PITTSBURGH, July 20 /CNW/ - All financial information is in U.S. dollars
unless otherwise indicated.
NOVA Chemicals Corporation (NOVA Chemicals) (NYSE:NCX)(TSX:NCX) reported
net income of $108 million ($1.30 per share diluted) for the second quarter of
2006. The second quarter's net income compares to a net loss of $5 million
($0.06 per share) for the first quarter of 2006 and a net loss of $25 million
($0.29 per share) for the second quarter of 2005.
During the second quarter, NOVA Chemicals restructured into three
business units. Net income from the businesses is shown below:
<<
Core Business: $147 million or $1.77 per share
----------------------------------------------
1. Olefins/Polyolefins
2. Expandable Polystyrene/Styrenic Performance Products
3. STYRENIX: $(45) million or $(0.54) per share
-----------------------------------------------
The following unusual items had a net positive impact of $52 million
or $0.62 per share on second quarter earnings:
-- Canadian tax rate reductions $60 million or $0.72 per share
-- June Corunna outage $(8) million or $(0.10) per share
>>
"Business conditions and our results improved through the second quarter.
With meaningful benefits from our restructuring, we will deliver total annual
cost reductions of approximately $65 million by the end of the third quarter
that will positively impact company results," said Jeff Lipton, NOVA
Chemicals' President and CEO. "Our restructuring will refocus NOVA Chemicals
on our core business, whose strength will be clear, while positioning STYRENIX
as a potential catalyst for change in the industry."
Second Quarter Snapshot
Olefins/Polyolefins:
-- Net income of $151 million compared to $70 million in the previous
quarter
-- Alberta Advantage of 14 cents per pound of ethylene cash cost, up
from 5 cents per pound in the first quarter
-- Polyethylene Performance Products sales volumes increased by 20%
versus the previous quarter
-- Canadian corporate tax rate reduction from 34% to 33% in 2006 and 30%
by 2010
Expandable Polystyrene/Styrenic Performance Products (EPS/SPP):
-- Net loss of $4 million compared to a net loss of $6 million in the
previous quarter
-- ARCEL(R) resin capacity expansions completed as scheduled by the end
of the quarter
STYRENIX:
-- Net loss of $45 million compared to a net loss of $39 million in the
previous quarter
-- Restructuring will enable cost reductions of $45 million per year
NOVA Chemicals will host a conference call today, Thursday, July 20,
2006, for investors and analysts at 10 a.m. EDT (8 a.m. MDT; 7 a.m. PDT).
Media are welcome to join this call in "listen-only" mode. The dial-in number
for this call is (416) 406-6419. The replay number is (416) 695-5800
(Reservation No. 3190159). The live call is also available on the Internet at
www.investorcalendar.com (ticker symbol NCX).
<<
NOVA Chemicals Highlights
(millions of U.S. dollars except per share amounts and as noted)
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Net income (loss)
Core
----
Olefins/Polyolefins $151 $70 $56 $221 $169
EPS/SPP (4) (6) (6) (10) (6)
STYRENIX (45) (39) (71) (84) (91)
--------
Corporate and other(1) 6 (30) (4) (24) (3)
------- ------- ------- -------- -------
Net income (loss) $108 $(5) $(25) $103 $69
------- ------- ------- -------- -------
Earnings (loss) per common
share
- basic $1.31 $(0.06) $(0.29) $1.25 $0.84
- diluted $1.30 $(0.06) $(0.29) $1.24 $0.82
Weighted-average common shares
outstanding (millions)(2)(3)
- basic 83 82 82 83 83
- diluted 83 82 82 83 90
Revenue $1,619 $1,553 $1,329 $3,172 $2,817
Adjusted EBITDA(4) $189 $121 $75 $310 $317
Depreciation and amortization $77 $72 $74 $149 $146
Funds from operations $101 $59 $45 $160 $197
Capital expenditures $64 $41 $115 $105 $188
Average capital employed(5) $3,769 $3,579 $3,354 $3,674 $3,373
After-tax return (loss) on
capital employed(6) 14.6% 2.9% (0.5)% 8.9% 6.4%
Return (loss) on average
common equity(7) 31.8% (1.6)% (7.2)% 15.8% 9.9%
(1) See tables on page 11 for a description of all Corporate Items.
(2) Weighted-average number of common shares outstanding during the
period used to calculate the earnings (loss) per share (see Note
7, page 22).
(3) For periods where there are losses, diluted shares are the same as
basic shares because outstanding securities such as stock options
that could potentially dilute earnings per share would be
anti-dilutive and are therefore excluded from outstanding diluted
shares.
(4) Net income (loss) before restructuring charges, income taxes,
other gains and losses, interest expense and depreciation and
amortization (see Consolidated Statement of Net Income (Loss) and
Reinvested Earnings on page 17 and Supplemental Measures on
page 11).
(5) Average capital employed equals cash expended on plant, property
and equipment (less accumulated depreciation and amortization) and
working capital, and excludes assets under construction and
investments. Amounts are converted to U.S. dollars using
quarter-end exchange rates (see Supplemental Measures on page 11).
(6) After-tax return (loss) on capital employed equals NOVA Chemicals'
net income (loss) plus after-tax interest expense (annualized)
divided by average capital employed (see Supplemental Measures on
page 11).
(7) Return (loss) on average common equity equals annualized net
income (loss) divided by average common equity.
OLEFINS/POLYOLEFINS BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars
except as noted) Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Revenue(1) $1,078 $1,008 $851 $2,086 $1,809
Operating income $160 $129 $101 $289 $288
Depreciation and amortization 46 43 42 89 83
------- ------- ------- -------- -------
Adjusted EBITDA(2) $206 $172 $143 $378 $371
Net income $151 $70 $56 $221 $169
Capital expenditures $28 $19 $62 $47 $108
Average capital employed(3) $2,482 $2,314 $2,000 $2,398 $2,024
After-tax return on capital
employed(4) 27.0% 15.1% 13.1% 21.3% 18.7%
(1) Before intersegment eliminations.
(2) Net income before restructuring charges, income taxes, other gains
and losses, interest expense and depreciation and amortization
(see Supplemental Measures on page 11).
(3) Average capital employed equals cash expended on plant, property
and equipment (less accumulated depreciation and amortization) and
working capital and excludes assets under construction. Amounts
are converted to U.S. dollars using quarter-end exchange rates.
(4) After-tax return on capital employed equals net income plus
after-tax interest expense (annualized) divided by average capital
employed.
Operating Highlights
Average Benchmark Prices(1)
(U.S. dollars per pound,
unless otherwise noted) Three Month Average Six Month Average
----------------------- -----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- --------- -------
Benchmark Principal Products:
Ethylene(2) $0.47 $0.50 $0.38 $0.48 $0.40
Polyethylene - LLDPE butene
liner(3) $0.63 $0.69 $0.51 $0.66 $0.55
Polyethylene - weighted-
average benchmark(4) $0.66 $0.70 $0.55 $0.68 $0.59
Benchmark Raw Materials:
NYMEX natural gas (dollars
per mmBTU)(5) $6.82 $9.07 $6.80 $7.95 $6.56
WTI crude oil (dollars per
barrel) (6) $70.69 $63.48 $53.17 $67.09 $51.51
(1) Average benchmark prices do not necessarily reflect actual prices
realized by NOVA Chemicals or any other petrochemical company.
(2) Source: Chemical Market Associates, Inc. (CMAI) U.S. Gulf Coast
(USGC) Net Transaction Price.
(3) Linear Low-Density Polyethylene (LLDPE) butene liner. Source:
Townsend Polymer Services Information (TPSI).
(4) Benchmark prices weighted according to NOVA Chemicals' sales
volume mix in North America. Source for benchmark prices: TPSI.
(5) Source: New York Mercantile Exchange (NYMEX) Henry Hub 3-Day
Average Close, values in millions of British Thermal Units
(mmBTU).
(6) Source: NYMEX WTI daily spot-settled price average for calendar
month.
Polyethylene Sales Volumes
(millions of pounds) Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Standard Products 691 615 620 1,306 1,279
Performance Products(1) 146 122 105 268 201
------- ------- ------- -------- -------
Total 837 737 725 1,574 1,480
------- ------- ------- -------- -------
(1) Performance Products include SCLAIR(R) and SURPASS(R) resins
produced at the Joffre site using Advanced SCLAIRTECH(TM)
technology.
>>
NOVA Chemicals' ability to implement announced price increases depends on
many factors that may be beyond its control. See Forward-Looking Information
on page 16.
Review of Operations
Olefins/Polyolefins
The Olefins/Polyolefins business unit reported net income of $151 million
in the second quarter of 2006 compared to net income of $70 million in the
first quarter. Of the $81 million improvement, $60 million was the result of
reduced tax rates in Canada (see page 5). The remaining improvement was
primarily due to margin increases and expanded Corunna operations. Margins
improved as lower prices were more than offset by lower feedstock costs.
Volume was up mainly due to the first quarter impact of the extended Corunna
outage.
Ethylene and Feedstocks
USGC ethylene benchmark prices averaged 47 cents per pound in the second
quarter of 2006 compared to 50 cents per pound in the first quarter.
The average price of NYMEX contract natural gas was down 25% to $6.82 per
mmBTU. USGC ethane prices averaged 157% of NYMEX natural gas cash prices, up
from an average of 112% in the previous quarter. AECO cash natural gas prices
were down 18% from the first quarter to $5.35 per mmBTU in the second quarter.
The Alberta Advantage averaged 14 cents per pound of cash cost of
ethylene production in the second quarter of 2006, up significantly from 5
cents per pound in the first quarter. The advantage strengthened as NOVA
Chemicals' ethane costs decreased by 16%, while ethane prices on the USGC
increased 19%. USGC ethane prices rose due to strong demand for ethane
feedstock, resulting from high USGC ethylene operating rates as well as the
rapid increase in the costs of alternative feeds. In July, the Alberta
Advantage was widened further to approximately 20 cents per pound. Alberta
advantaged ethylene is used to produce approximately 65% of NOVA Chemicals'
total polyethylene.
The average price of WTI crude oil was up 11% to $70.69 per barrel in the
second quarter. This increase in crude oil feedstock cost was more than offset
by higher co-product revenues from the Corunna flexi-cracker.
In the second quarter, the Corunna flexi-cracker was fully operational
until June 19, when production at the facility was stopped due to the
inadvertent activation of a process shutdown switch by a third-party
contractor. The resulting financial impact in the second quarter was $8
million after-tax. The facility returned to normal operations within two weeks
of the stoppage. The financial impact in the third quarter will be
approximately $1 million after-tax.
Polyethylene
NOVA Chemicals' total polyethylene sales volume for the second quarter
was 837 million pounds, up 100 million pounds from the previous quarter,
mainly reflecting increased ethylene availability from Corunna.
International sales volumes decreased 7% quarter-over-quarter to 95
million pounds primarily due to a focus on improved domestic sales and margin
opportunities. International sales represented 11% of total polyethylene sales
in the second quarter.
North American polyethylene demand exceeded supply in the second quarter
even though producer operating rates averaged 92%. During the same period, the
American Plastics Council (APC) reported that North American producer
inventories were reduced to 36 days of sales by the end of the quarter, which
is at the low end of the historical range. NOVA Chemicals finished the second
quarter with 22 days of polyethylene inventory, up from 18 days at the end of
the first quarter.
A 6 cents per pound polyethylene price increase was implemented in North
America in May and June, reversing the industry trend of five straight months
of 4 cents per pound price decreases through April. Two polyethylene price
increases totaling 12 cents per pound were announced during the second quarter
and are expected to be implemented in the third quarter.
Performance Products
Second quarter sales of polyethylene Performance Products manufactured
using Advanced SCLAIRTECH technology were 146 million pounds, or 69% of the
plant's 213 million pound quarterly capacity, up from 57% in the previous
quarter. Second quarter sales volume increased 20% from the first quarter of
2006 and 39% versus the second quarter of 2005. The commercialization of new
products for molding applications continues to drive the growth of Performance
Product sales.
Canadian Tax Rate Reductions
During the second quarter of 2006, the Canadian federal and Alberta
provincial governments passed legislation that will reduce income tax rates in
their jurisdictions. For income subject to tax in Alberta, the rate was
reduced from 11.5% to 10% effective April 1, 2006. For income subject to
Canadian federal tax, the rate will gradually reduce from 22.1% in 2007 to
19.0% in 2010. As a result of these changes, NOVA Chemicals reduced its future
tax liability by $60 million and recorded the tax savings as income in the
second quarter of 2006. Virtually all of the income subject to these taxes is
earned by the Olefins/Polyolefins business unit.
Second Quarter 2006 Versus Second Quarter 2005
Net income of $151 million in the second quarter of 2006 was up from net
income of $56 million in the second quarter of 2005. The quarter-over-quarter
improvement was due to product prices rising faster than feedstock costs,
increased production from Corunna and the benefit received in the second
quarter of 2006 as a result of the Canadian tax rate reductions.
First Six Months 2006 Versus First Six Months 2005
Net income for the first six months of 2006 was $221 million, up from
$169 million for the first six months of 2005. The improvement in the
year-over-year results was primarily related to increases in unit margin, the
improved market conditions and the Canadian tax rate reductions.
<<
EXPANDABLE POLYSTYRENE / STYRENIC PERFORMANCE PRODUCTS
BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars except as noted)
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Revenue(1) $106 $99 $102 $205 $204
Operating loss $(4) $(6) $(8) $(10) $(8)
Depreciation and amortization 3 3 3 6 6
------- ------- ------- -------- -------
Adjusted EBITDA(2) $(1) $(3) $(5) $(4) $(2)
Net loss $(4) $(6) $(6) $(10) $(6)
Capital expenditures $31 $20 $14 $51 $24
Average capital employed(3) $221 $216 $238 $218 $236
After-tax loss on capital
employed(4) (4.6)% (7.7)% (7.1)% (6.1)% (2.9)%
(1) Before intersegment eliminations.
(2) Net loss before restructuring charges, income taxes, other gains
and losses, interest expense and depreciation and amortization
(see Supplemental Measures on page 11).
(3) Average capital employed equals cash expended on plant, property
and equipment (less accumulated depreciation and amortization) and
working capital and excludes assets under construction. Amounts
are converted to U.S. dollars using quarter-end exchange rates.
(4) After-tax loss on capital employed equals net loss plus after-tax
interest expense (annualized) divided by average capital employed.
>>
NOVA Chemicals' ability to implement announced price increases depends on
many factors that may be beyond its control. See Forward-Looking Information
on page 16.
Review of Operations
EXPANDABLE POLYSTYRENE/ STYRENIC PERFORMANCE PRODUCTS
On June 26, 2006, NOVA Chemicals announced plans to restructure its
traditional Styrenics business into two new business units, EPS/SPP and
STYRENIX, with each unit to report results separately. EPS/SPP, which includes
NOVA Chemicals' North American expandable polystyrene and Styrenic Performance
Products operations, remains part of NOVA Chemicals' core business.
The EPS/SPP business unit includes the following:
-- Beaver Valley site, PA; Painesville, OH; and Belpre, OH polymer
facilities
-- ARCEL, DYLARK(R) FG, DYLARK automotive, NAS(R), ZYLAR(R), and ZYLAR
EX resins
-- Equity position in Lyondell's Channelview, TX styrene monomer
facility
-- NOVA Chemicals' interest in the NOVIDESA 50:50 joint venture in
Mexico
-- New business ventures
-- NOVA Chile
The EPS/SPP business unit reported a net loss of $4 million in the second
quarter of 2006 compared to a net loss of $6 million in the first quarter. The
quarter-over-quarter improvement in earnings was primarily related to volume
growth in EPS construction and cup markets.
North American Expandable Polystyrene (EPS)
North American EPS sales volume increased by 23% quarter-over-quarter and
by 13% on a year-to-date basis. APC reported a total EPS sales increase of 17%
quarter-over-quarter and an increase of 5% year-over-year. The
quarter-over-quarter volume increase largely reflects seasonal EPS growth in
the North American construction and cup market segments. The increase in the
sales volume offset the decrease in EPS prices.
A 4 cents per pound price increase, effective July 1, was announced
during the second quarter and is expected to be implemented during the third
quarter.
Performance Products
Styrenic Performance Products sales volumes were flat
quarter-over-quarter.
The ARCEL base resin capacity expansion at the Beaver Valley site was
completed during the second quarter and the plant re-started in late May 2006,
as scheduled. The construction of new finishing capacity for ARCEL base resins
in Ningbo, China, a venture with Loyal Chemical, was completed at the end of
June 2006. These expansions are both components of the plan to expand
manufacturing capacity for ARCEL resin to 220 million pounds per year by the
end of 2008.
Continued sales growth of Performance Products is expected with the
introduction of new applications such as the Reynolds' new microwave-safe
rotisserie packaging made with DYLARK FG resins and the specification of ARCEL
moldable foam resin by Panasonic for protective packaging of high-definition
plasma televisions.
Second Quarter 2006 Versus Second Quarter 2005
The EPS/SPP business unit had a net loss of $4 million in the second
quarter of 2006, compared to a net loss of $6 million in the second quarter of
2005 due to a 10% increase in sales volume.
First Six Months 2006 Versus First Six Months 2005
The net loss for the first six months of 2006 was $10 million, compared
to a net loss of $6 million for the first six months of 2005. Although
competitive factors have driven prices down during the first six months of
2006, volume increased due to the growth of EPS in North American construction
and cup market segments and the addition of new customer accounts.
<<
STYRENIX BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars except as noted)
Three Months Ended Six Months Ended
------------------------ ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- -------- -------- -------
Revenue(1) $510 $512 $449 $1,022 $968
Operating loss $(53) $(45) $(90) $(98) $(109)
Depreciation and amortization 28 26 29 54 57
------- ------- -------- -------- -------
Adjusted EBITDA(2) $(25) $(19) $(61) $(44) $(52)
Net loss $(45) $(39) $(71) $(84) $(91)
Capital expenditures $5 $2 $39 $7 $56
Average capital employed(3) $1,168 $1,134 $1,182 $1,151 $1,195
After-tax loss on capital
employed(4) (11.5)% (9.4)% (21.0)% (10.5)% (12.4)%
(1) Before intersegment eliminations.
(2) Net loss before restructuring charges, income taxes, other gains
and losses, interest expense and depreciation and amortization
(see Supplemental Measures on page 11).
(3) Average capital employed equals cash expended on plant, property
and equipment (less accumulated depreciation and amortization) and
working capital and excludes assets under construction. Amounts
are converted to U.S. dollars using quarter-end exchange rates.
(4) After-tax loss on capital employed equals net loss plus after-tax
interest expense (annualized) divided by average capital employed.
Operating Highlights
Average Benchmark Prices(1)
(U.S. dollars per pound,
unless otherwise noted) Three Month Average Six Month Average
----------------------- -----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- --------
Benchmark Principal Products:
Styrene monomer(2) $0.62 $0.61 $0.61 $0.61 $0.63
Solid polystyrene(3)
North America $0.84 $0.86 $0.86 $0.85 $0.86
Europe $0.66 $0.62 $0.66 $0.64 $0.68
Benchmark Raw Materials:
Benzene (dollars per
gallon)(4) $3.02 $2.68 $3.06 $2.85 $3.11
(1) Average benchmark prices do not necessarily reflect actual prices
realized by NOVA Chemicals or any other petrochemical company.
(2) Source: CMAI Contract Market.
(3) Source for benchmark prices: CMAI.
(4) A 10 cents per gallon change in the cost of benzene generally
results in about a 1 cent per pound change in the variable cost
of producing styrene monomer. Source of benzene benchmark prices:
CMAI.
STYRENIX Sales Volumes
(millions of pounds) Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Styrene monomer(1) 349 446 396 795 823
Solid polystyrene
North America 192 181 200 373 422
European Joint Venture 246 248 242 494 507
------- ------- ------- -------- -------
Total 787 875 838 1,662 1,752
------- ------- ------- -------- -------
(1) Third-party sales, including purchased volumes resold. Excludes
sales to the NOVA Innovene joint venture.
>>
NOVA Chemicals' ability to implement announced price increases depends on
many factors that may be beyond its control. See Forward-Looking Information
on page 16.
Review of Operations
STYRENIX
During the second quarter, NOVA Chemicals created a new business unit,
STYRENIX, to better align resources and reduce costs. This unit is not
considered to be part of NOVA Chemicals' core business.
Approximately $45 million of the company-wide $65 million cost reductions
will be directly related to STYRENIX. As a result, NOVA Chemicals will take a
restructuring charge in the third quarter of 2006. A charge of $10 million
after-tax related to the Chesapeake site closure was taken in the first
quarter of 2006.
STYRENIX includes NOVA Chemicals' styrene monomer and North American
solid polystyrene operations and its 50% interest in the NOVA Innovene
European joint venture. The STYRENIX business unit includes the following:
-- Bayport, TX and Sarnia, ON styrene monomer facilities
-- Decatur, AL; Springfield, MA; and Montreal, PQ solid polystyrene
facilities
-- Solid polystyrene production at Belpre, OH
-- NOVA Chemicals' 50% interest in NOVA Innovene
The STYRENIX business unit reported a net loss of $45 million in the
second quarter of 2006 compared to a net loss of $39 million in the first
quarter. Increased feedstock costs largely offset price increases mainly in
Europe.
Styrene Monomer
Styrene monomer margins were down in the second quarter as feedstock
costs outpaced styrene monomer prices. The second quarter average benzene
price increased to $3.02 per gallon up from $2.68 per gallon in the first
quarter, while styrene monomer prices increased to $0.62 per pound from $0.61
per pound in the first quarter.
In the second quarter, third-party styrene monomer sales volumes were
down 22% compared to the first quarter as a result of idling the Bayport, TX
plant on May 4, 2006 due to the ethylene force majeure declared by Huntsman
Corporation and limited ethylene availability on the USGC. The margin impact
of lost sales was minimal and the second quarter impact of the outage was $1
million after-tax, largely related to the costs associated with the plant
shutdown. The plant restarted in mid-July 2006. The estimated financial impact
for the third quarter is less than $1 million after-tax.
North American Solid Polystyrene (SPS)
North American SPS sales volume increased by 6% quarter-over-quarter with
the addition of several new customers. North American benchmark SPS prices
decreased by approximately 2 cents per pound from the first quarter.
NOVA Chemicals announced three price increases totaling 13 cents per
pound for North American SPS during the second quarter. A 5 cents per pound
increase effective June 1 is expected to be fully realized by the end of July.
Two price increases, 4 cents per pound each, are announced for third quarter
implementation.
SPS production at NOVA Chemicals' Chesapeake, VA site was permanently
shut down on June 9, 2006, three weeks ahead of schedule. Compounding
facilities at the site are expected to close in the second half of 2006.
Savings of $15 million per year are expected as a result of these actions.
NOVA Innovene
SPS sales volumes for NOVA Innovene, NOVA Chemicals' European joint
venture with INEOS, were down 11% from the first quarter. The decrease in
volume arose from a combination of weaker market demand and some market share
loss as NOVA Innovene took a firm position regarding the implementation of
price increases given the significant increase in feedstock costs. The
European SPS benchmark price increased approximately 4 cents per pound from
the first quarter.
EPS sales volumes for NOVA Innovene were up 18% from the first quarter.
Sales grew in the second quarter as a result of extremely low producer
inventories at the end of the first quarter and robust European demand.
Despite rapidly increasing market prices due to rising feedstock costs, demand
strengthened and EPS producer inventories remained low at the end of the
second quarter. The European EPS benchmark price increased by approximately 8
cents per pound from the first quarter.
NOVA Innovene continues to be on track to deliver its synergy-related
improvement target of $60 million per year by the end of 2007 as a result of
joint venture synergies. NOVA Chemicals will receive 50% of the benefit of the
total cost savings. By the end of the second quarter of 2006, the joint
venture had achieved annualized cost savings of $20 million.
Second Quarter 2006 Versus Second Quarter 2005
The STYRENIX business unit had a net loss of $45 million in the second
quarter of 2006, compared to a net loss of $71 million in the second quarter
of 2005. Declining prices and volumes in the second quarter of 2006 compared
to the second quarter of 2005 were more than offset by the benefit of the
lower feedstock costs.
First Six Months 2006 Versus First Six Months 2005
The STYRENIX business unit net loss for the first six months of 2006 was
$84 million, compared to a net loss of $91 million for the first six months of
2005. The year-over-year decreases in price and volume were more than offset
by lower feedstock costs.
<<
CORPORATE
Before-tax Corporate Items
(millions of U.S. dollars)
----------------------- ----------------
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006(5) 2005(5) 2006 2005(5)
------- ------- ------- -------- -------
Stock-based compensation and
profit sharing(1) $(3) $(4) $35 $(7) $37
Restructuring(2) (1) (15) - (16) -
Unusual non-cash insurance
charge(3) - - (22) - (22)
Mark-to-market feedstock
derivatives(4) 12 (25) (14) (13) (14)
------- ------- ------- -------- -------
$8 $(44) $(1) $(36) $1
------- ------- ------- -------- -------
After-tax Corporate Items
(millions of U.S. dollars)
----------------------- ----------------
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006(5) 2005(5) 2006 2005(5)
------- ------- ------- -------- -------
Stock-based compensation and
profit sharing(1) $(2) $(4) $20 $(6) $21
Restructuring(2) - (10) - (10) -
Unusual non-cash insurance
charge(3) - - (15) - (15)
Mark-to-market feedstock
derivatives(4) 8 (16) (9) (8) (9)
------- ------- ------- -------- -------
$6 $(30) $(4) $(24) $(3)
------- ------- ------- -------- -------
(1) NOVA Chemicals has two cash-settled stock-based incentive
compensation plans that are marked-to-market with changes in the
value of the common stock price. In November 2005, NOVA Chemicals
entered into a three-year hedging arrangement that effectively
neutralizes the mark-to-market impact on the stock-based incentive
compensation plans. In addition, NOVA Chemicals maintains a profit
sharing program available to most employees based on the
achievement of shareholder return on equity targets. Stock-based
compensation also includes the amount expensed related to the fair
value of stock options earned by employees during the period.
(2) NOVA Chemicals accrued $1 million (before-tax) of restructuring
costs in the second quarter of 2006 related to actions taken in
the European joint venture. NOVA Chemicals accrued $15 million
($10 million after-tax) in the first quarter of 2006 related to
severance costs for the Chesapeake, VA plant site closure.
(3) NOVA Chemicals accrued a non-cash expense of $22 million
($15 million after-tax) in the second quarter of 2005 related to
its share of estimated incremental costs in the insurance pools in
which it participates. NOVA Chemicals is one of many participants
in OIL and sEnergy - two mutual insurance companies formed to
insure against catastrophic risks. Due to losses incurred by OIL
and sEnergy that are related to participants other than NOVA
Chemicals, the company was required to pay higher premiums.
(4) See page 14 for description.
(5) Beginning in 2006, NOVA Chemicals began classifying stock option
expense and mark-to-market adjustments on feedstock derivative
positions as corporate items as they are non-cash items and are
not relevant in measuring business performance. Previously these
amounts were allocated to the Olefins/Polyolefins and Styrenics
business units. Prior periods have been restated to conform with
the new presentation.
>>
Supplemental Measures
In addition to providing measures in accordance with Canadian Generally
Accepted Accounting Principles (GAAP), NOVA Chemicals presents certain
supplemental measures as follows:
-- Adjusted EBITDA - This measure is provided to assist investors in
determining the ability of NOVA Chemicals to generate cash from operations.
Adjusted EBITDA can be determined from the Consolidated Statement of Net
Income (Loss) and Reinvested Earnings by adding to net income (loss) interest
expense, income taxes, depreciation and amortization, other gains and losses,
and restructuring charges. Segment adjusted EBITDA is determined as segment
operating income or loss before depreciation and amortization.
-- Average capital employed - defined on page 2
-- CFCT - defined on page 13
-- After-tax return (loss) on capital employed - defined on page 2
-- Net debt to total capitalization - defined on page 12
-- Net income (loss) from the business units - total net income or loss
from the Olefins/Polyolefins, EPS/SPP and STYRENIX business units, which
equals NOVA Chemicals' net income less corporate and other items (see page 1).
-- Net tangible asset coverage on long-term debt - defined on page 12
These measures do not have any standardized meaning prescribed by GAAP
and are therefore unlikely to be comparable to similar measures presented by
other companies.
<<
Liquidity and Capital Resources
Capitalization
(millions of U.S. dollars except as noted) June 30 Mar. 31 Dec. 31
2006 2006 2005
------- ------- -------
Current debt(1) $200 $302 $302
Less: restricted cash and other assets (72) (72) (72)
------- ------- -------
Net current debt 128 230 230
Long-term debt(2) 1,690 1,740 1,737
Less: cash and cash equivalents (93) (94) (166)
------- ------- -------
Total debt, net of cash, cash equivalents and
restricted cash 1,725 1,876 1,801
Total common shareholders' equity
(3)(4)(5)(6)(7) 1,387 1,218 1,219
------- ------- -------
Total capitalization(8) $3,112 $3,094 $3,020
------- ------ -------
(1) Current debt includes the $198 million preferred shares due
Mar. 15, 2007 and the current debt related to the Joffre
cogeneration facility joint venture.
(2) Maturity dates for NOVA Chemicals' current and long-term debt
range from March 2007 to August 2028.
(3) Common shares outstanding on July 14, 2006 were 82,549,694 (June
30, 2006 - 82,549,694; Mar. 31, 2006 - 82,540,944; Dec. 31, 2005 -
82,364,899).
(4) A total of 5,701,798 stock options to purchase common shares of
NOVA Chemicals were outstanding to officers and employees on July
14, 2006, and 5,701,798 were outstanding on June 30, 2006. A total
of 1,988,132 common shares were reserved but unallocated at
June 30, 2006. A total of 13 million common shares were initially
reserved for issuance under the Option Plan.
(5) A total of 47,800 shares were reserved for the Directors' Share
Compensation Plan.
(6) In April 2005, NOVA Chemicals' shareholders reconfirmed a
shareholder rights plan where one right was issued for each
outstanding common share. The plan expires in May 2009.
(7) For the three months ended June 30, 2006, a total of 8,750
common shares were issued upon the exercise of stock options.
(8) Total capitalization includes shareholders' equity and total
debt net of cash and cash equivalents and restricted cash.
Senior Debt Ratings (1)
Senior Unsecured Debt
-------------------------------
DBRS BBB (low) (negative)
Fitch Ratings BB (stable)
Moody's Ba2 (negative)
Standard & Poor's BB- (stable)
(1) Credit ratings are not recommendations to purchase, hold or sell
securities and do not comment on market price or suitability for
a particular investor. There is no assurance that any rating will
remain in effect for any given period of time or that any rating
will not be revised or withdrawn entirely by a rating agency in
the future.
Coverage Ratios Three Months Ended
------------------------
June 30 Mar. 31 Dec. 31
2006 2006 2005
-------- ------- -------
Net debt to total capitalization(1) 55.4% 60.6% 59.6%
Interest coverage on long-term debt(2) 0.0x 0.0x 0.0x
Net tangible asset coverage on long-term debt(3) 1.7x 1.6x 1.6x
(1) Net debt to total capitalization is equal to total debt, net of
cash, cash equivalents and restricted cash, divided by total
common shareholders' equity plus net debt (see Capitalization
table above and Supplemental Measures on page 11).
(2) Interest coverage on long-term debt is equal to net income before
interest expense on long-term debt and income taxes, for the last
four quarters, divided by annual interest requirements on
long-term debt.
(3) Net tangible asset coverage on long-term debt is equal to total
assets (excluding future tax assets) less liabilities (excluding
long-term debt) divided by long-term debt.
Funds Flow and Changes in Cash and Debt
The following table shows major sources and uses of cash.
(millions of U.S. dollars) Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------------ ----------------
Operating income $111 $145
Add back - depreciation and
amortization 77 149
- restructuring charges 1 16
------------------ ----------------
Adjusted EBITDA(1) 189 310
Interest expense (40) (82)
Restructuring charges (1) (16)
(Gain) loss on derivatives (12) 6
Current tax expense and other (35) (58)
------------------ ----------------
Funds from operations 101 160
Operating working capital decrease 147 67
------------------ ----------------
Cash from operations 248 227
Asset sale proceeds - 2
Capital expenditures (64) (105)
Turnaround costs, long-term
investments and other assets (11) (20)
Dividends paid (8) (15)
Common shares issued - 2
Foreign exchange and other (14) (15)
------------------ ----------------
Total change in cash and debt $151 $76
------------------ ----------------
Decrease in cash and cash
equivalents $(1) $(73)
Decrease in debt (including foreign
exchange changes) 152 149
------------------ ----------------
Total change in cash and cash
equivalents and debt $151 $76
------------------ ----------------
(1) See Consolidated Statement of Net Income (Loss) and Reinvested
Earnings on page 17 and Supplemental Measures on page 11.
>>
NOVA Chemicals' net debt to total capitalization ratio improved to 55.4%
at June 30, 2006 from 60.6% at Mar. 31, 2006. The corporation reduced net debt
by $151 million with cash generated from operations. In addition to this,
shareholders' equity increased by $169 million as a result of second quarter
profits and translation gains on foreign assets.
NOVA Chemicals' funds from operations were $101 million for the second
quarter of 2006, up from $59 million in the first quarter mainly due to an
increase in operating income. Operating working capital decreased by $147
million primarily as a result of the sale of accounts receivable under the
securitization programs in the second quarter of 2006.
NOVA Chemicals measures the effectiveness of its working capital
management through Cash Flow Cycle Time (CFCT). See Supplemental Measures on
page 11. CFCT measures working capital from operations (excluding the NOVA
Innovene joint venture) in terms of the number of days sales (calculated as
working capital from operations divided by average daily sales). This metric
helps to determine which portion of changes in working capital results from
factors other than price movements. CFCT was 30 days as of June 30, 2006, and
31 days as of Mar. 31, 2006.
Capital expenditures were $64 million in the second quarter of 2006,
compared to $41 million in the first quarter and $115 million in the second
quarter of 2005. Capital expenditures have declined following the substantial
completion of the Corunna ethylene flexi-cracker modernization project;
however, spending was up in the second quarter related to the ARCEL resin
plant expansion at the Beaver Valley site and other project spending.
Selling, general and administrative costs were $40 million higher than in
the second quarter of 2005 and $46 million higher on a year-to-date basis
compared to last year due to mark-to-market income in 2005 related to
stock-based compensation. This exposure to fluctuations in NOVA Chemicals'
share price has been hedged in 2006.
Depreciation and amortization was $5 million higher in the second quarter
of 2006 compared to the first quarter of 2006 primarily due to amortization of
the Corunna modernization project deferred start-up costs.
Interest expense was higher by $13 million in the second quarter of 2006
compared to the second quarter of 2005 and $30 million higher on a
year-to-date basis compared to 2005 due to less capitalized interest resulting
from the completion of the Corunna and Bayport projects, higher debt levels
and higher interest rates.
Financing
NOVA Chemicals has a $375 million revolving credit facility, expiring
June 30, 2010. As of June 30, 2006, NOVA Chemicals had utilized $111 million
of the revolving credit facility, of which $1 million is in the form of
operating letters of credit. On Mar. 31, 2006, NOVA Chemicals amended its debt
to capitalization ratio financial covenant from 55% to 60% for the period Mar.
31, 2006 to Sep. 30, 2006. Using the covenant methodology in the revolving
credit facility, the debt to capitalization ratio was 52% at June 30, 2006.
NOVA Chemicals continues to comply with all financial covenants under the
facility.
NOVA Chemicals also has a $100 million unsecured revolving facility,
expiring in March 2011. As of June 30, 2006, NOVA Chemicals had utilized $87
million of the revolving credit facility, of which $57 million is in the form
of operating letters of credit.
On June 30, 2006, NOVA Chemicals put in place an additional $100 million
unsecured revolving facility expiring June 30, 2008. No amounts have been
drawn on this facility.
Effective June 30, 2006, NOVA Chemicals increased the size of its
accounts receivable securitization programs to an aggregate amount of $350
million. The accounts receivable programs will expire on June 30, 2010. As of
June 30, 2006, $285 million was sold under the accounts receivable
securitization programs.
On May 15, 2006, $300 million of 7% medium-term notes were repaid.
Included in current debt are NOVA Chemicals' $198 million of preferred
shares. The total return swap, which is closely tied to the preferred shares,
comes due on Mar. 15, 2007. As a result, the preferred shares would also
become due for redemption and have therefore been classified as current debt.
In addition, $72 million of restricted cash and other assets have also been
reclassified to current assets.
Feedstock Derivative Positions
NOVA Chemicals maintains a derivatives program to manage risk associated
with feedstock purchases. In the second quarter, there was no net gain or loss
from natural gas, benzene and crude oil positions that matured; there was a $4
million after-tax gain in the first quarter.
In addition, NOVA Chemicals is required to record on its balance sheet
the market value of any outstanding derivative positions that do not qualify
for hedge accounting treatment. The gain or loss resulting from changes in the
market value of these derivatives is recorded through earnings each period.
The mark-to-market earnings impact in the second quarter of NOVA Chemicals'
outstanding feedstock derivative portfolio was an $8 million after-tax gain
compared to a $16 million after-tax loss in the first quarter. These
mark-to-market adjustments are recorded as part of Corporate and Other results
until the positions are realized. Once realized, any income effects are
recorded in business results.
FIFO Impact
NOVA Chemicals uses the first-in, first-out (FIFO) method of valuing
inventory. Most of NOVA Chemicals' competitors use the last-in, first-out
(LIFO) method. Because NOVA Chemicals uses FIFO, a portion of the first
quarter feedstock purchases flowed through the Consolidated Statement of Net
Income (Loss) and Reinvested Earnings in the second quarter. The following
chart depicts the benzene, crude and natural gas prices at the end of each
quarter.
<<
June 2006 March 2006
-------------------- ----------------------
Benzene(1) $ 3.30 per gallon $ 2.73 per gallon
Crude(2) $ 70.96 per barrel $ 62.97 per barrel
Natural Gas(3) $ 5.96 per mmBTU $ 7.28 per mmBTU
(1) Source: CMAI
(2) Source: NYMEX WTI daily spot-settled price average for calendar
month
(3) Source: NYMEX Henry Hub 3-Day Average Close
>>
NOVA Chemicals estimates that earnings would have been about $20 million
lower in the second quarter had NOVA Chemicals used the LIFO method of
accounting primarily due to the escalation of benzene and crude prices during
the second quarter.
NOVA Chemicals' share price on the New York Stock Exchange (NYSE) rose to
$28.79 at June 30, 2006 from $28.50 at Mar. 31, 2006. NOVA Chemicals' share
value increased 1% for the quarter ending June 30, 2006 on the NYSE while NOVA
Chemicals' share value decreased 4% for the quarter ending June 30, 2006 on
the Toronto Stock Exchange (TSX). Peer chemical companies' share values
increased 4% on average and the S&P Chemicals Index decreased 1%. The S&P/TSX
Composite Index was down 4% and the S&P 500 was down 2% in the second quarter.
As of July 19, 2006, NOVA Chemicals' share price was $29.42, up 2% from June
30, 2006. The S&P Chemicals Index was down 2% over the same period.
In the second quarter, approximately 43% of trading in NOVA Chemicals'
shares took place on the TSX and 57% of trading took place on the NYSE and
other U.S. markets.
<<
Second Quarter Trading
Volumes Millions of Shares % of Float % of Trading
------------------------- ------------------ ----------- -------------
Toronto Stock Exchange 26.6 32% 43%
Consolidated U.S. Trading
Volumes 35.6 43% 57%
------------------ ----------- -------------
Total 62.2 75% 100%
------------------ ----------- -------------
INVESTOR INFORMATION
For inquiries on stock-related matters including dividend payments,
stock transfers and address changes, contact NOVA Chemicals toll-free
at 1-800-661-8686 or e-mail to shareholders(at)novachem.com.
Contact Information
Phone: (403) 750-3600 (Canada) or (412) 490-4000 (United States)
Internet: www.novachemicals.com E-Mail: invest(at)novachem.com
NOVA Chemicals Corporation
1000 Seventh Avenue S.W., P.O. Box 2518
Calgary, Alberta, Canada T2P 5C6
If you would like to receive a shareholder information package, please
contact us at (403) 750-3600 or (412) 490-4000 or via e-mail at
publications(at)novachem.com.
We file additional information relating to NOVA Chemicals, including
our Annual Information Form (AIF), with Canadian securities
administrators. This information can be accessed through the System
for Electronic Document Analysis and Retrieval (SEDAR), at
www.sedar.com. This same information is filed with the U.S. Securities
and Exchange Commission and can be accessed via their Electronic Data
Gathering Analysis and Retrieval System (EDGAR) at
www.sec.gov/edgar.shtml
Transfer Agent and Registrar
CIBC Mellon Trust Company
600 The Dome Tower, 333 Seventh Avenue S.W.
Calgary, Alberta, Canada T2P 2Z1
Phone: (403) 232-2400/1-800-387-0825
Fax: (403) 264-2100
Internet: www.cibcmellon.ca
E-Mail: inquiries(at)cibcmellon.ca
Share Information
NOVA Chemicals' trading symbol on the New York and Toronto Stock
Exchanges is NCX.
Advanced SCLAIRTECH(TM) is a trademark of NOVA Chemicals.
ARCEL(R); DYLARK(R); and NAS(R) are registered trademarks of NOVA
Chemicals Inc.
SCLAIR(R) is a registered trademark of NOVA Chemicals Corporation in
Canada and of NOVA Chemicals (International) S.A. elsewhere;
authorized use/utilisation autorisee.
SURPASS(R) is a registered trademark of NOVA Chemicals Corporation in
Canada and of NOVA Chemicals (International) S.A. elsewhere.
ZYLAR(R) is a registered trademark of NOVA Chemicals (Canada) Ltd./
NOVA Chimie (Canada) Ltee.; authorized use/utilisation autorisee.
CHANGES IN NET INCOME (LOSS)
(millions of U.S. dollars)
Q2 2006 First Six
Compared with Months 2006
--------------- Compared
with First Six
Q1 2006 Q2 2005 Months 2005
------- ------- --------------
Higher net unit margins $26 $119 $28
Higher sales volumes 47 36 12
------- ------- --------------
Higher operating margin(1) 73 155 40
Higher research and development (1) (1) (1)
Higher selling, general and administrative (4) (40) (46)
Lower (higher) restructuring charges 14 (1) (16)
Higher depreciation and amortization (5) (3) (3)
Lower (higher) interest expense 2 (13) (30)
(Lower) higher other gains and losses (2) - 2
Lower income tax expense 36 36 88
------- ------- --------------
Increase in net income (loss) $113 $133 $34
------- ------- --------------
(1) Operating margin equals revenue less feedstock and operating
costs.
>>
Forward-Looking Information
This news release contains forward-looking statements with respect to
NOVA Chemicals, its subsidiaries and affiliated companies. By their nature,
forward-looking statements require NOVA Chemicals to make assumptions and are
subject to inherent risks and uncertainties. There is significant risk that
predictions, forecasts, conclusions and projections will not prove to be
accurate, that NOVA Chemicals' assumptions may not be correct and that actual
results may differ materially from such predictions, forecasts, conclusions or
projections. Forward-looking statements for the time periods beyond 2006
involve longer-term assumptions and estimates than forward-looking statements
for 2006 and are consequently subject to greater uncertainty. NOVA Chemicals
cautions readers of this news release not to place undue reliance on its
forward-looking statements as a number of factors could cause actual results,
conditions, actions or events to differ materially from the targets,
expectations, estimates or intentions expressed in the forward-looking
statements.
The words "believe," "expect," "plan," "intend," "estimate," or
"anticipate" and similar expressions, as well as future or conditional verbs
such as "will," "should," "would," and "could" often identify forward-looking
statements. Specific forward-looking statements contained in this news release
include, among others, statements regarding: NOVA Chemicals' expectations with
respect to delivery of total annual cost reductions of approximately $65
million by the end of the third quarter that will positively impact company
results; NOVA Chemicals' belief that its restructuring will position STYRENIX
as a potential catalyst for change in the industry; expected Styrenic
Performance Products sales and manufacturing capacity growth; expected
financial performance in future periods, including cost savings in NOVA
Chemicals' STYRENIX business unit; and implementation of announced price
increases. With respect to forward-looking statements contained in this news
release, NOVA Chemicals has made assumptions regarding, among other things:
future oil, natural gas and benzene prices; its ability to obtain raw
materials; its ability to market products successfully to its anticipated
customers; the impact of increasing competition; and its ability to obtain
financing on acceptable terms. Some of the risks that could affect NOVA
Chemicals' future results and could cause results to differ materially from
those expressed in the forward-looking statements include: commodity chemicals
price levels (which depend, among other things, on supply and demand for these
products, capacity utilization and substitution rates between these products
and competing products); feedstock availability and prices; operating costs;
terms and availability of financing; technology developments; currency
exchange rate fluctuations; starting up and operating facilities using new
technology; realizing synergy and cost savings targets; NOVA Chemicals ability
to implement its business strategies; meeting time and budget targets for
significant capital investments; avoiding unplanned facility shutdowns;
safety, health, and environmental risks associated with the operation of
chemical plants and marketing of chemical products, including transportation
of these products; public perception of chemicals and chemical end-use
products; the impact of competition; changes in customer demand, including
customer acceptance of NOVA Chemicals' Performance Products; changes in, or
the introduction of new laws and regulations relating to NOVA Chemicals'
business, including environmental, competition and employment laws; costs to
comply with the Kyoto Protocol; loss of the services of any of NOVA Chemicals'
executive officers; uncertainties associated with the North American, South
American, European, and Asian economies; terrorist attacks; severe weather
events; and other risks detailed from time to time in the publicly filed
disclosure documents and securities commission reports of NOVA Chemicals and
its subsidiaries or affiliated companies.
Implementation of announced price increases depends on many factors,
including market conditions, the supply/demand balance for each particular
product and feedstock costs. Price increases have varying degrees of success.
They are typically phased in and can differ by product or market. There can be
no assurances that any announced price increases will be successful or will be
realized within the anticipated time frame. In addition, benchmark price
indices sometimes lag price increase announcements due to the timing of
publication.
NOVA Chemicals' forward-looking statements are expressly qualified in
their entirety by this cautionary statement. In addition, the forward-looking
statements are made only as of the date of this news release, and except as
required by applicable law, NOVA Chemicals undertakes no obligation to
publicly update these forward-looking statements to reflect new information,
subsequent events or otherwise.
<<
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Net Income (Loss) and Reinvested Earnings
(unaudited, millions of U.S. dollars except per share amounts)
Three Months Ended Six Months Ended
----------------------- -----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------------------------- -------
Revenue $1,619 $1,553 $1,329 $3,172 $2,817
------- ------- ------- --------- -------
Feedstock and operating costs 1,363 1,370 1,228 2,733 2,418
Research and development 13 12 12 25 24
Selling, general and
administrative 54 50 14 104 58
Restructuring charges
(Note 3) 1 15 - 16 -
Depreciation and amortization 77 72 74 149 146
------- ------- ------- --------- -------
1,508 1,519 1,328 3,027 2,646
------- ------- ------- --------- -------
Operating income 111 34 1 145 171
------- ------- ------- --------- -------
Interest expense (net)
(Note 4) (40) (42) (27) (82) (52)
Other gains and losses (net)
(Note 5) - 2 - 2 -
------- ------- ------- --------- -------
(40) (40) (27) (80) (52)
------- ------- ------- --------- -------
Income (loss) before income
taxes 71 (6) (26) 65 119
Income tax recovery (expense)
(Note 6) 37 1 1 38 (50)
------- ------- ------- --------- -------
Net income (loss) $108 $(5) $(25) $103 $69
Reinvested earnings,
beginning of period 377 390 608 390 633
Common share dividends (8) (7) (6) (15) (13)
Common share repurchase - - - - (107)
Options retired for cash
(net) - (1) - (1) (5)
------- ------- ------- --------- -------
Reinvested earnings, end of
period $477 $377 $577 $477 $577
------- ------- ------- --------- -------
Earnings (loss) per share
(Note 7)
- basic $1.31 $(0.06) $(0.29) $1.25 $0.84
- diluted $1.30 $(0.06) $(0.29) $1.24 $0.82
Summary Quarterly Financial Information
(millions of U.S. dollars, except per share amounts)
Three Months Ended
--------------------------------------------------------
2006 2005 2004
-------------- --------------------------- -------------
June Mar. Dec. Sept. June Mar. Dec. Sept.
30 31 31 30 30 31 31 30
------- ------ ------ ------ ------ ------ ------ ------
Revenue $1,619 1,553 1,433 1,366 1,329 1,488 1,527 1,379
Operating
income (loss) $111 34 (79) (96) 1 170 51 96
Net income
(loss) $108 (5) (68) (105) (25) 94 162 56
Net income
(loss) per
share
-basic $1.31 (0.06) (0.82) (1.28) (0.29) 1.12 1.91 0.64
-diluted $1.30 (0.06) (0.82) (1.28) (0.29) 1.06 1.78 0.60
Weighted-
average
common shares
outstanding
(millions)
-basic 82.5 82.5 82.4 82.3 82.3 83.2 84.8 87.2
-diluted 83.2 82.5 82.4 82.3 82.3 90.0 92.4 95.9
Notes to the Consolidated Financial Statements appear on pages 20 to
24.
Consolidated Balance Sheets
(unaudited, millions of U.S. dollars) June 30, 2006 Dec. 31, 2005
------------- -------------
Assets
Current assets
Cash and cash equivalents $93 $166
Restricted cash and other assets 72 -
Accounts receivable 493 564
Inventories 674 680
------------- -------------
1,332 1,410
Investments and other assets 119 181
Plant, property and equipment, net 3,732 3,626
------------- -------------
$5,183 $5,217
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities
Bank loans $- $1
Accounts payable and accrued liabilities 948 996
Long-term debt due within one year 200 301
------------- -------------
1,148 1,298
Long-term debt 1,690 1,737
Future income taxes 614 645
Deferred credits and long-term liabilities 344 318
------------- -------------
3,796 3,998
------------- -------------
Shareholders' equity
Common shares 497 494
Contributed surplus 16 11
Cumulative translation adjustment 397 324
Reinvested earnings 477 390
------------- -------------
1,387 1,219
------------- -------------
$5,183 $5,217
------------- -------------
Notes to the Consolidated Financial Statements appear on pages 20 to
24.
Consolidated Statements of Cash Flows
(unaudited, millions of U.S. dollars)
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------------------------ -------
Operating activities
Net income (loss) $108 $(5) $(25) $103 $69
Depreciation and
amortization 77 72 74 149 146
Future income tax recovery (73) (27) (9) (100) (23)
(Gain) loss on derivatives (12) 18 4 6 1
Other gains and losses - (2) - (2) -
Stock option expense 1 3 1 4 4
------- ------- ------- -------- -------
Funds from operations 101 59 45 160 197
Changes in non-cash working
capital 147 (80) 67 67 10
------- ------- ------- -------- -------
Cash (used in) from
operations 248 (21) 112 227 207
------- ------- ------- -------- -------
Investing activities
Proceeds on asset sales and
other
capital transactions - 2 - 2 -
Plant, property and
equipment
additions (64) (41) (115) (105) (188)
Turnaround costs, long-term
investments and other assets (11) (9) (16) (20) (34)
Settlement of derivatives 1 6 10 7 13
Changes in non-cash working
capital (5) (6) 5 (11) 112
------- ------- ------- -------- -------
(79) (48) (116) (127) (97)
------- ------- ------- -------- -------
Financing activities
Decrease in current bank
loans - (1) - (1) -
Long term debt additions - 4 - 4 -
Long term debt repayments (302) - - (302) -
Long term debt - changes in
revolving debt 139 (1) - 138 -
Options retired for cash - - - - (10)
Common shares issued - 2 - 2 11
Common share repurchases - - - - (125)
Common share dividends (8) (7) (6) (15) (13)
Changes in non-cash working
capital 1 - (1) 1 (2)
------- ------- ------- -------- -------
(170) (3) (7) (173) (139)
------- ------- ------- -------- -------
Decrease in cash and cash
equivalents (1) (72) (11) (73) (29)
Cash and cash equivalents,
beginning of period 94 166 227 166 245
------- ------- ------- -------- -------
Cash and cash equivalents, end
of period $93 $94 $216 $93 $216
------- ------- ------- -------- -------
Cash tax payments $11 $- $44 $11 $53
------- ------- ------- -------- -------
Cash interest payments $48 $36 $24 $84 $62
------- ------- ------- -------- -------
Notes to the Consolidated Financial Statements appear on pages 20 to
24.
Notes to Consolidated Financial Statements
(unaudited, millions of U.S. dollars, except per share amounts and
unless otherwise noted)
These interim Consolidated Financial Statements do not include all of
the disclosures included in NOVA Chemicals' annual Consolidated
Financial Statements. Accordingly, these interim Consolidated
Financial Statements should be read in conjunction with the
Consolidated Financial Statements for the year ended Dec. 31, 2005.
1. Significant Accounting Policies
These interim Consolidated Financial Statements have been prepared in
accordance with Canadian GAAP, using the same accounting policies as
set out in Note 2 to the Consolidated Financial Statements for the
year ended Dec. 31, 2005 on pages 71 to 75 of the 2005 Annual Report.
Certain comparative figures have been restated to conform with the
current periods' presentation.
2. Pensions and Other Post-Retirement Benefits
Components of Net Periodic Benefit Cost for Defined Benefit Plans
Three Months Ended
-----------------------------------------------------
June 30, 2006 Mar. 31, 2006 June 30, 2005
----------------- ----------------- -----------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -----------------
Current service
cost $7 $2 $7 $1 $6 $1
Interest cost on
projected benefit
obligations 9 1 9 1 9 1
Actual return on
plan assets (9) - (9) - (9) -
-------- -------- -------- -------- -------- --------
Costs arising in
the period 7 3 7 2 6 2
Differences
between costs
arising in the
period and costs
recognized in
the period in
respect of the
long-term nature
of employee
future benefit
costs:
Transition
asset (1) - (1) - (1) -
Actuarial loss 2 - 2 - 2 -
-------- -------- -------- -------- -------- --------
Net defined
benefit cost
recognized $8 $3 $8 $2 $7 $2
-------- -------- -------- -------- -------- --------
Six Months Ended
-----------------------------------
June 30, 2006 June 30, 2005
-----------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------------------------- --------
Current service cost $14 $3 $12 $2
Interest cost on projected benefit
obligations 18 2 18 2
Actual return on plan assets (18) - (18) -
-------- -------- -------- --------
Costs arising in the period 14 5 12 4
Differences between costs arising
in the period and costs recognized
in the period in respect of the
long-term nature of employee
future benefit costs:
Transition (asset) obligation (2) - (2) 1
Actuarial loss 4 - 4 1
-------- -------- -------- --------
Net defined benefit cost
recognized $16 $5 $14 $6
-------- -------- -------- --------
The expected long-term rate of return on plan assets is 7.3%.
Employer Contributions
----------------------
NOVA Chemicals contributed $12 million to its defined benefit pension
plans and $2 million to its defined contribution plans in the second
quarter of 2006. NOVA Chemicals contributed $22 million to its defined
benefit pension plans and $4 million to its defined contribution plans
in the six months ended June 30, 2006.
3. Restructuring Charges
NOVA Chemicals accrued $1 million of additional restructuring costs in
the second quarter of 2006 related to rationalization activities
commenced in 2005 in its European joint venture with INEOS, NOVA
Innovene. These actions will largely be complete by the end of 2006.
On Jan. 19, 2006, NOVA Chemicals announced its intention to
permanently close its Chesapeake, VA plant. Closure of the site is
expected to reduce costs by $15 million annually and reduce SPS
production capacity by 300 million pounds and compounding capability
by 170 million pounds annually. Severance costs of $15 million ($10
million after-tax) related to the Chesapeake closure were accrued in
the first quarter of 2006. NOVA Chemicals ceased producing polystyrene
resin at this site in early June and expects to discontinue its
compounding operation in the second half of 2006. Less than $1 million
of the $15 million accrued severance costs was spent in the second
quarter.
4. Interest Expense
Components of Interest Expense Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Interest on long-term debt $37 $38 $28 $75 $55
Interest on securitizations
and other 6 5 3 11 4
------- ------- ------- -------- -------
Gross interest expense 43 43 31 86 59
Interest capitalized during
plant construction - (1) (3) (1) (5)
Interest income (3) - (1) (3) (2)
------- ------- ------- -------- -------
Interest expense (net) $40 $42 $27 $82 $52
------- ------- ------- -------- -------
5. Other Gains and Losses
NOVA Chemicals recorded a $2 million before-tax gain on the sale of
land at its former Joliet plant site in the first quarter of 2006.
6. Income Taxes
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Income (loss) before income
taxes $71 $(6) $(26) $65 $119
Statutory income tax rate 32.49% 33.62% 33.62% 32.49% 33.62%
------- ------- ------- -------- -------
Computed income tax recovery
(expense) $(23) $2 $9 $(21) $(40)
Decrease (increase) in taxes
resulting from:
Tax benefit of rate
reductions(1) 60 - - 60 -
Foreign tax rates 2 1 (6) 3 (7)
Other (2) (2) (2) (4) (3)
------- ------- ------- -------- -------
Income tax recovery (expense) $37 $1 $1 $38 $(50)
------- ------- ------- -------- -------
(1) As a result of Canadian federal and Alberta provincial income tax
rate reductions, which were enacted in the second quarter of 2006,
future tax liabilities were reduced by $60 million. This benefit
was recorded as a reduction in income tax expense.
7. Earnings (Loss) Per Share
(shares in millions) Three Months Ended
----------------------------------------------
June 30 Mar. 31 June 30
2006 2006 2005
-------------- --------------- ---------------
Basic Diluted Basic Diluted Basic Diluted
Net income (loss) $108 $108 $(5) $(5) $(25) $(25)
Interest on convertible
preferred shares - - - - - -
------ ------- ------- ------- ------- -------
Net income (loss) for
EPS calculation $108 $108 $(5) $(5) $(25) $(25)
------ ------- ------- ------- ------- -------
Weighted-average
common shares
outstanding 82.5 82.5 82.5 82.5 82.3 82.3
Add back effect of
dilutive securities:
Stock options - 0.7 - - - -
Preferred shares - - - - - -
------ ------- ------- ------- ------- -------
Weighted-average
common shares for
EPS calculations 82.5 83.2 82.5 82.5 82.3 82.3
------ ------- ------- ------- ------- -------
Earnings (loss) per
common share $1.31 $1.30 $(0.06) $(0.06) $(0.29) $(0.29)
------ ------- ------- ------- ------- -------
Six Months Ended
------------------------------
June 30 June 30
2006 2005
-------------- ---------------
Basic Diluted Basic Diluted
Net income (loss) $103 $103 $69 $69
Interest on convertible
preferred shares - - - 4
------ ------- ------- -------
Net income (loss) for
EPS calculation $103 $103 $69 $73
------ ------- ------- -------
Weighted-average
common shares
outstanding 82.5 82.5 82.8 82.8
Add back effect of
dilutive securities:
Stock options - 0.8 - 2.0
Preferred shares - - - 5.0
------ ------- ------- -------
Weighted-average
common shares for
EPS calculations 82.5 83.3 82.8 89.8
------ ------- ------- -------
Earnings (loss) per
common share $1.25 $1.24 $0.84 $0.82
------ ------- ------- -------
No stock options were excluded from the computation of diluted
earnings per share for the quarter ended June 30, 2006; however, 4.4
million stock options were excluded from the computation of diluted
earnings per share for the quarter ended Mar, 31, 2006 and 4.7 million
stock options and 8.5 million retractable preferred shares were
excluded from the computation of diluted earnings per share for the
quarter ended June 30, 2005 because they were anti-dilutive. As of
June 30, 2006, the fully diluted share count was 83.1 million. Options
become dilutive when the market price is higher than the strike price
and NOVA Chemicals is profitable. The amount of dilution will vary
with the stock price. The preferred shares were dilutive prior to
September 2005 when NOVA Chemicals' earnings per share was greater
than the preferred share dividend divided by the number of shares
issued on conversion. As of Sept. 30, 2005, the preferred shares are
no longer convertible to NOVA Chemicals' common stock and therefore
are no longer a dilutive factor in the earnings per share calculation.
No restatements were made to prior periods.
8. Segmented Information
On June 26, 2006, NOVA Chemicals announced the restructuring of its
business into three units to better reflect its performance, align
resources and reduce costs. These three units are Olefins/Polyolefins,
EPS/SPP and STYRENIX. Previously, the business was reflected in two
segments: Olefins/Polyolefins and Styrenics. Prior periods have been
restated to reflect the new operating segments.
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Revenue
Olefins/Polyolefins $1,078 $1,008 $851 $2,086 $1,809
EPS/SPP 106 99 102 205 204
STYRENIX 510 512 449 1,022 968
Intersegment eliminations(1) (75) (66) (73) (141) (164)
------- ------- ------- -------- -------
$1,619 $1,553 $1,329 $3,172 $2,817
------- ------- ------- -------- -------
Operating income (loss)
Olefins/Polyolefins $160 $129 $101 $289 $288
EPS/SPP (4) (6) (8) (10) (8)
STYRENIX (53) (45) (90) (98) (109)
Corporate and other 8 (44) (2) (36) -
------- ------- ------- -------- -------
$111 $34 $1 $145 $171
------- ------- ------- -------- -------
Net income (loss)
Olefins/Polyolefins $151 $70 $56 $221 $169
EPS/SPP (4) (6) (6) (10) (6)
STYRENIX (45) (39) (71) (84) (91)
Corporate and other 6 (30) (4) (24) (3)
------- ------- ------- -------- -------
$108 $(5) $(25) $103 $69
------- ------- ------- -------- -------
(1) Intersegment eliminations include eliminations between any of the
three business units.
June 30 Dec. 31
2006 2005
------- -------
Assets
Olefins/Polyolefins $2,870 $2,888
EPS/SPP 371 333
STYRENIX 1,600 1,584
Corporate and other(1) 342 412
------- -------
$5,183 $5,217
------- -------
(1) Amounts include all cash and cash equivalents.
9. Reconciliation to United States Generally Accepted Accounting
Principles
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Net income (loss) in
accordance with Canadian GAAP $108 $(5) $(25) $103 $69
Add (deduct) adjustments for:
Hedging and derivative
activity(1) 1 - - 1 (2)
Inventory costing(2) (3) (3) (6) (6) (7)
Start-up costs(3) 1 (7) - (6) 1
Other - - 1 - 1
------- ------- ------- -------- -------
Net income (loss) in
accordance with U.S. GAAP $107 $(15) $(30) $92 $62
------- ------- ------- -------- -------
Earnings (loss) per share -
basic $1.29 $(0.18) $(0.36) $1.12 $0.75
------- ------- ------- -------- -------
Earnings (loss) per share -
diluted $1.28 $(0.18) $(0.36) $1.10 $0.74
------- ------- ------- -------- -------
Three Months Ended Six Months Ended
----------------------- ----------------
June 30 Mar. 31 June 30 June 30 June 30
2006 2006 2005 2006 2005
------- ------- ------- -------- -------
Comprehensive income (loss)(4)
Net income (loss) in
accordance with U.S. GAAP $107 $(15) $(30) $92 $62
Cumulative translation
adjustment(5) 66 7 (63) 73 (95)
------- ------- ------- -------- -------
Comprehensive income (loss) in
accordance with U.S. GAAP $173 $(8) $(93) $165 $(33)
------- ------- ------- -------- -------
June 30 Dec. 31
2006 2005
------- -------
Accumulated other comprehensive income(4)
Cumulative translation adjustment(5) $376 $303
Minimum pension liability(6) (12) (12)
------- -------
$364 $291
------- -------
Balance sheet in accordance with U.S. GAAP
Current assets(2) $1,375 $1,455
Investments and other assets(3),(6) 88 159
Plant, property and equipment, net 3,711 3,604
Current liabilities(1) (1,144) (1,293)
Long-term debt(1) (1,693) (1,742)
Deferred credits and long-term liabilities(1),(6) (966) (972)
------- -------
Common equity $1,371 $1,211
------- -------
(1) Derivative Instruments and Hedging Activities. Canadian GAAP does
not require the recognition of derivative instruments on the
consolidated balance sheet at fair values, unless the derivative
instrument does not qualify for hedge accounting under Canadian
Accounting Guideline 13, Hedging Relationships (AcG-13).
Non-qualifying derivatives are adjusted to fair value through
income (loss). Under U.S. GAAP, entities must follow the
recommendations of Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, which require the recognition of all derivatives on
the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income (loss). If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings. For derivatives that are designated and qualify as
hedging instruments, the Corporation documents the hedging
strategy, including hedging instrument and hedged item, based on
the risk exposure being hedged. Based upon the designated hedging
strategy, effectiveness of the hedge in offsetting the hedged risk
is assessed at inception and on an ongoing basis during the term
of the hedge. The ineffective portion of a derivative's change in
fair value is immediately recognized in earnings. The application
of SFAS No. 133 for U.S. GAAP reporting results in differences
related to foreign exchange, commodity-based and other derivative
instruments used by NOVA Chemicals.
(2) Inventory Costing. Canadian GAAP allows fixed overhead costs
associated with production activities to be expensed during the
period whereas U.S. GAAP requires an allocation of fixed
production overhead to inventory.
(3) Start-up Costs. Canadian GAAP provides that when an entity starts
up a new facility, expenditures incurred during the pre-operating
period may be deferred when certain criteria are met. Under U.S.
GAAP, all costs (except interest on constructed assets)
associated with start-up activities must be expensed as incurred.
(4) Comprehensive Income (loss). U.S. GAAP SFAS No. 130, Reporting
Comprehensive Income, requires the presentation of a statement
containing the components of comprehensive income (loss) and the
accumulated balance of other comprehensive income. Comprehensive
income includes all changes in equity during the period including
items that are not in net income (loss). This statement is not
currently required under Canadian GAAP.
(5) Cumulative Translation Adjustment. Under U.S. GAAP unrealized
gains (losses) resulting from translation of self-sustaining
foreign operations are recorded in other comprehensive income
until there is a realized reduction in the investment.
(6) Minimum Pension Liability. SFAS No. 87, Employer's Accounting for
Pensions, requires an employer to record an additional minimum
liability (AML) if the unfunded accumulated benefit obligation
exceeds the accrued pension liability or if there is a prepaid
pension asset with respect to the plan. If an AML is recognized,
an intangible asset, in an amount not exceeding the unrecognized
prior service cost, is also recognized. The excess of the AML,
over the intangible asset, if any, is charged to other
comprehensive income, net of income tax effects.
(7) Joint Ventures. NOVA Chemicals accounts for its interests in
joint ventures using the proportionate consolidation method under
Canadian GAAP. As permitted by specific United States Securities
and Exchange Commission exemptions, adjustments to reflect equity
accounting, as required under U.S. GAAP, have not been made. The
equity method would not result in any changes in NOVA Chemicals'
net income (loss) or shareholders' equity, however, all assets,
liabilities, revenue, expenses, and most cash flow items would
decrease when compared with the amounts that are presented using
proportionate consolidation.
>>
