PITTSBURGH, October 18 /CNW/ - NOVA Chemicals Corporation
(NYSE:NCX)(TSX:NCX):
All financial information is in U.S. dollars unless otherwise indicated.
NOVA Chemicals Corporation (NOVA Chemicals) reported a net loss of $25
million ($0.30 per share loss) for the third quarter of 2006 compared to net
income of $108 million ($1.30 per share) for the second quarter of 2006, which
included a $60 million benefit from Canadian tax rate reductions. NOVA
Chemicals reported a net loss of $105 million ($1.28 per share loss) for the
third quarter of 2005.
The following items had a negative net impact of $103 million after-tax
or $1.25 per share on third quarter earnings:
Restructuring charges (see page 3)
-- Carrington, UK joint venture site closure...$46 million or $0.56 per
share
-- North American restructuring costs...$33 million or $0.40 per share
Other charges (see pages 10 and 13)
-- Mutual insurance company wind-up costs...$13 million or $0.16 per
share
-- Unrealized losses on feedstock derivatives...$11 million or $0.13 per
share
Net income from the businesses was $83 million ($1.00 per share) versus
$102 million ($1.23 per share) in the previous quarter. The $102 million
includes the $60 million tax benefit.
"Looking past the restructuring and other charges, investors will see
record operating performance in Olefins/ Polyolefins and improvement in
STYRENIX due to our cost reduction program," said Jeff Lipton, NOVA Chemicals'
President and CEO.
"The progress in STYRENIX improves the prospects of a deal that will
unlock the full value of our core businesses for shareholders."
Third Quarter Snapshot
Core Businesses: $118 million income or $1.42 per share
-- The Core Businesses include Olefins/Polyolefins and Performance
Styrenics (renamed from Expandable Polystyrene/Styrenic Performance Products)
-- Olefins/Polyolefins reported net income of $123 million and record
EBITDA of $255 million
-- Record Alberta Advantage averaged 17 cents per pound of ethylene cash
cost, up from 14 cents per pound in the previous quarter
-- Performance Styrenics net loss of $5 million similar to a net loss of
$4 million in the second quarter
STYRENIX: $35 million loss or $(0.42) per share
-- Cash flow from operations in Europe improved to a positive level by
the end of the quarter
NOVA Chemicals will host a conference call today, Wednesday, October 18,
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. 3196823). 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)
This should be read in conjunction with other interim and annual
financial statement disclosures as well as NOVA Chemicals' 2005
Annual Report.
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Net income (loss)
Core business units
Olefins/Polyolefins $123 $151(8) $26 $344(8) $195
Performance Styrenics (5) (4) (1) (15) (7)
STYRENIX (35) (45) (56) (119) (147)
Corporate(1) (108) 6 (74) (132) (77)
-------- ------- -------- -------- --------
Net income (loss) $(25) $108 $(105) $78 $(36)
-------- ------- -------- -------- --------
Earnings (loss) per common
share
- basic $(0.30) $1.31 $(1.28) $0.95 $(0.44)
- diluted $(0.30) $1.30 $(1.28) $0.94 $(0.44)
Weighted-average common
shares outstanding
(millions)(2)(3)
- basic 83 83 82 83 83
- diluted 83 83 82 83 83
Revenue $1,712 $1,619 $1,366 $4,884 $4,183
Adjusted EBITDA(4) $196 $189 $59 $506 $376
Depreciation and
amortization $75 $77 $70 $224 $216
Funds from operations $76 $101 $18 $236 $215
Capital expenditures $47 $64 $102 $152 $290
Average capital
employed(5) $3,759 $3,769 $3,284 $3,703 $3,343
After-tax return (loss) on
capital employed(6) 0.8% 14.6% (10.4)% 6.2% 0.9%
Return (loss) on average
common equity(7) (7.3)% 31.8% (31.6)% 7.9% (3.5)%
>>
<<
(1) See tables on page 10 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 6,
page 21).
(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 Statements of Net Income (Loss) and
Reinvested Earnings on page 16 and Supplemental Measures on page 10).
(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 10).
(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 10).
(7) Return (loss) on average common equity equals annualized net
income (loss) divided by average common equity.
(8) Includes $60 million benefit from Canadian tax rate reductions.
>>
RESTRUCTURING AND COST REDUCTION
NOVA Chemicals has targeted $125 million per year of company-wide cost
savings by the end of 2007 related to: the June 26, 2006 restructuring
announcement; NOVA Innovene synergies; and the expiry of styrene monomer
contracts. By the end of the third quarter, NOVA Chemicals took the necessary
actions to achieve a cost savings rate of $69 million per year.
<<
(in millions of U.S.
dollars/year) Q3 2006 Charges
----------------
Expected Annualized
Savings Rate
Targeted ----------------------- Before After
Savings Q4 2006 Q1 2007 Q1 2008 tax tax
------------------------------------------------
North American
Restructuring $65 $52 $65 $69 $53 $33
NOVA Innovene
Improvements
(NOVA Chemicals'
share) 30 17 33 40 56 46
Styrene Contract
Expiration 30 -- 22 30 -- --
------------------------------------------------
Total $125 $69 $120 $139 $109 $79
>>
North American Restructuring
On June 26, 2006, NOVA Chemicals announced plans to restructure its North
American operations to better align resources and reduce costs. A separate
business unit, named STYRENIX, was created to hold the NOVA Chemicals' styrene
monomer and solid polystyrene assets in North America as well as NOVA
Chemicals' interest in the European 50:50 joint venture with INEOS. As part of
this restructuring, a company-wide cost reduction target was set for $65
million per year by the end of 2006. This savings target includes
approximately $35 million per year of savings in the core businesses and $30
million per year of savings in STYRENIX.
NOVA Chemicals reached a North American cost-reduction rate of $52
million per year by the end of the third quarter of 2006, including $13
million per year in savings from the Chesapeake, VA, site closure in June
2006, $35 million in company-wide cost reductions and a $4 million reduction
in depreciation. Total cost reduction rates are expected to be at $65 million
per year by the first quarter of 2007 and at $69 million per year by the first
quarter of 2008.
In the third quarter of 2006, a restructuring charge of $53 million
before-tax ($33 million after-tax) was recorded related to severance, pension
and other employee-related costs.
NOVA Innovene
Upon start up in October 2005, NOVA Innovene, NOVA Chemicals' European
joint venture with INEOS, targeted synergy savings of $40 million per year
within 3 years. In the first quarter of 2006, the target was revised upward to
$60 million per year within 2 years. At this time, NOVA Innovene is on track
to exceed the revised target by the end of the fourth quarter of 2006, well
ahead of the shortened timeline. NOVA Chemicals receives 50% of the benefit of
the total cost savings.
By the end of the third quarter of 2006, NOVA Chemicals realized cost
savings of $17 million. In the fourth quarter, NOVA Chemicals expects to
realize additional savings related to the Carrington, UK and the Berre, France
plant closures, bringing the annual run rate to $33 million.
On July 25, 2006, NOVA Innovene announced plans to permanently close its
Carrington, UK, solid polystyrene facility in October 2006. Accordingly, NOVA
Chemicals fully wrote down the value of the plant as of Sept. 30, 2006. NOVA
Chemicals incurred a charge of $56 million before-tax ($46 million after-tax),
$8 million of which is related to employee severance and departure costs and
the balance due to non-cash asset write-downs.
Styrene Contract Expiration
NOVA Chemicals is required to purchase up to 1 billion pounds per year of
styrene monomer as part of two supply contracts. NOVA Chemicals estimates that
these contracts create $30 million per year of higher costs. The contracted
styrene monomer is more costly than its own production, and at times, has
forced NOVA Chemicals to reduce operating rates at its own facilities.
The first of the two supply contracts (400 million pounds per year)
expires on December 31, 2006 and will save an estimated $22 million per year
starting Jan. 1, 2007. The second supply contract (up to 600 million pounds
per year) will expire on December 31, 2007 and will save, at current styrene
economics, an estimated $8 million per year starting Jan. 1, 2008.
<<
OLEFINS/POLYOLEFINS BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars
except as noted) Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Revenue(1) $1,146 $1,078 $878 $3,232 $2,687
Operating income $211 $160 $58 $500 $346
Depreciation and
amortization 44 46 41 133 124
-------- ------- -------- -------- --------
Adjusted EBITDA(2) $255 $206 $99 $633 $470
Net income $123 $151(5) $26 $344(5) $195
Capital expenditures $22 $28 $67 $69 $175
Average capital
employed(3) $2,503 $2,482 $1,982 $2,433 $2,010
After-tax return on
capital employed(4) 22.5% 27.0% 7.6% 21.7% 14.9%
>>
<<
(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 10).
(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. (See
Supplemental Measures on page 10.)
(4) After-tax return on capital employed equals net income plus after-
tax interest expense (annualized) divided by average capital
employed. (See Supplemental Measures on page 10.)
(5) Includes $60 million benefit from Canadian tax rate reductions.
>>
<<
Operating Highlights
Average Benchmark Prices(1)
(U.S. dollars per pound,
unless otherwise noted) Three Month Average Nine Month Average
------------------------- ------------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- --------- --------
Benchmark Principal
Products:
Ethylene(2) $0.51 $0.47 $0.41 $0.49 $0.40
Polyethylene - LLDPE
butene liner(3) $0.69 $0.63 $0.54 $0.67 $0.55
Polyethylene - weighted-
average benchmark(4) $0.71 $0.66 $0.58 $0.69 $0.58
Benchmark Raw Materials:
AECO natural gas (dollars
per mmBTU)(5) $5.03 $5.35 $7.76 $5.64 $6.43
NYMEX natural gas
(dollars per mmBTU)(6) $6.53 $6.82 $8.25 $7.47 $7.12
WTI crude oil (dollars
per barrel)(7) $70.48 $70.69 $63.19 $68.22 $55.40
>>
<<
(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: Canadian Gas Price Reporter, weighted average daily spot
gas price, values in millions of British Thermal Units (mmBTU).
(6) Source: New York Mercantile Exchange (NYMEX) Henry Hub 3-Day
Average Close.
(7) Source: NYMEX WTI daily spot-settled price average for calendar
month.
>>
<<
Polyethylene Sales Volumes
(millions of pounds) Three Months Ended Nine Months Ended
-------------------------------------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Standard Products 698 691 587 2,004 1,866
Performance Products 102 146 127 370 328
-------- ------- -------- -------- --------
Total 800 837 714 2,374 2,194
-------- ------- -------- -------- --------
>>
Standard Products and Performance Products, including SCLAIR(R) and
SURPASS(R) resins, are produced at the Joffre site using Advanced
SCLAIRTECH(TM) technology. The other sites produce only Standard Products.
Review of Operations
Olefins/Polyolefins
The Olefins/Polyolefins business unit reported net income of $123 million
in the third quarter of 2006. Second quarter net income was $151 million,
including $60 million of Canadian tax rate reductions. Third quarter EBITDA of
$255 million is $49 million higher than the second quarter and is the highest
quarterly EBITDA in NOVA Chemicals' eight-year history as a publicly traded
company. The quarter-over-quarter improvement in EBITDA was primarily related
to margin improvement resulting from polyethylene and ethylene price increases
which outpaced higher feedstock costs and lower polyethylene volumes.
Ethylene and Feedstocks
USGC ethylene benchmark prices averaged 51 cents per pound in the third
quarter of 2006 compared to 47 cents per pound in the second quarter.
Quarter-over-quarter, the average price of NYMEX contract natural gas was
down 4% to $6.53 per mmBTU and the average USGC ethane price was up 12% to 76
cents per gallon. USGC ethane prices averaged 189% of NYMEX natural gas cash
prices, up from an average of 157% in the previous quarter. The average AECO
cash natural gas price of $5.03 per mmBTU in the third quarter was 6% lower
than the second quarter.
The Alberta Advantage averaged 17 cents per pound of cash cost of
ethylene production in the third quarter of 2006, up from 14 cents per pound
in the second quarter. The advantage was higher in the third quarter due to
both an increase in USGC ethane prices and a decrease in Alberta ethane costs.
NOVA Chemicals uses ethylene produced at its Joffre, Alberta, facility to
produce approximately 65% of its total polyethylene.
The price of WTI crude oil averaged $70.48 per barrel in the third
quarter, essentially flat from the second quarter. WTI crude prices increased
from second quarter levels in July and August but fell sharply in September.
NOVA Chemicals' average crude oil costs increased 7% during the quarter due to
its use of FIFO inventory accounting. This increase in crude oil feedstock
cost was offset by higher co-product revenues from the Corunna flexi-cracker.
Polyethylene
Third quarter polyethylene results improved from the second quarter as
higher margins more than offset reduced volumes.
NOVA Chemicals' total polyethylene sales volume for the third quarter was
800 million pounds, down 4% from the previous quarter. Volumes declined in
September as customers consumed inventory. International sales represented 10%
of total polyethylene sales in the third quarter, essentially the same as the
second quarter.
North American producer sales, as reported by the American Plastics
Council (APC), declined by 8% in the third quarter relative to the second
quarter of 2006. The APC also reported North American producer operating rates
averaged 92% in the third quarter. Producer inventories rose to 47 days of
sales versus a 45-day five-year average. NOVA Chemicals finished the third
quarter with 20 days of polyethylene inventory, down from 22 days at the end
of the second quarter.
The average butene liner benchmark polyethylene price in the third
quarter was 69 cents per pound, up 6 cents per pound from the second quarter.
Advanced SCLAIRTECH
Sales of Standard and Performance polyethylene products, manufactured
using Advanced SCLAIRTECH technology, reached a record high of 224 million
pounds, 9% higher than the second quarter. Third quarter market conditions
supported a product mix that resulted in sales volumes in excess of the
plant's 213 million pound quarterly nameplate capacity.
Third quarter sales of polyethylene Performance Products manufactured
using Advanced SCLAIRTECH technology were 102 million pounds, down 44 million
pounds from the second quarter due to a quality issue that has been resolved
and an opportunistic switch to higher margin standard product production.
Third Quarter 2006 Versus Third Quarter 2005
Net income of $123 million in the third quarter of 2006 was up from net
income of $26 million in the third quarter of 2005, due to increased margins
and volumes and the impact of 2005 outages.
First Nine Months 2006 Versus First Nine Months 2005
Net income for the first nine months of 2006 was $344 million, up from
$195 million for the first nine months of 2005, primarily related to price
increases that more than offset higher feedstock costs. Also, polyethylene
sales volumes in the first nine months of 2006 were 8% greater than the first
nine months of 2005 due to outages that occurred in 2005.
<<
PERFORMANCE STYRENICS BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars except as noted)
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Revenue(1) $111 $106 $90 $316 $294
Operating loss $(7) $(4) $(1) $(17) $(9)
Depreciation and
amortization 4 3 3 10 9
-------- ------- -------- -------- --------
Adjusted EBITDA(2) $(3) $(1) $2 $(7) $-
Net loss $(5) $(4) $(1) $(15) $(7)
Capital expenditures $16 $31 $23 $67 $47
Average capital
employed(3) $265 $221 $224 $234 $232
After-tax loss on capital
employed(4) (4.8)% (4.6)% (0.6)% (5.6)% (2.2)%
>>
<<
(1) Before intersegment eliminations.
(2) Net income (loss) before restructuring charges, income taxes,
other gains and losses, interest expense and depreciation and
amortization (see Supplemental Measures on page 10).
(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. (See
Supplemental Measures on page 10.)
(4) After-tax loss on capital employed equals net loss plus after-tax
interest expense (annualized) divided by average capital employed.
(See Supplemental Measures on page 10.)
>>
Review of Operations
Performance Styrenics
The Performance Styrenics business unit reported a net loss of $5 million
in the third quarter of 2006 compared to a net loss of $4 million in the
second quarter. The quarter-over-quarter decline in earnings was primarily
related to change in sales mix in North American expandable polystyrene (EPS).
North American EPS
North American EPS sales volume decreased by 8% from the second quarter
to the third quarter due to reduced demand in produce packaging. During the
third quarter, NOVA Chemicals implemented a price increase of 4 cents per
pound.
Styrenic Performance Products
Styrenic Performance Products sales volumes were 10% greater than the
prior quarter, driven by growth in ARCEL(R) and ZYLAR(R) resin sales.
During the third quarter, NOVA Chemicals announced the start-up of a
facility in Ningbo, China, a venture with Loyal Chemical. The facility
provides new finishing capacity for ARCEL moldable foam resin to support
growing Asian markets.
In addition, NOVA Chemicals entered into a 50:50 joint venture announced
on July 20, 2006 with Dietrich Metal Framing to develop and manufacture
durable, energy-saving composite construction products and systems. These
systems combine NOVA Chemicals' EPS technology with Dietrich's light-gauge
steel framing expertise.
Third Quarter 2006 Versus Third Quarter 2005
The Performance Styrenics business unit had a net loss of $5 million in
the third quarter of 2006, compared to a net loss of $1 million in the third
quarter of 2005. The impact of higher feedstock costs more than offset the
increase in prices and sales volumes.
First Nine Months 2006 Versus First Nine Months 2005
The net loss for the first nine months of 2006 was $15 million, compared
to a net loss of $7 million for the first nine months of 2005 as lower EPS
margins were only partially offset by higher sales volumes.
NOVA Chemicals' ability to implement announced price increases depends on
many factors that may be beyond its control. See Forward-Looking Information
on page 15.
<<
STYRENIX BUSINESS UNIT
Financial Highlights
(millions of U.S. dollars except as noted)
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Revenue(1) $555 $510 $443 $1,577 $1,411
Operating loss $(39) $(53) $(70) $(137) $(179)
Depreciation and
amortization 27 28 26 81 83
-------- ------- -------- -------- --------
Adjusted EBITDA(2) $(12) $(25) $(44) $(56) $(96)
Net loss $(35) $(45) $(56) $(119) $(147)
Capital expenditures $9 $5 $12 $16 $68
Average capital
employed(3) $1,108 $1,168 $1,137 $1,137 $1,176
After-tax loss on capital
employed(4) (8.1)% (11.5)% (16.8)% (9.7)% (13.8)%
>>
<<
(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 10).
(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. (See
Supplemental Measures on page 10.)
(4) After-tax loss on capital employed equals net loss plus after-tax
interest expense (annualized) divided by average capital employed.
(See Supplemental Measures on page 10.)
>>
<<
Operating Highlights
Average Benchmark Prices(1)
(U.S. dollars per pound,
unless otherwise noted) Three Month Average Nine Month Average
-------------------------- ------------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
--------- ------- -------- --------- --------
Benchmark Principal
Products:
Styrene monomer(2) $0.70 $0.62 $0.60 $0.64 $0.62
Solid polystyrene(3)
North America $0.93 $0.84 $0.82 $0.87 $0.85
Europe $0.76 $0.66 $0.64 $0.68 $0.66
Benchmark Raw Materials:
Benzene (dollars per
gallon)(4) $3.71 $3.02 $2.82 $3.14 $3.02
>>
<<
(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 cents 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 Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Styrene monomer(1) 351 349 384 1,146 1,207
Solid polystyrene
North America 194 192 197 567 619
European Joint Venture 234 246 267 728 774
-------- ------- -------- -------- --------
Total 779 787 848 2,441 2,600
-------- ------- -------- -------- --------
(1) Third-party sales, including purchased volumes resold. Excludes
sales to NOVA Innovene.
>>
Review of Operations
STYRENIX
The STYRENIX business unit reported a net loss of $35 million in the
third quarter of 2006, a 22% improvement over the $45 million net loss
reported in the second quarter. The quarter-over-quarter improvement in
earnings was related to improved NOVA Innovene results from further cost
reduction and some margin expansion.
Styrene Monomer
Styrene monomer margins were up in the third quarter as price increases
outpaced increases in feedstock costs. Styrene monomer prices rose to $0.70
per pound from $0.62 per pound in the second quarter. The third quarter
average benzene price increased to $3.71 per gallon up from $3.02 per gallon
in the second quarter. Benchmark ethylene prices averaged 51 cents per pound,
up from 47 cents per pound in the second quarter.
Third-party styrene monomer sales volumes in the third quarter were
essentially flat compared with the second quarter. In mid-July 2006, the
Bayport, TX plant re-started after having been idled since May 4, 2006 due to
the ethylene force majeure declared by Huntsman Corporation and limited
ethylene availability on the USGC.
NOVA Chemicals implemented 6 cents per pound of styrene monomer price
increases in the third quarter. An additional 6 cents per pound price increase
was announced to be effective Oct. 1.
North American Solid Polystyrene (SPS)
North American SPS sales volume increased by 1% in the third quarter
compared to the second quarter due to sales to new customers. North American
benchmark SPS prices increased by approximately 9 cents per pound from the
second quarter.
NOVA Chemicals implemented a total of 8 cents per pound of SPS price
increases during the third quarter. A 5 cents per pound price increase was
announced to be effective Oct. 1.
NOVA Innovene
In the third quarter, NOVA Innovene reported positive EBITDA, before NOVA
Chemicals' corporate charges. NOVA Innovene was EBITDA positive, after NOVA
Chemicals' corporate charges, in September of 2006 for the first time since
the joint venture started in October 2005.
SPS sales volumes for NOVA Innovene were down 9% from the second quarter,
in line with the Western European market.
EPS sales volumes for NOVA Innovene were up 2% from the second quarter.
EPS producer inventories remained low at the end of the third quarter. Margins
expanded in the third quarter as price increases outpaced higher feedstock
costs. The European EPS benchmark price increased by approximately 14 cents
per pound from the second quarter.
Third Quarter 2006 Versus Third Quarter 2005
The STYRENIX business unit had a net loss of $35 million in the third
quarter of 2006, compared to a net loss of $56 million in the third quarter of
2005. Higher prices more than offset higher feedstock costs and the decrease
in sales volume. Cost reduction programs were also a significant factor.
First Nine Months 2006 Versus First Nine Months 2005
The STYRENIX net loss for the first nine months of 2006 was $119 million,
compared to a net loss of $147 million for the first nine months of 2005, due
to margin expansion in styrene monomer and European EPS, as well as cost
reduction.
NOVA Chemicals' ability to implement announced price increases depends on
many factors that may be beyond its control. See Forward-Looking Information
on page 15.
<<
CORPORATE
Before-tax Corporate Items
(millions of U.S. dollars)
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005(5) 2006 2005(5)
-------- ------- -------- -------- --------
Stock-based compensation
and profit
sharing(1) $(8) $(3) $(16) $(15) $21
Restructuring(2) (109) (1) (85) (125) (85)
Non-cash insurance
charge(3) (19) - - (19) (22)
Mark-to-market feedstock
derivatives(4) (17) 12 17 (30) 3
-------- ------- -------- -------- --------
$(153) $8 $(84) $(189) $(83)
-------- ------- -------- -------- --------
>>
<<
After-tax Corporate Items
(millions of U.S. dollars)
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005(5) 2006 2005(5)
-------- ------- -------- -------- --------
Stock-based compensation
and profit sharing(1) $(5) $(2) $(11) $(11) $10
Restructuring (2) (79) - (75) (89) (75)
Non-cash insurance
charge(3) (13) - - (13) (15)
Mark-to-market feedstock
derivatives(4) (11) 8 12 (19) 3
-------- ------- -------- -------- --------
$(108) $6 $(74) $(132) $(77)
-------- ------- -------- -------- --------
>>
<<
(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) In the third quarter of 2006, NOVA Chemicals accrued $53 million
($33 million after-tax) of restructuring costs related to severance,
pension and other employee-related costs associated with the North
American restructuring announced on June 26, 2006. In addition, NOVA
Chemicals accrued $56 million ($46 million after-tax) related
primarily to the non-cash asset write-downs for the Carrington, UK
solid polystyrene facility closure. In the second quarter of 2006,
NOVA Chemicals accrued $1 million (before-tax) of restructuring costs
related to actions taken by NOVA Innovene. In the first quarter of
2006, NOVA Chemicals accrued $15 million ($10 million after-tax)
related to severance costs for the Chesapeake, VA plant site closure.
In the third quarter of 2005, NOVA Chemicals recorded a charge of $85
million ($75 million after-tax) primarily as a result of NOVA
Innovene's decision to cease EPS production at Berre, France and
permanently shutdown the EPS plant at Carrington, UK. The benefit of
tax losses in France and obsolete assets associated with the Corunna
modernization were written off and also included in this charge.
(3) NOVA Chemicals is one of many participants in OIL and sEnergy -
two mutual insurance companies formed to insure against catastrophic
risks. NOVA Chemicals accrued $19 million ($13 million after-tax) in
the third quarter of 2006 and $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.
Due to losses incurred by OIL and sEnergy that are related to
participants other than NOVA Chemicals, NOVA Chemicals was required
to pay higher premiums. The third quarter charges are related to
sEnergy which is in the process of closing operations.
(4) See page 13 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, defined on page 2, is provided to
assist investors in determining the ability of NOVA Chemicals to generate cash
from operations. Segment adjusted EBITDA is determined as segment operating
income or loss before depreciation and amortization.
-- After-tax return (loss) on capital employed - defined on page 2
-- Average capital employed - defined on page 2
-- Core Business income - Net income (loss) from the business units less
net income (loss) from the STYRENIX business unit
-- CFCT - defined on page 12
-- Net current debt - current debt less restricted cash and other assets
-- Net debt to total capitalization - defined on page 11
-- Net income (loss) from the business units - total net income or loss
from the Olefins/Polyolefins, Performance Styrenics and STYRENIX business
units, which equals NOVA Chemicals' net income less corporate and other items
(see page 1). This measure highlights the ongoing performance of the business
units without considering one-time charges events or other items which are not
driven by the business.
-- Net tangible asset coverage on long-term debt - defined on page 11
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) Sept. 30 June 30 Dec. 31
2006 2006 2005
-------- ------- -------
Current debt(1) $201 $200 $302
Less: restricted cash and other assets (72) (72) (72)
-------- ------- -------
Net current debt 129 128 230
Long-term debt(2) 1,753 1,690 1,737
Less: cash and cash equivalents (110) (93) (166)
-------- ------- -------
Total debt, net of cash, cash equivalents,
and restricted cash and other assets 1,772 1,725 1,801
Total common shareholders'
equity(3)(4)(5)(6)(7) 1,372 1,387 1,219
-------- ------- -------
Total capitalization(8) $3,144 $3,112 $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 Mar. 2007 to Aug. 2028.
(3) Common shares outstanding on Oct. 13, 2006 were 82,553,756 (Sept.
30, 2006 - 82,553,456; Sept. 30, 2005 - 82,335,363; Dec. 31, 2005 -
82,364,899).
(4) A total of 5,536,197 stock options to purchase common shares of
NOVA Chemicals were outstanding to officers and employees on Oct. 13,
2006, and 5,536,797 were outstanding on Sept. 30, 2006. A total of
2,149,371 common shares were reserved but unallocated at Sept. 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 Sept. 30, 2006, a total of 3,762 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
------------------------
Sept. 30 June 30 Dec. 31
2006 2006 2005
-------- ------- -------
Net debt to total capitalization(1) 56.4% 55.4% 59.6%
Interest coverage on long-term debt(2) 0.6x 0.0x 0.0x
Net tangible asset coverage on long-term 1.7x 1.7x 1.6x
debt(3)
>>
<<
(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 10).
(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 Nine Months Ended
Sept. 30, 2006 Sept. 30, 2006
------------------ -----------------
Operating income $12 $157
Add back - depreciation and
amortization 75 224
- restructuring
charges 109 125
------------------ -----------------
Adjusted EBITDA(1) 196 506
Interest expense (43) (125)
Cash-based restructuring charges (62) (78)
Loss on derivatives 11 17
Current tax expense and other (26) (84)
------------------ -----------------
Funds from operations 76 236
Operating working capital
(increase) decrease (65) 2
------------------ -----------------
Cash flow from operating
activities 11 238
Asset sale proceeds - 2
Capital expenditures (47) (152)
Turnaround costs, long-term
investments and other assets (18) (38)
Dividends paid (7) (22)
Common shares issued - 2
Options retired for cash (1) (1)
Foreign exchange and other 15 -
------------------ -----------------
Total change in cash and debt $(47) $29
------------------ -----------------
Increase (decrease) in cash and
cash equivalents $17 $(56)
(Increase) decrease in debt
(including foreign exchange
changes) (64) 85
------------------ -----------------
Total change in cash and cash
equivalents and debt $(47) $29
------------------ -----------------
(1) See Consolidated Statements of Net Income (Loss) and Reinvested
Earnings on page 16 and Supplemental Measures on page 10.
>>
NOVA Chemicals' funds from operations were $76 million for the third
quarter of 2006, down from $101 million in the second quarter. Operating
working capital increased by $65 million, primarily as a result of higher
inventories.
NOVA Chemicals measures the effectiveness of its working capital
management through Cash Flow Cycle Time (CFCT). See Supplemental Measures on
page 10. CFCT measures working capital from operations (excluding NOVA
Innovene) 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 35 days as of Sept. 30, 2006, and 30 days
as of June 30, 2006.
Capital expenditures were $47 million in the third quarter of 2006,
compared to $64 million in the second quarter and $102 million in the third
quarter of 2005. Capital spending was down from the same time last year due to
reduced expenditures related to the Corunna flexi-cracker modernization
project.
Selling, general and administrative (SG&A) costs were $27 million lower
than in the third quarter of 2005 and $19 million higher on a year-to-date
basis largely due to the mark-to-market impact from stock-based compensation
being recorded in 2005. In 2006, this exposure has been hedged.
Interest expense was higher by $15 million in the third quarter of 2006
compared to the third quarter of 2005 and $45 million higher on a year-to-date
basis compared to 2005 due to higher debt levels, higher interest rates and
less capitalized interest resulting from the completion of the Corunna and
Bayport projects.
Financing
NOVA Chemicals has $575 million of revolving credit facilities, which
expire on the following dates: $100 million on June 30, 2008, $375 million on
June 30, 2010 and $100 million on Mar. 12, 2011. As of Sept. 30, 2006, NOVA
Chemicals had utilized $257 million of the facilities, of which $52 million
was in the form of letters of credit. All the facilities are governed by the
same financial covenants.
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 Sept. 30,
2006. Using the covenant methodology in the revolving credit facilities, the
debt to capitalization ratio was 53% at Sept. 30, 2006. NOVA Chemicals
continues to comply with all financial covenants under the facilities.
NOVA Chemicals also has $350 million accounts receivable programs that
will expire on June 30, 2010. As of Sept. 30, 2006, $305 million was sold
under the accounts receivable securitization programs.
Feedstock Derivative Positions
NOVA Chemicals maintains a derivatives program to manage risk associated
with feedstock purchases. In the third quarter, there was a net gain of $4
million from all Corunna feedstock derivative positions that matured; there
was no net gain or loss in the second 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 third quarter of NOVA Chemicals'
outstanding feedstock derivative portfolio was an $11 million after-tax loss
compared to an $8 million after-tax gain in the second quarter. These
mark-to-market adjustments are recorded as part of Corporate 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 second
quarter feedstock purchases flowed through the Consolidated Statements of Net
Income (Loss) and Reinvested Earnings in the third quarter. The following
chart depicts the benzene, crude and natural gas prices at the end of each
quarter.
<<
Benchmark Price Sept. 2006 June 2006
--------------------- ---------------------
Benzene(1) $ 3.55 per gallon $ 3.30 per gallon
Crude(2) $ 63.90 per barrel $ 70.96 per barrel
Natural Gas(3) $ 6.82 per mmBTU $ 5.96 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 $6 million
lower in the third quarter had it used the LIFO method of accounting.
Other Information
As of Sept. 30, 2006, NOVA Chemicals' management, together with NOVA
Chemicals' President and Chief Executive Officer (CEO) and Chief Financial
Officer have evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based on this evaluation, the
President and CEO have concluded that the disclosure controls and procedures
of the company are effective. There were no changes in NOVA Chemicals'
internal controls over financial reporting during the most recent fiscal
quarter that have materially affected or are reasonably likely to materially
affect NOVA Chemicals' internal control over financial reporting.
NOVA Chemicals has received a comment letter from the staff of the
Securities and Exchange Commission concerning two items relating to its annual
report on Form 40-F for the fiscal year ended December 31, 2005. One issue
relates to the amount of disclosure provided for restructuring charges which
the company has agreed to provide on a prospective basis. The other issue
relates to the number of reportable segments in NOVA Chemicals' historical
disclosures pursuant to SFAS 131. This issue has not been resolved at this
time, but NOVA Chemicals is continuing to work with SEC staff to address the
issue. The resolution of this matter will not have any impact on NOVA
Chemicals' previously reported financial position, results of operations or
cash flows.
NOVA Chemicals' share price on the New York Stock Exchange (NYSE) rose to
$30.71 at Sept. 30, 2006 from $28.79 at June 30, 2006. NOVA Chemicals' share
value increased 7% for the quarter ending Sept. 30, 2006 on the NYSE and on
the Toronto Stock Exchange (TSX). Peer chemical companies' share values
increased 2% on average and the S&P Chemicals Index increased 4%. The S&P/TSX
Composite Index was up 1% and the S&P 500 was up 5% in the third quarter. As
of
Oct. 17, 2006, NOVA Chemicals' share price was $30.28, down 1% from Sept.
30, 2006. The S&P Chemicals Index was up 2% over the same period.
In the third quarter, approximately 38% of trading in NOVA Chemicals'
shares took place on the TSX and 62% of trading took place on the NYSE and
other U.S. markets.
<<
Third Quarter Trading Millions of Shares % of Float % of Trading
Volumes
--------------------------- ------------------ ---------- ------------
Toronto Stock Exchange 19.0 23% 38%
Consolidated U.S. Trading
Volumes 31.2 38% 62%
------------------ ---------- ------------
Total 50.2 61% 100%
------------------ ---------- ------------
>>
<<
INVESTOR INFORMATION
For inquiries on stock-related matters Transfer Agent and Registrar
including dividend payments, stock CIBC Mellon Trust Company
transfers and address changes, 600 The Dome Tower, 333
contact NOVA Chemicals toll-free at Seventh Avenue S.W.
1-800-661-8686 or e-mail to Calgary, Alberta, Canada T2P
shareholders(at)novachem.com. 2Z1
Phone: (403) 232-2400/1-800-
Contact Information 387-0825
Phone: (403) 750-3600 (Canada) or (412) Fax: (403) 264-2100
490-4000 (United States) Internet: www.cibcmellon.ca
Internet: www.novachemicals.com E-Mail: E-Mail:
invest(at)novachem.com inquiries(at)cibcmellon.ca
Share Information
NOVA Chemicals Corporation NOVA Chemicals' trading
1000 Seventh Avenue S.W., P.O. Box 2518 symbol on the New York and
Calgary, Alberta, Canada T2P 5C6 Toronto Stock Exchanges is
NCX.
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
>>
<<
Advanced SCLAIRTECH(TM) is a trademark of NOVA Chemicals.
ARCEL(R) is a registered trademark 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)
Q3 2006 First Nine
Compared with Months 2006
--------------- Compared
with First
Nine Months
Q2 2006 Q3 2005 2005
------- ------- -----------
Higher net unit margins $17 $81 $106
(Lower) higher sales volumes (9) 28 43
------- ------- -----------
Higher operating margin(1) 8 109 149
Lower research and development - 1 -
(Higher) lower selling, general and
administrative (1) 27 (19)
Higher restructuring charges (108) (24) (40)
Lower (higher) depreciation and
amortization 2 (5) (8)
Higher interest expense (3) (15) (45)
(Lower) higher other gains and losses (1) (1) 1
(Higher) lower income tax expense (30) (12) 76
------- ------- -----------
(Decrease) increase in net income (loss) $(133) $80 $114
------- ------- -----------
(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' belief that the
progress in STYRENIX improves the prospects of a deal that will unlock the
full value of its core businesses for shareholders; NOVA Chemicals'
expectations with respect to timing, delivery and financial impact of its cost
reduction initiatives; 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.
<<
Summary Quarterly Financial Information
(millions of U.S. dollars, except per share amounts)
Three Months Ended
--------------------------------------------------------
2006 2005 2004
--------------------- --------------------------- ------
Sept. June Mar. Dec. Sept. June Mar. Dec.
30 30 31 31 30 30 31 31
Revenue $1,712 1,619 1,553 1,433 1,366 1,329 1,488 1,527
Operating
income (loss) $12 111 34 (79) (96) 1 170 51
Net income
(loss) $(25) 108 (5) (68) (105) (25) 94 162
Net income
(loss) per
share
-basic $(0.30) 1.31 (0.06) (0.82) (1.28) (0.29) 1.12 1.91
-diluted $(0.30) 1.30 (0.06) (0.82) (1.28) (0.29) 1.06 1.78
Weighted-
average
common shares
outstanding
(millions)
-basic 82.6 82.5 82.5 82.4 82.3 82.3 83.2 84.8
-diluted 82.6 83.2 82.5 82.4 82.3 82.3 90.0 92.4
>>
<<
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 Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ---------------- -------- --------
Revenue $1,712 $1,619 $1,366 $4,884 $4,183
-------- ------- -------- -------- --------
Feedstock and operating
costs 1,448 1,363 1,211 4,181 3,629
Research and development 13 13 14 38 38
Selling, general and
administrative 55 54 82 159 140
Restructuring charges
(Note 3) 109 1 85 125 85
Depreciation and
amortization 75 77 70 224 216
-------- ------- -------- -------- --------
1,700 1,508 1,462 4,727 4,108
-------- ------- -------- -------- --------
Operating income (loss) 12 111 (96) 157 75
-------- ------- -------- -------- --------
Interest expense (net)
(Note 4) (43) (40) (28) (125) (80)
Other gains and losses
(net) (1) - - 1 -
-------- ------- -------- -------- --------
(44) (40) (28) (124) (80)
-------- ------- -------- -------- --------
Income (loss) before
income taxes (32) 71 (124) 33 (5)
Income tax recovery
(expense) (Note 5) 7 37 19 45 (31)
-------- ------- -------- -------- --------
Net income (loss) $(25) $108 $(105) $78 $(36)
Reinvested earnings,
beginning of period 477 377 577 390 633
Common share dividends (7) (8) (7) (22) (20)
Common share repurchase - - - - (107)
Options retired for cash
(net) (1) - - (2) (5)
-------- ------- -------- -------- --------
Reinvested earnings, end
of period $444 $477 $465 $444 $465
-------- ------- -------- -------- --------
Earnings (loss) per share
(Note 6)
- basic $(0.30) $1.31 $(1.28) $0.95 $(0.44)
- diluted $(0.30) $1.30 $(1.28) $0.94 $(0.44)
Notes to the Consolidated Financial Statements appear on pages 19 to
23.
>>
<<
Consolidated Balance Sheets
(unaudited, millions of U.S. dollars) Sept. 30, 2006 Dec. 31, 2005
-------------- -------------
Assets
Current assets
Cash and cash equivalents $110 $166
Restricted cash and other assets 72 -
Accounts receivable 491 564
Inventories 803 680
-------------- -------------
1,476 1,410
Investments and other assets 112 181
Plant, property and equipment, net 3,674 3,626
-------------- -------------
$5,262 $5,217
-------------- -------------
Liabilities and Shareholders' Equity
Current liabilities
Bank loans $1 $1
Accounts payable and accrued
liabilities 1,019 996
Long-term debt due within one year 200 301
-------------- -------------
1,220 1,298
Long-term debt 1,753 1,737
Future income taxes 559 645
Deferred credits and long-term
liabilities 358 318
-------------- -------------
3,890 3,998
-------------- -------------
Shareholders' equity
Common shares 497 494
Contributed surplus 17 11
Cumulative translation adjustment 414 324
Reinvested earnings 444 390
-------------- -------------
1,372 1,219
-------------- -------------
$5,262 $5,217
-------------- -------------
Notes to the Consolidated Financial Statements appear on pages 19 to
23.
>>
<<
Consolidated Statements of Cash Flows
(unaudited, millions of U.S. dollars)
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Operating activities
Net income (loss) $(25) $108 $(105) $78 $(36)
Depreciation and
amortization 75 77 70 224 216
Future income tax
recovery (34) (73) (15) (134) (38)
(Gain) loss on
derivatives 11 (12) (17) 17 (16)
Asset writedowns (Note
3) 47 - 85 47 85
Other gains and losses 1 - - (1) -
Stock option expense 1 1 - 5 4
-------- ------- -------- -------- --------
Funds from operations 76 101 18 236 215
Changes in non-cash
working capital (65) 147 121 2 131
-------- ------- -------- -------- --------
Cash flow from operating
activities 11 248 139 238 346
-------- ------- -------- -------- --------
Investing activities
Proceeds on asset sales
and other capital
transactions - - - 2 -
Plant, property and
equipment additions (47) (64) (102) (152) (290)
Turnaround costs, long-
term investments and
other assets (18) (11) (65) (38) (99)
Settlement of
derivatives 6 1 - 13 13
Changes in non-cash
working capital 9 (5) (4) (2) 108
-------- ------- -------- -------- --------
(50) (79) (171) (177) (268)
-------- ------- -------- -------- --------
Financing activities
Increase in current bank
loans 1 - 1 - 1
Long term debt additions - - 19 4 19
Long term debt
repayments (2) (302) (101) (304) (101)
Long term debt -
increase in revolving
debt 65 139 - 203 -
Options retired for cash (1) - - (1) (10)
Common shares issued - - - 2 11
Common share repurchases - - - - (125)
Common share dividends (7) (8) (7) (22) (20)
Changes in non-cash
working capital - 1 1 1 (1)
-------- ------- -------- -------- --------
56 (170) (87) (117) (226)
-------- ------- -------- -------- --------
Increase (decrease) in
cash and cash equivalents 17 (1) (119) (56) (148)
Cash and cash equivalents,
beginning of period 93 94 216 166 245
-------- ------- -------- -------- --------
Cash and cash equivalents,
end of period $110 $93 $97 $110 $97
-------- ------- -------- -------- --------
Cash tax payments $30 $11 $1 $41 $54
-------- ------- -------- -------- --------
Cash interest payments $44 $48 $40 $128 $102
-------- ------- -------- -------- --------
Notes to the Consolidated Financial Statements appear on pages 19 to
23.
>>
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
-----------------------------------------------------
Sept. 30, 2006 June 30, 2006 Sept. 30, 2005
----------------- ----------------- -----------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -----------------
Current service
cost $7 $1 $7 $2 $8 $-
Interest cost on
projected
benefit
obligations 9 1 9 1 11 1
Actual return on
plan assets (9) - (9) - (10) -
-------- -------- -------- -------- -------- --------
Costs arising in
the period 7 2 7 3 9 1
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) - (2) -
Actuarial loss 2 - 2 - 1 -
Past service
and actual
plan
amendments - - - - 1 -
-------- -------- -------- -------- -------- --------
Net defined
benefit cost
recognized $8 $2 $8 $3 $9 $1
-------- -------- -------- -------- -------- --------
>>
<<
Nine Months Ended
----------------------------------------
Sept. 30, 2006 Sept. 30, 2005
-------------------- -------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
------------------------------ ---------
Current service cost $21 $4 $20 $2
Interest cost on projected
benefit
obligations 27 3 29 3
Actual return on plan assets (27) - (28) -
--------- ------------------- ---------
Costs arising in the period 21 7 21 5
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 (3) - (4) 1
Actuarial loss 6 - 5 1
Past service and actual
plan amendments - - 1 -
--------- ------------------- ---------
Net defined benefit cost
recognized $24 $7 $23 $7
--------- ------------------- ---------
>>
The expected long-term rate of return on plan assets is 7.3% compared
with 7.5% in the prior year.
Employer Contributions
NOVA Chemicals contributed $28 million, $12 million and $17 million
during the quarters ended Sept. 30, 2006, June 30, 2006 and Sept. 30, 2005,
respectively, to its defined benefit pension plans. NOVA Chemicals contributed
$2 million during each of the quarters ended Sept. 30, 2006, June 30, 2006 and
Sept. 30, 2005 to its defined contribution plans. NOVA Chemicals contributed
$50 million and $32 million during the nine months ended Sept. 30, 2006 and
Sept. 30, 2005, respectively, to its defined benefit pension plans. NOVA
Chemicals contributed $6 million during each of the nine month periods ended
Sept. 30, 2006 and Sept. 30, 2005 to its defined contribution plans.
3. Restructuring Charges
In the third quarter of 2006, NOVA Chemicals had two significant
restructuring events as follows:
1) On June 26, 2006, NOVA Chemicals announced plans to restructure its
North American operations to better align resources and reduce costs. NOVA
Chemicals will remove $65 million of costs across the organization. These
reductions include the previously announced savings of $15 million per year
from the Chesapeake, Virginia site closure.
As a result, a restructuring charge of $53 million before-tax ($33
million after-tax) for severance, pension and other employee related costs was
booked in the third quarter of 2006. Of this amount, approximately $10 million
related to one-time pension curtailment and special termination benefit
charges. Of the $43 million remaining charge, NOVA Chemicals estimates $28
million will be paid to employees by the end of 2006 with the majority of the
remainder to be paid in 2007.
2) On July 25, 2006, NOVA Innovene announced its plans to permanently
close its Carrington, UK, solid polystyrene facility in October 2006.
Accordingly, NOVA Chemicals wrote down the value of the plant on its books to
zero as of Sept. 30, 2006. NOVA Chemicals incurred a charge of $56 million
before-tax ($46 million after-tax) related primarily to non-cash asset
write-downs, however $8 million will be paid to employees in severance and
other departure costs.
In the second quarter of 2006, NOVA Chemicals accrued $1 million of
additional restructuring costs 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.
In the third quarter of 2005, NOVA Innovene announced it plans to cease
EPS production at Berre, France and permanently shutdown the EPS plant at
Carrington, UK. Accordingly, NOVA Chemicals wrote down the value of the plants
on its books to zero as of Sept. 30, 2005. The amount of the write-down was
$76 million ($60 million after-tax). NOVA Chemicals also reduced the recorded
benefit of certain tax loss carry-forwards by $9 million, as the likelihood of
their utilization is reduced as a result of the formation of the joint venture
and closure of the plants. Certain other non-productive assets were written
off amounting to $9 million ($6 million after-tax). The total amount of the
restructuring charge was $85 million ($75 million after-tax).
Included in the restructuring charges for the nine months ended Sept. 30,
2006 are severance costs of $15 million ($10 million after-tax) related to the
Chesapeake closure that were accrued in the first quarter of 2006. $1 million
of the severance costs have been paid to employees to date with the majority
of the remainder to be paid by the end of 2006.
<<
4. Interest Expense
Components of Interest
Expense Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Interest on long-term debt $35 $37 $29 $110 $84
Interest on
securitizations and other 10 6 4 21 8
-------- ------- -------- -------- --------
Gross interest expense 45 43 33 131 92
Interest capitalized
during plant construction (1) - (4) (2) (9)
Interest income (1) (3) (1) (4) (3)
-------- ------- -------- -------- --------
Interest expense (net) $43 $40 $28 $125 $80
-------- ------- -------- -------- --------
>>
<<
5. Income Taxes
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Income (loss) before
income taxes $(32) $71 $(124) $33 $(5)
Statutory income tax rate 32.49% 32.49% 33.62 % 32.49% 33.62%
-------- ------- -------- -------- --------
Computed income tax
recovery (expense) $10 $(23) $42 $(11) $2
Decrease (increase) in
taxes resulting from:
Tax benefit of rate
reductions(1) - 60 - 60 -
Tax benefits not
recognized on
restructuring charges (6) - (16) (6) (16)
Foreign tax rates 4 2 (3) 7 (10)
Other (1) (2) (4) (5) (7)
-------- ------- -------- -------- --------
Income tax recovery
(expense) $7 $37 $19 $45 $(31)
-------- ------- -------- -------- --------
(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.
>>
<<
6. Earnings (Loss) Per Share
(shares in millions) Three Months Ended
----------------------------------------------
Sept. 30 June 30 Sept. 30
2006 2006 2005
--------------- -------------- ---------------
Basic Diluted Basic Diluted Basic Diluted
Net income (loss)
available to common
shareholders $(25) $(25) $ 108 $ 108 $ (105) $ (105)
------- ------- ------ ------- ------- -------
Weighted-average
common shares
outstanding 82.6 82.6 82.5 82.5 82.3 82.3
Add back effect of
dilutive securities:
Stock options - - - 0.7 - -
------- ------- ------ ------- ------- -------
Weighted-average
common shares for
EPS calculations 82.6 82.6 82.5 83.2 82.3 82.3
------- ------- ------ ------- ------- -------
Earnings (loss) per
common share $(0.30) $(0.30) $1.31 $1.30 $(1.28) $(1.28)
------- ------- ------ ------- ------- -------
(shares in millions) Nine Months Ended
------------------------------
Sept. 30 Sept. 30
2006 2005
-------------- ---------------
Basic Diluted Basic Diluted
Net income (loss)
available to common
shareholders $ 78 $ 78 $ (36) $ (36)
------ ------- ------- -------
Weighted-average
common shares
outstanding 82.5 82.5 82.6 82.6
Add back effect of
dilutive securities:
Stock options - 0.8 - -
------ ------- ------- -------
Weighted-average
common shares for
EPS calculations 82.5 83.3 82.6 82.6
------ ------- ------- -------
Earnings (loss) per
common share $0.95 $0.94 $(0.44) $(0.44)
------ ------- ------- -------
>>
3.4 million and 4.7 million stock options were excluded from the
computation of diluted earnings per share for the quarters ended Sept. 30,
2006 and Sept. 30, 2005, respectively, because they were anti-dilutive. No
stock options were excluded from the computation of diluted earnings per share
for the quarter ended June 30, 2006. As of Sept. 30, 2006, the fully diluted
share count was 82.6 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.
7. 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, Performance
Styrenics 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 Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Revenue
Olefins/Polyolefins $1,146 $1,078 $878 $3,232 $2,687
Performance Styrenics 111 106 90 316 294
STYRENIX 555 510 443 1,577 1,411
Intersegment
eliminations(1) (100) (75) (45) (241) (209)
-------- ------- -------- -------- --------
$1,712 $1,619 $1,366 $4,884 $4,183
-------- ------- -------- -------- --------
Operating income (loss)
Olefins/Polyolefins $211 $160 $58 $500 $346
Performance Styrenics (7) (4) (1) (17) (9)
STYRENIX (39) (53) (70) (137) (179)
Corporate and other (153) 8 (83) (189) (83)
-------- ------- -------- -------- --------
$12 $111 $(96) $157 $75
-------- ------- -------- -------- --------
Net income (loss)
Olefins/Polyolefins $123 $151(2) $26 $344(2) $195
Performance Styrenics (5) (4) (1) (15) (7)
STYRENIX (35) (45) (56) (119) (147)
Corporate and other (108) 6 (74) (132) (77)
-------- ------- -------- -------- --------
$(25) $108 $(105) $78 $(36)
-------- ------- -------- -------- --------
(1) Intersegment eliminations include eliminations between any of the
three business units.
(2) Includes $60 million benefit from Canadian tax rate reductions.
>>
<<
Sept. 30 Dec. 31
2006 2005
-------- -------
Assets
Olefins/Polyolefins $2,923 $2,888
Performance Styrenics 436 333
STYRENIX 1,566 1,584
Corporate and other(1) 337 412
-------- -------
$5,262 $5,217
-------- -------
(1) Amounts include all cash and cash equivalents.
>>
<<
8. Reconciliation to United States Generally Accepted Accounting
Principles
Three Months Ended Nine Months Ended
------------------------- -----------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
-------- ------- -------- -------- --------
Net income (loss) in
accordance with Canadian
GAAP $(25) $108 $(105) $78 $(36)
Add (deduct) adjustments
for:
Hedging and derivative
activity(1) (3) 1 (1) (2) (3)
Inventory costing(2) 6 (3) - - (7)
Start-up costs(3) 2 1 2 (4) 3
Stock-based
compensation(8) (1) - - (1) -
Other 1 - - 1 1
-------- ------- -------- -------- --------
Net income (loss) in
accordance with U.S. GAAP $(20) $107 $(104) $72 $(42)
-------- ------- -------- -------- --------
Earnings (loss) per share
- basic basic $(0.24) $1.29 $(1.27) $0.88 $(0.51)
-------- ------- -------- -------- --------
Earnings (loss) per share
- diluted $(0.24) $1.28 $(1.27) $0.87 $(0.51)
-------- ------- -------- -------- --------
>>
<<
Three Months Ended Nine Months Ended
--------------------------- -------------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2006 2006 2005 2006 2005
--------- -------- -------- --------- ---------
Comprehensive income
(loss) (4)
Net income (loss) in
accordance with U.S.
GAAP $(20) $107 $(104) $72 $(42)
Cumulative
translation
adjustment(5) 17 66 73 90 (22)
--------- -------- -------- --------- ---------
Comprehensive income
(loss) in accordance
with U.S. GAAP $(3) $173 $(31) $162 $(64)
--------- -------- -------- --------- ---------
>>
<<
Sept. 30 Dec. 31
2006 2005
-------- -------
Accumulated other comprehensive income(4)
Cumulative translation adjustment(5) $393 $303
Minimum pension liability(6) (12) (12)
-------- -------
$381 $291
-------- -------
>>
<<
Balance sheet in accordance with U.S. GAAP(7)
Current assets (2) $1,525 $1,455
Investments and other assets(3),(6) 83 159
Plant, property and equipment, net 3,654 3,604
Current liabilities(1) (1,217) (1,293)
Long-term debt(1) (1,755) (1,742)
Deferred credits and long-term liabilities(1),(6),(8) (934) (977)
------- -------
Common equity $1,356 $1,206
------- -------
>>
(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 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.
(8) Stock-Based Compensation Plans. Under Canadian GAAP, the Employee
Incentive Stock Option Plan is measured using a fair-value-based method, while
the Equity Appreciation Plan and the Restricted Stock Unit Plan are marked to
market. U.S. GAAP, SFAS No. 123(R), Accounting for Share-Based Payment,
effective Jan. 1, 2006, requires the share-based compensation transactions to
be accounted for using a fair-value-based method, such as the Black Scholes
method used by NOVA Chemicals. This standard requires adoption using a
modified prospective application. The fair value of awards classified as
liability instruments must be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. The
cumulative effect of $5 million for the period prior to Dec. 31, 2005, has
been charged to reinvested earnings at Dec. 31, 2005.
New Accounting Pronouncements
Canadian GAAP
EIC 162, Stock-Based Compensation for Employees Eligible to Retire Before
the Vesting Date, requires that compensation cost for stock-based awards for
employees eligible to retire at the grant date must be recognized at the grant
date. For those employees who will become eligible to retire during the
vesting period, compensation cost should be recognized over the period from
the grant date to the date on which the employee becomes eligible to retire.
Application of this standard will result in acceleration of the recognition of
compensation expenses. This standard is effective for NOVA Chemicals fourth
quarter 2006 reporting.
CICA 3831, Non-Monetary Transactions, is effective for periods beginning
on or after Jan. 1, 2006. It requires commercially substantive non-monetary
transactions to be measured at fair value rather than the carrying amount of
the assets given up.
CICA 3855, Financial Instruments - Recognition and Measurement & CICA
3865, Hedges, are effective for fiscal years beginning on or after October 1,
2006. This statement harmonizes Canadian and US GAAP and IFRS by establishing
standards for recognition and measurement of financial assets, liabilities and
non-financial derivatives. Previous Canadian standards addressed disclosure
and presentation matters only. CICA 3865 sets standards for when and how hedge
accounting may be applied, further restricting which hedging relationships
qualify for hedge accounting.
CICA 1530, Comprehensive Income, is effective for NOVA Chemicals fourth
quarter reporting and harmonizes Canadian and US GAAP and IFRS. This statement
defines the presentation of comprehensive income and its components.
Comprehensive income includes all changes in equity during the period
including items that are not in net income (loss).
CICA 1506, Changes in Accounting Policies and Estimates, and Errors, is
effective Jan. 1, 2007 and states an entity is permitted to change accounting
policies only when it is required by a primary source of GAAP, or when the
change results in a reliable and more relevant presentation in the financial
statements.
US GAAP
FIN 48, Accounting for Uncertainty in Income Taxes, clarifies accounting
for income taxes by prescribing a minimum recognition threshold a tax position
is required to meet before being recognized. An enterprise would be required
to recognize the best estimate of a tax position if that position is more
likely than not of being sustained upon examination, based solely on the
technical merits of the position.
SFAS 154, Accounting Changes and Error Corrections, requires
retrospective application, with restatement of prior periods, for a voluntary
change in accounting principle. This standard aligns US and Canadian GAAP and
IFRS.
SFAS 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, issued on Sept. 29, 2006, amends SFAS 87 and SFAS 106,
and requires recognition of the overfunded or underfunded status of pension
and other postretirement benefit plans on the balance sheet. Under SFAS 158,
gains and losses, prior service costs and credits, and any remaining
transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date, the date at which the
benefit obligation and plan assets are measured, is required to be the
company's fiscal year end. SFAS 158 is effective for publicly-held companies
for fiscal years ending after December 15, 2006, except for the measurement
date provisions, which are effective for fiscal years ending after December
15, 2008. NOVA Chemicals is currently assessing the impact that the adoption
of FAS 158 will have on NOVA Chemical's stockholders' equity at December 31,
2006. This Statement does not affect the results of operations.
