Overview

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

Consumption of the basic chemicals that we manufacture in the commodity portions of our olefins and vinyls processes has increased significantly over the past 30 years. Our olefins and vinyls products are some of the most widely used chemicals in the world and are upgraded into a wide variety of higher value-added chemical products used in many end-markets. Petrochemicals are typically manufactured in large volume by a number of different producers using widely available technologies. The petrochemical industry exhibits cyclical commodity characteristics, and margins are influenced by changes in the balance between supply and demand and the resulting operating rates, the level of general economic activity and the price of raw materials. The cycle is generally characterized by periods of tight supply, leading to high operating rates and margins, followed by a decline in operating rates and margins primarily as a result of significant capacity additions. Due to the significant size of new plants, capacity additions are built in large increments and typically require several years of demand growth to be absorbed. In 2003 and 2004, the olefins and vinyls markets began a cyclical recovery and operating rates and margins rose as economic growth improved and excess capacity was absorbed. These factors resulted in increased industry product margins in 2004, 2005 and 2006. In 2007 and 2008, however, weakness in the housing market contributed to lower demand, and operating margins have declined in our vinyls business. The demand for olefins products remained strong in 2007 largely due to balanced industry supply and demand fundamentals for polyethylene and strong export demand, but margins were lower due to increased feedstock costs. In 2008, olefins margins declined significantly due to a sharp drop in product demand that started in August as customers began to anticipate lower product prices due to a weakened global economy. This was followed by a sharp drop in product prices in the last quarter of 2008, which resulted in continued slow demand, lower operating rates and a significant operating loss in the fourth quarter of 2008.

PVC industry operating rates dropped from peak levels in the third quarter of 2006 to much lower levels in the fourth quarter of 2008. This downturn, which impacts our Vinyls segment, was primarily due to weakness in the construction market which started in September 2006 and continued through 2008. Looking forward, North American PVC capacity is projected to increase in 2009 and 2010. Capacity growth is expected to exceed demand growth and, as a result, operating rates and margins may not improve and could decline further from 2008 levels.

Olefins industry forecasts show a significant increase in worldwide ethylene capacity over the next five years, with the largest increase in the Middle East and Asia. As a result, operating margins may not improve and could decline further in 2009 and 2010.

We purchase significant amounts of ethane and propane feedstock, natural gas, chlorine and salt from external suppliers for use in production of basic chemicals in the olefins and vinyls chains. We also purchase significant amounts of electricity to supply the energy required in our production processes. While we have agreements providing for the supply of ethane and propane feedstocks, natural gas, chlorine, salt and electricity, the contractual prices for these raw materials and energy vary with market conditions and may be highly volatile. Factors that have caused volatility in our raw material prices in the past and which may do so in the future, include:

• shortages of raw materials due to increasing demand;

• capacity constraints due to construction delays, strike action or involuntary shutdowns;

• the general level of business and economic activity; and

• the direct or indirect effect of governmental regulation.

Significant volatility in raw material costs tends to put pressure on product margins as sales price increases could lag behind raw material cost increases. Conversely, when raw material costs decrease, customers may seek relief in the form of lower sales prices. We currently use derivative instruments to reduce price volatility risk on feedstock commodities and lower overall costs. Normally, there is a pricing relationship between a commodity that we process and the feedstock from which it is derived. When this pricing relationship deviates from historical norms, we have from time to time entered into derivative instruments and physical positions in an attempt to take advantage of this relationship.

Our historical results have been significantly affected by our plant production capacity, our efficient use of the capacity and our ability to increase our capacity. Since our inception, we have followed a disciplined growth strategy that focuses on plant acquisitions, new plant construction and internal expansion. We evaluate each expansion project on the basis of its ability to produce sustained returns in excess of our cost of capital and its ability to improve efficiency or reduce operating costs.

In August 2008, we announced that we will construct a new chlor-alkali plant to be located at our vinyls manufacturing complex in Geismar, Louisiana. The new chlor-alkali unit is expected to produce 250,000 ECUs annually upon completion, bringing our total ECU capacity to 525,000 per year, including the chlor-alkali expansion at our Calvert City complex described below. The new plant is expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC, and increase caustic soda sales. The project is currently estimated to cost between $250 million and $300 million and is targeted for completion in 2011. We expect the project will be partially funded with funds drawn from the proceeds of the issuance of the 6 3/4% revenue bonds of the Louisiana Local Government Environmental Facility and Development Authority, issued in December 2007 for our benefit, which are currently held as restricted cash. The remaining funding will depend on our revolving credit facility, cash flow from operations, and, possibly, our ability to obtain additional financing.

We announced in March 2008 our plans to open a new PVC pipe plant in Yucca, Arizona to produce pipe for water, sewer, irrigation and related industrial and residential markets in the Western United States. The new plant became operational in the first quarter of 2009 and has the capacity to produce approximately 120 million pounds of PVC pipe annually.

We decided to permanently close our Pawling, New York facility and consolidate manufacturing of window and door components in Calgary, Canada in the first quarter of 2008. In addition, during the fourth quarter of 2008, we announced the idling of our Van Buren, Arkansas PVC pipe facility. Asset impairments, severance and other costs recorded in 2008 related to the Pawling plant closure and the idling of the Van Buren plant were approximately $3.9 million.

In October 2007, we announced our plans to expand our chlor-alkali and PVC resin units and build a large diameter PVC pipe plant at our Calvert City complex. The chlor-alkali expansion was completed in the fourth quarter of 2008 and has added 50,000 ECUs of annual capacity. The chlor-alkali expansion is expected to improve the vertical integration of our vinyls business from chlorine downstream into VCM and PVC and increase caustic soda sales. The PVC resin plant expansion was completed in the first quarter of 2009 and increased capacity by 300 million pounds per year, bringing our total PVC capacity to 1.7 billion pounds annually. The expansion is expected to enhance the integration of the vinyls product chain by consuming VCM that was previously sold on the merchant market. During the third quarter of 2008, we also completed construction of a new large diameter PVC pipe facility at the complex with a capacity of approximately 55 million pounds per year of large diameter pipe. Our annual fabricated products capacity increased to approximately 1,076 million pounds with this expansion and the completion of the Yucca plant.

Since 2006 we have been in discussions with the Government of The Republic of Trinidad and Tobago (the "Government") to develop an ethane-based ethylene, polyethylene and other derivatives project in that country. The project has faced several major constraints, and we and the Government are discussing how to overcome those challenges. In the interim, we have suspended active work on the project.

We experienced several shut-downs and turnarounds from 2006 to 2008. In 2006, we completed a scheduled major maintenance turnaround in Calvert City. The ethylene and VCM units at Calvert City were down for 16 days while the chlor-alkali and PVC units were down for a shorter period. Sales continued during the turnaround from inventory on hand. In September 2006, we encountered mechanical problems with a compressor and related equipment at one of our ethylene units in Lake Charles, Louisiana, resulting in an unscheduled shutdown of that unit. While that unit was down, we completed a maintenance turnaround of that unit that was scheduled for early 2007. During the unit's shut-down, we also completed portions of our project to upgrade the feedstock flexibility at our ethylene plant designed to reduce energy costs and provide for additional ethylene capacity. The unit was successfully restarted in late October 2006 and resumed full production. As a result of the Lake Charles outage, we incurred approximately $3.1 million in maintenance expense and $27.4 million in turnaround costs which were capitalized. In 2007, we completed a major turnaround for one of our ethylene units at our Lake Charles facility. The unit was shut down for approximately 30 days to complete the tie-in portion of a project designed to upgrade the feedstock flexibility of the unit in order to reduce energy costs and provide for additional ethylene capacity. The cost of the turnaround of approximately $8.3 million was capitalized. In addition, during the first and second quarters of 2008 we performed a major turnaround of our styrene plant in Lake Charles. The unit was shut down for a total of 48 days to perform a major maintenance turnaround and revamp project designed to increase energy efficiency and slightly increase capacity. The cost of this turnaround was approximately $17.5 million, which was capitalized. Also, during August and September 2008, we shut down our vinyls facilities at our Geismar, Louisiana complex and our olefins facilities at our Lake Charles, Louisiana complex due to Hurricanes Gustav and Ike. Both complexes sustained minimal damage from the hurricanes; however, the energy and power shortages caused by the hurricanes affected many suppliers and, as a consequence, the Lake Charles facilities were shut down for approximately three weeks due to the two hurricanes, while the Geismar facilities were shut down for approximately one and a half weeks due to Hurricane Gustav. In addition, one of our ethylene units in Lake Charles was idled during December 2008 due to significant customer inventory destocking and resulting weakened demand for our derivative products. A maintenance turnaround initially scheduled for this unit for the first half of 2009 has been brought forward to be performed during this down time, and the facility is expected to resume operations in the first quarter of 2009.

Results of Operations

Segment Data



                                                       Year Ended December 31,
                                                2008            2007            2006
                                                       (dollars in thousands)
 Net External Sales
 Olefins
 Polyethylene                                $ 1,724,671     $ 1,545,639     $   783,968
 Ethylene, styrene and other                     823,253         629,414         585,612

 Total olefins                                 2,547,924       2,175,053       1,369,580

 Vinyls
 Fabricated finished products                    428,461         497,610         596,461
 VCM, PVC, and other                             715,968         519,515         518,325

 Total vinyls                                  1,144,429       1,017,125       1,114,786

 Total                                       $ 3,692,353     $ 3,192,178     $ 2,484,366

 (Loss) income from operations
 Olefins                                     $   (40,145 )   $   152,563     $   160,875
 Vinyls                                           17,877          29,991         157,918
 Corporate and other                              (7,272 )        (7,833 )        (5,542 )

 Total (loss) income from operations             (29,540 )       174,721         313,251
 Interest expense                                (33,957 )       (18,422 )       (16,519 )
 Debt retirement costs                                -               -          (25,853 )
 Other income, net                                 5,475           2,658          11,670
 Benefit from (provision for) income taxes        28,479         (44,228 )       (87,990 )

 Net (loss) income                           $   (29,543 )   $   114,729     $   194,559

 (Loss) earnings per diluted share           $     (0.45 )   $      1.76     $      2.98

                                                      2008                             2007
                                           Average Sales                    Average Sales
                                               Price           Volume           Price           Volume
Key product sales price and volume
percentage change from prior year
period
Olefins(1)                                         +19.6 %       -2.5 %              +3.3 %      +55.5 %
Vinyls                                             +16.5 %       -4.0 %             -17.4 %       +8.6 %
Company average                                    +18.7 %       -3.0 %              -4.7 %      +33.2 %




                                               2008    2007    2006
                  Average industry prices(1)
                  Ethane (cents/lb)             30.1    26.7    22.1
                  Propane (cents/lb)            33.4    28.6    23.9
                  Ethylene (cents/lb)(2)        58.5    48.8    48.1
                  Polyethylene (cents/lb)(3)    89.4    76.3    74.4
                  Styrene (cents/lb)(4)         73.2    68.2    64.8
                  Caustic ($/short ton)(5)     687.5   332.1   300.6
                  Chlorine ($/short ton)(6)    269.2   316.3   330.0
                  PVC (cents/lb)(7)             57.0    60.0    60.3

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

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

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

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

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

(7) Represents North American contract prices of PVC over the period as reported by CMAI. During 2008, CMAI made a 16 cent per pound downward, non-market related adjustment to PVC resin prices.

Summary

For the year ended December 31, 2008, we had a net loss of $29.5 million, or $0.45 per diluted share, on net sales of $3,692.4 million. This represents a decrease of $144.2 million, or $2.21 per diluted share, from the year ended December 31, 2007 net income of $114.7 million, or $1.76 per diluted share, which included a tax benefit of $8.0 million, or $0.12 per diluted share, related to a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries. Sales for the year ended December 31, 2008 increased from 2007 sales of $3,192.2 million to $3,692.4 million, primarily due to higher average sales prices for all of the major products. A significant increase in product prices in the first three quarters of 2008 was reversed in the fourth quarter of 2008 as prices fell in response to lower demand and the sharp drop in feedstock costs. The 2008 net loss is largely the result of a $109.6 million net loss in the fourth quarter of 2008, primarily due to the sharp drop in product prices, resulting in a significant negative operating margin. The loss from operations was $29.5 million for the year ended December 31, 2008 as compared to income from operations of $174.7 million for the year ended December 31, 2007. The 2008 results have been negatively impacted by a number of factors, including the sharp drop in operating income in the fourth quarter of 2008 as discussed in the following paragraph, the effects of Hurricanes Gustav and Ike, higher raw material, natural gas and electricity costs, lower PVC pipe sales volume and a loss from trading activities. Our Olefins segment benefited from high operating rates through much of 2008 largely due to balanced industry supply and demand fundamentals for polyethylene; however, this segment experienced a sharp drop in product demand that began in the third quarter of 2008 as customers began to anticipate lower product prices due to a weakened global economy. This was followed by a sharp drop in product prices in the fourth quarter of 2008, which resulted in continued slow demand, lower operating rates and significantly lower operating margins. In addition, Olefins margins were negatively impacted by rising feedstock, natural gas and electricity costs and a trading loss of $9.4 million in 2008 compared to a trading loss of $1.0 million in 2007. Our Vinyls segment results in 2008 were relatively flat compared to 2007 as lower margins and volumes for downstream products, primarily due to the poor construction market, were mostly offset by higher caustic margins.

The fourth quarter 2008 operating loss was $165.8 million as compared to operating income in the fourth quarter of 2007 of $20.0 million, a decrease of $185.8 million. The significant loss in the fourth quarter of 2008 was primarily due to a sharp drop in product prices, a significant drop in sales volumes and operating rates and an increase in the allowance for doubtful accounts. The sharp drop in product prices in the fourth quarter of 2008 was primarily due to a collapse in feedstock prices. For ethane and propane, our two primary raw materials, average industry prices dropped 56.5% and 60.2%, respectively, from September 30, 2008 to December 31, 2008. As a result, polyethylene and PVC resin industry prices dropped 41.4% and 31.3%, respectively, during the same period. It generally takes 60 to 90 days from the time our feedstock is purchased, converted into finished goods, inventoried and sold. As a result of utilizing the first-in, first-out (FIFO) method of inventory accounting, and the rapid drop in feedstock costs and product prices in the fourth quarter, we had very high feedstock costs recorded in cost of sales in the fourth quarter of 2008, while our product sales prices were based on lower market sales prices due to the weakened demand for the products. This resulted in significant inventory losses, inclusive

of transportation and other distribution costs, and $22.0 million of adjustments due to the valuation of inventory at the lower of cost or market prices, in the fourth quarter of 2008. In addition, our plants operated at reduced rates in the fourth quarter of 2008 due to the general weakened demand as a result of the continued deterioration in the U.S. and global economies, and as a reaction to the concurrent sharp drop in product prices. In an effort to manage the build-up of excess inventory, and to control costs, we elected to idle one of our ethylene units in Lake Charles, Louisiana that was scheduled for a major maintenance turnaround in the first quarter of 2009. The maintenance work is being performed early during this downtime and the facility is expected to resume operations in the first quarter of 2009. The fourth quarter of 2008 gross profit was negatively impacted by approximately $168.0 million due to the inventory losses and the expensing of unabsorbed fixed manufacturing costs related to the drop in operating rates. In addition, during the fourth quarter of 2008 we increased the allowance for doubtful accounts by $8.9 million, which is a direct result of the current economic environment.

2008 Compared with 2007

Net Sales. Net sales increased by $500.2 million to $3,692.4 million in 2008 from $3,192.2 million in 2007. This increase was primarily due to higher average sales prices for all of our major products and higher sales volumes for PVC resin, partially offset by lower sales volumes for polyethylene and PVC pipe. Average sales prices for 2008 increased by 18.7% as compared to 2007. Overall sales volume decreased by 3.0% in 2008 as compared to 2007.

Gross Profit. Gross profit percentage decreased to 1.9% in 2008 from 8.5% in 2007. This decrease was primarily due to the inventory losses and unabsorbed fixed manufacturing costs of approximately $168.0 million recorded in the fourth quarter of 2008. Our raw material costs in both segments normally track industry prices, which experienced an increase of 12.7% for ethane and 16.8% for propane in 2008 as compared to 2007. In addition, we experienced a $9.4 million loss in connection with trading activity for 2008 compared to a $1.0 million loss for 2007, an unfavorable change of $8.4 million (see Note 10 to the consolidated financial statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.2 million, or 2.3%, in 2008 as compared to 2007. The increase was primarily due to a $10.9 million increase in the allowance for doubtful accounts, directly attributable to the current economic environment. This increase was partially offset by transition costs related to the acquisition of the Longview facilities incurred in the first four months of 2007 and a reduction in legal expenses.

Interest Expense. Interest expense in 2008 increased by $15.6 million to $34.0 million from $18.4 million in 2007, primarily due to higher average debt outstanding for the period, largely as a result of our issuance of the 6 3/4% senior notes in the fourth quarter of 2007.

Other Income, Net. Other income, net increased by $2.8 million to $5.5 million in 2008 from $2.7 million in 2007 primarily due to higher interest income from the restricted cash balance associated with our 6 3/4% senior notes, higher equity income from our joint venture in China and a $0.9 million write-down of a long-term investment in 2007.

Income Taxes. The effective income tax rate was 49.1% in 2008 as compared to 27.8% in 2007. The 2008 tax rate was above the statutory rate of 35% primarily due to state tax credits and a reduction of gross unrecognized tax benefits, partially offset by state income taxes, all being applied to a loss before income taxes. The 2007 tax rate was below the statutory rate of 35% primarily due to state tax credits, a reduction in deferred taxes due to a change in apportionment ratios upon the reorganization of several subsidiaries and the domestic manufacturing deduction, partially offset by state income taxes.

Olefins Segment

Net Sales. Net sales increased by $372.8 million, or 17.1%, to $2,547.9 million in 2008 from $2,175.1 million in 2007. This increase was primarily due to higher sales prices for all major products, partially offset by lower sales volumes for polyethylene. Average sales prices for the Olefins segment increased by 19.6% in 2008 from 2007.

Income from Operations. Income from operations decreased by $192.7 million to a loss of $40.1 million in 2008 from income of $152.6 million in 2007. This decrease was primarily due to a loss from operations of $136.3 million in the fourth quarter of 2008 during which lower production, weakened product demand and a sharp drop in industry pricing resulted in negative margins. Industry polyethylene prices fell from September 30, 2008 to December 31, 2008 due to the collapse in energy and feedstock costs in the fourth quarter. As a result of utilizing the FIFO method of inventory accounting and the unprecedented drop in feedstock costs and product prices in the fourth quarter, we had very high feedstock costs recorded in our cost of sales in the fourth quarter of 2008 while our product prices were based on current costs. Other contributing factors for the decrease in 2008 included an increase in feedstock, natural gas and electricity costs in the first nine months of 2008. Due to market conditions, we were unable to increase prices to fully compensate for increased costs. Additionally, the impact of Hurricanes Gustav and Ike, which caused two separate outages at the Lake Charles plant during the third quarter of 2008, lower sales volumes for polyethylene and a trading loss of $9.4 million in 2008 as compared to a trading loss of $1.0 million in 2007. In addition, these decreases in operating income were only partially offset by higher average sales prices in 2008. Results for 2007 were negatively impacted by a major turnaround and an unscheduled outage at our Lake Charles ethylene units.

Vinyls Segment

Net Sales. Net sales increased by $127.3 million, or 12.5%, to $1,144.4 million in 2008 from $1,017.1 million in 2007. This increase was primarily due to higher sales prices for all major products and increased PVC resin sales volumes. Average sales prices for the Vinyls segment increased by 16.5% in 2008 as compared to 2007. These increases were partially offset by lower sales volumes for VCM and fabricated products.

Income from Operations. Income from operations decreased by $12.1 million to $17.9 million in 2008 from $30.0 million in 2007. This decrease was primarily due to weakness in the construction market, which continues to negatively affect demand and product pricing in our vinyls downstream businesses. In addition, the closure of our Pawling, New York facility in the first quarter of 2008 and the idling of our Van Buren PVC pipe plant in the fourth quarter of 2008 negatively impacted income from operations as severance, asset impairments and other related costs totaled approximately $3.9 million in 2008. Partially offsetting these decreases were higher margins for caustic. Results for 2007 were negatively impacted by $6.7 million due to a legal settlement and expenses associated with the litigation.

2007 Compared with 2006

Net Sales. Net sales increased by $707.8 million to $3,192.2 million in 2007 from $2,484.4 million in 2006. This increase was primarily due to higher sales volumes for polyethylene, ethylene, caustic and PVC resin. Polyethylene sales volumes were significantly higher in 2007 as compared to 2006 primarily due to the acquisition of the Longview facility. These increases were partially offset by overall lower average sales prices.

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