. § 6901 et seq., as amended, the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended, the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., as amended, the Hazardous Materials Transportation Act, 49 Ap. U.S.C.A. § 1801 et seq., as amended, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq., as amended, and comparable state and local Laws, and other environmental conservation and protection Laws.

     “Esters” means plasticizers esters meeting the applicable Product Specifications.

     “Esters Facility Fee” means, subject to any adjustments thereto pursuant to Section 3.03, Section 4.04(d), Section 4.04(e) or Section 6.02(f), a fee for the Esters Unit in the amount of *** per Quarter; provided, however, that (i) the Esters Facility Fee shall be pro rated for any partial Quarter by multiplying the Esters Facility Fee by a fraction, the numerator of which is the number of Days in such Quarter during which this Agreement is in effect, and the denominator of which is the actual number of Days in such Quarter, and (ii) the Esters Facility Fee shall not be increased based on the number of pounds of Esters produced (irrespective of the product mix) unless:

(A) no Expansion Project related to the Esters Unit has been conducted and the number of pounds of Esters produced in any Year exceeds ***

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pounds, in which event BASF shall pay Sterling a supplemental Esters Facility Fee for such Year (but only for such Year) in an amount equal to the amount by which (1) *** times a fraction, the numerator of which is the number of pounds of Esters produced in such Year and the denominator of which is ***, exceeds (2) ***, such supplemental Esters Facility Fee to be paid by BASF to Sterling within 30 Days after the end of such Year; or

(B)

an Expansion Project related to the Esters Unit is conducted, in which event the Esters Facility Fee for each Quarter, commencing with the first Quarter beginning after such Expansion Project has achieved mechanical completion, shall be an amount equal to the Esters Facility Fee then in effect times a fraction, the numerator of which is the expected Capacity of the Esters Unit following such Expansion Project and the denominator of which is the Capacity of the Esters Unit immediately prior to the commencement of such Expansion Project.

     “Esters Unit” means the Esters production unit at the Site, together with all replacements and substitutions thereof, all deletions therefrom and all additions or other changes thereto during the term of this Agreement.

     “Estimated Delivery, Shipment and Storage Instructions” has the meaning specified in Section 2.01(b).

     “Exercise Date” has the meaning specified in Section 2.09(a).

     “Existing Agreement” has the meaning specified in the Preliminary Statements.

     “Expansion Capital Expenditures” means any Capital Expenditure made with respect to the PA Unit or the Esters Unit in connection with an Expansion Project.

     “Expansion Project” means (i) the Switch Condenser Project and (ii) any Capital Project requested by BASF pursuant to Section 3.04(d) that (A) requires Capital Expenditures, (B) is intended to expand the Capacity of the PA Unit or the Esters Unit beyond its then existing capabilities and (C) is intended to improve or upgrade the PA Unit or the Esters Unit from its historical condition.

     “Facility Fees” means the Esters Facility Fee, the Oxo Facility Fee and the PA Facility Fee, collectively.

     “Fixed Costs” means (i) any and all actual fixed costs or expenses incurred, sustained or paid by Sterling in connection with the Plasticizers Complex, the receipt or storage of Ancillary Raw Materials or Raw Materials or the production, storage, sale or delivery of Products, including those costs and expenses for the Esters Unit and the PA Unit in the General Categories listed on Exhibit A in the table “Direct Fixed Costs,” (ii) until the Oxo Unit Termination Date, any and all costs and expenses allocated to the Oxo Unit, the receipt or storage of Ancillary

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Raw Materials or Raw Materials for the Oxo Unit or the production, storage, sale or delivery of Oxo-Alcohols, (iii) those costs and expenses for the Esters Unit and the PA Unit included in the Allocated Fixed Costs Table and (iv) any and all other costs and expenses allocated to the Plasticizers Complex, the receipt or storage of Ancillary Raw Materials or Raw Materials or the production, storage, sale or delivery of Products but only to the extent such costs and expenses are allocated by Sterling among its different product lines generally, are not exclusively applicable to the manufacture or handling of products at the Site that are not Products hereunder, are not costs or expenses currently incurred by Sterling and are not of the same type or character as any of the Allocated Fixed Costs included in the Allocated Fixed Costs Table; provided, however, that (A) any costs or expenses allocated under clause (ii) or clause (iv) above shall be allocated by Sterling on a fair and reasonable basis and (B) for purposes of this Agreement, (x) the actual costs and expenses for the Allocated Fixed Costs for any Month shall be deemed to equal the Allocated Fixed Costs Amount for such Month and (y) the actual costs and expenses for the Allocated Fixed Costs for any Year shall be deemed to equal the Allocated Fixed Costs Amount for such Year.

     “Force Majeure Event” has the meaning specified in Section 6.02(c).

     “GAAP” means generally accepted United States accounting principles, applied on a consistent basis (except for changes in which the independent auditors of both Parties concur) as in effect from time to time.

     “General Category” means all Fixed Costs or Variable Costs listed in the same row in any of the tables on Exhibit A or Exhibit B, including all subcategories.

     “Governmental Authority” means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter.

     “Hazardous Materials” means any hazardous or toxic substances or contaminated material including asbestos (friable, non-friable or any other form), polychlorinated biphenyls and any flammable materials, explosives, radioactive materials, hazardous materials, hazardous waste, hazardous or toxic or regulated substances or related materials defined in or under any Environmental Law, and any other substance, waste, pollutant, contaminant or material, including petroleum products and derivatives, crude oil or fractions thereof or any chemical which causes cancer or reproductive effects, which are defined by applicable Law as hazardous or toxic or the use, transport, disposal, storage, treatment, recycling, handling, discharge, Release or emission of which is regulated or governed by any applicable Law.

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     “Indemnified Person” has the meaning specified in Section 6.01(c).

     “Indemnifying Party” has the meaning specified in Section 6.01(c).

     “Insurance Premium Charges” means (i) with respect to any Year, the aggregate of the Property Damage/Business Interruption Insurance Premium Charges and the Liability Insurance Premium Charges for each Month during such Year, and (ii) with respect to any Month, the Property Damage/Business Interruption Insurance Premium Charges for such Month plus the Liability Insurance Premium Charges for such Month.

     “Invoice” has the meaning specified in Section 3.02(b).

     “Laws” means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority.

     “Liability” means, with respect to any Person, any indebtedness, obligation and other liability of such Person, whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due.

     “Liability Insurance Premium Charges” means with respect to the Esters Unit and the PA Unit, (i) for each 12-month period commencing on July 1 of each Year, an amount equal to ***; provided, however, that as of July 1 of each Year, beginning with July 1, 2006, the Liability Insurance Premium Charges shall be adjusted by multiplying the Liability Insurance Premium Charges then in effect by a fraction (A) the numerator of which is the premium rate assessed for the 12-month period commencing on that date under Sterling’s liability insurance policy and (B) the denominator of which is the premium rate assessed for the immediately preceding 12-month period under Sterling’s liability insurance policy, and (ii) with respect to any Month, 1/12 of the Liability Insurance Premium Charges in effect for the 12-month period (commencing on July 1 of each Year) in which such Month occurs. The premium rate under Sterling’s liability insurance policy for the 12-month period from July 1, 2005 through July 1, 2006 is *** of liability coverage.

     “Lien” means (i) any mortgage, lien, charge, pledge, hypothecation, assignment, deposit arrangement, encumbrance, security interest, assessment, adverse claim, levy, preference or priority or other security agreement of any kind or nature whatsoever (whether voluntary or involuntary, affirmative or negative, and whether imposed or created by contract, operation of Law or otherwise) in, on, of or with respect to any assets or properties, whether now owned or hereafter acquired, (ii) any other interest in assets or properties designed to secure the repayment of indebtedness or any other Liability, whether arising by contract, operation of Law or otherwise, (iii) any contract to give any of the foregoing and (iv) any conditional sale or other title retention agreement and any financing lease having substantially the same effect as any of the foregoing.

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     “Losses” means any and all damages (including consequential, punitive and exemplary to the extent not excluded pursuant to Section 6.03), fines, penalties, judgments, deficiencies, losses, costs and expenses, including court costs, reasonable fees of attorneys, accountants and other experts and other reasonable expenses of any Claim.

     “Maintenance Budget” has the meaning specified in Section 3.05.

     “Marine Provisions” means the marine provisions attached hereto as Exhibit C; provided, however, that Sterling shall have the right, at any time and from time to time, to revise the Marine Provisions and, upon delivery of any such revised Marine Provisions to BASF, the Marine Provisions shall be deemed to be amended without further action by either of the Parties so long as (i) such revised Marine Provisions apply to all of Sterling’s customers generally, (ii) such amendment does not materially adversely affect BASF’s rights and obligations under the Marine Provisions and (iii) such revised Marine Provisions do not violate any applicable Law.

     “Measuring Equipment” means the shore tanks and scales located at the Site for measuring deliveries and receipts of Products and Raw Materials to be loaded into or off-loaded from, as applicable, ships, barges, other inland water or marine vessels, ships, rail cars, tank trucks or other conveyances.

     “Month” means the period beginning on the first Day of a calendar month until the first Day of the next succeeding calendar month.

     “Monthly Contract Capacity” means, with respect to any Product, the Capacity for such Product divided by 12.

     “New Switch Condenser Project” has the meaning specified in Section 3.04(c).

     “Old Switch Condensers” means the nine switch condensers installed in the PA Unit prior to 1998 having equipment functional item numbers 53E6-1, 53E6-2, 53E6-3, 53E6-4, 53E6-5, 53E6-6, 53E6-7, 53E6-8, 53E6-9 and 53E6-14.

     “Oxo-Alcohols” means oxo-alcohols meeting the applicable Product Specifications.

     “Oxo Facility Fee” means, subject to any adjustments thereto pursuant to Section 4.04(d), Section 4.04(e) or Section 6.02(f) until the Oxo Unit Termination Date, a fee for the Oxo Unit in the amount of *** per Quarter; provided, however, that the Oxo Facility Fee shall be pro rated for any partial Quarter by multiplying the Oxo Facility Fee by a fraction, the numerator of which is the number of Days in such Quarter during which this Agreement is in effect with respect to the Oxo Unit, and the denominator of which is the actual number of Days in such Quarter.

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     “Oxo Unit” means the Oxo-Alcohols production unit at the Site, together with all replacements and substitutions thereof, all deletions therefrom and all additions or other changes thereto during the term of this Agreement.

     “Oxo Unit Termination Date” means the earlier of the Exercise Date or the expiration or termination of this Agreement.

     “Oxo Unit Termination Option Payment” means a payment by BASF to Sterling in the amount *** for the right, subject to the terms and conditions of this Agreement, to terminate its obligations under this Agreement with respect to the operation of the Oxo Unit pursuant to Section 2.09.

     “PA” means phthalic anhydride meeting the applicable Product Specifications.

     “PA Facility Fee” means, subject to any adjustments thereto pursuant to Section 3.03, Section 3.04(c), Section 4.04(d), Section 4.04(e) or Section 6.02(f), a fee for the PA Unit in the amount of *** per Quarter; provided, however, that (i) the PA Facility Fee shall be pro rated for any partial Quarter by multiplying the PA Facility Fee by a fraction, the numerator of which is the number of Days in such Quarter during which this Agreement is in effect, and the denominator of which is the actual number of Days in such Quarter, and (ii) the PA Facility Fee shall not be increased based on the number of pounds of PA produced unless:

(A)

no Expansion Project related to the PA Unit has been conducted and the number of pounds of PA produced in any Year exceeds *** pounds, in which event BASF shall pay Sterling a supplemental PA Facility Fee for such Year (but only for such Year) in an amount equal to the amount by which (1) *** times a fraction, the numerator of which is the number of pounds of PA produced in such Year and the denominator of which is ***, exceeds (2) ***, such supplemental PA Facility Fee to be paid by BASF to Sterling within 30 Days after the end of such Year; or

(B)

an Expansion Project related to the PA Unit is conducted, in which event the PA Facility Fee for each Quarter, commencing with the first Quarter beginning after such Expansion Project has achieved mechanical completion, shall be an amount equal to the PA Facility Fee then in effect times a fraction, the numerator of which is the expected Capacity of the PA Unit following such Expansion Project and the denominator of which is the Capacity of the PA Unit immediately prior to the commencement of such Expansion Project.

     “PA Unit” means the PA production unit at the Site, together with all replacements and substitutions thereof, all deletions therefrom and all additions or other changes thereto during the term of this Agreement.

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     “Parties” has the meaning specified in the introductory paragraph hereof.

     “Permitted Encumbrances” means any and all (i) Liens for taxes if the same shall at the time not be delinquent or thereafter may be paid without penalty or if such taxes are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted; provided, however, that reserves or other appropriate provisions (if any) as shall be required by GAAP shall have been made therefor, (ii) Liens consisting of easements, zoning restrictions or other restrictions on the use of real property that do not materially affect the value of the assets or properties encumbered thereby or materially impair the ability of the owner of such assets or properties to use such assets or properties in its business, (iii) Liens of landlords, mechanics, materialmen, warehousemen, carriers or other statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business, (iv) Liens resulting from deposits to secure payments of workmen’s compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids or contracts in the ordinary course of business and (v) Liens existing on the date hereof or created after the date hereof in accordance with the terms of this Agreement.

     “Person” means any individual, firm, corporation, trust, association, company, limited liability company, joint stock company, partnership, joint venture, Governmental Authority or other entity or enterprise.

     “Plant” means the petrochemicals manufacturing facility owned by Sterling that is located at the Site, including the Plasticizers Complex.

     “Plant Disposition” has the meaning specified in Section 5.02(a).

     “Plasticizers Complex” means the Esters Unit, the PA Unit and, until the Oxo Unit Termination Date, the Oxo Unit.

     “Plasticizers Complex Reconfiguration” has the meaning specified in Section 3.02(c).

     “Point of Delivery” means (i) with respect to any Raw Materials, the point specified in Section 2.03(b), and (ii) with respect to any Product, the point specified in Section 2.03(c).

     “PPI Adjusted Fixed Costs” means, with respect to the Esters Unit and the PA Unit, all General Categories of Fixed Costs that have the word “Yes” under the column titled “PPI Adjustment” in any of the tables on Exhibit A.

     “PPI Adjusted Fixed Costs Amount” means, with respect to any Year, the aggregate of all amounts listed under the column “Initial Annual Amount” in each of the tables on Exhibit A for all General Categories of PPI Adjusted Fixed Costs; provided, however, as of December 31 of each Year, beginning with December 31, 2006, the amount specified in such tables for each General Category of PPI Adjusted Fixed Costs shall be deemed to be (i) the amount for such General

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Category of PPI Adjusted Fixed Costs then in effect plus (ii) the amount, if any, by which (A) the amount for such General Category of PPI Adjusted Fixed Costs Amount then in effect times the PPI Factor exceeds (B) the amount for such General Category of PPI Adjusted Fixed Costs then in effect.

     “PPI Factor” means, with respect to any Year, a fraction, the numerator of which is the average of the monthly Producer Price Index — Commodities (Chemicals and allied products) as published by the United States Department of Labor, Bureau of Labor Statistics for such Year, and the denominator of which is 174.4.

     “Product Specifications” means the specifications for the Products set forth in the Quality Assurance Manual.

     “Products” means PA, Esters and, until the Oxo Unit Termination Date, Oxo-Alcohols.

     “Property Damage/Business Interruption Insurance Premium Charges” means, with respect to the Esters Unit and the PA Unit, (i) for each 12-month period commencing on July 1 of each Year, an amount equal to ***; provided, however, that as of July 1 of each Year, beginning with July 1, 2006, the Property Damage/Business Interruption Insurance Premium Charges shall be adjusted by multiplying the Property Damage/Business Interruption Insurance Premium Charges then in effect by a fraction (A) the numerator of which is the premium rate assessed for the 12-month period commencing on that date under Sterling’s property damage/business interruption insurance policy and (B) the denominator of which is the premium rate assessed for the immediately preceding 12-month period under Sterling’s property damage/business interruption insurance policy, and (ii) with respect to any Month, 1/12 of the Property Damage/Business Interruption Insurance Premium Charges in effect for the 12-month period (commencing on July 1 of each Year) in which such Month occurs. The premium rate under Sterling’s property damage/business interruption insurance policy for the 12-month period from July 1, 2005 through July 1, 2006 is *** of property value.

     “Quality Assurance Manual” means the Quality Assurance Manual of even date with this Agreement setting forth the Raw Materials Specifications, the Product Specifications, and procedures for inspecting, sampling and testing Ancillary Raw Materials, Raw Materials and Products, the contents of which are incorporated herein by reference. BASF may, from time to time, propose deletions from or changes or additions to the Quality Assurance Manual and, if Sterling makes no objection to such deletion, change or addition within 30 Days after receipt thereof, the Quality Assurance Manual shall be deemed amended as of the last Day of such 30-Day period without further action of the Parties; provided, however, that, unless Sterling and BASF consent otherwise in writing, (i) no change in the Quality Assurance Manual shall amend any of the terms or conditions of this Agreement, (ii) no change in the Quality Assurance Manual shall be effective if such change would result in a material adverse effect with respect to any Unit or either Party unless BASF adequately compensates Sterling

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for such adverse effects and (iii) no change in the Quality Assurance Manual shall be effective as to any Ancillary Raw Materials or Raw Materials delivered or Products produced prior to the date of such change.

     “Quarter” means the period beginning on the first Day of a calendar quarter until the first Day of the next succeeding calendar quarter; provided, however, that (i) the first Quarter hereunder shall commence on the Effective Date and continue thereafter until the first Day of the next Quarter, (ii) with respect to the Oxo Unit, the final Quarter hereunder shall end on the Oxo Unit Termination Date, and (iii) with respect to the Esters Unit and the PA Unit, the final Quarter hereunder shall end on the date that this Agreement expires or otherwise terminates.

     “Quarterly Meeting” means a meeting of representatives of the Parties to be held during the first two weeks of January, April, July and October of each Year, commencing with January of 2006, or at such other times as may be agreed to by the Parties.

     “Rail Cars” means those certain railroad tank cars owned or leased by Sterling that are specified on Exhibit G, which are the only railroad tank cars subject to the Car Service Contract as of the Effective Date.

     “Raw Materials” means the catalysts and raw materials specified in the Quality Assurance Manual that are used in the production of Products, which are to be provided by BASF pursuant to the terms of this Agreement, in each case, meeting the applicable Raw Materials Specifications in effect from time to time pursuant to this Agreement.

     “Raw Materials Specifications” means the specifications for Raw Materials and Ancillary Raw Materials set forth in the Quality Assurance Manual.

     “Reduction Factor” means an amount equal to the Capacity of the Unit that produces the affected Products after the event or circumstances that caused a reduction in the Capacity of such Unit divided by the Capacity of such Unit immediately prior to such event or circumstances.

     “Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles).

     “Site” means the real estate and improvements in Texas City, Texas owned by Sterling.

     “Spills or Releases Requiring Response Action” means any Release or threatened Release of Hazardous Materials into or upon ambient air, surface water, ground water, land or subsurface strata relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials in connection with the ownership or operation of the Plasticizers Complex, any ship, barge, other inland water or marine vessel, rail

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car, tank truck or other conveyance, or the production, delivery, storage, shipment, sale, resale, use, disposal or transportation of Products, Raw Materials, Ancillary Raw Materials, waste or other materials used in or resulting from the production of Products.

     “Sterling” has the meaning specified in the introductory paragraph hereof.

     “Sterling Indemnified Persons” has the meaning specified in Section 6.01(b).

     “Switch Condenser Project” means the replacement of switch condensers performed pursuant to Section 4.7(d) of the Existing Agreement.

     “Third Party Claim” has the meaning specified in Section 6.01(c).

     “Threshold Fixed Costs Amount” means, subject to any adjustments thereto pursuant to Section 2.01(e), Section 2.09(b), Section 3.04(d) or Section 4.02(b), *** plus (i) the aggregate amount of Fixed Costs directly attributable to (A) producing more than *** pounds of PA in any Year prior to the completion of any Expansion Project pertaining to the PA Unit or (B) producing more than *** pounds of Esters in any Year prior to the completion of any Expansion Project pertaining to the Esters Unit, plus (ii) as of December 31 of each Year, beginning with December 31, 2006, the aggregate amount, if any, by which all of the General Categories of PPI Adjusted Fixed Costs Amount are increased on such date pursuant to the definition of PPI Adjusted Fixed Costs Amount.

     “Units” means the Esters Unit, the PA Unit and, until the Oxo Unit Termination Date, the Oxo Unit.

     “Variable Costs” means (i) any and all variable costs or expenses incurred, sustained or paid by Sterling in connection with the Plasticizers Complex, the purchase, supply, receipt or storage of Ancillary Raw Materials, Raw Materials or other materials or the production, storage, sale or delivery of Products, including those costs and expenses in the categories listed on Exhibit B, in each case, net of steam credits for any Day when steam is being sold to third parties or consumed by Sterling at the Site.

     “Year” means a period of 12 consecutive months beginning on the first Day of January of each calendar year during the term of this Agreement; provided, however, that (i) the first Year hereunder shall commence on the Effective Date and continue thereafter until the first Day of the next Year, (ii) with respect to the Oxo Unit, the final Year hereunder shall end on the Oxo Unit Termination Date, and (iii) with respect to the Esters Unit and the PA Unit, the final Year hereunder shall end on the date that this Agreement expires or otherwise terminates.

          Section 1.02. Interpretation. In this Agreement, unless a clear contrary intention appears:

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     (a) the words “hereof,” “herein” and “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement;

     (b) all terms defined in the singular shall have the same meanings in the plural and vice versa;

     (c) reference to any entity includes such entity’s successors and assigns; provided, however, that nothing contained in this clause (c) is intended to authorize any assignment not otherwise permitted by this Agreement;

     (d) all references to Articles and Sections shall be deemed to be references to the Articles and Sections of this Agreement;

     (e) all references to Exhibits shall be deemed to be references to the Exhibits attached hereto which are made a part hereof and incorporated herein by reference;

     (f) the word “including” (and with correlative meaning “include”) means including, without limiting the generality of any description preceding such term;

     (g) with respect to the determination of any period of time, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”;

     (h) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; and

     (i) no provision of this Agreement shall be interpreted or construed against either Party hereto solely because that Party or its legal representative drafted such provision.

Article II

Production and Delivery of Products

     Section 2.01. Production and Delivery. (a) Commencing on the Effective Date, on the terms and subject to the conditions of this Agreement:

     (i) Sterling shall (A) manufacture Products for BASF in the amounts requested by BASF in accordance with the terms hereof and hold available any excess capacity at the Plasticizers Complex for BASF, (B) receive Raw Materials, (C) provide Ancillary Raw Materials, (D) store Raw Materials, Ancillary Raw Materials and Products, (E) ship Products in bulk, (F) provide BASF with any and all toxicological and ecological data regarding Products and any and all technology acquired by Sterling regarding the manufacture of Esters or Oxo-Alcohols received from Monsanto Company (other than information licensed from

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a party other than BASF or Monsanto Company), (G) during the hours of operation referenced in Section 2.08, assist in the scheduling of deliveries and shipments and the proper documentation thereof, whether into or out of the Site, of Raw Materials or Products, (H) affix labels supplied by BASF to Products, (I) provide a reasonable number of samples of Products to BASF’s customers according to BASF’s instructions and (J) provide any other services typically performed by a manufacturer of products similar to the Products for its customers; and

     (ii) BASF shall deliver Raw Materials to Sterling, receive Products from Sterling and make the payments contemplated by this Agreement.

The amount of Products delivered by Sterling to BASF, and received and purchased by BASF, in any Month shall be determined in accordance with paragraph (b) below.

     (b) Subject to the terms and conditions of this Agreement, BASF may nominate volumes for each Product and determine the total Product mix in its sole discretion; provided, however, that, after the Commissioning Period, in its nominations for volumes of Esters, BASF may only nominate *** in any given Month. BASF shall be solely responsible for any and all costs and expenses incurred in connection with any modification of any Unit or related activities performed in connection with any substantial variations in the volumes of the various Products nominated by BASF or material changes in campaign frequencies, and such costs and expenses shall be excluded from any calculation of Costs Savings or the Threshold Fixed Costs Amount under this Agreement and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount. On or before October 31 of each Year, BASF shall provide Sterling with a written forecast of its requirements for each Product for the following Year. At least five Days prior to the beginning of each Month, BASF will provide Sterling with a written rolling forecast of its deliveries of Raw Materials and requirements for Products for the next three Months, with the forecast for the immediately ensuing Month being referred to in this Agreement as the “Estimated Delivery, Shipment and Storage Instructions”. BASF shall provide Sterling with written notice setting forth BASF’s requested dates and volumes of deliveries and shipping of Raw Materials and Products, and its storage requirements for Raw Materials and Products, (i) at least 72 hours prior to the desired loading or unloading date in the case of deliveries by ship, barge or other inland water or marine vessel, (ii) at least 48 hours prior to the desired loading or unloading date and at least 72 hours prior to the desired shipping date in the case of deliveries by rail car and (iii) at least 48 hours prior to the desired loading or unloading date or shipping date in the case of deliveries by tank truck and deposits of Products into storage (the “Delivery, Shipment and Storage Instructions”). Sterling shall be entitled to rely upon any Estimated Delivery, Shipment and Storage Instructions unless superseded by Delivery, Shipment and Storage Instructions. Sterling shall use reasonable efforts to comply with the Estimated Delivery, Shipment and Storage Instructions and the Delivery, Shipment and Storage Instructions, and shall give BASF the same rights of priority and scheduling with respect thereto that it uses for deliveries and shipments of its own raw materials and products and those of Sterling’s other suppliers and customers. BASF may also deliver to Sterling from time to time additional delivery, shipment and storage instructions and Sterling shall use reasonable

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efforts to receive Raw Materials, deliver Products and store Raw Materials and Products at the times specified in such instructions; provided, however, that if such additional delivery, shipment and storage instructions cause Sterling to incur additional expense, BASF shall reimburse Sterling for such additional expense. All such additional delivery, shipment and storage instructions shall be given as early as is practicable prior to the requested delivery, shipment or storage date but, in any event, at least as far in advance of the requested date of delivery, shipment or storage as is required for Delivery, Shipment and Storage Instructions. If BASF fails to provide any ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance at the times specified in the applicable Estimated Delivery, Shipment and Storage Instructions, Delivery, Shipment and Storage Instructions or additional delivery, shipment and storage instructions, the applicable ship, barge, other inland water or marine vessel, rail car or tank truck will not be loaded or unloaded until the next available window for such method of transportation at the Site.

     (c) If BASF fails to take delivery of any Product that meets the applicable Product Specifications and is tendered to it by Sterling pursuant to the Estimated Delivery, Shipment and Storage Instructions, the Delivery, Shipment and Storage Instructions or additional delivery, shipment and storage instructions, Sterling shall have the right to reduce or curtail production of Products if (i) such failure to take delivery will result in the exceedance of storage capacity at the Site and BASF does not provide for, or agree to allow and to pay for, outside storage, or (ii) BASF’s failure to take delivery will result in the need to shut down any Unit. Except to the extent otherwise provided in this Agreement, a failure to take delivery of any Products by BASF shall not limit its payment obligations hereunder. The taking of delivery of Products by BASF shall not prejudice the right of BASF to dispute or question the quantity or quality of any Products delivered hereunder pursuant to Sections 2.05 and 2.06 or limit or otherwise affect the indemnity obligations of Sterling under Section 6.01(a).

     (d) Notwithstanding anything to the contrary contained in this Agreement, (i) BASF shall not, in any Estimated Delivery, Shipment and Storage Instructions, Delivery, Shipment and Storage Instructions or additional delivery, shipment and storage instructions, request the delivery of, and Sterling shall not be required to deliver, any Product in any Month in quantities in excess of the Monthly Contract Capacity for such Product, and (ii) except as otherwise provided in Section 6.02(a), Sterling shall not be required to purchase any Product from any other source in order to supply such Product to BASF hereunder; provided, however, that, notwithstanding anything to the contrary contained in clause (i) above, BASF may request delivery of any Product in excess of the Monthly Contract Capacity for such Product if the relevant Unit is capable of producing such Product in quantities in excess of the Monthly Contract Capacity, in which event BASF shall be solely responsible for any and all incremental costs and expenses incurred by Sterling in connection with producing such Product in quantities in excess of the Monthly Contract Capacity, and such costs and expenses shall be excluded from any calculation of Costs Savings or the Threshold Fixed Costs Amount under this Agreement and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount. Prior to any material expansion, upgrade or change in design, layout,

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configuration or capacity of any Unit, including any change in catalyst, the Parties shall discuss such expansion, upgrade or change.

     (e) In the event that, at any time after the Commissioning Period, BASF desires to substitute an Esters Product for *** then being produced, (i) the Threshold Fixed Costs Amount shall be increased by an amount equal to the actual increase in direct and allocated Fixed Costs resulting from such change, (ii) such additional direct and allocated Fixed Costs shall thereafter be included in the calculation of the Threshold Fixed Costs Amount and (iii) to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount. In the event that BASF desires to produce more than *** in the Esters Unit in any given Month, the Parties will negotiate in good faith appropriate increases in the Threshold Fixed Costs Amount, the Allocated Fixed Costs Amount and the impact on any calculation of Costs Savings, and, in the absence of agreement on such matters, Sterling shall not be required to produce such additional Esters. If BASF desires to add other products or substitute a product for any Product, Sterling will produce such other products so long as (i) either no modification of the Plasticizers Complex is required or BASF pays for all such modifications, (ii) neither such production nor any required modifications to the Plasticizers Complex will unreasonably affect the operations of the Plant and (iii) any required amendment to Sterling’s air permit has been obtained. Sterling shall use commercially reasonable efforts to expeditiously obtain any required amendment to the air permit.

     (f) BASF acknowledges and agrees that production of more than *** pounds of PA in any Month prior to the completion of the New Switch Condenser Project or another Expansion Project pertaining to the PA Unit will likely result in decreased yields from the Raw Materials for PA, including orthoxylene, and higher Fixed Costs and Variable Costs. In the event that BASF desires for Sterling to produce more than *** pounds of PA in any Month prior to the completion of the New Switch Condenser Project or another Expansion Project pertaining to the PA Unit, (i) any increase in Fixed Costs resulting from such excess production shall be excluded from any calculation of Cost Savings or the Threshold Fixed Costs Amount, (ii) to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount and (iii) for purposes of determining whether any Cost Savings have resulted in the Year in which such Month falls, the per pound usage for each component of Variable Costs in such Month shall be deemed to be the same as the per pound usage of such component of Variable Costs experienced in the most recent Month during which such excess production did not occur.

     (g) Notwithstanding anything to the contrary contained in this Agreement, Sterling shall not be required to use the Old Switch Condensers to produce any PA hereunder. Sterling shall take the actions set forth on Exhibit E in order to decommission the Old Switch Condensers and remove them from service, and BASF shall reimburse Sterling for (i) *** of the first *** in costs and expenses associated with the engineering required to define the scope of work and procedures to isolate the Old Switch Condensers plus *** of any costs and expenses associated with such engineering to the extent such costs and expenses exceed ***, plus (ii) *** of the first *** in costs and expenses to perform the actions set forth on Exhibit E and *** of the next *** of such costs and expenses, in each case, within 15 Days after receipt of an invoice

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therefore from Sterling. Both Parties shall cooperate to minimize the costs associated with performing such actions while ensuring that all environmental, health, and safety issues are adequately addressed. In the event that such costs and expenses exceed or are expected to exceed ***, prior to conducting any further decommissioning activities, the Parties shall determine what further actions are required in connection with the decommissioning of the Old Switch Condensers and set a budget therefore. BASF shall reimburse Sterling for *** of the costs and expenses to perform such additional actions (not to exceed *** of the agreed budget) within 15 Days after receipt of an invoice therefore from Sterling. *** BASF shall reimburse Sterling for any and all costs and expenses required to maintain the Old Switch Condensers in place in a safe and environmentally responsible manner and such costs and expenses shall be excluded from any calculation of Cost Savings or the Threshold Fixed Costs Amount and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount.

          Section 2.02. Raw Materials and Ancillary Raw Materials. (a) BASF shall furnish to Sterling, or cause to be furnished to Sterling, all Raw Materials used in the production of Products in such quantities and at such times as are required for Sterling to perform its production and delivery obligations to BASF; provided, however, that (i) Sterling shall notify BASF in writing of its requirements for Raw Materials at such times as will allow BASF to supply such Raw Materials in the ordinary course and permit Sterling to fulfill its production and delivery obligations hereunder, and (ii) the failure by Sterling to provide such notice to BASF shall not relieve Sterling of any of its obligations under this Agreement. BASF shall provide Sterling with written notice of the expected dates of arrival of each shipment of Raw Materials in accordance with Section 2.01(b).

          (b) Sterling shall supply all Ancillary Raw Materials and any other materials (other than Raw Materials) used in the production of Products.

          (c) Sterling shall supply all sample packaging (excluding drums), as specified by BASF for shipment of Products, in such quantities and at such times as are necessary for Sterling to perform its manufacturing and delivery obligations under this Agreement. BASF may, at its option, elect to supply any or all sample packaging by providing Sterling with at least 30 Days’ prior written notice of its election to do so.

          Section 2.03. Deliveries; Title and Risk of Loss. (a) All deliveries of Raw Materials and shipments of Products by ship, barge or other inland water or marine vessel shall be made in conformance with the Marine Provisions. Unless Sterling otherwise consents, BASF shall supply all ships, barges, other inland water and marine vessels, rail cars, tank trucks or other conveyances required for all deliveries of Raw Materials and shipments of Products under this Agreement; provided, however, that (i) Sterling shall make Rail Cars available to BASF pursuant to the Car Service Contract between the Parties until July 31, 2006, and (ii) notwithstanding anything to the contrary contained in the Car Service Contract between the Parties, BASF shall pay *** of the costs and expenses pertaining to the Rail Cars, including maintenance costs and expenses. Upon the written request of BASF, Sterling shall, with the prior written consent of the relevant Rail Car owner, assign to BASF any leases for Rail Cars leased by Sterling in connection with the delivery of Products pursuant to this Agreement for a

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term mutually acceptable to BASF and the relevant Rail Car owner. BASF shall be solely responsible for arranging and providing any emergency response measures required in connection with any ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance (except that Sterling shall provide emergency response measures, at the cost and expense of BASF, if the applicable ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance is physically located at the Site). Notwithstanding anything to the contrary contained in the Car Service Contract, the Car Service Contract will terminate and cease to be of any further force or effect on July 31, 2006; provided, however, that BASF may, by providing written notice to Sterling, elect to terminate the Car Service Contract prior to that time, in which event BASF shall be responsible for any and all costs and expenses resulting from the early termination of any rail car leases covering any of the Rail Cars and such costs and expenses shall be excluded from any calculation of Cost Savings or the Threshold Fixed Costs Amount and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount.

          (b) The Point of Delivery for all Raw Materials shall be the point of transfer of custody of such Raw Materials from BASF to Sterling, and shall be at the Plant’s loading-arm flange from which such Raw Materials are received by Sterling. Risk of loss to Raw Materials shall pass to Sterling at such flange (irrespective of whether BASF owns or has provided any ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance from which such Raw Materials are transferred). As between Sterling and BASF, except as otherwise provided herein, (i) BASF shall be in control and possession of all Raw Materials delivered hereunder and responsible for any damage or injury thereto or caused thereby until risk of loss with respect thereto has passed to Sterling, and (ii) Sterling shall be in control and possession of all Raw Materials received hereunder and responsible for any damage or injury thereto or caused thereby after risk of loss with respect thereto has passed to Sterling.

          (c) The Point of Delivery of all Products shall be the point of transfer of custody of such Products from Sterling to BASF, and shall be at the Plant’s loading-arm flange from which such Products are loaded into the applicable ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance for shipment. Risk of loss to such Products shall pass to BASF at such flange (irrespective of whether Sterling owns or has provided any ship, barge, other inland water or marine vessel, rail car, tank truck or other conveyance into which such Products are stored or loaded). As between Sterling and BASF, except as otherwise provided herein, (i) Sterling shall be in control and possession of Products produced hereunder and responsible for any damage or injury thereto or caused thereby until risk of loss with respect thereto has passed to BASF and (ii) BASF shall be in control and possession of Products produced hereunder and responsible for any damage or injury thereto or caused thereby after risk of loss with respect thereto has passed to BASF.

          Section 2.04. Warranties. BASF warrants that all Raw Materials delivered to Sterling pursuant to this Agreement will meet the applicable Raw Materials Specifications. Sterling warrants that (a) any Raw Materials not rejected by Sterling pursuant to Section 2.05(b) will meet the applicable Raw Materials Specifications (excluding any failure to meet the Raw Materials Specifications caused by the storage

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of such Raw Materials beyond their shelf life), (b) all Ancillary Raw Materials used in the production of Products will meet the applicable Raw Materials Specifications, (c) all Products delivered to BASF pursuant to this Agreement will meet the applicable Product Specifications, (d) Sterling will convey good title to all Products delivered to BASF hereunder and (e) such Products shall be delivered free from any lawful Lien. Except For The Representations And Warranties Expressly Provided Herein, Neither Party Makes, And Each Party Hereby Expressly Disclaims And Negates, Any Representation Or Warranty With Respect To Any Product, Raw Materials Or Ancillary Raw Materials Delivered Or Used Pursuant To This Agreement (Express, Implied, Common Law, Statutory Or Otherwise), Including Any Warranty Of Merchantability Or Fitness For A Particular Purpose Or Use Or Any Other Matter With Respect To Any Products, Raw Materials Or Ancillary Raw Materials Delivered Or Used Hereunder, Whether Used Alone Or In Combination With Any Other Material.

          Section 2.05. Quality Testing. (a) During the hours of operation referenced in Section 2.08, Sterling shall (i) inspect, sample and test each lot of Raw Materials, Ancillary Raw Materials and Products under the procedures set forth in the Quality Assurance Manual, (ii) code to identify Raw Materials and Ancillary Raw Materials to specific Products produced and shipped and (iii) perform such additional testing, statistical process control and statistical quality control for Products as may be reasonably requested by BASF. BASF shall also have the right to further test Products prior to shipment hereunder. Sterling shall cooperate in any such test, and shall have the right to be represented and to participate in any such test, and to inspect any equipment used in determining the nature or quality of any Product. The cost of all inspecting, sampling, testing and coding hereunder shall be included in Fixed Costs. All records or certifications shall be kept for a period of not less than one year (or for the duration of any contest with respect thereto, if longer), and all samples shall be kept for a period of not less than 90 Days (or for the duration of any contest with respect thereto, if longer), with the procedures for taking samples at the unloading flange for Raw Materials and the procedures for taking samples of Products as of the date of shipment to be mutually agreed upon by the Parties. All records, certifications and samples shall be made available to BASF on request. The retained sample for any Raw Materials or Ancillary Raw Materials shall be the exclusive source for determining whether any Raw Materials or Ancillary Raw Materials meet the applicable Raw Materials Specifications, and the retained sample for any Product shall be the exclusive source for determining whether any Product meets the applicable Product Specifications.

          (b) Subject to the terms of this Agreement, Sterling shall accept any and all deliveries of Raw Materials; provided, however, that Sterling may reject any delivery of Raw Materials if Sterling notifies BASF in writing, within 10 Business Days after the delivery of such Raw Materials to Sterling, of the failure of such Raw Materials to meet the applicable Raw Materials Specifications. In the event that Sterling rejects any delivery of Raw Materials, BASF may object to such rejection in writing within five Business Days after receipt of the relevant notice from Sterling, in which event the Parties will meet within three Business Days after delivery of such objection to resolve the question of whether such Raw Materials meet the applicable Raw Materials Specifications. If the Parties are unable to resolve the matter during such meeting,

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either Party may refer the matter to an independent surveyor or chemical laboratory mutually agreeable to the Parties, such agreement will not be unreasonably withheld, for testing the retained sample of such Raw Materials under the agreed upon procedure. The findings of the independent surveyor or chemical laboratory will be conclusive and binding upon the Parties. If any Raw Materials fail to meet the applicable Raw Materials Specifications and BASF does not timely make available other Raw Materials meeting the applicable Raw Materials Specifications, Sterling’s manufacturing and delivering obligations hereunder shall be reduced accordingly.

          (c) Subject to the terms of this Agreement, BASF shall accept any and all deliveries of Products; provided, however, that BASF may reject any delivery of Products if BASF notifies Sterling in writing, within 45 Business Days after the later of delivery of such Products to BASF or delivery of such Products to a BASF customer (if shipped directly from the Site to such customer), of the failure of such Product to meet the applicable Product Specifications as of the date of shipment. In the event that BASF rejects any delivery of Products, Sterling may object to such rejection in writing within five Business Days after receipt of the relevant notice from BASF, in which event the Parties will meet within three Business Days after delivery of such objection to resolve the question of whether such Products meets the applicable Product Specifications. If the Parties are unable to resolve the matter during such meeting, either Party may refer the matter to an independent surveyor or chemical laboratory mutually agreeable to the Parties, such agreement will not be unreasonably withheld, for testing the retained sample of such Product under the agreed upon procedure. The findings of the independent surveyor or chemical laboratory will be conclusive and binding upon the Parties. If any Products fail to meet the applicable Products Specifications, Sterling shall reprocess such Products to meet the applicable Products Specifications or deliver replacement Products that meet the applicable Products Specifications.

          Section 2.06. Quantity Measurement and Testing. (a) The unit of measurement of Products and Raw Materials shall be one pound (avoirdupois). All quantities referred to herein, unless otherwise expressly stated, are in terms of such unit of measurement.

          (b) Quantities of Raw Materials and Products delivered by ship, barge or other inland water or marine vessel shall be determined by taking the opening and closing inventory of Sterling’s properly calibrated shore tanks before and after loading or unloading such shipment, unless otherwise provided hereunder. Quantities of Raw Materials and Products delivered by rail car or tank truck shall be determined by weighing the applicable rail cars or tank trucks on Sterling’s certified scales before and after loading.

          (c) Sterling shall maintain and operate the Measuring Equipment in accordance with customary practice in the industry, and all Measuring Equipment, including all scales, meters and thermometers, shall be certified for accuracy at least once every Year by an independent service. BASF may, at its option and expense, install measuring equipment for checking the Measuring Equipment, so long as such installation does not unreasonably interfere with the operation of the Plasticizers Complex or the Plant. Each Party shall have the right to be present at the time of any calibrating, installing, reading, cleaning, changing, repairing, inspecting, testing or

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adjusting of the Measuring Equipment or any measuring equipment used to check the Measuring Equipment. Each Party will maintain all records, charts and weigh tickets pertaining to deliveries of Raw Materials and Products hereunder for a period of at least one year (or for the duration of any contest with respect thereto, if longer). The records from the Measuring Equipment shall remain the property of Sterling and the records of any additional measuring equipment installed by BASF shall remain the property of BASF; provided, however, that, upon request, each Party will submit to the other Party copies of its records, charts and weigh tickets, together with calculations therefrom. If any of the Measuring Equipment is found to be inaccurate to any degree, Sterling shall repair, calibrate and certify such Measuring Equipment to measure accurately.

          Section 2.07. Storage of Raw Materials and Products. Sterling shall use the Bulk Storage Tanks for the storage of Raw Materials and Products, as designated by BASF in the Estimated Delivery, Shipment and Storage Instructions and the Delivery, Shipment and Storage Instructions, or as otherwise determined by Sterling. Should any Bulk Storage Tank be taken out of service by Sterling for repair or service, Sterling will repair such Bulk Storage Tank and place it back in service as soon as practicable and, pending the completion of such repair, Sterling shall make available for the storage of Raw Materials and Products any other suitable bulk storage tanks it then has available at the Plant. Sterling shall, at all times, physically segregate all Raw Materials furnished by BASF and all Products produced by Sterling for BASF at the Site or other storage facilities from all chemicals, packaging materials and products owned by Sterling or third parties.

          Section 2.08. Hours of Operation. Each Party acknowledges and agrees that (a) material handling services will be provided by Sterling on a 24-hours a Day, 365/366 Days a year basis, (b) laboratory services will be provided by Sterling only between the hours of 6:30 a.m. and 11:30 p.m. (Houston, Texas time), Monday through Friday, and (c) customer and scheduling services will be provided by Sterling only between the hours of 7:30 a.m. and 4:00 p.m. (Houston, Texas time), Monday through Friday.

          Section 2.09. Option to Terminate Obligations With Respect to the Oxo Unit. (a) In consideration of the payment of the Oxo Unit Termination Option Payment, and subject to the terms and conditions of this Agreement, BASF shall have the right to terminate its obligations hereunder with respect to the operation of the Oxo Unit by providing Sterling with written notice of its exercise of such right, which notice shall specify the date upon which BASF’s obligations with respect to the operation of the Oxo Unit will terminate (the “Exercise Date”); provided, however, that (i) if the Exercise Date is on or before December 31, 2007, the Exercise Date must be at least three months after the date on which Sterling receives such notice, and (ii) if the Exercise Date is after December 31, 2007, the Exercise Date must be at least six months after the date on which Sterling receives such notice. If BASF exercises its right under this paragraph (a), BASF shall be responsible for all costs and expenses associated with converting operations from manufactured Oxo-Alcohols to delivered Oxo-Alcohols; provided, however, that pursuant to Section 3.02(c) Sterling shall be solely responsible for the first *** of costs and expenses incurred in connection with the conversion of the existing Oxo-Alcohols storage tanks from manufactured Oxo-Alcohols service to delivered Oxo-Alcohols service.

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          (b) If BASF exercises its rights under paragraph (a) above and, within 30 Days after the Exercise Date, Sterling elects to permanently close the Oxo Unit by providing written notice of such election to BASF within such 30-Day period:

     (i) BASF shall have the right, in its sole discretion, to purchase the *** from the Oxo Unit from Sterling for *** if BASF (A) provides written notice of its exercise of such right to Sterling within 30 Days after receipt of the notice from Sterling of its election to permanently shut down the Oxo Unit, (B) pays such amount to Sterling within 30 Days after delivery of such exercise notice to Sterling and (C) reimburses Sterling for all actual costs and expenses incurred in connection with decontaminating, dismantling, packing and transportation of such assets;

     (ii) Sterling will use commercially reasonable efforts to eliminate all costs associated with the Oxo Unit;

     (iii) any fixed costs associated with the Oxo Unit that could not be eliminated under clause (ii) above (estimated to be ***) shall, from and after the Exercise Date, be reallocated proportionately across all operating units at the Site, including the Esters Unit and the PA Unit; and

     (iv) any additional costs for storage and handling of delivered Oxo-Alcohols used by the Esters Unit shall, from and after the Exercise Date, be allocated to the Esters Unit;

provided, however, that the Threshold Fixed Costs Amount shall be increased by an amount equal to any costs allocated to the Esters Unit or the PA Unit pursuant to clause (iii) or clause (iv) above, such costs shall be excluded from any calculation of Cost Savings and the portion of the Allocated Fixed Costs Amount pertaining to each relevant General Category of Allocated Fixed Costs shall be increased by the applicable portion of such costs.

Article III

Payments; Capital Expenditures

          Section 3.01. Option Price for Early Termination of Oxo Unit; Profit Sharing Payment. (a) In addition to the other amounts payable by BASF under this Agreement, BASF shall pay Sterling the Oxo Unit Termination Option Payment in three installments, (i) an initial installment of *** due and payable on or before December 31, 2005, (ii) a second installment of *** due and payable on January 31, 2006 and (iii) a third installment of *** due and payable on December 1, 2006. The Parties acknowledge and agree that BASF shall be obligated to pay all three installments of the Oxo Unit Termination Option Payment, irrespective of whether or not BASF elects to exercise its rights under Section 2.09 and, if BASF does exercise its rights under Section 2.09, irrespective of whether such exercise is prior to, at the time of or after any such installment becomes due and payable.

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          (b) On the Effective Date, BASF, at its sole cost and expense, shall conduct a full physical inventory of all Products, Raw Materials and Ancillary Raw Materials associated with the Existing Agreement that are on hand at the Site and a physical inventory of all Products associated with the Existing Agreement that are at terminals, in route and elsewhere. On or before January 23, 2006, BASF shall pay Sterling an amount equal to (i) Sterling’s accrued Profit (as defined in the Existing Agreement) as of December 31, 2005 plus (ii) *** of the estimated Profit to be derived from the sale of finished goods inventories of Products on hand as of December 31, 2005 (based upon average market prices for Products, average freight costs and actual inventory costs for December 2005), to the extent such amounts have not already been paid by BASF to Sterling. On or before January 23, 2006, BASF shall render a statement to Sterling showing the calculation of Profit for the final Year of the Existing Agreement (i.e., 2005) and Sterling’s share of such Profit under the Existing Agreement. Sterling may, if it desires, in good faith contest the validity or amount of any matter shown in such statement; provided, however, that Sterling provides BASF with written notice of such contest within three Months after receipt of the final Profit statement from BASF. Upon reasonable request, BASF shall provide Sterling access to all records pertaining to the calculation of such Profit, which records shall be subject to audit by an independent certified public accounting firm reasonably acceptable to BASF at any reasonable time within three months following receipt by Sterling of the final statement. Any audit will be at Sterling’s expense. Sterling shall enter into a written confidentiality agreement with any such auditing firm pursuant to which the auditing firm will agree to maintain the confidentiality of BASF’s accounts and records, and agree not to disclose proprietary information about BASF. Sterling will use commercially reasonable efforts to cause BASF to be a third party beneficiary of the nondisclosure and nonuse obligations contained in such confidentiality agreement. The auditor will either verify the correctness of BASF’s accounts and records or advise both Parties of the composite adjustments required to correct discrepancies for the period audited. Should it be determined that any additional amount of Profit is due and owing to Sterling, BASF shall immediately pay such part to Sterling, with interest thereon to the date of payment at the Applicable Interest Rate. Should it be determined that BASF paid Sterling an excess amount of Profit, Sterling shall immediately refund such excess amount to BASF to correct such overpayment. Payment or acceptance of any payment by Sterling shall not prejudice the right of Sterling to dispute or question the correctness thereof. Except as specifically set forth in this paragraph (b), no adjustments shall be made to such statement, and neither Party shall be required to pay or refund any amount to the other Party with respect to Sterling’s accrued Profit as of the date of this Agreement or the estimated Profit to be derived from the sale of inventories of Products on hand as of the date of this Agreement, irrespective of whether the amount shown in such statement thereafter is shown to have been incorrect.

          (c) Sterling shall pay BASF the remaining balance owing for the Switch Condenser Project at the same times and in the same amounts as would have been paid under the Existing Agreement.

          (d) On the Effective Date, BASF shall pay Sterling an amount equal to the remaining unamortized amount of charges for catalyst under the Existing Agreement and reimburse Sterling for the cost of existing inventory of fresh, uncharged catalyst.

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          Section 3.02. Payments. (a) On or before January 1, 2006, BASF shall pay *** to Sterling as a prepayment towards certain Fixed Costs. Except as otherwise provided in this paragraph (a), such prepayment shall not be applied towards the payment of any invoice issued to BASF pursuant to this Agreement other than the invoice for Fixed Costs for the final Month of this Agreement (with any excess being refunded by Sterling to BASF on or before 15 Days after the termination of this Agreement). Under no circumstances shall any interest be payable to BASF by Sterling on the *** prepayment (unless Sterling wrongfully refuses to apply such amount towards the final Fixed Costs invoice or refund any excess). In the event that BASF fails to pay any undisputed invoice hereunder within five Business Days after receipt of written notice from Sterling of such delinquent payment, Sterling shall apply all or any portion of such prepayment towards the payment of such invoice and, if BASF fails to replenish the prepayment fund within five Business Days after receiving written notice from Sterling of any such application, Sterling shall be entitled to immediately cease all production of Products at the Plasticizers Complex and withhold shipment of any Products until such time as BASF replenishes the *** prepayment fund through the payment of such invoice in full, and Sterling shall not have any liability whatsoever to BASF as a result of such cessation of production and shipping.

          (b) Sterling shall, within 15 Days after the end of each Month, submit an invoice to BASF (an “Invoice”) showing (i) the quantity of each Product produced during the immediately preceding Month, (ii) the amount of Fixed Costs and Variable Costs incurred during such Month, (iii) the amount of Capital Expenditures and Expansion Capital Expenditures made during such Month and (iv) any other amounts due Sterling at that time pursuant to Section 3.04. Except as otherwise provided in Section 3.09(b), BASF shall pay each Invoice on or before the 15th Day after receipt thereof (or if such Day is not a Business Day, then on the next Business Day), irrespective of whether any Products were produced in such Month; provided, however, that if no Products are produced in any Month, Sterling will use reasonable efforts to minimize the amount of Variable Costs incurred during such Month. Notwithstanding anything to the contrary contained in this Agreement, if, in any Year, Sterling’s cost of providing the engineering services referred to in the Engineering General Category of Allocated Fixed Costs exceed the amount attributable to such General Category of Allocated Fixed Costs in the calculation of the Allocated Fixed Costs Amount for such Year, Sterling may, in its sole discretion, cease providing engineering services pursuant to this Agreement in such Year unless and until BASF agrees in writing to reimburse Sterling for the cost of all such engineering services in such Year.

          (c) As of the date of this Agreement, each of the Esters Unit and the PA Unit have rated annual production capacities in excess of the Capacity for such Unit. Sterling shall, at BASF’s sole cost and expense, perform such work (including engineering work) as is required to convert each of the Units to produce Products at the Capacity for such Products and convert Sterling’s existing Oxo-Alcohols storage tanks from manufactured Oxo-Alcohols service to delivered Oxo-Alcohols service (the “Plasticizers Complex Reconfiguration”), and (i) BASF shall reimburse Sterling for such costs and expenses on the same basis as BASF is required to reimburse Sterling for Variable Costs under paragraph (b) above and (ii) to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the

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Allocated Fixed Costs Amount; provided, however, that Sterling shall be solely responsible for the first *** of costs and expenses incurred in connection with such conversion of the existing Oxo-Alcohols storage tanks.

          (d) From and after the Commissioning Date, if the aggregate Fixed Costs charged by Sterling for the Esters Unit and the PA Unit in any Year (excluding catalyst amortization, maintenance turnaround expense and any severance costs connected with either of such Units paid by BASF pursuant to Section 3.06(e)) (the “Component Fixed Costs”) exceed the Threshold Fixed Costs Amount by more than ***, BASF may elect to terminate this Agreement; provided, however, that:

     (i) no such termination will be effective unless BASF has given written notice to Sterling of its election to terminate this Agreement within 30 Days after the end of such Year;

     (ii) such termination will become effective on the date specified in such notice (which may not be prior to 12 months after the date of receipt of such notice by Sterling) or, if no such date is specified, 12 months after the date on which such notice is received by Sterling; and

     (iii) BASF pays Sterling the applicable Early Termination Fee on the effective date of the termination of this Agreement, as determined under clause (ii) above, provided, however, that:

(A)	if the Component Fixed Costs for such Year exceed the greater of the Threshold Fixed Costs Amount and the actual Fixed Costs for the first full Year after the Commissioning Date by at least *** but less than ***, the applicable Early Termination Fee shall be reduced by an amount equal to ***;
(B)	if the Component Fixed Costs for such Year exceed the greater of the Threshold Fixed Costs Amount and the actual Fixed Costs for the first full Year after the Commissioning Date by at least *** but less than ***, the applicable Early Termination Fee shall be reduced by an amount equal to ***; and
(C)	if the Component Fixed Costs for such Year exceed the greater of the Threshold Fixed Costs Amount and the actual Fixed Costs for the first full Year after the Commissioning Date by at least ***.

For purposes of determining whether BASF has the right to terminate this Agreement as provided above, (x) if the Commissioning Date is on or before June 30 of a Year, the first Year shall be the period from the Commissioning Date through December 31 of that Year, in which event the Threshold Fixed Costs Amount shall be pro rated based on the number of Days left in such Year as of the Commissioning Date, and (y) if the Commissioning Date is after June 30 of a Year, the first Year shall begin on January 1 of the next Year. Notwithstanding anything to the contrary in this paragraph (d), in the event that (1) BASF provides Sterling with a written notice of its election to terminate this Agreement and (2) Sterling, by providing written notice to BASF within 30 Days

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after its receipt of the termination notice from BASF, elects to cap BASF’s reimbursement obligation for Component Fixed Costs for such Year at the Threshold Fixed Costs Amount, then such termination notice from BASF shall be null and void and of no further force or effect. In such event, Sterling shall reimburse BASF for any Component Fixed Costs previously paid by BASF in excess of the Threshold Fixed Costs Amount in that Year and BASF shall not be required to reimburse Sterling for any Component Fixed Costs beyond the Threshold Fixed Costs Amount for that Year that remain unpaid.

          Section 3.03. Facility Fees. In addition to the other amounts payable by BASF under this Agreement, on the first Day of each Quarter, commencing with the Quarter commencing on the Effective Date, BASF shall pay Sterling the Facility Fees for such Quarter. Except to the extent otherwise provided in Section 4.04, each of the Facility Fees shall be payable in full irrespective of whether any production occurs at any of the Units during such Quarter or the level of production at any of the Units during such Quarter; provided, however, that if Sterling fails (unless such failure is excused pursuant to Section 6.02 or is caused by a breach of the Agreement by BASF) to maintain the production capacity of the Esters Unit or the PA Unit over any period of at least *** consecutive Days at a level of at least *** (in the case of Esters) or at least *** (in the case of PA) of the relevant Monthly Contract Capacity and, in either case, BASF requires production in excess of the available capacity, then the Esters Facility Fee or the PA Facility Fee, as applicable, shall be reduced for each Quarter (or portion thereof) that Sterling so fails to maintain the Monthly Contract Capacity. In such cases, the relevant Facility Fee payable for such Quarter shall be determined by (a) dividing the relevant Facility Fee by 90 to determine the amount of such Facility Fee payable for each Day during such Quarter, (b) reducing the amount determined under clause (a) for each Day during such Quarter when Sterling so failed to maintain the Monthly Contract Capacity for the relevant Product by multiplying such amount by the Reduction Factor applicable to such Day and (c) deducting the aggregate reductions under clause (b) for such Quarter from the Facility Fee otherwise payable for such Quarter. If the Facility Fee for any Quarter is reduced pursuant to this Section 3.03 after BASF has paid such Facility Fee, BASF may deduct the amount overpaid from the next Facility Fee payable hereunder or, if no further Facility Fees are payable hereunder, Sterling shall refund such amount to BASF within 15 Days after receipt of an invoice therefore from BASF.

          Section 3.04. Capital Expenditures and Expansion Capital Expenditures. (a) At least 30 Days prior to the Quarterly Meeting to be held in October of each Year, Sterling shall submit to BASF a capital budget, prepared by Sterling in good faith and upon realistic assumptions, for the next succeeding Year (each, a “Capital Budget”) for those Capital Projects that Sterling deems necessary (i) to maintain the reliable and safe operation of the PA Unit and the Esters Unit at Capacity, (ii) until the Oxo Unit Termination Date, to maintain the reliable and safe operation of the Oxo Unit at Capacity, and (iii) to maintain the Plasticizers Complex in compliance with all applicable Laws and permits. The Capital Budget for 2006 is attached hereto as Exhibit F. Each Capital Budget shall include a description of each Capital Project in reasonable detail and an estimate of the Capital Expenditures anticipated to be made in connection with such Capital Project. Prior to commencing any Capital Project, Sterling shall, to the extent practicable under the circumstances, consult with BASF and give BASF the opportunity to comment on such proposed Capital Project or propose alternative

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approaches to such Capital Project; provided, however, that (A) except as otherwise provided in paragraph (b) below, in the event that Sterling and BASF disagree on whether a Capital Project should be pursued or on the approach to any Capital Project, *** and (B) except as otherwise specifically provided in this Agreement, BASF shall not be liable to Sterling for any Damages directly or indirectly arising out of Sterling’s use or implementation of BASF’s comments to such Capital Project. In addition, in the event of an emergency, Sterling may conduct Capital Projects and make Capital Expenditures, irrespective of whether or not any such Capital Project was included in any previous Capital Budget, if Sterling, in its sole discretion, deems such Capital Project and Capital Expenditures necessary to maintain the Plasticizers Complex in accordance with the standards provided in this paragraph (a) or the standard of care described in Section 4.01; provided, however, that Sterling shall inform BASF via facsimile or E-Mail of the nature of the emergency and the expected expenditures within 72 hours after it makes such determination. BASF shall reimburse Sterling for *** of all Capital Expenditures made for each Capital Project. In the event that Sterling’s engineering services are required in connection with any Capital Project or Expansion Project, Sterling shall provide such engineering services at BASF’s sole cost and expense, and such engineering services shall not be considered as being among the engineering services referred to in the Allocated Fixed Costs Table.

          (b) Notwithstanding anything to the contrary contained in this Section 3.04, during the period commencing on January 1, 2011 and continuing thereafter until the expiration or termination of this Agreement, BASF shall have the right to elect to not proceed with any Capital Project the primary purpose of which is to maintain the reliable operation of any Unit at Capacity; provided, however, that BASF elects to not renew this Agreement for an Additional Term prior to January 1, 2011 and, provided further, that if BASF elects to not proceed with any such Capital Project, Sterling shall have the option to either:

     (i) proceed with such Capital Project, in which event BASF shall reimburse Sterling for, (A) if such Capital Project was initially submitted for approval at any time before January 1, 2011, *** of the actual Capital Expenditures made to complete such Capital Project, (B) if such Capital Project was initially submitted for approval at any time on or after January 1, 2011 but before January 1, 2012, *** of the actual Capital Expenditures made to complete such Capital Project, or (C) if such Capital Project was initially submitted for approval at any time on or after January 1, 2012 but before January 1, 2013, *** of the actual Capital Expenditures made to complete such Capital Project, in each case, irrespective of whether such Capital Expenditures are made during the Year used to determine the applicable percentage of reimbursement and irrespective of whether such Capital Expenditures are made prior to or after the expiration of this Agreement (but excluding any Capital Expenditures made on or after January 1, 2014); or

     (ii) not proceed with such Capital Project, in which event BASF shall make a one-time payment to Sterling in an amount equal to (A) if such Capital Project was initially submitted for approval at any time before January 1, 2011, *** of the estimated Capital Expenditures required to complete such Capital Project, (B) if such Capital Project was initially submitted for approval at any time

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on or after January 1, 2011 but before January 1, 2012, *** of the estimated Capital Expenditures required to complete such Capital Project, or (C) if such Capital Project was initially submitted for approval at any time on or after January 1, 2012 but before January 1, 2013, *** of the estimated Capital Expenditures required to complete such Capital Project; provided, however, that if BASF disputes the necessity of any such Capital Project or the estimated Capital Expenditures required to complete any such Capital Project, such dispute shall be resolved in accordance with the dispute resolution procedures set forth in Section 8.09.

Any payments made by BASF pursuant to this paragraph (b) shall be excluded from the obligation of Sterling to reimburse BASF for undepreciated capital pursuant to paragraph (e) below.

          (c) At any time during the term of this Agreement, BASF may, at its option and at its sole cost and expense, (i) elect to increase the Capacity of the PA Unit through the installation of new switch condensers (the “New Switch Condenser Project”) and (ii) elect to use all or any portion of the incremental PA to produce additional Esters or sell all or any portion of the incremental PA in the merchant market. If BASF elects to sell all or any portion of the incremental PA in the merchant market, an additional PA storage tank would be installed at the Site. BASF shall be responsible for any and all Expansion Capital Expenditures and other costs associated with the New Switch Condenser Project and the installation of any additional storage tanks required in connection with the storage and shipping of the resulting additional PA, and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount. Upon commissioning of any of the switch condensers under the New Switch Condenser Project, the PA Facility Fee shall be increased to an amount equal to the PA Facility Fee then in effect times a fraction, the numerator of which is the expected Capacity of the PA Unit following the New Switch Condenser Project and the denominator of which is the Capacity of the PA Unit immediately prior to the commissioning of any of the switch condensers under the New Switch Condenser Project.

          (d) At any time during the term of this Agreement, BASF may, at its option and at its sole cost and expense, elect to increase the Capacity of the PA Unit or the Esters Unit through Expansion Projects other than the New Switch Condenser Project. BASF shall be responsible for any and all Expansion Capital Expenditures and other costs associated with each such Expansion Project and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount; provided, however, that any payments made to Sterling by BASF for Expansion Capital Expenditures under this paragraph (d) shall be excluded from the obligation of Sterling to reimburse BASF for undepreciated capital pursuant to paragraph (e) below. BASF shall also be responsible for any and all Fixed Costs directly attributable to the increased Capacity of the PA Unit or the Esters Unit by virtue of any Expansion Project and (i) the Threshold Fixed Costs Amount shall be increased by the aggregate amount of such Fixed Costs and (ii) to the extent such costs and expenses are Allocated Fixed Costs, the portion of the Allocated Fixed Costs Amount pertaining to each relevant General Category of Allocated Fixed Costs shall be increased by the applicable portion of such costs and expenses. Upon mechanical

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completion of any Expansion Project, the PA Facility Fee or the Esters Facility Fee, as applicable, shall be increased as provided in the definition of PA Facility Fee or Esters Facility Fee, as applicable.

          (e) Subject to Section 7.01(d), within 90 Days after the expiration or termination of this Agreement, Sterling shall pay BASF an amount equal to the undepreciated capital paid by BASF for each Capital Project (excluding any amounts paid by BASF pursuant to paragraphs (b) or (d) above), based on a straight line, *** life, mid-year convention depreciation as defined by the U.S. Federal Income Tax Code, calculated from the completion date of each relevant Capital Project; provided, however, that:

     (i) if (A) BASF elects to terminate this Agreement pursuant to Section 3.02(d), (B) either Party elects to terminate this Agreement pursuant to Section 6.02(e) or (C) Sterling elects to terminate this Agreement pursuant to Section 7.01(c) based on a breach by BASF of any material covenant, agreement, term, provision or condition of this Agreement, the amount of undepreciated capital paid by BASF for all Capital Projects shall be deemed to be zero and no amount shall be payable by Sterling to BASF pursuant to this paragraph (e);

     (ii) if BASF elects to terminate this Agreement pursuant to Section 7.01(b), (A) the amount of undepreciated capital shall be the lower of (x) the amount of the applicable Early Termination Fee and (y) the amount of undepreciated capital that would have existed on December 31, 2013 if this Agreement had continued until that date and (B) on each anniversary of the actual date of termination of this Agreement, Sterling shall pay BASF an amount equal to the depreciation of such capital that would have been recognized during the immediately preceding 12-month period (using the *** depreciation schedule described above) if the first such payment had occurred on December 31, 2014 until such time as the total amount payable by Sterling under clause (A) above has been paid in full;

     (iii) if BASF elects to terminate this Agreement pursuant to Section 7.01(c) based on a breach by Sterling of any material covenant, agreement, term, provision or condition of the Agreement, Sterling shall pay BASF an amount equal to such undepreciated capital as of the date of termination within 30 Days after the date of such termination; and

     (iv) if either Party elects to terminate this Agreement pursuant to Section 4.04(e), the amount of undepreciated capital payable to BASF in connection with the termination of this Agreement shall be determined pursuant to that Section.

In the event that Sterling fails to pay any amount when due under this paragraph (e), such amount shall bear interest at the Applicable Interest Rate, accruing each Day from the Day such amount was originally due until the Day such amount is paid in full.

          Section 3.05. Maintenance Expenditures. At least 30 Days prior to the Quarterly Meeting to be held in October of each Year, Sterling shall submit to BASF a maintenance expense budget, prepared by Sterling in good faith and upon realistic

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assumptions, for the next succeeding Year (each, a “Maintenance Budget”) for such maintenance as Sterling determines is required to maintain the Plasticizers Complex in accordance with the standard of care described in Section 4.01. Sterling shall provide BASF with monthly reports regarding maintenance expenses. Unless otherwise agreed by the Parties, all maintenance expenses shall be included in Fixed Costs for purposes of this Agreement.

          Section 3.06. Cost Savings; Manpower Reductions. (a) The Parties shall cooperate in investigating, evaluating and implementing mutually agreeable methods to reduce Fixed Costs, Variable Costs, Capital Expenditures and Expansion Capital Expenditures. On or before January 31 of each year, commencing with January 31, 2006, Sterling shall submit a statement to BASF showing in reasonable detail any reductions in Fixed Costs or Variable Costs (“Cost Savings”) achieved in the immediately preceding calendar year compared to the Fixed Costs in the Maintenance General Category, the Fixed Costs in the Materials Handling General Category and the Variable Costs for such Unit incurred when such costs were at there lowest in any calendar year after 2003 and the Fixed Costs in the Personnel General Category and the Fixed Costs in the Other Direct General Category for such Unit incurred during 2005; provided, however, that:

     (i) for purposes of determining whether any Cost Savings attributable to PPI Adjusted Fixed Costs were achieved in any Year, the aggregate amount of PPI Adjusted Fixed Costs incurred in the earlier period shall be adjusted as of December 31 of each year after such PPI Adjusted Fixed Costs were actually incurred by the PPI Factor for such subsequent year (e.g., if PPI Adjusted Fixed Costs incurred in 2008 were being compared to PPI Adjusted Fixed Costs incurred in 2006, the PPI Adjusted Fixed Costs incurred in 2006 would be adjusted based on the PPI Factor for 2007 and adjusted again based on the PPI Factor for 2008);

     (ii) the amounts shown in each such statement shall be split into the General Categories of Fixed Costs and Variable Costs and Cost Savings shall be determined for each General Category of Fixed Costs and each General Category of Variable Costs independently;

     (iii) the Variable Costs for each calendar year shall be based on per pound usages for each component of Variable Costs with the Cost Savings derived from any improvements in usages being calculated using current market prices at the time of determination;

     (iv) the per pound usages for each component of Variable Costs for 2004 are specified on Exhibit B; provided, however, that irrespective of actual per pound usage in 2004, the per pound usage for *** in 2004 shall be deemed to be *** pounds of *** per pound of PA; and

     (v) once the Plasticizers Complex Reconfiguration is completed, the initial per pound usages of each component of Variable Costs for the Esters Unit will be determined under paragraph (c) below.

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Each statement delivered by Sterling shall set forth (A) the amount of Fixed Costs in each General Category of direct Fixed Costs during the immediately preceding year, (B) the amount of Variable Costs in each General Category of Variable Costs during the immediately preceding year, (C) the amount of Fixed Costs in each of the Maintenance General Category and the Materials Handling General Category when the Fixed Costs in that General Category were at their lowest in any calendar year after 2003, (D) the amount of Fixed Costs in each of the Personnel General Category and the Other Direct General Category for 2005, (E) the amount of Variable Costs in each General Category of Variable Costs for the Oxo Unit (through the Oxo Unit Termination Date) and the PA Unit when the Variable Costs in that General Category were at their lowest in any calendar year after 2003, and (F) the amount of Variable Costs in each General Category of Variable Costs for the Esters Unit when the Variable Costs in that General Category were at their lowest in any calendar year after 2003 (or, after the Commissioning Date, their lowest since the end of the year including the Commissioning Date), in each case, subject to the adjustments described above. For example, the statement delivered on or before January 31, 2009 will (1) compare the amount of Fixed Costs in the Maintenance General Category of Fixed Costs and the Materials Handling General Category of Fixed Costs (by General Category) in 2008 to the lowest amount of such Fixed Costs (by General Category) in any calendar year after 2003 (after the above-described adjustments), (2) compare the amount of Variable Costs (by General Category) for the Oxo Unit (through the Oxo Unit Termination Date) and the PA Unit in 2008 to the lowest amount of Variable Costs (by General Category) in any calendar year after 2003 (after the above-described adjustments), which may be different calendar years for different General Categories of Variable Costs, (3) compare the amount of Variable Costs (by General Category) for the Esters Unit in 2008 to the lowest amount of Variable Costs (by General Category) in any calendar year after 2003 (or, after the Commissioning Date, in any calendar year from and after the year including the Commissioning Date (after the above-described adjustments), which may be different calendar years for different General Categories of Variable Costs, and (4) compare the amount of Fixed Costs in the Personnel General Category of Fixed Costs and the Other Direct General Category of Fixed Costs (by General Category) in 2008 to the Fixed Costs in those General Categories in 2005 (after the above-described adjustments).

          (b) Within 15 Days after receipt of such statement, BASF will pay Sterling an amount equal to (i) *** of the amount by which the Fixed Costs included in the Maintenance General Category in the earlier calendar year shown in the statement exceed the Fixed Costs included in the Maintenance General Category in the later calendar year shown in such statement, plus (ii) *** of the amount by which the Fixed Costs included in the Materials Handling General Category in the earlier calendar year shown in the statement exceed the Fixed Costs included in the Materials Handling General Category in the later calendar year shown in such statement, plus (iii) *** of the amount by which the Fixed Costs included the Personnel General Category in 2005 exceed the Fixed Costs included the Personnel General Category in the later calendar year shown in such statement plus (iv) *** of the amount by which the Fixed Costs included the Other Direct General Category in 2005 exceed the Fixed Costs included the Other Direct General Category in the later calendar year shown in such statement plus (v) *** of the amount by which the per pound usage of any component of Variable Costs in the earlier calendar year shown in the statement exceeds the per pound usage of

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such component of Variable Costs in the later calendar year shown in such statement times the average market price for such component of Variable Costs during the later calendar year shown in the statement. Sterling shall employ consistent accounting practices from year to year.

          (c) Notwithstanding anything to the contrary contained in this Section 3.06, the per pound usage of each component of Variable Costs for the Esters Unit for the Year in which the Commissioning Date occurs shall be deemed to be (i) the per pound usage of such component of Variable Costs experienced in the most recent full Month prior to the Commissioning Date during which the Esters Unit was not shut down at any time due to operational difficulties or (ii) such other per pound usage as the Parties shall mutually agree; provided, however, if the Parties fail to agree on an alternative per pound usage of any component of Variable Costs for the Esters Unit under this clause (ii) within 30 Days after the Commissioning Date, the per pound usage of such component of Variable Costs shall be the per pound usage determined under clause (i).

          (d) For purposes of calculating Cost Savings under this Section 3.06, if a Force Majeure Event results in the suspension of all or any of the operations at the Plasticizers Complex in any Month (whether in the current Year or any prior Year), the Fixed Costs and Variable Costs for such Month shall be deemed to be the same as the Fixed Costs and Variable Costs experienced in the most recent preceding full Month that was not affected by a Force Majeure Event.

          (e) In addition to the amounts (if any) payable by BASF hereunder for Cost Savings, in the event that any manpower reduction occurs at the Site, (i) BASF shall pay Sterling an amount equal to *** of the severance costs incurred in connection with such manpower reduction that will result in direct labor costs savings for the Plasticizers Complex and (ii) BASF shall pay Sterling its allocable portion of any severance costs incurred in connection with such manpower reduction that will result in lower allocated Fixed Costs for the Plasticizers Complex, such allocation to be based on the same percentages as are then used to allocate other allocated Fixed Costs to the Plasticizers Complex; provided, however, that any reduction in salaries and employee benefits resulting from any such manpower reduction shall be excluded from any subsequent comparisons of Fixed Costs and Variable Costs.

          (f) Notwithstanding anything to the contrary contained in this Section 3.06, if any Cost Savings are achieved in any Year due to a reduction in the Fixed Costs allocated to the Plasticizers Complex following the commissioning of a new operating unit at the Site, for purposes of any subsequent calculations of Cost Savings, each prior Year that benefited from such reduction in allocated Fixed Costs shall be calculated as if such reduction in Fixed Costs had not occurred. For example, if a *** reduction in the Maintenance General Category of Fixed Costs occurred due to such a reallocation in 2007 and in 2008 the amount of Fixed Costs in the Maintenance General Category also reflected such *** reduction, then, for purposes of calculating Cost Savings in 2009, the amount of Fixed Costs in the Maintenance General Category incurred in both 2007 and 2008 would be deemed to be *** higher than those actually incurred.

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          (g) Notwithstanding anything to the contrary contained in this Agreement, the per pound usages of each component of Variable Costs shall be used solely for purposes of determining whether Sterling has achieved any Cost Savings in a given year and BASF shall pay the actual amounts of Variable Costs incurred during each Month.

          Section 3.07. Taxes. In addition to the other amounts payable by BASF under this Agreement, all sales, use and excise taxes and other taxes and similar charges which Sterling may be required to pay and which are levied directly upon the receipt or storage by Sterling of Raw Materials, the production or storage of Products or the sale or delivery of Products hereunder (including any “Superfund” tax and any other environmental tax or like charge assessed or imposed by any Governmental Authority but excluding franchise tax or any tax levied against the income or gross receipts of Sterling) shall be paid by BASF (or if paid by Sterling, reimbursed by BASF within 15 Days after receipt of an invoice therefore, or if such Day is not a Business Day, then on the next Business Day).

          Section 3.08. Wire Transfers, Etc. All sums and amounts payable under this Agreement shall be paid in United States dollars by wire transfer or electronic funds transfer of immediately available funds to such bank or account in the continental United States for the account of the payee as from time to time the payee shall have directed to the payor in writing (or, if no such direction shall have been given, by check of the payor payable to the order of the payee and mailed to the payee in the manner and at the address set forth in Section 8.01). Whenever in this Agreement BASF is required to pay or reimburse Sterling upon receipt of invoice, or otherwise when no due date for payment is specifically provided, payment shall be due as provided in Section 3.02(b) and shall be made in the manner set forth in this Section 3.08.

          Section 3.09. Late Payments. (a) In the event that either Party fails to pay any amount when due hereunder, such amount shall bear interest at the Applicable Interest Rate, accruing each Day from the Day such amount was originally due until the Day such amount is paid in full. With respect to any delinquent payment by BASF, unless such amount is the subject of a good faith dispute between the Parties pursuant to paragraph (b) below, Sterling shall have the rights provided in Section 3.02(a). Sterling may exercise its rights under Section 3.02(a), and either Party may exercise its rights under this paragraph (a), at any time and from time to time during the continuance of this Agreement.

          (b) Notwithstanding anything to the contrary contained in paragraph (a) above, BASF may, in good faith, contest the validity or amount of any amount included in any invoice submitted by Sterling pursuant to this Article III, and may defer the payment of any contested portion thereof during the pendency of such contest without defaulting under this Agreement; provided, however, that BASF gives written notice to Sterling of its contest of such amount prior to the time the relevant invoice is due and payable. In the event that BASF withholds the payment of any contested amount and it is ultimately determined that such amount is due and payable to Sterling, BASF shall pay such amount to Sterling immediately after such determination, together with interest thereon at the Applicable Interest Rate accruing each Day from the Day such amount was originally due until the Day such amount is paid in full. Payment of any amount under this Article III shall not prejudice the right of BASF to dispute or

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question the correctness thereof so long as BASF notifies Sterling that it is contesting the correctness of such amount prior to its payment thereof.

Article IV

Operation of the Plasticizers Complex and Related Matters

          Section 4.01. Operational Practices. Sterling shall operate and maintain the Plasticizers Complex and perform its other obligations hereunder, including material handling and distribution, using operating procedures equivalent to or better than (a) the standard of care it uses in operating and conducting manufacturing at the Plant and performing obligations for its own account and (b) the standard of care a prudent operator would use in operating and manufacturing at a unit similar to the Plasticizers Complex. Subject to the terms and conditions of this Agreement, Sterling shall operate the Plasticizers Complex in a manner designed to fulfill its obligations to deliver Products hereunder that meet the Product Specifications in accordance with the Estimated Delivery, Shipment and Storage Instructions, the Delivery, Shipment and Storage Instructions and any additional delivery, shipment and storage instructions issued by BASF pursuant to Section 2.01(b); provided, however, that such operational practices do not violate this Agreement or any applicable Law and are not inconsistent with the prudent operation of the Plasticizers Complex. Except for amounts being contested in good faith, Sterling shall pay, as they become due, all costs and expenses incurred to trade creditors in the operation of the Plasticizers Complex which, if remaining unpaid, might become a Lien on the Plasticizers Complex.

          Section 4.02. Plant Visits; BASF Liaison. (a) Sterling shall grant BASF personnel access to the Plasticizers Complex at reasonable times and on reasonable notice; provided, however, that such visits are consistent with Sterling’s contractual obligations under licenses or sublicenses to which it is a party. BASF shall cause all of its personnel to comply with Sterling’s safety and reasonable confidentiality procedures and policies.

          (b) BASF would have the option, at its sole cost and expense, to appoint a liaison person (the “BASF Liaison”) for the Plasticizers Complex, and the BASF Liaison would be entitled to make recommendations to Sterling regarding the maintenance, upkeep and operations of the Plasticizers Complex; provided, however, that Sterling would not be under any obligation to adopt or implement any recommendations made by the BASF Liaison that Sterling, in its sole discretion, believes may adversely affect the health, safety or environmental performance of the Plasticizers Complex or may increase Sterling’s costs to operate or maintain the Plasticizers Complex. If Sterling does not wish to adopt or implement any recommendation made by the BASF Liaison solely because Sterling believes that such adoption or implementation may increase Sterling’s costs to operate or maintain the Plasticizers Complex, Sterling shall adopt or implement such recommendation but (i) any increase in costs resulting from such adoption or implementation shall be paid by BASF, (ii) the Threshold Fixed Costs Amount shall be increased by the amount of such costs, (iii) such costs shall be excluded from any calculation of Costs Savings and (iv) to the extent such costs and expenses are Allocated Fixed Costs, the portion of the

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Allocated Fixed Costs Amount pertaining to each relevant General Category of Allocated Fixed Costs shall be increased by the applicable portion of such costs and expenses. Sterling would provide the BASF Liaison with office space at the Site and grant the BASF Liaison access to the Plasticizers Complex at all reasonable times to observe and inspect, and to perform safety, manufacturing and quality studies; provided, however, that such activities do not materially disrupt the operation of the Plasticizers Complex or Sterling’s other operations at the Site.

          Section 4.03. Insurance. During the term of this Agreement, Sterling shall maintain property damage and liability insurance on the Plasticizers Complex and those parts of the Plant which serve the Plasticizers Complex in types and amounts, and against such risks, substantially similar to those carried and insured against as of the date of this Agreement; provided, however, that in any event Sterling shall not be required to maintain business interruption or terrorism insurance coverages. BASF shall reimburse Sterling for any amounts paid by Sterling that are credited towards the deductible under Sterling’s liability insurance policy or property damage/business interruption policy to the extent the underlying event (a) is directly related to the Plasticizers Complex, any Raw Material, Ancillary Raw Material or Product or any other matter under this Agreement and (b) Sterling is not required to indemnify BASF for such underlying event pursuant to Section 6.01(a). Any payments required to be made by BASF pursuant to this Section 4.03 (i) shall be made by BASF within 15 Days after receipt of an invoice therefore from Sterling, or if such Day is not a Business Day, then on the next Business Day, (ii) shall be excluded from any calculation of Costs Savings or the Threshold Fixed Costs Amount under this Agreement and (iii) to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount. BASF may carry additional insurance, at its sole discretion and cost.

          Section 4.04. Damage or Destruction. (a) If, at any time during the term of this Agreement, if all or any part of the Plasticizers Complex or any Dependent Facility is damaged or destroyed by fire explosion, flood, hurricane, windstorm or other casualty of any kind or nature (including any insured or uninsured casualty), ordinary or extraordinary, foreseen or unforeseen, Sterling shall either (i) at its sole cost and expense, and irrespective of whether the insurance proceeds, if any, are sufficient for such purpose, within *** Days after the date of such damage or destruction, commence repairing, altering, restoring, replacing or rebuilding the Plasticizers Complex or such Dependent Facility to substantially the same condition as existed immediately prior to such damage or destruction, and thereafter continue with such work with reasonable diligence, or (ii) elect, by providing BASF with written notice of such election within *** Days after the date of such damage or destruction, not to repair, alter, restore, replace or rebuild the Plasticizers Complex or such Dependent Facility.

          (b) If Sterling elects to repair, alter, restore, replace or rebuild the Plasticizers Complex or such Dependent Facility, (i) Sterling shall have the right to require that all insurance proceeds from policies maintained by Sterling and BASF providing coverage for the relevant casualty be applied to the payment of all costs and expenses related thereto, and (ii) the Parties’ respective obligations under this Agreement shall continue, but Sterling shall bear all costs of such repair in excess of the proceeds of insurance and shall have the right to fully depreciate such repair costs.

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          (c) If Sterling elects not to repair, alter, restore, replace or rebuild the Plasticizers Complex or such Dependent Facility, BASF may elect, at its sole cost and expense, to pay the cost to repair, alter, restore, replace or rebuild the Plasticizers Complex or such Dependnent Facility; provided, however, that BASF exercises such right within 120 Days following receipt of written notice of Sterling’s election not to do so and, provided further, that, notwithstanding any such payment, BASF shall not acquire any right, title or interest in or to the Plasticizers Complex or such Dependent Facility. If BASF exercises such election, Sterling shall apply all insurance proceeds from policies maintained by Sterling that provided coverage for the relevant casualty to the payment of all costs and expenses related to such repair, alteration, restoration, replacement or rebuilding.

          (d) In the event that all or any portion of the Plasticizers Complex or any Dependent Facility is damaged or destroyed after the Effective Date by fire or other casualty, and either (i) neither Party has elected to repair, alter, restore, replace or rebuild the Plasticizers Complex, such Dependent Facility or relevant portion thereof or (ii) Sterling has elected to repair, alter, restore, replace or rebuild the Plasticizers Complex, such Dependent Facility or relevant portion thereof but has not begun to repair, alter, restore, replace or rebuild the Plasticizers Complex, such dependent Facility or relevant portion thereof within six months following such damage or destruction (or at any time thereafter fails to use reasonable efforts to continue to repair, alter, restore, replace or rebuild the Plasticizers Complex, such Dependent Facility or relevant portion thereof), then each of the Facility Fees shall be reduced for each Quarter, or portion thereof, during which Sterling fails to maintain the Monthly Contract Capacity for any related Products. In such cases, the relevant Facility Fee payable for each such Quarter shall be determined by (A) dividing the relevant Facility Fee by 90 to determine the amount of such Facility Fee payable for each Day during such Quarter, (B) reducing the amount determined under clause (A) for each Day during such Quarter when Sterling so failed to maintain the Monthly Contract Capacity for the relevant Product by multiplying such amount by the Reduction Factor applicable to such Day and (C) deducting the aggregate reductions under clause (B) for such Quarter from the Facility Fee otherwise payable for such Quarter. If the Facility Fee for any Quarter is reduced pursuant to this paragraph (d) after BASF has paid such Facility Fee, BASF may deduct the amount overpaid from the next Facility Fee payable hereunder or, if no further Facility Fees are payable hereunder, Sterling shall refund such amount to BASF within 15 Days after receipt of an invoice therefore from BASF.

          (e) If neither Party elects to repair, alter, restore, replace or rebuild the Plasticizers Complex, such Dependent Facility or the relevant portion thereof and the damage or destruction involves more than *** of the Plasticizers Complex or causes the Plasticizers Complex to be incapable of producing Products at greater than *** of Capacity, either Party may terminate this Agreement on 30 Days’ prior written notice to the other Party and BASF may cease paying the Facility Fees after the occurrence of the relevant damage or destruction. In the event of any such termination of this Agreement, the amount of undepreciated capital paid by BASF for all Capital Projects shall be deemed to be an amount equal to the lesser of (i) the amount of such undepreciated capital as of the date of such damage or destruction and (ii) the amount recovered by Sterling under its insurance policies attributable to the damage to or destruction of the

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Plasticizers Complex minus the portion of the deductible under such insurance policies attributable to such damage to or destruction of the Plasticizers Complex times a fraction, the numerator of which is the amount of such undepreciated capital and the denominator of which is the value of the Plasticizers Complex prior to such damage or destruction.

          Section 4.05. Hazards. Each Party acknowledges that Ancillary Raw Materials, Raw Materials and Products may be, or become, considered Hazardous Materials, and that it is familiar with the hazards of Ancillary Raw Materials, Raw Materials and Products, their respective applications and the containers in which they are shipped. Each Party shall inform and train its employees and customers with respect to all such hazards. In addition, Sterling shall (a) warn all persons at the Plant, including its employees, agents and invitees, of the health and environmental hazards associated with Ancillary Raw Materials, Raw Materials and Products, their respective applications and the containers in which they are shipped (including proper disposal methods), (b) advise all such persons at the Plant who handle or might otherwise come into contact with such materials of all applicable precautions and safety measures to be employed at the Plant when handling or storing such materials and (c) cause such precautions and safety measures to be employed at the Plant in accordance with all safety, health and environmental regulations.

          Section 4.06. Compliance with Laws. Nothing in this Agreement is intended to, or shall be deemed or construed as being intended to, authorize or require Sterling to violate any Law (including any Environmental Law). Each Party shall comply with all Laws (including Environmental Laws) applicable to the Parties, the transactions contemplated by this Agreement or the preservation of public or Plant health or safety, including the Occupational Safety and Health Act of 1970, and the regulations issued thereunder, as the same may be amended from time to time. In accordance with the foregoing provision, but not by way of limitation, it is specifically understood that BASF is an Equal Opportunity Employer and Sterling warrants that Sterling complies with the Fair Labor Standard Act of 1938, as amended. Sterling agrees that, if this Agreement is construed to be a subcontract within the meaning of the Rules and Regulations approved by the United States Secretary of Labor pursuant to Executive Order 11246, as amended, the Vietnam Era Veterans Readjustment Assistance Act of 1974, as amended, or the Rehabilitation Act of 1973, as amended, or of the regulations issued pursuant to Executive Order 11625, the provisions of the applicable regulations as well as the Equal Opportunity and Nondiscrimination provision of Section 202 of Executive Order 11246 shall be incorporated herein by reference and shall be binding upon Sterling as part of this Agreement. Sterling shall label and placard all shipments of Products in compliance with all applicable Laws.

Article V

Additional Agreements

          Section 5.01. Title. (a) Sterling expressly does not by the terms of this Agreement, sell, transfer or assign to BASF any right, title or interest in the Plasticizers Complex or the Plant or any assets or properties of Sterling, and nothing in this

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Agreement shall be deemed to convey to BASF any legal or beneficial ownership in or to all or any portion of the Plasticizers Complex, the Plant or any other assets or properties of Sterling. Title to all Raw Materials and Product shall at all times remain in BASF. Title to Product shall vest in BASF as of the time of its production. Sterling shall not impose or permit to be imposed upon any of the Raw Materials or Products within the custody and control of Sterling any Liens other than those created by, through or in favor of BASF. Notwithstanding anything to the contrary contained in any prior agreement or any understanding between the Parties (including the Existing Agreement), upon the execution of this Agreement, title to any Raw Materials or Product on hand (at the Site, at terminals, in route and elsewhere) shall vest in BASF as if such Raw Materials or Product were supplied pursuant to the terms of this Agreement.

          (b) Sterling hereby authorizes BASF to file any and all UCC financing statements that are necessary to evidence or perfect BASF’s ownership of all rights, title and interests in the Raw Materials and Products referred to in Section 5.01(a). Upon the request of BASF, Sterling shall execute and deliver to BASF any other notices as may be reasonably requested by BASF to reflect and file of record BASF’s ownership of all rights, title and interests in and to all Raw Materials and Products referred to in Section 5.01(a).

          (c) On the earlier of (i) February 28, 2006 and (ii) the Day after BASF notifies Sterling in writing that it has made all filings it desires to make pursuant to paragraph (b) above, the Security Agreement dated                     , 1986 (left blank in original) between the Parties shall terminate and all liens and security interests granted therein shall automatically be released and discharged. BASF hereby authorizes Sterling to file, at any time on or after such date, any and all UCC financing statements that are necessary to release such liens and security interests of record. Upon the request of Sterling, BASF shall execute and deliver to Sterling any other notices as may be reasonably requested by Sterling to release such liens and security interests of record.

          Section 5.02. Sale or Transfer of Interest in the Plasticizers Complex. During the term of this Agreement, Sterling may not sell or transfer an interest in all or any part of the Plasticizers Complex to a Competitor without the prior written consent of BASF, which consent will not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, (a) Sterling may sell or otherwise dispose of the Plasticizers Complex to a Competitor as part of the sale, transfer or other disposition of all or substantially all of the Plant’s assets, directly or indirectly, or as a part of the merger, consolidation, reorganization or sale of all or substantially all of the assets or equity of Sterling (each, a “Plant Disposition”), and (b) except as set forth in Section 5.01, Sterling may grant Permitted Encumbrances and other Liens in or on the Plasticizers Complex to secure any indebtedness of Sterling, now existing or hereafter arising, and any holder of such indebtedness may foreclose upon all or any portion of the Plasticizers Complex, sell such assets in lieu of foreclosure and otherwise exercise all rights or remedies they may have with respect thereto, without restriction hereunder, and any purchaser on foreclosure or sale in lieu of foreclosure may take such assets free from such restrictions.

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          Section 5.03. Books and Records; Audits. Sterling shall maintain accurate records and books of account with regard to the operation of the Plasticizers Complex and the transactions contemplated by this Agreement, and furnish a report thereon to BASF, in a form reasonably acceptable to BASF, within 21 Days following the end of each Month. All accounting and reporting for the operation of the Plasticizers Complex and the transactions contemplated by this Agreement will be in accordance with GAAP. Upon reasonable request, each Party shall provide the other Party with copies of all purchase orders, invoices and other backup data pertaining to any costs or expenses related to this Agreement, and the Party receiving such information shall maintain the confidentiality of all such documents and information in accordance with the provisions of Section 5.06.

          (b) Upon reasonable request, Sterling shall provide BASF with access to all records pertaining to the operation of the Plasticizers Complex and the transactions contemplated by this Agreement, which records shall be subject to audit by an independent certified public accounting firm reasonably acceptable to Sterling at any reasonable time during, or within the two years following, the period being audited. Any audit will be at BASF’s expense. In no event shall BASF initiate more than one audit each Year. Each auditing firm will maintain the confidentiality of Sterling’s accounts and records, and will either verify the correctness thereof or advise both Parties of the composite adjustments required to correct discrepancies for the period audited. Any discrepancies shall be corrected by appropriate payments or credits, as the case may be, at the earliest practicable time, in the amount thereof. If the total amount of such discrepancies exceeds *** for any Year, the Party owing such amount shall also pay the other Party interest on the amount of such discrepancies at the Applicable Interest Rate accruing each Day from the Day such amount was originally due (or paid) until the Day such amount is paid (or refunded) in full.

          (c) Upon the written request of BASF, Sterling shall provide BASF reasonable suitable temporary office accommodations at the Site for a limited number of BASF personnel or representatives to audit or review records maintained by Sterling pursuant to this Agreement.

          Section 5.04. Meetings. (a) At each Quarterly Meeting, representatives of the Parties shall review the operations of the Plasticizers Complex and such other matters as may be determined to be appropriate by the Parties. At the Quarterly Meeting to be held in October of each Year, the Parties shall (i) review the Capital Budget and the Maintenance Budget for the ensuing Year, (ii) review the Fixed Costs and Variable Costs for the immediately preceding 12-month period and (iii) establish a budget for Fixed Costs and Variable Costs for the following 12-month period; provided, however, that no Capital Budget, Maintenance Budget or budget for Fixed Costs or Variable Costs shall reduce, modify or limit in any way BASF’s obligation to pay the actual Capital Expenditures, Expansion Capital Expenditures, maintenance expenditures, Fixed Costs or Variable Costs incurred pursuant to this Agreement.

          (b) Sterling shall make its employees and other representatives available to BASF on reasonable request to discuss the present or proposed operations of the Plasticizers Complex, so long as such availability does not disrupt the operation of any Unit or the Plant. Representatives of the Parties shall meet at a mutually acceptable

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time and place if either Party gives reasonable prior written notice to the other Party of its request for a meeting.

          Section 5.05. Technical Advice. (a) BASF shall advise Sterling regarding technical questions arising in connection with the operation of the Plasticizers Complex, and shall provide assistance to Sterling in the event of any disturbances at any Unit. Any advice given by BASF pursuant to this Section 5.05 shall utilize BASF’s technical knowledge and experience, to the extent that they are suitable for the operation of the Plasticizers Complex; provided, however, that BASF shall not be obligated to provide Sterling with technical knowledge or experience acquired by BASF during the term of this Agreement which BASF, in its reasonable judgment, considers to be a considerable improvement or in respect of which BASF has filed a patent application. Notwithstanding anything to the contrary contained in this Section 5.05, BASF shall be under no obligation to provide technical advice that would require in-house work by BASF or its representatives, including laboratory or pilot plant tests. BASF shall be available to discuss important technical questions at a meeting between technical experts of BASF and Sterling, either in Ludwigshafen, Germany or in Texas City, Texas by mutual agreement and at suitable intervals. In the event that engineering services of BASF are required in connection with Capital Projects or Expansion Projects, BASF shall, at its sole option and at its sole cost and expense, provide such engineering services.

          (b) BASF shall render the services contemplated by this Section 5.05 in the best interests of Sterling and shall apply the same standard of care in rendering such services as it applies in its own affairs. In the event that BASF fails to fulfill its obligation with such care, (i) BASF shall be obligated to re-perform such services free of charge, (ii) such re-performance shall be Sterling’s exclusive remedy for such breach and (iii) BASF shall not incur any further liability whatsoever related to such matter.

          Section 5.06. Confidentiality. (a) For purposes of this Section 5.06, the following terms have the following respective meanings:

     “Furnishing Party” means, with respect to any Information, the Party that furnished, or whose Representatives furnished, such Information to the Receiving Party pursuant to this Agreement.

     “Information” means (i) all information (whether written or oral) furnished (whether before or after the date hereof) by the Furnishing Party or any of its Representatives, to the Receiving Party or any of its Representatives for or relating to the transactions contemplated by this Agreement, including all information relating to the business, products, assets and finances of the Furnishing Party, including financial statements and related books and records, minute books, personnel records, lists of customers and potential customers, lists of suppliers and potential suppliers, price and cost data, computer programs, computer hardware, patents, patent applications, apparatus, equipment, drawings, reports, processes, methods and techniques of manufacture, know-how, trade secrets, specifications of materials, manuals, technical information plans, drawings and other data and similar information and records, and (ii) all other information of or concerning the Furnishing Party or any of its Representatives;

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provided, however, that the term “Information” does not include information which (A) is or becomes publicly available other than as a result of a disclosure by the Receiving Party or any of its Representatives in violation of this Section 5.06, (B) is known by, is in the possession of or is or becomes available to the Receiving Party or any of its Representatives from a source (other than the Furnishing Party or any of its Representatives) which, to the knowledge of the Receiving Party, is not prohibited from disclosing such information by a legal, contractual or fiduciary obligation to the Furnishing Party or any of its Representatives, or (C) has been independently developed by the Receiving Party without violating any of its obligations under this Section 5.06 and, provided further, that the fact that information is included in other information which is or becomes otherwise available to the Receiving Party or its Representatives pursuant to clause (A) or (B) shall not exclude the balance of such information from the term “Information.”

     “Received Information” means (a) with respect to Sterling, all Information furnished by, of or concerning BASF or any of its Representatives to Sterling or any of its Representatives pursuant to this Agreement, and all analyses, compilations, forecasts, studies or other documents prepared by Sterling or any of its Representatives which contain or reflect any of such Information, and (b) with respect to BASF, all Information furnished by, of or concerning Sterling or any of its Representatives to BASF or any of its Representatives pursuant to this Agreement and all analyses, compilations, forecasts, studies or other documents prepared by BASF or any of its Representatives which contain or reflect any of such Information.

     “Receiving Party” means, with respect to any Information, the Party that received such Information from the Furnishing Party or any of the Furnishing Party’s Representatives pursuant to this Agreement.

     “Representatives” means, with respect to each Party, such Party’s directors, officers, employees, partners, agents, Affiliates and non-employee representatives (including attorneys, accountants, potential sources of financing, underwriters or other financial advisors, bankers or agents); provided, however, that neither Party shall be deemed to be a Representative of the other Party.

          (b) The Receiving Party (i) shall keep all Received Information confidential and will not, except as otherwise provided in this Section 5.06 or with the prior written consent of the Furnishing Party, disclose any Received Information in any manner or to any Person whatsoever, and (ii) will not use any Received Information other than in connection with the transactions contemplated by this Agreement; provided, however, that the Receiving Party may reveal the Received Information to its Representatives (A) who need to know the Received Information in connection with the transactions contemplated by this Agreement, (B) who are informed by the Receiving Party of the confidential nature of the Received Information and (C) who agree to abide by and act in accordance with the terms of this Section 5.06 to the same extent as if they were parties to this Agreement. The Receiving Party will cause its Representatives to observe the terms of this Section 5.06 and will be responsible for any breach of this

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Section 5.06 by any of its Representatives to the same extent as if the Receiving Party had breached this Section 5.06 directly.

          (c) Nothing in this Section 5.06 shall prohibit the Receiving Party or any of its Representatives from disclosing any Received Information to the extent required by applicable Law, legal process or other legal compulsion. If the Receiving Party or any of its Representatives are requested pursuant to, or are required by, applicable Law, legal process or other legal compulsion to disclose any Received Information, the Receiving Party will give the Furnishing Party prompt written notice of such request or requirement so that the Furnishing Party may seek a protective order or other appropriate remedy or waive compliance with the terms of this Section 5.06, and the Receiving Party will provide reasonable cooperation to the Furnishing Party (at the expense of the Furnishing Party) to obtain such protective order. If no such protective order or other remedy is obtained, or the Furnishing Party waives compliance with the terms of this Section 5.06, the Receiving Party (or such other Person who is requested or required to make such disclosure) will furnish only that portion of the Received Information which it is advised by its counsel is legally required to be disclosed and, upon the Furnishing Party’s request and at the expense of the Furnishing Party, will exercise all commercially reasonable efforts to obtain assurances that confidential treatment will be afforded the Received Information.

          (d) At any time upon the written request of the Furnishing Party, the Receiving Party will promptly (i) destroy or deliver to the Furnishing Party, at the Receiving Party’s expense, all copies of the written Received Information which is in its or its Representatives’ possession, (ii) destroy all copies of Received Information internally generated by it or materials which are based upon or incorporate Received Information and (iii) deliver to the Furnishing Party a certificate executed by one of its duly authorized officers indicating that the requirements of this paragraph (d) have been satisfied in full; provided, however, that notwithstanding anything to the contrary contained in this Section 5.06, the Receiving Party may retain one copy of the Received Information in the files of its legal department, which copy may only be used in case of questions raised as to the Receiving Party’s compliance with the terms of this Section 5.06. Notwithstanding the return or destruction of Received Information, the Receiving Party and its Representatives will continue to be bound by its obligations under this Section 5.06.

          (e) The obligations of the Receiving Party under this Section 5.06 shall terminate with respect to any given Received Information ten years after the date on which such Received Information was originally disclosed to the Receiving Party.

          Section 5.07. Restriction on Transfer of Information. Except in connection with a Plant Disposition, a foreclosure, a sale in lieu of foreclosure or other transfer of the Plasticizers Complex permitted hereby, Sterling shall not sell, assign or otherwise transfer any right, title or interest in or to use (except for production of Products at the Plasticizers Complex) its intellectual property related to the production, sale or marketing of Products without the prior written consent of BASF.

          Section 5.08. Public Statements. Neither Party shall issue any public announcement or statement with respect to the transactions contemplated hereby

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without the prior written consent of the other Party, unless such announcement or statement is required by Law or the rules of any securities exchange on which the securities of such Party are traded.

          Section 5.09. SEC Reports. Sterling shall, at the same time that Sterling makes such reports available to its stockholders, furnish to BASF all quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed by Sterling with the Securities and Exchange Commission.

Article VI

Indemnification; Limitation of Liability; Remedies

          Section 6.01. Indemnification. (a) Except as otherwise provided herein, from and after the Effective Date, Sterling shall defend, indemnify and hold harmless BASF, its Affiliates, their respective present, former and future directors, officers, stockholders, employees and agents and their respective heirs, executors, personal representatives, administrators, successors and assigns (the “BASF Indemnified Persons”), from and against any and all Damages suffered or incurred by any BASF Indemnified Person on account of or arising from or related to:

     (i) the negligence or intentional misconduct of Sterling or any of its employees, contractors, agents or representatives (excluding (A) any act or omission of any third party contractor performing any services contemplated by the Car Service Contract and (B) the choice by Sterling of any third party contractor performing any services contemplated by the Car Service Contract);

     (ii) any Raw Materials, Ancillary Raw Materials or Products during any period when Sterling had risk of loss to such Raw Materials, Ancillary Raw Materials or Products;

     (iii) any Liability or alleged Liability to any third Person, whether incurred under Law or in tort, to the extent such Liability or alleged Liability is based on (A) the Product delivered being a completely different Product than the Product specified in BASF’s Shipment and Storage Instructions; provided, however, that for purposes of this clause (A) a Product shall not be deemed or considered to be a different Product solely because the material delivered fails to meet the applicable Product Specifications, or (B) the Product delivered failing to meet the Product Specifications if (but only if) either (x) Sterling failed to test the quality of the Product prior to shipment or (y) the test of the quality of the Product performed by Sterling showed that the Product failed to meet the Product Specifications in any material respect and Sterling did not inform BASF of such failure and obtain BASF’s express written approval to ship such Product notwithstanding such deficiency prior to the arrival of such Product at its intended destination; and

     (iv) any Liability or alleged Liability to any third Person, whether incurred under Law or in tort, or any environmentally related Claim, arising directly or indirectly from the operations conducted by or on behalf of Sterling at or in

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connection with the Plasticizers Complex, or arising out of Spills or Releases Requiring Response Action at the Site occurring before, during or after the term of this Agreement (except to the extent such Liability, alleged Liability or Claim is based on the negligence or intentional misconduct of BASF or any of its employees, contractors, agents or representatives).

          (b) Except as otherwise provided herein, from and after the Effective Date, BASF shall defend, indemnify and hold harmless Sterling, its Affiliates, their respective present, former and future directors, officers, stockholders, employees and agents and their respective heirs, executors, personal representatives, administrators, successors and assigns (the “Sterling Indemnified Persons”), from and against any and all Damages suffered or incurred by any Sterling Indemnified Person on account of or arising from or related to:

     (i) the negligence or intentional misconduct of BASF or any of its employees, contractors, agents or representatives;

     (ii) any Raw Materials or Products during any period when Sterling does not have risk of loss to such Raw Materials or Products (excepting ***);

     (iii) any Liability or alleged Liability to any third Person, *** in each case, to the extent such Liability, alleged Liability or Claim is based on the negligence or intentional misconduct of BASF or any of its employees, contractors, agents or representatives; and

     (iv) any Liability to any Person arising from the *** (except to the extent such Liability arises out of any negligent act or omission of Sterling or intentional misconduct of Sterling in ***, in any case, occurring on or after January 1, 2006, it being understood and agreed that, for purposes of this clause (iv) ***).

          (c) Within a reasonable period of time after a Sterling Indemnified Person or a BASF Indemnified Person (whether one or more, an “Indemnified Person”) receives actual notice of any Damages covered by paragraph (a) or (b) above, as applicable, the Indemnified Person shall, if a claim in respect thereof is to be made pursuant to paragraph (a) or (b) above, as applicable, notify the Party from whom indemnification is sought (the “Indemnifying Party”) in writing of such Damages; provided, however, that the failure to so notify the Indemnifying Party will not relieve the Indemnifying Party from any obligation it may have to indemnify the Indemnified Person pursuant to paragraph (a) or (b) above, except to the extent of material detriment suffered by the Indemnifying Party as a result of such failure. In the event that any Damages arise out of or result from matters with respect to third parties (a “Third Party Claim”), the Indemnifying Party will undertake the defense thereof by attorneys chosen by it; provided, however, that if the Indemnifying Party, within a reasonable time after notice of any such Third Party Claim, fails to defend such Third Party Claim actively and in good faith, the Indemnified Person will (upon further notice) have the right to undertake the defense, compromise or settlement of such Third Party Claim, or consent to the entry of a judgment with respect to such Third Party Claim, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party will thereafter have no right to challenge the Indemnified Person’s defense, compromise,

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settlement or consent to judgment. No consent order shall be entered into or Third Party Claim settled unless the Indemnified Person has given its prior written consent thereto, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that the Indemnified Person shall consent to any settlement, compromise or discharge of such Third Party Claim that the Indemnifying Party may recommend that by its terms fully releases the Indemnified Person from any further Claims, Liabilities and Losses with respect to the matters giving rise to such Third Party Claim. So long as the Indemnifying Party is defending any Third Party Claim actively and in good faith, the Indemnified Person will not settle such Third Party Claim without the consent of the Indemnifying Party. Each of the Indemnifying Party and the Indemnified Person will be entitled to consult with each other, to the extent it reasonably requests, in respect of the defense of such Third Party Claim and will cooperate in the defense of any such Third Party Claim, including making its officers, directors, employees and books and records available for use in such Third Party Claim, and will take those actions reasonably within its power which are reasonably necessary to preserve any legal defenses to such matters, without the necessity of formal subpoena or court action.

          (d) The Indemnifying Party will promptly pay each Indemnified Person any amount due under this Section 6.01 upon demand therefore, and reimburse each Indemnified Person for all reasonable expenses (including reasonable attorneys’ fees and costs of court) for which the Indemnified Person is entitled to be indemnified hereunder as they are incurred by such Indemnified Person. Upon judgment, determination, settlement or compromise of any Third Party Claim, the Indemnifying Party will, upon demand therefor, promptly pay on behalf of the Indemnified Person, and/or will promptly reimburse the Indemnified Person for its payment of, the amount so determined by such judgment, determination, settlement or compromise and all other claims of the Indemnified Person with respect thereto, unless, in the case of a judgment or determination, an appeal is made therefrom; provided, however, that if the Indemnifying Party desires to appeal from an adverse judgment or determination, then the Indemnifying Party will post and pay the cost of the security or bond to stay execution of the judgment or determination pending appeal. Upon the payment in full by the Indemnifying Party of all of such amounts, the Indemnifying Party will succeed to the rights of the Indemnified Person, to the extent such rights are not waived in settlement, against the third party who made such Third Party Claim. Any amounts which are not paid when due hereunder will bear interest at a rate equal to the Applicable Interest Rate, accruing each Day from the Day such amount was originally due until the Day such amount is paid in full.

          Section 6.02. Force Majeure. (a) If, as the result of the occurrence of a Force Majeure Event, a Party is rendered unable, in whole or in part, to carry out its obligations under this Agreement (other than any obligation to make payment of any amount when due and payable hereunder), the obligations of such Party, insofar as they are affected by such Force Majeure Event, shall be suspended during the continuance of such Force Majeure Event provided that the Party prevented from performing by such Force Majeure Event (i) provides the other Party with written notice of the occurrence or likely occurrence of such Force Majeure Event within a reasonable time, which notice shall describe such Force Majeure Event in reasonable detail and, to the extent practicable, include an estimate of the anticipated duration thereof, (ii) takes all actions

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reasonable necessary to remedy such Force Majeure Event or its resulting effects, or otherwise remove the basis for non-performance, with all reasonable dispatch, and (iii) upon such remedy or removal resumes performance of its obligations under this Agreement. Upon receipt of any notice of the occurrence or likely occurrence of a Force Majeure Event, the Parties will consult with each other regarding how such circumstances affect this Agreement and the measures to be taken, and each of the Parties will use commercially reasonable efforts to avoid or reduce the detrimental effects of such Force Majeure Event as much as possible. If by reason of any Force Majeure Event, supplies of any Product deliverable hereunder or Raw Materials or Ancillary Raw Materials are curtailed or cut off, Sterling shall not be required to increase the amount of any Raw Materials or Ancillary Raw Materials acquired from any source of supply or to purchase Products, Raw Materials or Ancillary Raw Materials to replace the Products, Raw Materials or Ancillary Raw Materials so curtailed or cut-off unless BASF agrees to pay incremental costs or expenses associated therewith, in which event such costs and expenses shall be excluded from any calculation of Cost Savings or the Threshold Fixed Costs Amount and, to the extent such costs and expenses are Allocated Fixed Costs, shall be paid separately from, and in addition to, the Allocated Fixed Costs Amount.

          (b) The settlement of strikes or lockouts shall be entirely within the discretion of the Party having the difficulty, and the above requirement that the Party prevented from performing remedy the applicable Force Majeure Event or its resulting effects or otherwise remove the basis for non-performance as soon as practicable shall not require the settlement of strikes or lockouts by acceding to the demands of the opposing party when such course is deemed inadvisable, in the sole discretion of the Party having the difficulty.

          (c) For purposes of this Agreement, the term “Force Majeure Event” means acts of God, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, hurricanes, floods, high water, washouts, arrests, restraints of government and people, civil disturbances, explosions, lack of adequate supplies of fuel, power, raw materials, labor, containers or transportation facilities, breakage or accident to wells, machines, equipment, apparatus or lines of pipe or property, freezing of wells, machines, equipment, apparatus or lines of pipe or property, partial or entire failure of any wells, machinery, equipment, apparatus or lines of pipe or other property, strikes, work stoppages, labor difficulties, other industrial disturbances, acts of public enemy, sabotage, governmental controls (including price and allocation controls), Laws (including those dealing with pollution, health, ecology, tariffs, duties or other governmental assessments or restrictions or environmental matters), embargoes, unavailability or shortages of ships, barges, other inland water or marine vessels or other conveyance or, without limitation, any other causes or contingencies (whether or not of the same nature as those hereinbefore specified) beyond the reasonable control of the Party claiming force majeure.

          (d) The failure by a Party to perform any of its obligations under this Agreement shall be deemed to have not been caused by a Force Majeure Event or circumstances reasonably outside its control if such failure results from the shortage of cash or anything reasonably attributable to a Party’s own actions or preventable by a

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Party, including through the expenditure of sums which are reasonable in light of the likelihood of the event occurring or the probable effect if is such event were to occur.

          (e) In the event that, at any time during the term of this Agreement, any Governmental Authority adopts any Law and takes any other action or enters any order which directly or indirectly materially and adversely affects the rights or obligations of either Party in this Agreement, then the Party affected by such action shall notify the other Party thereof and the Parties shall enter into good faith negotiations to modify this Agreement to ameliorate the effects of such governmental action. In the event that the Parties fail to agree upon such modifications within 30 Days after receipt of the notice of such action, the Party giving such notice may, upon further written notice, terminate this Agreement. In the event of any such termination of this Agreement, the amount of undepreciated capital paid by BASF for all Capital Projects shall be deemed to be zero and no amount shall be payable by Sterling to BASF pursuant to Section 3.04(e).

          (f) If a Force Majeure Event results in all or substantially all of the operations of the Plasticizers Complex being suspended for a period of at least six consecutive Months, (i) Sterling shall use reasonable efforts to reduce direct Fixed Costs and Variable Costs at the Plasticizers Complex during the pendency of such Force Majeure Event, (ii) BASF shall not be obligated to pay Sterling any Fixed Costs or Facility Fees for the period commencing with the first Day of the seventh Month of such Force Majeure Event and continuing thereafter until the recommencement of operations at the Plasticizers Complex, and (iii) each date specifically referenced in the definition of Early Termination Fee and Section 7.01(b), and the last Day of the Initial Term (if there is no Additional Term) or the final Additional Term, as applicable, shall automatically, without further action of either Party, be deemed to be a later date that is determined by adding to the original date a number of Days equal to the number of Days for which no Facility Fee was payable by BASF pursuant to this paragraph (f). If a Force Majeure Event results in all or substantially all of the operations of the Plasticizers Complex being suspended for a period of at least nine consecutive Months, either Party may, at any time thereafter during the continuance of such Force Majeure Event, terminate this Agreement by providing written notice of such termination to the other Party, such termination to be effective 15 Days after the receipt of such notice by the non-terminating Party.

          Section 6.03. Limitations on Damages. (a) In The Event That Sterling Shall Be Liable To BASF For Any Matter Relating To The Quantity Or Quality Of Any Products Delivered By Sterling To BASF Hereunder, Whether Based Upon An Action Or Claim In Contract, Equity, Negligence Or Otherwise, The Amount Of Damages Recoverable By BASF For All Events, Acts Or Omissions Will Not Exceed, In The Aggregate, An Amount Equal to ***; Provided, However, That Such Limitation Shall Not Apply To Any Liability For Which ***.

          (b) Notwithstanding Anything To The Contrary Contained In This Agreement, Neither Of The Parties Will Be Liable To The Other Party For Any Consequential, Indirect, Special Or Punitive Damages (Including Loss Of Use Of Property Or Lost Profits Or Revenues) From Any Cause Whatsoever, Whether Based In Contract, Tort (Including Negligence), Strict Liability Or

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Any Other Legal Theory Unless (i) Such Damages Result From The Gross Negligence Or Intentional Misconduct Of Such Party, (ii) Such Damages Result From Any Breach Of Section 5.06 Or (iii) Such Damages Are Payable By An Indemnified Person Pursuant To A Third Party Claim For Which Indemnification Is Available Hereunder.

          Section 6.04. Remedies. If either Party breaches or otherwise fails to perform its obligations hereunder, the other Party shall be entitled to pursue all legal and equitable remedies for such breach or failure (including specific performance, whether or not such remedy is otherwise normally available).

Article VII

Term; Effect of Termination

          Section 7.01. Term and Termination. (a) This Agreement shall commence on the date hereof and, unless terminated earlier in accordance with the terms of this Agreement, continue thereafter until December 31, 2013 (the “Initial Term”); provided, however, that upon expiration of the Initial Term, this Agreement shall automatically renew for successive three-year terms thereafter (each, an “Additional Term”) unless this Agreement is terminated earlier in accordance with the terms hereof or either Party gives written notice to the other Party of its intention to not renew this Agreement for an Additional Term at least one year prior to the expiration of the Initial Term or an Additional Term, as the case may be.

          (b) Notwithstanding anything to the contrary contained in paragraph (a) above, BASF shall have the right to terminate this Agreement as of December 31, 2010, December 31, 2011 or December 31, 2012 by (i) providing Sterling with at least one year’s prior written notice of its election to terminate this Agreement and (ii) paying Sterling, on the termination date, the applicable Early Termination Fee.

          (c) This Agreement may also be terminated by mutual prior written consent of the Parties at any time or by either Party if the other Party is in breach of any material covenant, agreement, term, provision or condition of this Agreement, and has failed to cure such breach within 30 Days after receipt from the non-defaulting Party of a written notice of such breach. In the event that Sterling terminates this Agreement based on the breach by BASF of any material covenant, agreement, term, provision or condition of this Agreement, the amount of undepreciated capital paid by BASF for all Capital Projects shall be deemed to be zero and no amount shall be payable by Sterling to BASF pursuant to Section 3.04(e).

     (d) If, within 90 Days after the expiration or termination of this Agreement for any reason, Sterling provides written notice to BASF of its decision to permanently close the PA Unit or the Esters Unit, (i) the amount of undepreciated capital paid by BASF for all Capital Projects associated with the Unit to be permanently closed shall be deemed to be zero and no payment shall be made to BASF by Sterling pursuant to Section 3.04(e) and (ii) if the PA Unit is to be permanently closed, BASF shall have the right, in its sole discretion, to purchase from Sterling *** if, but only if, BASF (A)

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provides written notice of its exercise of such right to Sterling within 30 Days after receipt of the notice from Sterling of its election to permanently shut down such Units, (B) pays such amount to Sterling within 30 Days after delivery of such exercise notice to Sterling and (C) reimburses Sterling for all actual costs and expenses incurred in connection with decontaminating, dismantling, packing and transportation of such assets.

     Section 7.02. Effect of Termination. (a) In the event of any termination of this Agreement, this Agreement will immediately become void; provided, however, that each provision of this Agreement that is required to ensure the full exercise or performance of the rights and obligations of the Parties hereunder will survive any such termination and (ii) except as otherwise expressly provided in this Agreement, neither Party shall have any liability to the other Party as a result of a termination of this Agreement for any reason; provided, however, that no such termination shall affect any rights or remedies of either Party arising out of any breach of this Agreement prior to such termination or the right of either of the Parties to receive any amount earned or accrued hereunder prior to such termination or otherwise payable with respect to any period prior to such termination.

     (b) Within 30 Days after the expiration or termination of this Agreement, all Raw Materials and Products remaining in Sterling’s possession or custody shall, at the sole cost and expense of BASF, be loaded on ships, barges, other inland water or marine vessels, rail cars, tank trucks or other conveyances, all of which shall be supplied by BASF, for delivery to BASF, with BASF bearing all packing, loading and transportation costs.

Article VIII

Miscellaneous

     Section 8.01. Notices. Any and all notices, requests or other communications hereunder shall be given in writing and delivered by (a) regular, overnight or registered or certified mail (return receipt requested), with first class postage prepaid, (b) hand delivery, (c) facsimile or electronic transmission or (d) overnight courier service, to the Parties at the following addresses or numbers:

(i)	if to Sterling, to:
	Sterling Chemicals, Inc.
	Attn: Senior Vice President — Commercial
	333 Clay Street, Suite 3600
	Houston, TX 77002-4312
	Fax: (713) 654-9551
	Phone: (713) 654-9591

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	With a copy to:
		Sterling Chemicals, Inc.
		Attn: General Counsel
		333 Clay Street, Suite 3600
		Houston, TX 77002-4312
		Fax: (713) 654-9577
		Phone: (713) 654-9502
(ii)	if to BASF, to:
	BASF Corporation
	Attn: Group Vice President, Petrochemicals, Alcohols, Plasticizers
	100 Campus Drive
	Florham Park, New Jersey 07932
	Fax: (973) 245-6798
	Phone: (973) 245-6685
	With a copy to:
			BASF Corporation
			Attn: General Counsel
			100 Campus Drive
			Florham Park, New Jersey 07932
		Fax: (973) 245-6711
		Phone: (973) 245-6048

or at such other address or number as shall be designated by either Party in a notice to the other Party given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, (A) in the case of a notice sent by regular mail, on the date actually received by the addressee, (B) in the case of a notice sent by registered or certified mail, on the date receipted for (or refused) on the return receipt, (C) in the case of a notice delivered by hand, when personally delivered, (D) in the case of a notice sent by facsimile or electronic transmission, upon transmission subject to telephone confirmation of receipt, and (E) in the case of a notice sent by overnight mail or overnight courier service, the date delivered at the designated address, in each case given or addressed as aforesaid.

          Section 8.02. Counterparts. This Agreement may be executed by the Parties in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same agreement.

     Section 8.03. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

     Section 8.04. No Third Party Rights. Nothing in this Agreement shall be deemed to create any right in any creditor or other person or entity not a Party hereto

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(other than the Indemnified Persons) and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any other third party.

     Section 8.05. No Partnership or Agency. This Agreement shall not be construed to create a partnership, joint venture, association or other entity or business organization or to create a principal-agent relationship between the Parties.

     Section 8.06. Amendments and Waiver. No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the Parties. No amendment or modification of this Agreement shall be effected by the sending, acknowledgment or acceptance of any purchase order, acknowledgment or other form containing terms or conditions at variance with or in addition to those set forth in this Agreement. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the Party against whom that waiver is sought to be enforced. No failure or delay on the part of either Party in exercising any right, power or privilege hereunder, and no course of dealing between the Parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either Party in any case shall entitle such Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of either Party to any other or further action in any circumstances without notice or demand.

     Section 8.07. Assignments. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by either Party without the prior written consent of the other Party and any attempt to do so shall be null and void; provided, however, (a) that no such consent shall be required for assignment for collateral purposes or to a successor in interest of all or substantially all of the assets or business of either Party to which this Agreement relates and (b) no assignment by either Party of any of its rights, interests or obligations hereunder shall relieve such Party of its obligations under this Agreement unless the other Party expressly agrees otherwise in writing.

     Section 8.08. Severability. Should any clause, sentence, paragraph, subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the Parties agree that (a) the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein and (b) the Parties shall substitute a valid, lawful and enforceable provision, with economic effects that are as equivalent as reasonably possible, for such invalid, unenforceable or void part or parts of this Agreement.

          Section 8.09. Dispute Resolution Procedures. (a) As used in this Section 8.09, “Dispute” means any and all questions, claims controversies or disputes arising out of or relating to this Agreement, including the validity, construction, meaning, performance, effect or breach of this Agreement, other than any questions, claims, controversies or disputes relating to the breach or alleged breach of Section 5.06. Each Party agrees that the procedures set forth in this Section 8.09 shall be the sole and

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exclusive remedy in connection with any Dispute and irrevocably waives any right to commence any action, suit or proceeding in or before any governmental authority, except as expressly provided in this Section 8.09.

          (b) In the event of any Dispute between the Parties, the Parties shall promptly and in good faith attempt to resolve such Dispute through negotiations. A disputing Party shall give written notice of the Dispute to the other Party that shall contain a brief statement of the nature of the Dispute. If the Parties are unable to resolve the Dispute within 30 Days after receipt of such notice by the other Party, the Parties shall submit the Dispute to mediation as set forth in paragraph (c) below.

          (c) The mediation of any Dispute hereunder shall be conducted in accordance with the Commercial Mediation Rules and Procedures of the American Arbitration Association (“AAA”). Each Party shall have the right to be represented by counsel in any mediation. The Parties shall attempt to agree upon an impartial mediator to mediate the Dispute, but if they are unable or fail to appoint a mediator within ten Days of the filing of a written request for mediation with the AAA, the AAA will appoint a qualified mediator to serve unless the Parties mutually agree to extend such time period. The mediation shall be held in New York, New York within 30 Days of appointment of the mediator unless the Parties mutually agree to hold the mediation at some other time or place. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by the mediator be admissible or be made known to the arbitrator in any arbitration proceedings. Costs of the mediation shall be borne equally by the Parties, except that each Party shall be responsible for its own expenses.

          (d) If the Parties are unable or fail to settle their Dispute through mediation as provided in paragraph (c) within 10 Days after the commencement of the mediation, the Dispute shall be settled by binding arbitration administered by the AAA in accordance with its Commercial Arbitration Rules and Procedures unless the Parties mutually agree in writing that such Dispute shall no longer be subject to this Section 8.09. Either Party who fails or refuses to submit to such binding arbitration shall bear all costs and expenses incurred by such other Party in compelling arbitration of such Dispute. With respect to a Dispute in which the claims or amounts in controversy do not exceed $200,000, a single arbitrator shall be chosen and shall resolve the Dispute. In such case, the arbitrator shall have authority to render an award up to but not exceeding $200,000. With respect to a Dispute in which the claims or amounts in controversy exceed $200,000, such Dispute shall be decided by a majority vote of a panel of three arbitrators, with each Party appointing one arbitrator, and with the Party-appointed arbitrators appointing the third, neutral arbitrator, who will act as chairperson of the tribunal. For any Dispute being decided by a panel of three arbitrators, the determination of any two of the three arbitrators will constitute the determination of the arbitration panel; provided, however, that all three arbitrators on the arbitration panel must actively participate in all hearings and deliberations. Each arbitrator selected pursuant to this paragraph (d) (i) shall be qualified by training, education and experience to rule on the issues presented, (ii) shall an AAA approved arbitrator and (iii) shall not be an employee, agent or representative of either Party or of an Affiliate of either Party. The arbitration shall be held in New York, New York unless the Parties mutually agree in writing to hold the arbitration at some other place. The Parties

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expressly agree to consolidation of arbitral proceedings that concern common issues of fact or law. The award shall be in writing and shall state the reasoning on which the award rests. A judgment on the award may be entered in any court of competent jurisdiction.

          (e) In the event that a Dispute is submitted to arbitration pursuant to paragraph (d) above, either Party may request limited document production from the other Party of specific and expressly relevant documents, with the reasonable expenses of the producing Party incurred in such production paid by the requesting Party. Any such discovery (which rights to documents shall be substantially less than document discovery rights prevailing under the Federal Rules of Civil Procedure) shall be conducted expeditiously. Depositions, interrogatories or other forms of discovery (other than the document production, set forth above) shall not occur except by consent of the Parties. All discovery requests will be subject to the Parties’ rights to claim any applicable privilege. The arbitrator or the arbitration panel, as the case may be (in either case, the “Arbitrator”), will adopt procedures to protect the proprietary rights of the Parties and to maintain the confidential treatment of the arbitration proceedings (except as may be required by Law). Subject to the foregoing, the Arbitrator shall have the power to issue subpoenas to compel the production of documents relevant to the Dispute, to impose sanctions, to permit or order depositions and discovery and to take such other actions as the Arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure and applicable Law.

          (f) The Arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or to award damages in excess of the amount or other than the types allowed by this Agreement. In addition, the Arbitrator may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. If a Party fails or refuses to appear at and participate in an arbitration hearing after due notice, the Arbitrator may hear and determine the controversy upon evidence produced by the appearing Party.

          (g) At any time after submission of a written notice of Dispute, either Party may request a court of competent jurisdiction to grant interim measures of protection (i) to preserve the status quo pending resolution of the Dispute, (ii) to prevent the destruction of documents and other information or things related to the Dispute, or (iii) to prevent the transfer, dissipation or hiding of assets. A request for such interim measures to a judicial authority shall not be deemed incompatible with the provisions of this Section 8.09 or a waiver of a Party’s right to arbitrate.

          (h) By submitting a written notice of Dispute pursuant to paragraph (b) above, all applicable statutes of limitations and defenses based on the passage of time shall be tolled while negotiation, mediation and arbitration proceedings are diligently conducted pursuant to this Section 8.09. The Parties will take such action, if any, required to effectuate such tolling.

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          (i) The costs of the arbitration (including the Arbitrator) shall be borne equally by the Parties, except that each Party shall be solely responsible for its own costs and expenses, including the costs of legal representation and assistance and for experts.

          (j) Except as required by Law, the Parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence except as may be required by Law or in order to enforce any award. Each of the Parties shall request that any mediator or arbitrator comply with such confidentiality requirement.

          (k) Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Section 8.09 with respect to all matters not subject to such Dispute.

          (l) The interpretation of the provisions of this Section 8.09, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the United States Arbitration Act, 9 U.S.C., §§ 1-14, as the same may be amended from time to time, and other applicable federal Law.

     Section 8.10. Applicable Law. This Agreement And The Rights And Obligations Of The Parties Hereunder Shall Be Governed By And Construed In Accordance With The Laws Of The State Of New Jersey, Without Giving Effect To The Conflict Of Law Principles Thereof.

     Section 8.11. Submission to Jurisdiction. Each Party hereby irrevocably submits to the non-exclusive personal jurisdiction of any state or federal court sitting in the State of New Jersey, over any claim or dispute arising out of or relating to this Agreement. Each Party hereby irrevocably agrees that service of process may be made on it by mailing, by certified mail, a copy of such process to such Party’s registered agent for service of process. Each Party agrees that a final non-appealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Section 8.11 shall affect the right of either Party to serve legal process in any other manner permitted by Law or affect the right of either Party to bring any action or proceeding in the courts of any other jurisdictions, domestic or foreign.

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     Section 8.12. Prevailing Party Costs. Except as otherwise provided in Section 8.09, if either Party commences an action against the other Party to enforce any of the terms, covenants, conditions or provisions of this Agreement or because of a breach by a Party of its obligations under this Agreement, the prevailing Party in any such action shall be entitled to recover its costs and expenses, including reasonable attorneys’ fees and costs of court, incurred in connection with the prosecution or defense of such action, from the losing Party.

     Section 8.13. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the Parties with respect to the matters contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the Parties, whether written, oral or otherwise. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the Parties concerning the subject matter hereof except as set forth herein.

          In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

Sterling Chemicals, Inc.
By:	/s/ RICHARD K. CRUMP
Printed Name:		Richard K. Crump
Title:	President and CEO
Date:	December 22, 2005
BASF Corporation
By:	/s/ CENAN OZMERAL
Printed Name:		Cenan Ozmeral
Title:	Vice President, BASF Corp.
Date:	12/22/05

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Exhibit A

Esters Unit and PA Unit Fixed Costs Categories

Direct Fixed Costs:

General Category	Subcategories	PPI Adjustment	Initial Annual Amount
Personnel	•    Wages	***	***
	•    Wages Overtime
	•    Wages Overhead
	•    AS/PS Coverage
	•    Salaries
	•    Salaries Overtime
	•    Salaries Overhead
Maintenance	•    Repair M&E	***	***
	•    I&E Repair
	•    Zone Overhead
	•    Analyzer
	•    Repair Other
Other Direct	•    Supplies	***	***
	•    Freight
	•    Training
	•    Minor Start-Up Expenses
	•    Rental Equipment
	•    Fee-Legal
	•    Fee-Other
	•    Memberships/Subscriptions
	•    Outside Contractors
	•    Consultants
	•    Travel
	•    Employees Meals
	•    Sales Taxes
	•    Demurrage
Materials Handling		***	***

A-i

Allocated Fixed Costs:

General Category	Subcategories	PPI Adjustment	Initial Annual Amount
Data Processing	•    Data Processing	***		***
	•    Data Processing Innovation
	•    ICS Application Development
Laboratory		***		***
Environmental(1)	•    Biological Treatment	***		***
	•    Waste Management
	•    Primary Waste Treatment
	•    Secondary Waste Treatment
	•    Solid Waste
Factory Indirect Expense	•    FIE Allocation	***		***
	•    Janitorial Services
	•    PSM/RC Engineering
Telephones		***		***
Indirect Depreciation		***		***
SG&A		***		***
Property Taxes		***		***
Shipping		***		***
Insurance	•    Property Damage/Business Interruption	***		***
	•    Liability
Routine Engineering	•    Inspection & Corrosion	***		***
	•    Plant Engineering
	•    Process Engineering

(1)	Environmental costs will be adjusted if new Laws increase the cost of compliance.
(2)	See separate adjustment mechanism included in definitions of Liability Insurance Premium Charges and Property Damage/Business Interruption Insurance Premium Charges.

A-ii-

Exhibit B

Variable Costs Categories

Esters Unit Variable Costs

		2004 Usage per Pound of
Category	Engineering Units	Product
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***

B-i

Oxo Unit Variable Costs

		2004 Usage per Pound of
Category	Engineering Units	Product
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***

B-ii

PA Unit Variable Costs

		2004 Usage per Pound of
Category	Engineering Units	Product
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***
***	***	***

* — by agreement; does not necessarily reflect actual per pound usage in 2004

B-iii

Exhibit C

Marine Provisions

     Section 1. Definitions. Capitalized terms used in these Marine Provisions shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require:

     “Agreement” means the sales, purchase, supply, exchange, conversion, processing, production or other agreement to which these Marine Provisions are attached or into which these Marine Provisions are incorporated by reference.

     “Arrival Date” means, with respect to any Vessel, the calendar day (commencing at 0001 of such calendar day) on which such Vessel is scheduled to arrive at the Terminal in accordance with Section 2 below.

     “Cargo” means, with respect to any Vessel, the goods, raw materials or products which are to be loaded onto or unloaded from such Vessel.

     “ETA” means, with respect to any Vessel, the estimated time of arrival of such Vessel.

     “NOR” means, with respect to any Vessel, Notice of Readiness of such Vessel.

     “Party” has the meaning specified in the Agreement.

     “Ship” means a boat, ship, tanker or other inland or marine water vessel.

     “Sterling” means Sterling Chemicals, Inc.

     “Terminal” means a plant or terminal facility delivering or receiving Cargo.

     “Terminal Party” means the Party responsible for delivering the Cargo onto or for receiving the Cargo from a Vessel.

     “Tow” means any combination of Vessels functioning as a single unit.

     “Vessel” means a barge or Ship.

     “Vessel Party” means the Party responsible for providing the Vessel, irrespective of whether such Vessel is delivering or receiving the Cargo.

          Section 2. Vessel Nomination. (a) Ships. Not less than seven days prior to the ETA of a Ship, the Vessel Party shall provide a written nomination for such Ship to the Terminal Party. The Terminal Party shall confirm the nomination in writing based on the dock availability and approval by Sterling’s vetting process. If the Terminal Party does not accept the Ship then

C-i

the Terminal Party shall indicate each unacceptable item in writing. Once all of the items are resolved, the Terminal Party shall accept the Ship.

          (b) Barges. Not less than five days prior to the ETA of a barge, the Vessel Party shall provide the nomination for such barge to the Terminal Party with an arrival window of no more than three days. The Terminal Party shall confirm the nomination in writing based on the dock availability and approval by Sterling’s vetting process. If the Terminal Party does not accept the barge then the Terminal Party shall indicate each unacceptable item in writing. Once all of the items are resolved, the Terminal Party shall accept the barge.

          Section 3. Notice of Arrival. The Notice of Arrival shall be given by the Vessel to the Terminal Party by telephone or radio not less than 72 hours (or within reason for a given Cargo) prior to the ETA of such Vessel for purposes of fixing the berthing time. The ETA shall be reconfirmed daily until the Vessel arrives for loading. When the Vessel’s ETA is within 24 hours then the master of the Vessel shall promptly notify the Terminal Party of the new ETA if the ETA has changed by three hours or more (plus or minus). In no event shall notice of arrival time constitute an agreement to alter the laycan or the arrival window.

          Section 4. Vessel Requirements. Each Vessel nominated by a Vessel Party shall meet the general vessel requirements of the Terminal. In no event will nomination or acceptance of confirmation of a Vessel be deemed or constitute a waiver of such requirements.

          Section 5. Notice of Readiness. (a) Ships. After a Ship has received all port clearances and arrived at the anchorage or other place of waiting, and is otherwise in all respects ready to receive or discharge the goods or products, the master of the Ship (or his agent) shall tender NOR of the Ship to the Terminal by letter, telegraph, telex, facsimile or electronic message means or other written communication. The Terminal shall attempt to berth the Ship on an equal basis with all other Vessels arriving at the port to load or discharge cargoes in the same order as the order in which the Terminal receives NORs from the Ship and all other Vessels. The giving or acceptance of NOR shall not be deemed or construed to constitute an acceptance or change in the Ship’s laycan. If a Ship tenders NOR prior to 0001 hours, local time, of the first day of the laycan, such NOR shall not be effective until 0001 hours, local time, of the first day of the laycan, unless the Terminal elects to accept the Ship earlier, in which case used laytime shall commence when the Ship is all fast. Unless the Terminal Party consents otherwise in writing, in no event will laytime commence prior to 0600 on the first day of the laycan.

          (b) Barges. When the barge is four hours from arriving at the Terminal, the barge owner, agent or pilot shall notify the Terminal. The Terminal shall attempt to berth the barge on an equal basis with all other Vessels arriving at the port to load or discharge cargoes in the same order in which the Terminal receives the four hour notifications or NORs from the barge or Ship, respectively.

          Section 6. Vessel Berths. The Terminal shall provide a berth for the Vessel at which the Vessel can always lie safely afloat (within the specified maximum drafts and specified minimum water depths, free of all wharfage and dockage dues. All duties and other charges on the Vessel, including, without limitation, those incurred for tugs and pilots, mooring masters,

C-ii

other port costs and tax on services for Cargo transfer, shall be borne by the Vessel. Neither the Terminal nor the Terminal Party shall be deemed to warrant the safety of any channel, fairway, anchorage or other waterway used in approaching the designated berth or be liable for any loss, damage, injury or delay to Vessel resulting from the use of such waterways not caused by its fault or neglect. The Terminal Party shall have the right to shift the Vessel from one berth to another, or to anchorage; provided, however, that the Terminal Party shall be responsible for all costs and expenses incurred in such shifting or anchoring of the Vessel, with the time consumed in the shifting counted as used laytime. Expenses incurred for any shifting of the Vessel within a port by one of the Parties hereto for the sole convenience of such Party shall be for that Party’s account.

          Section 7. Laytime. (a) Ships. The allowed laytime shall be either a specified number of hours or at a pumping rate as defined in the Agreement, subject to a 12-hour minimum. If allowed laytime is not specified in the Agreement, then laytime allowed shall be the number of hours or at the pumping rate (in metric tons per hour) set forth below and based on Cargo lot size, or as may otherwise be mutually agreed between the Parties. If the Terminal will not permit loading or discharging of Cargo within the specified time or at the agreed pumping rate, then the additional time necessary therefore shall be deemed to be used laytime.

Cargo Lot Size	Loading/Unloading Rate
³ 6,000 MTs	150 MT/hr
³ 2,000 but < 6,000 MTs	100 MT/hr
³ 1,000 but < 2,000 MTs	75 MT/hr
< 1,000 MTs	12 hrs

If a Vessel arrives on the first day of the laycan, laytime shall commence on the later of (i) six hours after acceptance of NOR from the Terminal to load or discharge, and (ii) Vessel arrival and completion of mooring at berth (all fast). The Terminal Party shall always be entitled to the six hours tendering allowance, if needed, whether or not allowed laytime has expired and whether or not the Ship is on demurrage. In the event a Ship arrives prior to the commencement of laydays, laytime shall not commence before 0600 hours local time on the date of commencement of laydays unless the Ship is berthed prior to this time with the Terminal Party’s consent. In the event the Terminal Party agrees to load the Ship prior to commencement of laydays, all such time to be credited against any time the Ship is on demurrage. For purposes of this clause, time to count when the Ship commences loading.

          (b) Barges. The allowed laytime shall be either a specified number of hours or at a pumping rate as defined in the Agreement, subject to an 8-hour minimum. If allowed laytime is not specified in the Agreement, then laytime allowed shall be the number of hours or at the pumping rate (in metric tons per hour) set forth below and based on Cargo lot size, or as may otherwise be mutually agreed between the Parties. If the Terminal will not permit loading or discharging of Cargo within the specified time or at the agreed pumping rate, then the additional time necessary therefore shall be deemed to be used laytime.

C-iii

Cargo Lot Size	Loading/Unloading Rate
³ 30,000 BBLs	24 hours
³ 20.000 but < 30,000 BBLs	16 hours
< 20,000 BBLs	12 hours

If the barge arrives on the first day of the arrival window, laytime shall commence when the barge is spotted at the dock and the mooring at berth (all fast) is completed but no earlier than 0400 hrs.

     (c) Time consumed due to any of the following shall not count as used laytime:

     (i) any delay to the Vessel in reaching or departing the berth (including weather delays) caused by any reason or condition not reasonably within the Terminal Party’s control;

     (ii) any time consumed by the Vessel in moving from port anchorage to all fast in berth including, but not limited to, awaiting daylight, tide, tug boats or pilots or time consumed by the Vessel lining up;

     (iii) any delay due to the Vessel’s condition, breakdown or failure to maintain agreed pumping rates, or inability of the Vessel’s facilities to load or discharge Cargo;

     (iv) any delay due to prohibition of loading or discharging at any time by the owner or operator of the Vessel or by the port authorities, unless such prohibition is caused by the Terminal’s failure to comply with applicable laws or regulations;

     (v) any delay due to Vessel bunkering or provisioning;

     (vi) any delay due to Vessel discharging or shifting of ballast, slops or contaminated cargo;

     (vii) any delay due to pollution or threat thereof caused by any defect in the Vessel, or any act or omission of the master or crew of the Vessel;

     (viii) any delay due to the Vessel’s violation of the operating and/or safety regulations of the Terminal, noncompliance with federal or state law or Coast Guard or other applicable regulations, or failure to obtain or maintain an oil pollution responsibility certificate;

     (ix) any delay caused by strike, lockout, work stoppage or restraint of labor of master, officers or crew of the Vessel, or of tugboats or pilots; and

     (x) any time spent awaiting customs and immigration clearance.

Used laytime shall cease upon disconnection of hoses or cargo arms after all Cargo has been loaded or discharged. The Vessel shall vacate the berth expeditiously, consistent with safe operating practices (unless permission to remain is given).

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          Section 8. Demurrage. Demurrage will be paid for all time that used laytime exceeds the allowed laytime at the rate specified in the Agreement. If the demurrage rate is not specified in the Agreement, demurrage shall be paid based upon parcel size and at the applicable charter party rate, provided that the Vessel Party gave the Terminal Party the laytime and demurrage rate information with the vessel nomination. If the Terminal Party has this information and accepts the vessel nomination, the demurrage, if any, will be paid at the charter party rate. If the demurrage rate was not provided, then the Terminal Party may elect to pay based on the schedule below.

Ship Size	Rate
³ 40,000 DWT	$20,000/day prorated
³ 25,000 but < 40,000 DWT	$15,000/day prorated
³ 10,000 but < 25,000 DWT	$10,000/day prorated
< 10,000 DWT	$7,500/day prorated

For Ships with parcel sizes less than 1,000 MT, the Terminal Party shall pay demurrage, if any, at $7,500/day prorated unless mutually agreed otherwise.

Barge Size	Rate
³ 30,000 BBLs	$100/hr prorated
³ 20,000 but < 30,000 BBLs	$90/hr prorated
³ 10,000 but < 20,000 BBLs	$90/hr prorated

For barges with parcel sizes less than 1,000 MTs, the Terminal Party shall pay 50% of any applicable demurrage. Demurrage incurred in port by reason of fire, explosion, storm, weather, strike, lockout, work stoppage or restraint of labor or by breakdown of machinery or equipment in or about the Terminal shall be paid for at one-half the rate otherwise provided for demurrage. The Terminal Party will be responsible for demurrage if such failure results from the Terminal Party’s shortage of cash or anything reasonably attributable to the Terminal Party’s own actions (including delays at the Terminal causing loading or unloading to exceed the allowed laytime) or preventable by the Terminal Party, including through the expenditure of sums which are reasonable in light of the likelihood of the event occurring or the probable effect is such event were to occur and, if such demurrage has been paid by the Vessel Party, the Terminal Party will reimburse the Vessel Party for such demurrage. Demurrage claims must be submitted within 90 days from the date of completion of discharge of the Cargo and must be accompanied by the Notice of Readiness, the Master’s Port Log with Pumping Record, the Agent’s Port Log, the Laytime Statement, the Charter Party Agreement and telexes or other documentation supporting original Ship nomination. Any claim for demurrage which is not accompanied by such documentation shall be deemed waived and forever barred.

          Section 9. Delivery, Title and Risk. Delivery of Cargo shall be to or from the Terminal designated by the Terminal Party onto or from the Vessel nominated by the Vessel Party in accordance with the terms of the Agreement. Unless otherwise specified in the

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Agreement, title to, and risk of loss of, all or any of the Cargo shall pass at the flange connection between the Vessel’s cargo manifold and the hose connection at the Terminal.

          Section 10. Quantity and Quality. Unless otherwise provided in the Agreement, Cargo quantity and quality shall be determined by an independent and mutually acceptable inspector, the cost of which shall be shared equally between the Parties, and whose determinations as to quantity and quality shall be conclusive and binding upon the Parties.

          Section 11. Cargo Vulnerable To Heating (Styrene Monomer Only). The Vessel Party shall not stow the Cargo in tanks adjacent to tanks which contain heatable cargoes or are otherwise subject to heating.

          Section 12. Hoses. The Terminal Party agrees to connect the hose at the shore and to use the shore facility crane to lift the hose to the Vessel’s manifold where the Vessel Party agrees to connect and disconnect hoses to the Vessel’s manifold.

          Section 13. Cleaning. The Vessel shall arrive at the Terminal with all cargo tanks, pumps and pipes suitably clean to the satisfaction of the Terminal Party’s Inspector. The Vessel Party shall ensure that all traces of sediment, tank washings or chemicals, if used, are removed from tanks, pumps and pipes intended for carriage of designated Cargo. Any delays as a result of the Vessel arriving at the Terminal and not being suitable condition to load the designated Cargo, shall be for the Vessel Party’s account and the laytime shall not count.

          Section 14. Gangway. The Terminal Party shall not be responsible for providing or assisting in the set up of the gangway. Any time lost shall be for the Vessel Party’s account.

          Section 15. Texas City Terminal Restrictions. No Vessel shall be allowed to lighter, engage in slop disposal, clean tanks while on berth or bunker.

          Section 16. Excess Berth Occupancy. If, after disconnection of cargo hoses, the Vessel remains at the berth exclusively for the Ship’s purposes, other than by reasons of Force Majeure, the Vessel Party shall be responsible for direct costs incurred by the Terminal Party.

          Section 17. Conflict. In the event of any conflict between these Marine Provisions and the provisions of the Agreement, the provisions of the Agreement shall prevail and be given effect.

          Section 18. Pollution Prevention. Regardless of the nature of the Cargo carried, all Vessels and all towboats and barges transporting any of the Cargo shall have pollution liability insurance coverage that is sufficient to at least meet all applicable statutory pollution liability limits.

          Section 19. Damage and Injury. The Vessel and the Vessel Party assume full responsibility for any injury to and/or death of persons, as well as damage sustained by wharves, berths or docks owned, operated or maintained by the Terminal and the Terminal Party arising out of the negligent or improper operation of the Vessel, tows, barges, or any other waterborne

C-vi

craft, either owned or operated by the Vessel or the Vessel Party, or being operated by subcontractors by the Vessel or the Vessel Party. The Vessel and the Vessel Party shall fully indemnify the Terminal and the Terminal Party for any such injury, death or damage.

          Section 20. Terminal Regulations. All Vessels will comply with any regulations specific to the Terminal. Any Vessel not in compliance with such regulations may not be permitted to dock or may be directed to disconnect and leave the dock or berth, with all and any resulting costs and expenses borne solely by, and for the account of, the Vessel Party.

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Exhibit D

Specified Equipment — PA Unit

***

D-i

Exhibit E

Old Switch Condensers Action Items

***

E-i

Exhibit F

2006 Capital Budget

***

F-i

Exhibit G

Rail Cars

Owned Cars:

STEX 20056
STEX 20119
STEX 24003 STEX 20057
STEX 24000
STEX 41011 STEX 20108
STEX 24001 STEX 20116
STEX 24002

Leased Cars:

UTLX 645766
UTLX 645770
UTLX 645774
UTLX 645778 UTLX 645767
UTLX 645771
UTLX 645775
UTLX 645779 UTLX 645768
UTLX 645772
UTLX 645776
UTLX 645780 UTLX 645769
UTLX 645773
UTLX 645777

G-i

EX-21.1

Exhibit 21.1

Subsidiaries of

STERLING CHEMICALS, INC.
As of December 31, 2005

Owns 100% of:

Sterling Chemicals Energy, Inc., a Delaware corporation

1

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-105794 on Form S-8 of our report dated March 16, 2006, appearing in this Annual Report on Form 10-K of Sterling Chemicals, Inc. for the year ended December 31, 2005.

DELOITTE & TOUCHE LLP

Houston, Texas
March 16, 2006

2

EX-31.1

Exhibit 31.1

I, Richard K. Crump, certify that:

1.	I have reviewed this annual report on Form 10-K of Sterling Chemicals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2006

/s/ RICHARD K. CRUMP

Richard K. Crump

President and Chief Executive Officer

3

EX-31.2

Exhibit 31.2

I, Paul G. Vanderhoven, certify that:

1.	I have reviewed this annual report on Form 10-K of Sterling Chemicals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2006

/s/ PAUL G. VANDERHOVEN

Paul G. Vanderhoven

Senior Vice President — Finance and Chief Financial Officer

4

EX-32.1

Exhibit 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Richard K. Crump, as President and Chief Executive Officer of Sterling Chemicals, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the accompanying Form 10-K report of the Company for the period ending December 31, 2005, as filed with the U.S. Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 15, 2006

/s/ RICHARD K. CRUMP

Richard K. Crump,

President and Chief Executive Officer

5

EX-32.2

Exhibit 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Paul G. Vanderhoven, as Senior Vice President — Finance and Chief Financial Officer of Sterling Chemicals, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the accompanying Form 10-K report of the Company for the period ending December 31, 2005, as filed with the U.S. Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 15, 2006

/s/ PAUL G. VANDERHOVEN

Paul G. Vanderhoven,

Senior Vice President — Finance and
Chief Financial Officer

6

EX-99.1

Exhibit 99.1

Sterling Chemicals, Inc.

Amended and Restated
Audit Committee Charter

Preliminary Statements

     Whereas, the Board of Directors (the “Board”) of Sterling Chemicals, Inc. (the “Corporation”) has heretofore established and designated a standing committee of the Board known as the Audit and Compliance Committee (the “Committee”);

     Whereas, the Board has heretofore delegated oversight responsibility to the Committee for the accounting and financial reporting, control and audit functions of the Board and for compliance and monitoring programs, corporate information and reporting systems and similar matters;

     Whereas, the Board desires to transfer certain of the oversight responsibility for compliance and monitoring programs, corporate information and reporting systems and similar matters from the Committee to its Corporate Governance Committee and to rename the Committee the “Audit Committee”;

     Whereas, the Board has heretofore adopted an Audit and Compliance Committee Charter governing the composition, duties and responsibilities of the Committee; and

     Whereas, the Board desires to amend the Audit and Compliance Committee Charter and to restate the Audit and Compliance Committee Charter in its entirety;

     Now, Therefore, It Is Hereby Resolved that this Amended and Restated Audit Committee Charter (this “Charter”) be, and it hereby is, adopted and approved as the Charter of the Committee.

Article I

Name and Purposes of the Committee

     Section 1.01. Name of Committee. From and after the adoption of this Charter, the Committee shall be known as the “Audit Committee”.

     Section 1.02. Audit Matters. In connection with the Committee’s responsibilities related to audit matters, the Committee shall assist the Board in its oversight of the integrity of the Corporation’s financial statements and its compliance with legal and regulatory requirements.

     The Committee shall also act on behalf of the Board and (a) oversee the accounting and financial reporting processes of the Corporation and audits of the financial statements of the Corporation, (b) monitor the qualifications, independence and performance of the Corporation’s internal (if any) and independent auditors, (c) be directly responsible for the appointment, compensation and oversight of the Corporation’s independent auditors, (d) be responsible for resolving disagreements between management and the Corporation’s independent auditors regarding financial reporting matters and (e) prepare any reports required to be included in the Corporation’s annual proxy statement under the rules of the Securities and Exchange Commission (“SEC”).

     Section 1.03. Compliance Matters. The Committee shall act on behalf of the Board and oversee all aspects of the Corporation’s Code of Ethics for the Chief Executive Officer and Senior Financial Officers (the “Financial Code of Ethics”).

Article II

Composition of the Committee

     Section 2.01. Number. The Committee shall consist of a number of directors (not less than two) as the Board shall determine from time to time.

     Section 2.02. Term; Removal; Vacancies. Each member of the Committee, including it chairman and any alternate members, shall be appointed by the Board, shall serve at the pleasure of the Board and may be removed at any time by the Board (with or without cause). The term of each member of the Committee shall otherwise be determined in accordance with the Bylaws of the Corporation. The Board shall have the power at any time to fill vacancies in the Committee, to change the membership of the Committee or to dissolve the Committee.

     Section 2.03. Member Requirements. Together with any additional requirements required after the date of this Charter under applicable law or the rules of any stock exchange or quotation system on which the securities of the Corporation are listed or quoted, both at the time of the director’s appointment and throughout his or her term as a member of the Committee, each member of the Committee shall:

     (a) be independent of management and be free from any relationship that, in the opinion of the Board, would interfere with the exercise of the independent judgment of such member of the Committee;

     (b) be financially literate (i.e., shall have the ability to read and understand fundamental financial statements, including a balance sheet, income statement and statement of cash flow, and the ability to understand key financial risks and related controls and control processes);

     (c) not simultaneously serve on the audit committee of more than three public companies; and

-2-

     (d) have, in the opinion of the Board and in the opinion of each member, sufficient time available to devote reasonable attention to the responsibilities of the Committee.

In addition, at least one member of the Committee shall, in the opinion of the Board, be an “audit committee financial expert” or have accounting or related financial management expertise.

Article III

Meetings of the Committee

     Section 3.01. Frequency. The Committee shall meet at least once during each fiscal quarter of the Corporation. Additional meetings of the Committee may be scheduled as considered necessary by the Committee, its chairman or at the request of the Chief Executive Officer or Chief Financial Officer of the Corporation.

     Section 3.02. Calling Meetings. Meetings of the Committee may be called at any time by the Board or by any member of the Committee. The chairman of the Committee shall call a meeting of the Committee at the request of the Chief Executive Officer or Chief Financial Officer. In addition, any internal or external auditor, accountant or attorney may, at any time, request a meeting with the Committee or the chairman of the Committee, with or without management attendance.

     Section 3.03. Agendas. The chairman of the Committee shall be responsible for preparing an agenda for each meeting of the Committee. The chairman will seek the participation of management and key advisors in the preparation of agendas.

     Section 3.04. Attendees. The Committee may request members of management, internal auditors (if any), external auditors, accountants, attorneys and such other experts as it may deem advisable to attend any meeting of the Committee. At least once each year, the Committee shall meet in a private session at which only members of the Committee are present. In any case, the Committee shall meet in executive session separately with internal auditors (if any), external auditors and the Corporation’s external securities counsel (if any) at least annually.

     Section 3.05. Quorum; Required Vote. At all meetings of the Committee, a majority of the members of the Committee shall be necessary and sufficient to constitute a quorum for the transaction of business. If a quorum shall not be present at any meeting of the Committee, the members of the Committee present thereat may adjourn the meeting from time to time (without notice other than announcement at the meeting) until a quorum shall be present. A meeting of the Committee at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of any member; provided, however, that no action of the remaining members of the Committee shall constitute the act of the Committee unless the action is approved by at least a majority of the required quorum for the meeting or such greater number of members of the Committee as shall be required by applicable law or the Certificate of Incorporation or Bylaws of the Corporation. The act of a majority of the members of the Committee present at any meeting of the Committee at which there is a quorum shall be the act of the Committee unless by express provision of law or the Certificate of Incorporation or

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Bylaws of the Corporation a different vote is required, in which case such express provision shall govern and control.

     Section 3.06. Rules of Procedure and Minutes. The Committee may adopt and establish its own rules of procedure; provided, however, that such rules of procedure are not inconsistent with the Certificate of Incorporation or Bylaws of the Corporation or with any specific direction as to the conduct of its affairs as shall have been given by the Board. The Committee shall keep regular minutes of its proceedings and report the same to the Board when requested.

Article IV

Reporting to the Board

     The Committee, through its chairman, shall periodically report to the Board on the activities of the Committee. These reports shall occur at least twice during each fiscal year of the Corporation.

Article V

Delegation of Authority for Audit Matters

     Section 5.01. Authority to Engage Advisors. The Committee shall have the power and authority, without approval of the Board, to engage independent counsel and other advisers as it determines necessary to carry out its duties.

     Section 5.02. Audit and Non-Audit Services. The Committee shall have the responsibility, and the power and authority, without approval of the Board, to approve all audit services (which may include providing comfort letters in connection with securities underwritings) and all non-audit services that are otherwise permitted by law (including tax services, if any) that are to be provided to the Corporation by any independent auditors. The Committee may delegate to one or more of its members the authority to preapprove audit and non-audit services that are otherwise permitted by law; provided, however, that any such preapproval is submitted to the full Committee for ratification at the next scheduled meeting of the Committee.

     Section 5.03. Engagement Fees; Funding. The Committee shall have the power and sole authority, without approval of the Board, (a) to approve the scope of engagement of any independent auditors to be employed by the Corporation (such approval constituting approval of each audit service within such scope of engagement) and to approve all audit engagement fees and terms, and (b) to determine appropriate funding (which shall be provided by the Corporation) for the payment of compensation to (i) any independent auditors employed by the Corporation for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation, (ii) any independent counsel or other advisers engaged by the Committee and (iii) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

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Article VI

Responsibilities For Audit Matters

     Section 6.01. Relationship with External Auditors; Auditor Independence; Financial Reporting and Controls. (a) The Committee shall be directly responsible for the appointment, termination, compensation, retention and oversight of the work of any independent auditors employed by the Corporation (including resolution of disagreements between management and the auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation, and all independent auditors shall report directly to the Committee.

     (b) In executing its authority with respect to independent auditors and its oversight role with respect to financial reporting and related matters, the Committee shall:

• review and assess the nature and effect of any non-audit services provided by external auditors;

• review and assess the compensation of external auditors and the scope and proposed terms of their engagement, including the range of audit and non-audit fees;

• review annually the qualifications, performance and independence of the Corporation’s internal (if any) and external auditors;

• ensure receipt and review of a formal written statement from the external auditors consistent with Independence Standards Board Standard No. 1, and a report by the independent auditors describing (i) the independent auditors’ internal quality control procedures and (ii) any material issues raised by the most recent quality control review, or peer review, of the independent auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more audits carried out by the independent auditors, and any steps taken to deal with any such issues;

• discuss with external auditors any relationships or services that may affect their objectivity or independence; and

• meet separately, periodically, with the independent auditors and review any audit problems or difficulties, including any restrictions on the scope of the independent auditors’ activities or on access to requested information, and any significant disagreements with management, and management’s responses.

If the Committee is not satisfied with any external auditor’s assurances of independence, it shall take or recommend to the Board appropriate action to ensure the independence of such external auditor.

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     (c) The Committee shall be charged with the responsibility of reviewing the adequacy of the Corporation’s financial statements and financial reporting systems. In this regard, the Committee shall:

• prior to the filing of each Form 10-K or Form 10-Q, (i) review and discuss such document with management and the Corporation’s independent auditors, including review of the financial statements to be included therein and the specific disclosures therein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) engage in discussions with the Corporation’s independent auditors with respect to the results of such independent auditors’ review of same;

• prior to the filing of each Form 10-K, ensure that the Corporation’s independent auditors attest to, and report on, their assessment of the effectiveness of the Corporation’s internal control structure and procedures for financial reporting in accordance with applicable law and the rules and regulations of the SEC;

• implement procedures to assure that the independent auditors engaged by the Corporation to audit the Corporation’s financial statements do not provide any non-audit services prohibited by applicable law or the rules and regulations promulgated by the Public Company Accounting Oversight Board, the SEC or NASDAQ;

• ensure the regular rotation of the lead audit partner and the reviewing audit partner of any independent auditing firm engaged by the Corporation as required by law;

• consider major changes and other questions of choice regarding the appropriate auditing and accounting principles and practices to be followed when preparing the Corporation’s financial statements, including major financial statement issues and risks and their impact or potential effect on reported financial information and the scope, as well as the level of involvement by external auditors in the preparation and review, of unaudited quarterly or other interim-period information;

• review the annual audit plan and the process used to develop the plan and monitor the status of activities;

• review the results of each external audit, including any qualifications in the external auditor’s opinion, any related management letter, management’s responses to recommendations made by external auditors in connection with any audit and any reports submitted to the Committee by internal auditors (if any) that are material to the Corporation as a whole, and management’s responses to those reports;

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• discuss with the Corporation’s external auditors (i) methods used to account for significant unusual transactions, (ii) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus, (iii) the process used by management in formulating particularly sensitive accounting estimates and the basis for the auditor’s conclusion regarding reasonableness of such estimates and (iv) disagreements with management over the application of accounting principles, the basis for management’s accounting estimates or the disclosures contained in the financial statements; and

• discuss with management the Corporation’s earnings press releases (if any), as well as financial information and earnings guidance provided to analysts or rating agencies.

If any internal or external auditor of the Corporation identifies any significant issue relative to overall Board responsibility that has been communicated to management but, in their judgment, has not been adequately addressed, they should communicate these issues to the chairman of the Committee.

     (d) The Committee shall be charged with the responsibility of setting clear hiring policies for employees or former employees of the Corporation’s independent auditors.

     Section 6.02. Internal Financial Controls; Communications With the Board; Regulatory Examinations. (a) The Committee shall review the appointment and replacement of the senior internal-auditing executive of the Corporation (if any) and any key financial management of the Corporation, and shall review the performance of the Corporation’s internal auditors (if any). The Corporation’s internal auditors (if any) shall be responsible to the Board through the Committee. The Committee shall consider, in consultation with the Corporation’s external auditors and the Corporation’s senior internal-auditing executive (if any), the adequacy of the Corporation’s internal financial controls. The Committee shall meet (i) separately, periodically, with management, with the Corporation’s internal auditors (or other personnel responsible for the internal audit function) and with the Corporation’s independent auditors and (ii) separately, periodically, with the senior internal-auditing executive (if any) to discuss any audit problems or difficulties, special problems or issues that may have been encountered by the internal auditors (if any) and review management’s responses and the implementation of any recommended corrective actions. The Committee shall also meet periodically with senior management to review the Corporation’s major financial risk exposures and the Corporation’s policies with respect to risk assessment and risk management.

     (b) The Committee shall serve as a channel of communication between the Corporation’s external auditors and the Board and between the Corporation’s senior internal-auditing executive (if any) and the Board.

     (c) The Committee shall review and assess any SEC inquiries and the results of examination by other regulatory authorities in terms of important findings, recommendations and management’s responses.

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     Section 6.03. Audit Committee Report and Proxy Disclosures. The Committee shall prepare the report required by the rules of the SEC to be included in the Corporation’s annual report. In connection with the Committee report, the Committee shall:

• review the annual audited financial statements with management and the Corporation’s independent auditors;

• discuss with the Corporation’s independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, relating to the conduct of the audit and the independent auditors’ judgment about the quality of the Corporation’s accounting principles, including such matters as accounting for significant transactions, significant accounting policies, estimates and adjustments and disagreements with management;

• discuss with the Corporation’s independent auditors their independence, giving consideration to the range of audit and non-audit services performed by such independent auditors;

• review, at least annually, a formal written statement from the Corporation’s independent auditor delineating all relationships with the Corporation, consistent with Independence Standards Board Standard No. 1;

• recommend to the Board whether the Corporation’s annual audited financial statements and accompanying notes should be included in the Corporation’s Annual Report on Form 10-K; and

• determine whether fees paid to the Corporation’s independent auditors are compatible with maintaining their independence.

     Section 6.04. Limitations on Responsibilities for Audit Matters. While the Committee has the duties and responsibilities set forth in this Charter, the Committee is not responsible for planning or conducting audits or for determining whether the Corporation’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. In fulfilling their responsibilities hereunder, it is recognized that members of the Committee are not full-time employees of the Corporation, it is not the duty or responsibility of the Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards. Each member of the Committee shall be entitled to rely, in the absence of actual knowledge to the contrary (which shall be promptly reported to the Board), on (a) the integrity of those persons and organizations within and outside the Corporation from which it receives information, (b) the accuracy of the financial and other information provided to the Committee and (c) statements made by management or third parties as to any information technology, internal audit and other non-audit services provided by the auditors to the Corporation.

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     Section 6.05. Annual Reviews. The Committee shall conduct an annual evaluation of its performance in fulfilling its duties and responsibilities under this Charter. The Committee shall review and assess the adequacy of this Charter annually. The Committee shall approve the Charter in the form to be included in the Corporation’s proxy statement in accordance with applicable SEC rules and regulations, as well as the rules and regulations of any applicable stock exchange or quotation system.

Article VII

Financial Compliance Matters

     Financial Code of Ethics. In executing its oversight role with respect to the Financial Code of Ethics, the Committee shall review the adequacy of the Financial Code of Ethics and the Corporation’s internal controls and disclosure controls and related policies, standards, practices and procedures (including compliance guides and manuals). In this connection, the Committee may coordinate its compliance activities with the Corporate Governance Committee of the Board and any other standing committee of the Board. In addition, the Committee shall meet periodically with senior management to discuss their views on whether:

     (a) the operations of the Corporation and its subsidiaries are conducted in compliance with all applicable laws, rules and regulations pertaining to financial reporting matters;

     (b) all accounting and reporting financial errors, fraud and defalcations, legal violations and instances of non-compliance (if any) with the Financial Code of Ethics or the Corporation’s internal controls or disclosure controls or related policies, standards, practices and procedures are detected;

     (c) all violations of legal requirements pertaining to financial reporting matters (if any) are promptly reported to appropriate governmental officials when discovered and prompt, voluntary remedial measures are instituted; and

     (d) senior management and the Board are provided with timely, accurate information to allow management and the Board to reach informed judgments concerning the Corporation’s compliance with all applicable laws, rules and regulations pertaining to financial reporting matters.

The Committee shall also be responsible for establishing procedures for the receipt, retention, and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters. The General Counsel of the Corporation shall be in charge of the Financial Code of Ethics, including the day-to-day monitoring of compliance by officers and other employees and agents of the Corporation and its subsidiaries.

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Article VIII

Expectations and Information Needs

     The Committee should communicate its expectations and the nature, timing and extent of information it requires to management and internal and external auditors, accountants and attorneys. Written materials, including key performance indicators and measures related to key financial risks, should be provided to the Committee by management at least one week in advance of any meeting of the Committee at which such materials will be discussed.

Article IX

Additional Powers

     The Committee is authorized, in the name and on behalf of the Corporation and at its expense, to take or cause to be taken any and all such actions as the Committee shall deem appropriate or necessary to carry out its responsibilities and exercise its powers under this Charter.

Article X

Limitations on Duties and Responsibilities

     The Committee shall not have or assume any powers, authority or duties vested in the Board which, under applicable law or any provision of the Certificate of Incorporation or the Bylaws of the Corporation, may not be delegated to a committee of the Board. The grant of authority to the Committee contained in this Charter may be modified from time to time or revoked at any time by the Board in its sole discretion.

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