**Exhibit 99.3**

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Annual Report containsforward-looking statements with respect to NOVA Chemicals.  By their nature, forward-looking statementsrequire us to make assumptions and are subject to inherent risks anduncertainties.  There is significant riskthat predictions, forecasts, conclusions and projections will not prove to beaccurate, that our assumptions may not be correct and that actual results maydiffer materially from such predictions, forecasts, conclusions orprojections.  Forward-looking statementsfor the time periods beyond 2006 involve longer-term assumptions and estimatesthan forward-looking statements for 2006 and are consequently subject to greateruncertainty.  We caution readers of thisAnnual Report not to place undue reliance on our forward-looking statements asa number of factors could cause actual results, conditions, actions or eventsto differ materially from the targets, expectations, estimates or intentionsexpressed in the forward-looking statements.

 

The words “believe,” “expect,”“plan,” “intend,” “estimate,” or “anticipate” and similar expressions, as wellas future or conditional verbs such as “will,” “should,” “would,” and “could”often identify forward-looking statements. Specific forward looking statementscontained in this Annual Report include, among others, statements regarding:our expected financial performance in future periods, including cost savings inthe Styrenics Business; NOVA Chemicals’ expectations regarding futureimprovements in underlying EBITDA from its Olefins/Polyolefins and StyrenicsBusinesses due to its Performance Products; NOVA Chemicals’ expectations offavorable market conditions in the near-term; the effect of forwardtransactions on NOVA Chemicals’ earnings; our expectations of the supply/demandbalance and global and North American operating rates in future periods;changes in the demand for our products and the future sales of our standard andPerformance Products and production capacity growth; changes in our historicalaverage cost advantage for ethylene produced at our Joffre, Alberta, site; theexpected completion dates and benefits of our plant modernization projects;changes in pricing policies by us or our competitors; our competitive advantagesand ability to compete successfully; our plans to increase our capacity tomanufacture Performance Products; our beliefs concerning the cost savings andother benefits of our joint ventures; our estimates of the present value of ourfuture net cash flows; changes in the costs of energy and raw materials; ourmethods of raising capital; our level of debt; our intended quarterly dividend;and general economic conditions.

 

With respect toforward-looking statements contained in this Annual Report, we have madeassumptions regarding, among other things: future oil, natural gas, natural gasliquids and benzene prices; our ability to obtain raw materials; our ability tomarket products successfully to our anticipated customers; the impact ofincreasing competition; and our ability to obtain financing on acceptableterms. Some of our assumptions are based upon internal estimates and analysesof current market conditions and trends, management plans and strategies,economic conditions and other factors and are necessarily subject to risks anduncertainties inherent in projecting future conditions and results.

 

Some of the risks that couldaffect our future results and could cause results to differ materially fromthose expressed in our forward-looking statements include: commodity chemicalsprice levels (which depend, among other things, on supply and demand for theseproducts, capacity utilization and substitution rates between these productsand competing products); feedstock availability and prices; operating costs;terms and availability of financing; technology developments; currency exchangerate fluctuations; starting up and operating facilities using new technology;realizing synergy and cost savings targets; our ability to implement orbusiness strategies; meeting time and budget targets for significant capitalinvestments; avoiding unplanned facility shutdowns; safety, health, andenvironmental risks associated with the operation of chemical plants andmarketing of chemical products, including transportation of these products;public perception of chemicals and chemical end-use products; the impact ofcompetition; changes in customer demand, including customer acceptance of ourPerformance Products; changes in, or the introduction of new laws and regulationsrelating to our business, including environmental, competition and employmentlaws; costs to comply with the Kyoto Protocol; loss of the services of any ofour executive officers; uncertainties associated with the North American, SouthAmerican, European, and Asian economies; terrorists attacks; severe weatherevents; and other risks detailed from time to time in the publicly fileddisclosure documents and securities commission reports of NOVA Chemicals.

 

NOVA Chemicals’forward-looking statements are expressly qualified in their entirety by thiscautionary statement.  In addition, theforward-looking statements are made only as of the date of this Annual Report,and except as required by applicable law, we undertake no obligation topublicly update these forward-looking statements to reflect new information,subsequent events or otherwise.

 

**2005 FINANCIAL REVIEW TABLE OF CONTENTS**

 

Management’s Discussion and Analysis  **30**

 

Consolidated Financial Statements  **63**

 

Notes to Consolidated Financial Statements  **71**

 

Trademark Information **101** |  Investor Information  **102**

 

1

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**MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

The following discussion andanalysis should be read in conjunction with information contained in the ConsolidatedFinancial Statements and the notes thereto starting on page 63. Thisdiscussion and analysis has been based upon financial statements prepared inaccordance with Canadian Generally Accepted Accounting Principles (GAAP). Theseaccounting principles are different in some respects from those generallyaccepted in the United States, and the significant differences are described inNote 23 to the Consolidated Financial Statements. References to average capitalemployed, after-tax return on capital employed, cash flow cycle time, net debtto total capitalization, earnings before interest, taxes, depreciation andamortization, and net income (loss) from the businesses should be read inconjunction with the discussion of Supplemental Measures on page 55. Thisdiscussion and analysis is the responsibility of management. The Board ofDirectors carries out its responsibility for review of this disclosureprincipally through its Audit, Finance and Risk Committee comprised exclusivelyof independent directors. The Audit, Finance and Risk Committee reviews thisdisclosure and recommends its approval by the Board of Directors. Thisdiscussion and analysis was prepared as of February 15, 2006.

 

All amounts are presented inU.S. dollars unless otherwise noted.

 

**Plasticsand Chemicals**

 

NOVA Chemicals is a focusedplastics and chemicals company that operates two primary businesses:

 

•  TheOlefins/Polyolefins business manufactures and sells ethylene, ethyleneco-products and polyethylene resins.

 

•  TheStyrenics business manufactures and sells styrene monomer, polystyrene andexpandable polystyrene.

 

Polyethylene and styrenicpolymer products are used in a wide variety of applications, including rigidand flexible packaging, food packaging, construction materials, electronics,appliances, automotive components, and other industrial and consumer goods.

 

NOVA Chemicals’ assetsconsist of NOVA Chemicals constructed world scale plants; acquisitions fromcompanies such as Polysar Energy and Chemical Corporation, Union Carbide CanadaLtd., DuPont Canada Inc., ARCO Chemical Company, Huntsman Corporation and theShell Petroleum Company Limited; and joint ventures with Dow Chemical CanadaInc., INEOS, and GRUPO IDESA.

 

By its nature, profitabilityin the commodity plastics and chemicals industry is highly cyclical. Inaddition to manufacturing standard commodity products (standard products), NOVAChemicals’ Olefins/Polyolefins and Styrenics businesses developed a range ofPerformance Products. Performance Products have unique attributes that deliverenhanced value to customers and, therefore, earn a margin premium to standardproducts.

 

The combination of bothlow-cost standard products and value-added Performance Products provides NOVAChemicals with leverage to a commodity cycle peak and the prospects of enhancedearnings stability during the course of the entire cycle.

 

**Key Driversof Financial Performance**

 

NOVA Chemicals’ earnings andcash flow are primarily influenced by the margins we earn on the products wemanufacture. Margin, on a unit basis, is defined as the difference between theselling price of products and the direct cost to produce and distribute them.Margins are directly impacted by changes in supply/demand balance, which drivethe relationship of cost, seller’s price and sales volumes.

 

***Supply/Demand Balance.***The supply/demand balance of NOVA Chemicals’ products can best bemeasured by industry operating rates. Peak conditions occur when operatingrates are high. During peak conditions, prices and margins tend to increaserapidly as customers attempt to secure scarce supply to meet their productionneeds. Conversely, trough conditions exist when there is ample supply,operating rates are low and producers tend to compete for market share byreducing prices, which in turn decreases margins.

 

2

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The supply of product in theplastics and chemicals industry is primarily determined by the size andavailability of manufacturing capacity. New capacity is typically added in largeincrements. It generally requires significant amounts of capital and lead timeof three to five years for construction completion.

 

Demand is driven by economicgrowth and is related to both Gross Domestic Product (GDP) and IndustrialProduction (IP). Market demand for polyethylene and polystyrene has typicallygrown at one to two times GDP depending on the region of the world. Sustainedindustry operating rates in excess of 90% in polyethylene and 92% in styrenemonomer represent typical inflection points at which margins in NOVA Chemicals’Olefins/Polyolefins and Styrenics businesses begin to expand.

 

**Figure 1.NCXNet Income (Loss) vs. United States GDP and IP**

 

 

During industry downturns,chemical manufacturers are reluctant to add production capacity. In NorthAmerica, Europe and Latin America, relatively little new capacity has beenadded in recent years and demand is absorbing excess capacity. Globally, newcapacity is being added in the Middle East and Asia to meet the growing demandfor petrochemicals and plastics from developing nations such as China andIndia, as well as other Southeast Asian countries and South America. Thesupply/demand balance, however, is expected to remain tight as the Chinese andIndian economies continue to register near double-digit plastics and chemicaldemand growth rates. In addition, plastics and chemical construction projectsare experiencing delays and, in some cases, cancellations due to increasingconstruction and engineering costs. In North America, comparatively, littlepolyethylene or styrene monomer capacity has been added in the last severalyears, and there have been no announcements of new plant construction goingforward. As a result, assuming GDP growth rates of approximately 3% as forecastby *Global Insight*, operatingrates are expected to reach and maintain peak levels in polyethylene andstyrene monomer in 2006 - 2008.

 

**Figure 2.Polyethylene Growth by Region**(1) **(2006–2008)**

 

 

3

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***Price.***Theprices for NOVA Chemicals’ standard polymer products are based on whatcustomers are willing to pay relative to the price of competing products.Prices can change quickly as a result of fluctuations in the supply/demandbalances and feedstock costs. Volatile feedstock costs during the last fewyears have made it essential for NOVA Chemicals, and others in the plastics andchemical industry, to shorten the time it takes to realize price increases fromcustomers. In the third quarter of 2005, NOVA Chemicals’ policy regarding itsprice-increase notification period was revised from 30 days to as little asfive days.

 

***Volume.***Salesvolumes for plastics and chemicals products are most heavily influenced byeconomic growth and industrial production, both of which are key drivers ofcustomer demand. NOVA Chemicals’ market share is the result of its products’price, quality, performance properties and terms of sale versus those of itscompetitors. NOVA Chemicals sells large volumes of standard products. Theability to earn good returns requires a low-cost position.

 

***Cost.***Variablefeedstock costs are the single largest component of NOVA Chemicals’ costs, andaccount for 60-80% of the total cost of its products. NOVA Chemicals’ primaryfeedstocks include ethane and other natural gas liquids (NGLs), crude oil andbenzene. Pricing of these products has been volatile in the past and is likelyto be volatile in the future. Changes in feedstock costs heavily influence theprice of NOVA Chemicals’ products; however, it is margin driven by thesupply/demand balance for plastics and chemical products that determines ourprofitability.

 

Fixed costs, those costs thatdo not vary with production, consist of plant operating and certaindistribution costs; selling, general and administrative costs (SG&A); andresearch and development costs (R&D). SG&A costs represent all directand most indirect expenses incurred in directing and administering the company.R&D costs relate to technical activities to support the development andcommercialization of new products, processes and applications.

 

The following tableillustrates how changes in various factors could affect NOVA Chemicals’profitability, assuming all other factors are held constant. Changes in theopposite direction would have the opposite effect.

 

**Potential Impact to NOVAChemicals’ Profitability of:**

 
| ** **                                                  | ** ** | **(MILLIONS  OF US $)** | ** ** | ** **      | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|
| ** **                                                  | ** ** | **ANNUAL**              | ** ** | **ANNUAL**      | ** ** | **(BILLIONS  OF LBS.)** | ** ** |
| ** **                                                  | ** ** | **BEFORE-TAX**          | ** ** | **AFTER-TAX**   | ** ** | **ANNUAL** | ** ** |
| ** **                                                  | ** ** | **INCOME**              | ** ** | **INCOME**      | ** ** | **PRODUCTION** | ** ** |
| **AS OF DECEMBER 31, 2005**                            | ** ** | **INCREASE**            | ** ** | **INCREASE(1)** | ** ** | **CAPACITY(2)** | ** ** |
| *Increase  of U.S. 1¢ per pound in profit margin*      |       |                    |       |            |       |   |   |
| Ethylene(3)                                                 |       | $                       | 48         |            | $          | 32 |   | 4.8 |   |
| Polyethylene                                                |       | 34                      |       | 22              |       | 3.4 |   |
| Styrene(4)                                                  |       | 38                      |       | 25              |       | 3.8 |   |
| Styrenic polymers - North America(5)                        |       | 17                      |       | 12              |       | 1.7 |   |
| Styrenic polymers - Europe(6)                               |       | 12                      |       | 8               |       | 1.2 |   |
| Propylene(7)                                                |       | 9                       |       | 6               |       | 0.9 |   |
| Decrease in  cost of natural gas by U.S. 10¢ per mmBTU |       | 11                      |       | 7               |       | — |   |
| Decrease in  cost of benzene by U.S. 5¢ per gallon     |       | 20                      |       | 13              |       | — |   |
| Decrease in  Canadian dollar of 1¢ vs. U.S. dollar     |       | 11                      |       | 7               |       | — |   |
|                                                             |            |                         |            |                 |            |  |  |  |  |

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| (1) | Based on an assumed tax  rate of 34%.                                                                                                                                                                        |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Estimate based on current  production capacity assuming 100% utilization.                                                                                                                                    |
| (3) | Represents NOVA Chemicals’  annual ethylene capacity of 6.4 billion pounds at year-end 2005, less 1.6  billion pounds of ethylene capacity that is subject to toll and  margin-sharing agreements.      |
| (4) | Includes 925 million pounds  of long-term purchase agreements.                                                                                                                                               |
| (5) | Excludes production from  Chesapeake, Virginia, facility scheduled to be closed by the end of the  second quarter of 2006.                                                                                   |
| (6) | Represents NOVA Chemicals’  50% share of NOVA Innovene production. Excludes production from the Berre,  France, plant based on the assumption that production will cease at the end  of July 2006. |
| (7) | Co-product from Corunna,  Ontario, and Joffre, Alberta.                                                                                                                                                      |

 

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**2005Financial Overview**

 

**NOVAChemicals’ Highlights**

 
| **(MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)** | ** ** | **2005**   | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                                                     |       |       | ** ** |        |       |        |       |
| Total assets                                                             | ** ** | **$**      | **5,217**  | ** **  | $          | 5,047       |       | $ | 4,413 |   |
| Total  long-term liabilities                                             | ** ** | **$**      | **2,700**  | ** **  | $          | 2,646       |       | $ | 2,517 |   |
| Total  revenue                                                           | ** ** | **$**      | **5,616**  | ** **  | $          | 5,270       |       | $ | 3,949 |   |
| Net income  (loss)                                                       |       |       | ** ** |        |       |        |       |
| Olefins/Polyolefins                                                      | ** ** | **$**      | **241**    | ** **  | $          | 249         |       | $ | 2 |   |
| Styrenics                                                                | ** ** | **(221**   | **)**      | (73         | )          | (140        | )          |
| Corporate and Other Items                                                | ** ** | **(124**   | **)**      | 76          |       | 100         |       |
| Methanex(2)                                                              | ** ** | **—** | ** ** | —      |       | 37          |       |
| Net income  (loss)                                                       | ** ** | **$**      | **(104**   | **)**       | $          | 252         |       | $ | (1 | ) |
| Net income  (loss) per common share                                      |       |       | ** ** |        |       |        |       |
| Basic                                                                    | ** ** | **$**      | **(1.26**  | **)**       | $          | 2.91        |       | $ | (0.02 | ) |
| Diluted                                                                  | ** ** | **$**      | **(1.26**  | **)**       | $          | 2.71        |       | $ | (0.02 | ) |
| Dividends  per share (in Canadian dollars)                               | ** ** | **$**      | **0.40**   | ** **  | $          | 0.40        |       | $ | 0.40 |   |
| Weighted-average  common shares outstanding (millions)                   |       |       | ** ** |        |       |        |       |
| Basic                                                                    | ** ** | **83**     | ** ** | 87          |       | 87          |       |
| Diluted                                                                  |       | ** ** | **83**     | ** **  | 95         |        | 87         |   |
|                                                                          |            |            |            |             |            |             |            |  |  |  |  |

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(1)          Restated— see Note 2 to the Consolidated Financial Statements.

(2)          InJune 2003, NOVA Chemicals sold its investment in Methanex Corporation.

 

**Changes inNOVA Chemicals’ Net Income (Loss)**

 
| **(MILLIONS OF U.S. DOLLARS)**            | ** ** | **2005 vs 2004** | ** ** | **2004 vs 2003** | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|
|                                      |       |             | ** ** |             |       |
| Higher net  unit margin                   | ** ** | **$**            | **8**      | ** **       | $          | 334 |   |
| (Lower)  higher sales volumes             | ** ** | **(193**         | **)**      | 83               |       |
| (Lower)  higher gross margins(1)          | ** ** | **(185**         | **)**      | 417              |       |
| Lower  (higher) SG&A and R&D      | ** ** | **70**           | ** ** | (86              | )          |
| (Higher)  lower restructuring charges     | ** ** | **(160**         | **)**      | 7                |       |
| Lower  depreciation and amortization      | ** ** | **7**            | ** ** | 1                |       |
| (Higher)  lower interest expense          | ** ** | **(5**           | **)**      | 22               |       |
| Higher  income tax (expense) recovery     | ** ** | **86**           | ** ** | (154             | )          |
| (Lower)  higher other gains               | ** ** | **(169**         | **)**      | 85               |       |
| Lower equity  earnings in Methanex        | ** ** | **—**       | ** ** | (39              | )          |
| (Decrease)  increase in net income (loss) | ** ** | **$**            | **(356**   | **)**            | $          | 253 |   |

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(1)   Calculated as revenue less feedstock andoperating costs.

 

5

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**ConsolidatedFinancial Results of Operations**

 

***2005 versus 2004***

 

***Net Income (Loss).***During 2005, NOVA Chemicals reported a net loss of $104 million, or$1.26 per share, compared to net income of $252 million, or $2.71 per share in2004. While NOVA Chemicals delivered solid returns in the first quarter due tofavorable supply/demand fundamentals and strong margins, the balance of 2005proved more challenging due in large part to a series of unusual events thatimpacted bottom line results for the year.

 
| **UNUSUAL EVENTS IN 2005**                                 | ** ** | **ESTIMATED AFTER-TAX IMPACT (IN MILLIONS)** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
| Power outage at Corunna                                    |       | $                                            | (21        | ) |
| Joffre ethane interruption                                 |       | (24                                          | )          |
| Insurance accrual                                          |       | (15                                          | )          |
| European joint venture plant closures and  severance costs |       | (79                                          | )          |
| Delayed Corunna start-up                                   |       | (55                                          | )          |
| Non-cash write-down of Chesapeake,  Virginia, facility     |       | (46                                          | )          |
| Impact to  2005 net income                                 |       | $                                            | (240       | ) |

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***Revenue.***Revenueincreased $346 million, or 7%, from $5,270 million in 2004 to $5,616 million in2005. The increase was principally due to higher selling prices. Weightedaverage benchmark prices for NOVA Chemicals’ polymers increased throughout2005. Total sales volumes in both polymer businesses declined due to scheduledmaintenance turnarounds, unplanned outages and lower demand for styrenicpolymers.

 

***Feedstock and Operating Costs.***Feedstock and operating costs increased $531million, or 12%, from $4,380 million in 2004 to $4,911 million in 2005. Theincrease was primarily attributed to rising feedstock costs. Prices of WTIcrude oil and NYMEX natural gas increased 37% and 40%, respectively, from 2004to 2005. From 2004 through 2005, average annual benzene prices remainedrelatively flat, ethylene prices increased 29%, and natural gas pricesincreased 40%.

 

***Depreciation and Amortization.***Depreciation and amortization expensedecreased $7 million, or 2%, from $297 million in 2004 to $290 million in 2005principally because NOVA Chemicals’ second ethylene cracker (E2) at Joffre,Alberta, was fully depreciated as of June 2004.

 

***Selling, General & Administrative Costs.***SG&A costs decreased $72 million, or 26%,from $273 million in 2004 to $201 million in 2005. The decrease in NOVAChemicals’ SG&A costs was primarily attributed to a reduction instock-based compensation expense due to a decrease in NOVA Chemicals’ commonstock price. During November 2005, NOVA Chemicals hedged thismark-to-market exposure. Accordingly, fluctuations in earnings caused by theeffects of stock price volatility on the existing stock-based compensationprograms should not be significant going forward. In the second quarter of 2005,NOVA Chemicals accrued a non-cash expense of $22 million ($15 millionafter-tax) related to its share of estimated incremental costs in the insurancepools in which it participates. NOVA Chemicals will be required to pay higherfuture premiums as a result of losses incurred by OIL and sEnergy (two mutualinsurance companies formed to insure against catastrophic risks). In addition,losses sustained by the insurance industry resulted in a $14 million increasein insurance premiums.

 

***Research & Development.***R&D costs increased $2 million, or 4%,from $48 million in 2004 to $50 million in 2005. This increase was primarilyattributed to our development of Performance Products.

 

***Restructuring Charges.***Restructuring charges in 2005 were $168 million, primarily the result ofa decision by NOVA Innovene to cease expandable polystyrene production at itsBerre, France, facility and permanently shut down its expandable polystyreneplant at Carrington, United Kingdom; and a decision by NOVA Chemicals topermanently close the Chesapeake, Virginia, polystyrene plant. For additionalNOVA Innovene information, refer to “Styrenics Business –– Styrenic PolymerJoint Ventures” on page 45.

 

***Interest Expense (Net).***Net interest expense in 2005 increased to $113 million, compared to $108million in 2004. NOVA Chemicals issued $400 million of senior notes in October 2005that resulted in additional interest expense and repaid $100 million of 7%notes that matured in September 2005.

 

***Other Gains.***NOVA Chemicals experienced $8 million of other gains in 2005 primarilyrelated to a tax settlement. Gains were $177 million in 2004 primarily relatedto the sale of NOVA Chemicals’ interest in the Alberta Ethane Gathering System(AEGS) for a gain of $53 million and income tax related settlements for a gainof $122 million.

 

6

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***Income Tax Recovery (Expense).***Income tax expense decreased $86 million froman $81 million expense in 2004 to a $5 million recovery in 2005. This decreasein income tax expense was primarily attributed to a decrease in earnings.

 

***2004 versus 2003***

 

***Net Income (Loss).***During 2004, NOVA Chemicals earned net income of $252 million, or $2.71per share. This compares to a net loss in 2003 of $1 million, or $0.02 pershare. Plastics and chemical demand growth in 2004 outpaced supply as theUnited States and European economies rebounded from a recession in themanufacturing sector compared to 2003. In 2004, strengthening demand combinedwith limited capacity additions, resulted in increased sales volume and prices.Margins expanded for all products despite record high crude oil and benzenecosts, as pricing stayed ahead of feedstock cost increases.

 

***Revenue.***Revenueincreased $1,321 million, or 33%, from $3,949 million in 2003 to $5,270 millionin 2004. Sales volumes improved for both of NOVA Chemicals’ polymer businessesin 2004 on strong demand due to an improving economy. After the first quarter,weighted-average benchmark prices for polymers increased in 2004.

 

***Feedstock and Operating Costs.***Feedstock and operating costs increased $904million, or 26%, from $3,476 million in 2003 to $4,380 million in 2004. Theincrease was primarily due to rising feedstock costs and higher productionvolumes. Prices of WTI crude oil, NYMEX natural gas and benzene increased 33%,12% and 87%, respectively, from 2003 to 2004.

 

***Depreciation and Amortization Expense.***Depreciation and amortization expense remainedessentially flat at $297 million in 2004 compared with $298 million in 2003.Depreciation and amortization expense was reduced by approximately $30 millionannually as Joffre’s second ethylene cracker was fully depreciated at thattime. However, increases in the Canadian dollar and euro denominated assetvalues offset this reduction when converted to U.S. dollars.

 

***Selling, General & Administrative.***SG&A expenses increased $83 million, or44%, from $190 million in 2003 to $273 million in 2004 mainly due to $76million of additional mark-to-market charges resulting from the impact of NOVAChemicals’ common stock price appreciation on cash-settled stock-basedcompensation plans. Currency related cost increases of approximately $9 millionwere due to a higher Canadian dollar and euro.

 

***Research & Development.***R&D spending increased $3 million, or 7%,from $45 million in 2003 to $48 million in 2004. The year-over-year increase ininvestment reflects NOVA Chemicals’ focus on the development of PerformanceProducts.

 

***Restructuring Charges.***In 2004, NOVA Chemicals took a restructuring charge of $8 million ($5million after-tax) for additional dismantling and severance costs related tothe May 2004 shutdown of the A-Line at its St. Clair River polyethyleneplant at Corunna, Ontario. This amount is in addition to a $15 million ($10million after-tax) charge taken in 2003, which was comprised mainly of assetwrite-down and severance costs.

 

***Interest Expense (Net).***Net interest expense in 2004 decreased to $108 million as compared to$130 million in 2003. $400 million of senior notes were issued in January 2004.The proceeds were primarily used to redeem $383 million of preferredsecurities. The $29 million decrease in interest on preferred shares andsecurities was offset by a $13 million increase in interest expense onlong-term debt. In addition, $3 million of interest was capitalized in 2004;whereas, no interest was capitalized in 2003, and interest income increased by$3 million in 2004.

 

***Equity Earnings of Affiliate.***In 2004, there were no equity accountedaffiliates; however, in 2003, we earned $39 million from NOVA Chemicals’investment in Methanex Corporation. In June 2003, we sold our investmentin Methanex Corporation.

 

***Other Gains (Losses).***In 2004, NOVA Chemicals had other gains of $177 million compared to $92million in 2003. NOVA Chemicals’ 2004 other gains included the sale of NOVAChemicals’ interest in AEGS for a $53 million gain and a $122 million gain dueto income tax related settlements. In 2003, NOVA Chemicals realized a gain of$29 million on the sale of its investment in Methanex Corporation, a gain of$76 million on the sale of the Fort Saskatchewan Ethylene Storage facility anda $13 million loss on the Bayport, Texas, fire.

 

***Income Tax Recovery (Expense).***Income taxes shifted from a recovery in 2003to expense in 2004, primarily due to the improvement in earnings. In 2004,income tax expense was $81 million compared with a recovery of $73 million in2003. 

 

7

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**Olefins/PolyolefinsBusiness**

 

***Market and Economics.***Ethylene is the most widely produced commodity petrochemical in theworld. It is a key building block for a variety of polymers and other chemicalsused to manufacture products such as packaging, containers, films, sheet,construction and building products, automotive components, and other industrialand consumer goods. Regionally traded for the most part, ethylene is theprimary feedstock used in the production of polyethylene. NOVA Chemicals’customers convert polyethylene resins to produce consumer end-use applications,such as packaging film, plastic bags, toys and bottles. Industrial applicationsinclude automotive components, building products, storage drums and shrinkwrap. Ethylene margins typically reach peak conditions when operating rates areat or above 92%, a level that the industry has had difficulty maintaining forlong periods.

 

Financial results in NOVAChemicals’ Olefins/Polyolefins business are driven in large part by thesupply/demand balance for polyethylene. Polyethylene is a globally tradedcommodity with established merchant markets. When the polyethylenesupply/demand balance tightens, operating rates increase and margins usuallyexpand. Polyethylene margins typically reach peak conditions when operatingrates for polyethylene are at or above 90%.

 

***Business Overview.***NOVA Chemicals’ Olefins/Polyolefins business operates two largemanufacturing complexes in Joffre, Alberta, and Sarnia, Ontario, which produceethylene, polyethylene and chemical co-products. These complexes are large,low-cost and among the most energy efficient in the world. Additionally, NOVAChemicals has one of the few polyethylene businesses with independent, patentedprocess and catalyst technology, allowing the company to produce uniquepolyethylene Performance Products that deliver higher value to customers versusstandard polyethylene resins.

 

NOVA Chemicals’Olefins/Polyolefins business sells primarily into North American markets.Approximately 10% – 15% of the Company’s standard polyethylene volume is soldin China and other countries in Asia and Europe. The Olefins/Polyolefinsbusiness produces and sells standard polyethylene products, such as linearlow-density polyethylene (LLDPE), low-density polyethylene (LDPE) andhigh-density polyethylene (HDPE). NOVA Chemicals also manufactures and sellsvalue-added polyethylene Performance Products, including SURPASS® and SCLAIR® resins (LLDPE and HDPE) that are manufacturedusing Advanced SCLAIRTECHTM technology.

 

In addition to direct polymersales, NOVA Chemicals also licenses its proprietary SCLAIRTECHTM technology andNOVACATTM family of catalysts. NOVA Chemicals’ has licensed SCLAIRTECHtechnology for more than 20 years and now has 11 licensed plants located aroundthe world. Following the planned 2008 start-up of a licensee’s polyethylenefacility in India, NOVA Chemicals’ SCLAIRTECH technology will be used toproduce more than 42% of all the polyethylene in India, one of the fastestgrowing economies in the world.

 

The NOVACAT catalysts are aseries of advanced Ziegler-Natta catalysts designed specifically for thegas-phase platform. NOVACAT catalysts are capable of producing butene andhexene LLDPE copolymers with improved performance characteristics.

 

In October 2004, NOVAChemicals announced that it had been selected by Pemex Petroquimica as a partnerin a feasibility study for a potential world-scale ethylene and polyethylenecomplex in Mexico. During 2005, it was determined that this project, asoriginally planned, will not proceed due to raw material pricing issues.However, an alternative version of the project has been proposed and NOVAChemicals is in the process of evaluating and responding to it.

 

***Olefins/Polyolefins Manufacturing.***NOVA Chemicals’ largest volume product isethylene, which is central to the production of both polyethylene and styrenemonomer. NOVA Chemicals’ produces approximately 75% of its ethylene at itsJoffre site; and the remaining balance at its Corunna, Ontario, flexi-cracker.Approximately 50% of total ethylene capacity is consumed by NOVA Chemicals forits own polyethylene production and approximately 7% is used in the productionof styrene monomer. The balance of ethylene production is sold to thirdparties.

 

NOVA Chemicals’ Joffre siteis the largest ethylene and polyethylene complex in the world. Referred to as a‘light’ ethylene cracker because ethane is the primary feedstock, the Joffresite has, on average, a lower cost of production compared to typical UnitedStates Gulf Coast (USGC) light-ethylene crackers. Production costs are lower atJoffre due to the facility’s scale of operations and energy efficiency.Additionally, the site benefits from Alberta’s historically lower-cost naturalgas, large-scale ethane extraction plants, and efficient natural gas gatheringand transportation infrastructure. Collectively referred to as the ‘AlbertaAdvantage,’ the combination of these factors has historically yielded anaverage cash-cost advantage of approximately 6¢ per pound of ethylene.

 

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In 2005, NOVA Chemicalsrealized an average cash-cost advantage of 6¢ per pound of ethylene. In thefourth quarter of 2005, the Alberta Advantage averaged only 3¢ per pound ofethylene as USGC hurricane-related shutdowns resulted in severely depressedethane prices in the region. By the end of the fourth quarter, as natural gasprices fell, a more typical relationship between natural gas and ethane wasrestored. While Joffre’s ethylene advantage will continue to fluctuate, NOVAChemicals expects it will maintain its historical average cost advantagerelative to typical USGC ethylene crackers.

 

To acquire ethane for theJoffre ethylene crackers, NOVA Chemicals pays a fee to NGL facility owners toextract and deliver ethane from natural gas streams processed at theirfacilities, in addition to purchasing natural gas to replace the extractedethane. NOVA Chemicals also purchases ethane directly. The majority of theethane we use at the Joffre plant is extracted and delivered under medium- tolong-term contracts. In the second half of 2005, construction on a newpipeline, owned by Taylor NGL Limited Partnership and operated by NOVAChemicals, was completed. As a result, NOVA Chemicals has the enhancedcapability to use alternate feedstocks, such as propane, to supplement aportion of its feedstock requirements at Joffre when the economics arefavorable.

 

**Figure 3.Historical Alberta Advantage**

 

 

NOVA Chemicals’ Corunnaflexi-cracker has the capability to tailor its feedstock slate between crudeoil, crude oil derivatives and NGLs, depending on market conditions. Feedstocksfor the Company’s Corunna ethylene flexi-cracker are obtained from a widevariety of sources. The majority of the feedstocks are crude oil and crude oilderivatives and condensates (heavy feeds), with the remainder being butane, propaneand ethane (light feeds). The crude oil and derivatives are supplied fromwestern Canada via pipeline, and from the United States and overseas via marineand pipeline transportation. Condensate is sourced primarily from outside NorthAmerica, also via marine and pipeline transportation. The offshore feedstock isdelivered via bulk oil tankers into Portland, Maine, and then transported viacommon carrier pipelines into Corunna. Propane, butane and ethane are sourcedfrom western Canada, local Sarnia producers and the United States, and aretransported to the facility primarily via pipeline and rail.

 

Anticipating strong operatingconditions in 2006, 2007 and 2008, NOVA Chemicals advanced all feasiblescheduled maintenance turnarounds into 2005. Five of six turnarounds weresuccessfully completed. In addition to the scheduled maintenance at its Corunnafacility, NOVA Chemicals undertook a modernization and expansion project, whichincluded the installation of new furnaces, compressor units and other equipment.The plant was originally scheduled to restart on October 23, 2005, butproblems primarily with new equipment delayed start-up to January 24,2006.

 

NOVA Chemicals expects theCorunna flexi-cracker modernization will improve the overall energy efficiencyof the plant by 15%. It will also increase annual ethylene capacity toapproximately 1.85 billion pounds and propylene design capacity toapproximately 900 million pounds per year. In both cases, capacity will bedependent upon feedstock mix. The plant annual operating costs are expected tobe $20- $25 million lower when the modernization is completed later in 2006.

 

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***Performance Products.***In addition to its standard polyethylene products, NOVA Chemicals hasdeveloped a portfolio of differentiated Performance Products. Based on patentedAdvanced SCLAIRTECH technology and proprietary catalysts, NOVA Chemicals’polyethylene Performance Products deliver enhanced value to customers and, as aresult, are expected to generate higher and more sustainable margins for thebusiness.

 

SURPASS film resins deliver aunique combination of processability, puncture resistance and exceptionaloptical properties not found in traditional single-site polyethylene resins.SURPASS thin-wall injection molding resins are distinguished by superiortoughness and flexibility, coupled with the ability to fill the thinnest moldsfaster than other polyethylene products. SURPASS rotational molding resinsexhibit greater stiffness and toughness and can be used in a wide variety ofapplications, such as tanks, dumpsters and industrial storage containers.SCLAIR resins can be easily tailored to meet customers’ needs. They haveexcellent overall processability, which makes them suited for flexiblepackaging applications.

 

Since their introduction,sales of Performance Products have grown to 52% of Advanced SCLAIRTECHtechnology plant capacity. By 2007, Advanced SCLAIRTECH technology polyethylenePerformance Product sales are targeted to be approximately 92% of capacity. Theannual EBITDA (see Supplemental Measures on page 55) contribution fromAdvanced SCLAIRTECH technology products was $25 million, exceeding the targeted$10 - $20 million EBITDA in 2005. By 2008, our target is to achieve EBITDA of$110 - $135 million from Advanced SCLAIRTECH technology products.

 

**Figure 4.Advanced SCLAIRTECH Technology Polyethylene Performance Products Sales Volume**

 

 

**Olefins/PolyolefinsFinancial Highlights**

 
| **(MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                                     |       |       | ** ** |       |       |     |       |
| Revenue(1)                                                               | ** ** | **$**      | **3,586**  | ** ** | $          | 3,230    |       | $ | 2,559 |   |
| Operating  income                                                        | ** ** | **$**      | **437**    | ** ** | $          | 445      |       | $ | 98 |   |
| Depreciation  and amortization                                           | ** ** | **$**      | **166**    | ** ** | $          | 181      |       | $ | 187 |   |
|                                                                     | ** ** | ** ** | ** ** | ** ** |       |     |       |   |   |   |
| EBITDA(2)                                                                | ** ** | **$**      | **603**    | ** ** | $          | 626      |       | $ | 285 |   |
| Net income                                                               | ** ** | **$**      | **241**    | ** ** | $          | 249      |       | $ | 2 |   |
| Average  capital employed(3)                                             | ** ** | **$**      | **2,029**  | ** ** | $          | 1,940    |       | $ | 1,898 |   |
| After-tax  return on capital employed(4)                                 | ** ** | **14.1**   | **%**      | 15.2       | %          | 2.6      | %          |

 

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(1)          Before inter-segment eliminations.

(2)          See Supplemental Measures on page 55.

(3)          Average capital employed equals cash expendedon plant, property and equipment (less accumulated depreciation andamortization) and working capital and excludes assets under construction.Amounts are converted to U.S. dollars using quarter-end exchange rates. SeeSupplemental Measures on page 55.

(4)          After-tax return on capital employed equalsnet income plus after-tax interest expense divided by average capital employed.See Supplemental Measures on page 55.

 

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**Olefins/PolyolefinsOperating Highlights**

 
| ** **                                              | ** ** | **2005** | ** ** | ** ** | ** ** | **ANNUAL** | ** ** |
|---------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| **(U.S. DOLLARS PER POUND, EXCEPT  WHERE NOTED)**       | ** ** | **Q1**   | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |     |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Benchmark Principal Product Prices(1)                   |       |     |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Ethylene(2)                                             | ** ** | **$**    | **0.42**   | ** ** | **$**      | **0.38**   | ** ** | **$** | **0.41** | ** ** | **$** | **0.56** | ** ** | **$** | **0.44** |   | $ | 0.34 |   | $ | 0.29 |   |
| Polyethylene – linear low-density butene  liner(3) | ** ** | **$**    | **0.58**   | ** ** | **$**      | **0.51**   | ** ** | **$** | **0.54** | ** ** | **$** | **0.76** | ** ** | **$** | **0.60** |   | $ | 0.48 |   | $ | 0.43 |   |
| Polyethylene – weighted-average  benchmark(4)      | ** ** | **$**    | **0.62**   | ** ** | **$**      | **0.55**   | ** ** | **$** | **0.58** | ** ** | **$** | **0.78** | ** ** | **$** | **0.63** |   | $ | 0.50 |   | $ | 0.46 |   |
| Benchmark Raw Material Prices:                          |       |     |       |       |       |       |       |   |   |   |   |   |   |   |   |
| NYMEX Natural Gas (per mmBTU)(5)                        | ** ** | **$**    | **6.32**   | ** ** | **$**      | **6.80**   | ** ** | **$** | **8.25** | ** ** | **$** | **12.85** | ** ** | **$** | **8.55** |   | $ | 6.09 |   | $ | 5.44 |   |
| WTI Crude Oil (per barrel)(6)                           | ** ** | **$**    | **49.84**  | ** ** | **$**      | **53.17**  | ** ** | **$** | **63.19** | ** ** | **$** | **60.02** | ** ** | **$** | **56.56** |   | $ | 41.41 |   | $ | 31.04 |   |

 

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(1)          Average benchmark prices do not necessarilyreflect actual prices realized by NOVA Chemicals or any other petrochemicalcompany.

(2)          Source: Chemical Market Associates, Inc.(CMAI) - USGC Net Transaction Price.

(3)          LLDPE butene liner. Source: Townsend PolymerServices Information (TPSI).

(4)          Benchmark prices weighted according to NOVAChemicals’ sales volume mix in North America. Source for benchmark prices:TPSI.

(5)          Source: NYMEX Henry Hub 3-Day Average Close,values in millions of British Thermal Units (mmBTU).

(6)          Source: NYMEX WTI daily spot- settled priceaverage for calendar month.

 

**PolyethyleneSales Volumes**

 
| **(MILLIONS OF POUNDS)**             | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
|                                 |       |      |       |     |       |     |       |
| NOVAPOL  Resins                      |       |      |       |     |       |     |       |
| Joffre site: LLDPE                   | ** ** | **1,207** |       | 1,320    |       | 1,256    |       |
| Moore site: LDPE                     | ** ** | **230**   |       | 305      |       | 261      |       |
| Moore site: HDPE                     | ** ** | **350**   |       | 449      |       | 392      |       |
| SCLAIRTECH  Resins                   |       |      |       |     |       |     |       |
| St. Clair River site: LLDPE and HDPE | ** ** | **325**   |       | 452      |       | 500      |       |
| Advanced  SCLAIRTECH Resins          |       |      |       |     |       |     |       |
| Joffre site: Standard LLDPE and HDPE | ** ** | **291**   |       | 470      |       | 416      |       |
| Joffre site: Performance Products    | ** ** | **438**   |       | 289      |       | 184      |       |
| Total                                | ** ** | **2,841** |       | 3,285    |       | 3,009    |       |

 

***2005 versus 2004***

 

***Net Income.***TheOlefins/Polyolefins business reported net income of $241 million in 2005,compared to net income of $249 million in 2004. Average margins were higher in 2005.The combination of planned and unplanned outages; however, significantlyreduced sales volumes. In addition to planned maintenance turnarounds at sixOlefins/Polyolefins facilities, sales volumes were impacted by unplanned eventsin 2005, including: a second quarter power outage that forced the shutdown ofthe Corunna flexi-cracker; reduced ethane supply due to a tornado that damagedthird-party NGL extraction facilities at Empress, Alberta and also impacted thebusiness in the second and third quarters; as well as the extended turnaroundof the Corunna flexi-cracker due to labor availability issues and problems withnewly installed equipment in the fourth quarter. See Unusual Events table on page 34.

 

***EBITDA.***EBITDAdecreased $23 million, or 4%, to $603 million in 2005 from $626 million in thesame period in 2004.

 

***Revenue.***Revenuefrom the Olefins/Polyolefins business increased $356 million, or 11%, from$3,230 million in 2004 to $3,586 million in 2005. The increase was primarilydue to higher average selling prices during 2005, which were partially offsetby lower sales volumes due to planned and unplanned outages.

 

Year-over-year, NOVAChemicals’ polyethylene inventories were down from 23 days of sales on December 31,2004, to 22 days on December 31, 2005. During the same period, theAmerican Plastics Council (APC) reported that North American inventories werereduced by approximately 400 million pounds in 2005, and inventories ofpolyethylene were low as of year-end. APC also reported that North Americanindustry operating rates were 86% in 2005, as compared to 94% in 2004.

 

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The year-over-year decline inoperating rates is attributable to two main factors. Chain inventory, built inlate 2004 and early 2005, was consumed in the second quarter, sharply loweringvolumes and margins. In addition, and more significantly, hurricanes Katrinaand Rita, which occurred in August and September 2005 respectively,forced the shutdown of many plants on the USGC. Approximately 60% of NorthAmerican ethylene and 50% of North American polyethylene capacity was affected.CMAI estimated that the combined impact of the hurricanes resulted in areduction in ethylene production of 3 billion pounds and a reduction in polyethyleneproduction of approximately 1.5 billion pounds.

 

Average prices for NOVAChemicals’ ethylene and polyethylene in 2005 increased over 2004 averages by29% and 26%, respectively. Ethylene volumes were down 12% in 2005 whilepolyethylene volumes were down 14%. The decrease in ethylene and polyethylenevolumes was due primarily to unplanned outages at the Corunna flexi-cracker inApril, the Joffre ethane interruption in June due to a tornado, and thefourth quarter extended outage at Corunna.

 

International volumesdeclined 17% to 398 million pounds in 2005 compared to 2004. Internationalsales represented 14% of NOVA Chemicals’ total polyethylene sales volume in2005 versus 15% in 2004. In 2005, polyethylene sales to China accounted for 53%of international volumes, or 212 million pounds, with the balance of remainingsales going to other Asian and European countries. Comparatively, in 2004polyethylene sales to China totaled 233 million pounds or approximately 48% ofinternational sales volumes.

 

In 2005, Advanced SCLAIRTECHtechnology Performance Products sales volume, including new SURPASS rotationalmolding and thin-wall injection molding resins, increased 52% from 289 millionpounds in 2004 to 438 million pounds.

 

***Feedstocks and Operating Costs.***Feedstock and operating costs increased $364million, or approximately 15%, from $2,485 million in 2004 to $2,849 million in2005. Crude oil prices continued to rise through most of 2005, with WTI crudeoil hitting a record high close of $69.81 per barrel in August 2005.Average WTI crude oil prices rose 37% from $41.41 per barrel in 2004 to $56.56per barrel in the 2005 period.

 

The average NYMEX natural gasprice was up 40% from 2004 to 2005 year-end, while the AECO contract naturalgas price was up 34% to $6.98 per mmbtu. During 2005, the basis differentialaveraged $1.57 per mmBTU compared to $0.88 per mmBTU in 2004. In 2005, theAlberta Advantage averaged 6¢ per pound of ethylene compared to 7¢ per pound in2004 primarily due to the narrowing of the spread between USGC and Albertaethane, especially in the fourth quarter.

 

***2004 versus 2003***

 

***Net Income.***TheOlefins/Polyolefins business reported net income of $249 million in 2004,compared to net income of $2 million in 2003. Several polyethylene priceincreases were announced during 2004 and were successfully implemented,allowing margins to expand even as feedstock costs rose.

 

***EBITDA.***EBITDAincreased $341 million, or 120%, to $626 million in 2004 from $285 million in2003.

 

***Revenue.***Revenuefrom the Olefins/Polyolefins business increased $671 million, or 26%, from$2,559 million in 2003 to $3,230 million in 2004. The increase was primarilydue to higher average selling prices during 2004.

 

During 2004, the APC reportedNorth American industry operating rates for polyethylene of 94%, up from 85% in2003. Average prices for NOVA Chemicals’ ethylene and polyethylene products in2004 increased over 2003 averages by 17% and 9%, respectively.

 

Polyethylene volumes were up9% over 2003 while ethylene volumes were relatively flat. The increase inpolyethylene volumes came largely from Advanced SCLAIRTECH technology resins,which were up 27% to 759 million pounds.

 

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***Feedstock and Operating Costs.***Feedstock and operating costs increased $320million, or approximately 15%, from $2,165 million in 2003 to $2,485 million in2004. Crude oil prices began to rise midway through 2003 and continued to risethroughout most of 2004, with WTI crude oil hitting a record high close of $55.17per barrel in October 2004. Average WTI crude oil prices rose 33% from$31.04 per barrel in 2003 to $41.41 per barrel in 2004. NYMEX natural gas wasup 12% from 2003 to 2004. AECO contract natural gas price was up 10% to $5.21per mmbtu over the same period. Price increases implemented throughout 2004,coupled with strong co-product pricing from the Corunna flexi-cracker, morethan offset the negative impact of increasing costs. The Alberta Advantageaveraged 7¢ per pound of ethylene in 2004 compared to 4¢ per pound in 2003.

 

***Outlook for Olefins/Polyolefins Business***

NOVA Chemicals expects strongindustry market conditions based on global and North American GDP forecasts of3 – 3.5% growth, limited capacity additions in North America, and effectiveoperating rates in polyethylene in excess of 92%. With the completion of majorasset turnarounds and long-standing feedstock advantages, NOVA Chemicalsbelieves it is well-positioned to benefit from a cyclical peak. In addition, NOVAChemicals polyethylene Performance Products are becoming a more significantportion of sales and should provide for greater earnings stability over thelong-term cycle.

 

**Figure 5. North American Polyethylene Operating RatesProjected Demand Growth of 4.5% 2006–2008**

 

 

NOTE: The 2005 polyethyleneoperating rates were negatively impacted by lower utilization due to hurricanesKatrina and Rita. CMAI estimates that polyethylene production lost in the lastfour months of 2005 due to the hurricanes was equivalent to 4% of annual productioncapacity.

 

**Figure 6. Global Polyethylene Operating RatesProjected Demand Growth of 5.5% 2006–2008**

 

 

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**StyrenicsBusiness**

 

NOVA Chemicals is NorthAmerica’s largest producer of styrene monomer and styrenic polymers. Inaddition, NOVA Chemicals is a 50:50 participant in NOVA Innovene, Europe’slargest styrenic polymer producer. NOVA Innovene was created on October 1,2005, through a cashless, 50:50 joint venture transaction with Innovene, BPp.l.c’s commodity chemicals business. Innovene was acquired by INEOS on December 16,2005.

 

***Market and Economics***

 

A globally traded commodity,styrene monomer is a key feedstock used in the production of styrenic polymerssuch as solid polystyrene and expandable polystyrene. Styrenic polymers areused to make everyday products such as electronics packaging, constructioncomponents and food packaging. While polystyrene accounts for approximatelytwo-thirds of styrene monomer demand, styrene monomer is also used in ABS, syntheticrubber and unsaturated polyesters.

 

As in most basic chemicalsand plastics businesses, margins in the styrenics industry are primarily drivenby fundamental supply/demand dynamics. Styrene monomer is the supply bottleneckin the styrenics chain and therefore the key indicator of supply/demandtightness. Operating rates in excess of 92% for styrene monomer generally leadto margin expansion. Profitability in the global styrenics industry has beenundermined in the last several years primarily due to the over-supply ofstyrene monomer and the relatively high costs of benzene feedstock.

 

Styrene monomer is producedfrom the combination of ethylene and benzene, referred to as the ethylbenzenestyrene monomer production method; or “on-purpose” styrene production. Styrenemonomer can also be made as a by-product of propylene oxide production. Thistechnology is called propylene oxide/styrene monomer production (PO/SM) andaccounts for approximately 19% of global production and approximately 34% ofEuropean production. One of the drivers of excess styrene monomer capacity inthe late 1990s has been PO/SM process technology. Developed in the 1980s, PO/SMhas had a significant negative impact on the styrene monomer supply/demandbalance because, for every pound of propylene oxide produced, 2.2 pounds ofstyrene monomer are produced as a by-product. New technologies have recentlybeen introduced to produce “on-purpose” propylene oxide, and this willessentially eliminate future PO/SM plant construction; a positive developmentfor restoring better styrene monomer supply/demand balance.

 

***Business Overview***

 

***Styrene Monomer.***NOVA Chemicals has approximately 4 billion pounds of total annualstyrene monomer supply. Approximately 73% of this production is consumed internallyfor styrenic polymer production and the balance is sold to third parties on aspot basis and under short-term contracts.

 

NOVA Chemicals manufacturesapproximately 3 billion pounds of styrene monomer annually from productionfacilities in Bayport, Texas, and Sarnia, Ontario; and through equityparticipation in Lyondell Chemical Company’s Channelview, Texas plant. All ofthe ethylene and approximately half of the benzene requirements for its Sarniastyrene plant are supplied from its Corunna flexi-cracker. The balance ofbenzene feedstock is obtained from nearby petroleum refineries. For the Bayportand Channelview facilities, ethylene and benzene requirements are purchased,with the exception of some ethylene swaps.

 

NOVA Chemicals also purchasesapproximately 925 million pounds of styrene monomer through two long-termsupply contracts that expire in December 2006 and December 2007.These contracts are arrangements that were negotiated as part of theacquisition of assets.

 

In addition, NOVA Chemicalsengages in transatlantic swap arrangements with other styrene producers tosatisfy its contractual obligation to provide 50% or approximately 1 billionpounds per year of NOVA Innovene’s styrene monomer requirements.

 

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As a result of NOVA Chemicals’make, buy and swap arrangements, the Company’s styrene monomer supply exceedsits polymer manufacturing capacity by more than 1 billion pounds. Primarily dueto minimum purchase requirements of its long-term styrene monomer purchasecontracts during the last several years, NOVA Chemicals was obligated to buyhigher-cost monomer to sell or consume, while its more cost-effective plantswere run at less than optimum levels. It is estimated that had NOVA Chemicals beenable to run its own styrene monomer plants at higher operating rates, EBITDAlosses since 2001 would have been reduced by approximately $30 million peryear. NOVA Chemicals can begin to move toward a more balanced position at theend of 2006 when the first of the long-term contracts for 400 million poundsper year expires. The remaining contract, totaling 525 million pounds per year,has a termination option at the end of 2007.

 

In 2005, NOVA Chemicalscompleted turnarounds at both of its styrene monomer facilities. In addition, amodernization and expansion project was completed at its Bayport plant that isexpected to improve the overall energy efficiency of the plant. The projectincluded the installation of 450 million pounds of incremental styrene monomercapacity. Approximately 220 million pounds of this capacity is committed toBASF through long-term contracts.

 

***Styrenic Polymers.***NOVA Chemicals’ styrenic polymer production includes polystyrene,expandable polystyrene and a portfolio of Performance Products. In NorthAmerica, annual polystyrene production capacity is approximately 1.5 billionpounds and expandable polystyrene capacity is approximately 370 million pounds.In Europe, NOVA Chemicals’ 50% share of NOVA Innovene production capacity is approximately794 million pounds of polystyrene and 385 million pounds of expandablepolystyrene annually, excluding the Berre facility that expects to ceaseproduction in July 2006.

 

***Performance Products.***NOVA Chemicals also manufactures and sells unique styrenic polymerPerformance Products including ARCEL® specialty foamresins for protective packaging; DYLARK® resins forautomotive interiors and food packaging; and ZYLAR® resins for food, medical and industrial packaging. Sold to moldersaround the world, each of these Performance Products earns a significant marginabove standard polymers because of their unique attributes and value in use.

 

ARCEL is a high-performance,moldable foam resin consisting of a combination of polystyrene andpolyethylene. ARCEL resin provides the best of both polymers with itsexceptional toughness, flexibility and durability in a lightweight foam. Thestrength and flexibility of ARCEL can be molded into complex and intricateforms. Its lightweight construction is resistant to puncture, flaking, tearingand breaking. In addition, packaging molded with ARCEL resin is more compactand provides superb cushioning and easy handling, all of which helps to reduceproduct damage while providing lower freight and other packaging costs.

 

DYLARK engineering resins areused by plastics designers, engineers and processors for automotiveapplications, such as soft instrument panels, structural consoles, roof-mountedLCD video supports, interior trim and audio components. DYLARK resins are specifiedfor their temperature resistance, stiffness and strength, lot-to-lotconsistency, exceptional foam adhesion and low total cost.

 

Some DYLARK grades are alsodesigned specifically for microwavable food packaging applications. DYLARKpackaging resins provide superior low-temperature toughness and thermalstability required for freezer-to-microwave performance. The versatility ofDYLARK resins provide a wide range of application options, such astake-out/carry-out containers, home meal replacement and retail food packaging.

 

ZYLAR packaging resin is aclear acrylic copolymer. It provides low-temperature toughness for refrigeratedand frozen-food packaging. Also designed for injection molding, extrusion andthermoforming processes, ZYLAR provides improved clarity and low odor and tastetransfer.

 

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In 2005, NOVA Chemicals’capacity to produce styrenic polymer Performance Products grew by 50% toapproximately 200 million pounds by year-end. The EBITDA contribution fromStyrenics Performance Products was $10 million, exceeding the targeted range of$0- $8 million in 2005. By 2008, our target is to achieve EBITDA of $130- $165million net of R&D, marketing and commercialization costs.

 

To deliver on EBITDA targets,NOVA Chemicals plans to expand annual Performance Product production capacityto approximately 480 million pounds by 2008. In September 2005, NOVAChemicals entered into a long-term agreement with Loyal Chemical IndustrialCorporation to manufacture ARCEL moldable foam resin near Shanghai, China. Thisagreement is part of the plans to expand manufacturing capacity for ARCEL resinto 100 million pounds annually by the end of 2006 and 225 million pounds by themiddle of 2008.

 

**Figure 7.Production Capacity of Styrenics Performance Products**

 

 

***Downstream Value Capture***

 

In 2005, NOVA Chemicals’Styrenics business began to implement downstream business models to capturevalue beyond the manufacturing and sale of plastics. By leveraging intellectualproperty and market expertise into strategic relationships with downstreampartners, NOVA Chemicals expects to generate incremental profit from technologylicensing and finished-product sales. Business activities in 2005 include:

 

•                  Acquired IMageTM technology used to manufacturecups and containers that offer both high-quality graphics and superb hot andcold insulation. In the fourth quarter, NOVA Chemicals started up its firstIMage technology manufacturing asset, which produces in-mold labeled cups. Themachine is expected to produce 14 million cups annually, which will be used forthe development of an IMage technology licensing program.

 

•                  Manufactured and sold Insulated Concrete Form (ICF)blocks for the construction of 900 new low-cost, residential homes in Chile. Aninnovative construction system, ICFs are made from molded expandablepolystyrene. When fitted together and filled with concrete, they become thefoundation and walls of a structure. More resistant to mold and termites thanalternative building products, ICFs offer built-in insulation. ICFs are alsoeasy to assemble which can reduce construction time and lower labor costs.

 

•                  Entered into a joint development agreementwith Dietrich Metal Framing, a Worthington Industries company, to commercializeconstruction products that combine light gauge steel and expandable polystyreneto make wall systems for commercial construction. The initial target marketsare military housing and commercial buildings.

 

•                  Filed two new patents for lightweightconcrete. In addition, a joint development agreement was signed with Metromont,a leading supplier of pre-cast, pre-stressed concrete panels for theconstruction industry. Lightweight concrete combines concrete with expandablepolystyrene beads to create a building material with lower weight thantraditional concrete, while maintaining high levels of compression strength andbetter insulating properties.

 

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***Styrenic Polymer Joint Ventures***

 

The effects of a cyclicaltrough in the Styrenics industry, particularly in Europe, has had a negativeimpact on NOVA Chemicals’ Styrenics business performance over the last severalyears. In 2005, NOVA Chemicals entered into two joint ventures which we believewill reduce costs and improve the competitiveness of our styrenic polymerbusiness.

 

***NOVA Innovene in Europe.***Primarily due to relatively low operating rates caused by excesscapacity, NOVA Chemicals’ European styrenic polymers business delivered weakresults over the last several years. Since 2001, European styrenic polymerEBITDA losses have averaged $30 million per year, or approximately half of theStyrenics business’ loss for the period.

 

The enhanced scale of NOVAInnovene is expected to deliver approximately $60 million per year of totalcost savings within three years. Savings will be shared equally between NOVAChemicals and INEOS. The savings are expected to be derived from assetrationalizations and reductions in administration, sales and marketingexpenses. For example, at start-up, NOVA Innovene had non-manufacturing staffof 165 people. Prior to the commencement of NOVA Innovene, NOVA Chemicals alonehad 160 non-manufacturing staff in Europe.

 

Additionally, on October 11,2005, NOVA Innovene announced it will permanently shut down a previously idledexpandable polystyrene plant in Carrington, United Kingdom, and permanentlycease expandable polystyrene production at its Berre, France, plant in thesecond half of 2006. These two rationalizations will remove nearly 30% of NOVAInnovene’s original expandable polystyrene capacity, approximately 310 millionpounds per year, which represents approximately 10% of Western Europeanexpandable polystyrene capacity.

 

NOVA Chemicals believes theNOVA Innovene joint venture creates a single entity with greater size, scaleand competitiveness. At year-end 2005, the joint venture had manufacturingcapacity of approximately 1.6 billion pounds of polystyrene, approximately 24%of Western Europe’s total capacity. Including the impact of announced shutdownsat year-end, NOVA Innovene had expandable polystyrene production capacity of770 million pounds, approximately 30% of Western Europe’s total capacity.

 

***NOVIDESA in Mexico.***In October 2005, NOVIDESA, S.A. de C.V., a 50:50 joint venture inMexico formed by NOVA Chemicals and GRUPO IDESA, commenced operations. NOVIDESAmarkets high-value expandable polystyrene for construction and packagingapplications in the Mexican market and distributes NOVA Chemicals’ polystyrenein Mexico. NOVIDESA was formed through a cashless transaction.

 

While smaller in scale thanNOVA Innovene, NOVIDESA is an example of how NOVA Chemicals is leveraging itsexpandable polystyrene process technology, exclusive application designs, andvalue-added polymer products to enter a new and growing market quickly atrelatively low-cost. Expandable polystyrene production for the new jointventure is provided by GRUPO IDESA’s Apizaco facility in the state of Tlaxcala,Mexico.

 

***Closure of Chesapeake, Virginia, Site***

 

On January 19, 2006, NOVAChemicals announced plans to close its Chesapeake, Virginia, site in 2006. Thesite includes polystyrene production capacity of 300 million pounds per yearand compounding capability of 170 million pounds per year. The Company remainscommitted to its compounded products and plans to identify productionalternatives in 2006. The closure is expected to reduce fixed costs byapproximately $15 million per year and will reduce working capitalrequirements. NOVA Chemicals took a non-cash, after-tax charge of approximately$46 million in the fourth quarter of 2005 due to the Chesapeake closure.Additional closure costs of approximately $10 million after-tax will be accruedduring the first quarter of 2006.

 

17

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**StyrenicsFinancial Highlights**

 
| **(MILLIONS OF U.S. DOLLARS,  EXCEPT PER SHARE AMOUNTS AND WHERE NOTED)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Revenue(1)                                                                | ** ** | **$**      | **2,259**  |       | $          | 2,324    |       | $ | 1,579 |   |
| Operating  loss                                                           | ** ** | **$**      | **(271**   | **)**      | $          | (71      | )          | $ | (147 | ) |
| Depreciation  and amortization                                            | ** ** | **$**      | **124**    | ** ** | $          | 116      |       | $ | 111 |   |
|                                                                      | ** ** | ** ** | ** ** | ** ** |       |     |       |   |   |   |
| EBITDA(2)                                                                 | ** ** | **$**      | **(147**   | **)**      | $          | 45       |       | $ | (36 | ) |
| NOVA Chemicals Styrenics                                                  | ** ** | **$**      | **(83**    | **)**      | $          | 56       |       | $ | (15 | ) |
| European Styrenic Polymers                                                | ** ** | **$**      | **(64**    | **)**      | $          | (11      | )          | $ | (21 | ) |
| Net loss                                                                  | ** ** | **$**      | **(221**   | **)**      | $          | (73      | )          | $ | (140 | ) |
| Average  capital employed(3)                                              | ** ** | **$**      | **1,386**  |       | $          | 1,386    |       | $ | 1,323 |   |
| After-tax  loss on capital employed(4)                                    | ** ** | **(13.1**  | **)%**     | (2.5       | )%         | (6.9     | )%         |

 

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(1)          Before inter-segment eliminations.

(2)          See Supplemental Measures on Page 55.

(3)          Average capital employed equals cash expendedon plant, property and equipment (less accumulated depreciation andamortization) and working capital and excludes assets under construction. SeeSupplemental Measures on page 55.

(4)          After-tax loss on capital employed equals netloss plus after-tax interest expense divided by average capital employed. See SupplementalMeasures on page 55.

 

**StyrenicsOperating Highlights**

 
| ** **                                        | ** ** | **2005** | ** ** | **ANNUAL** | ** ** |
|---------------------------------------------------|------------|----------|------------|------------|------------|
| **(U.S. DOLLARS PER POUND, EXCEPT  WHERE NOTED)** | ** ** | **Q1**   | ** ** | **Q2**     | ** ** | **Q3** | ** ** | **Q4** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benchmark  Principal Product Prices(1):           |       |     |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Styrene monomer(2)                                | ** ** | **$**    | **0.64**   | ** ** | **$**      | **0.61** | ** ** | **$** | **0.60** | ** ** | **$** | **0.64** | ** ** | **$** | **0.63** |   | $ | 0.58 |   | $ | 0.41 |   |
| Polystyrene (weighted-average)(3)                 |       |     |       |       |       |   |   |   |   |   |   |   |   |   |   |
| North America                                     | ** ** | **$**    | **0.89**   | ** ** | **$**      | **0.89** | ** ** | **$** | **0.87** | ** ** | **$** | **0.92** | ** ** | **$** | **0.89** |   | $ | 0.77 |   | $ | 0.61 |   |
| Europe                                            | ** ** | **$**    | **0.71**   | ** ** | **$**      | **0.69** | ** ** | **$** | **0.65** | ** ** | **$** | **0.63** | ** ** | **$** | **0.67** |   | $ | 0.65 |   | $ | 0.48 |   |
| Benchmark  Raw Material Prices:                   |       |     |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Benzene (per gallon)(4)                           | ** ** | **$**    | **3.17**   | ** ** | **$**      | **3.06** | ** ** | **$** | **2.82** | ** ** | **$** | **2.54** | ** ** | **$** | **2.90** |   | $ | 2.88 |   | $ | 1.54 |   |

 

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(1)   Average benchmark prices do not necessarily reflect actual pricesrealized by NOVA Chemicals or any other petrochemical company.

(2)   Source: CMAI Contract Market.

(3)   Benchmark prices weighted according to NOVA Chemicals’ polystyrene salesvolume mix. Includes solid and expandable polystyrene, but excludes styrenicpolymer Performance Products. Source for benchmark prices: CMAI.

(4)   A 10 cents per gallon change in the cost of benzene generally results inabout a 1 cent per pound change in the variable cost of producing styrenemonomer. Source of benzene benchmark prices: CMAI.

 

**StyrenicsSales Volumes**

 
| **(MILLIONS OF POUNDS)**          | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Styrene  monomer(1)               | ** ** | **1,672** |       | 1,772    |       | 1,305    |       |
| Solid and  Expandable Polystyrene |       |      |       |     |       |     |       |
| North America                     | ** ** | **1,061** |       | 1,280    |       | 1,084    |       |
| Europe                            | ** ** | **989**   |       | 1,022    |       | 1,026    |       |
| Performance  Products(2)          | ** ** | **117**   |       | 115      |       | 265      |       |
| Total                             | ** ** | **3,839** |       | 4,189    |       | 3,680    |       |

 

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(1)  Third partysales only. Excludes sales to the NOVA Innovene joint venture.

 

(2)  PerformanceProducts include ARCEL, DYLARK and ZYLAR resins.

 

18

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***2005 versus 2004***

 

***Net Loss.***TheStyrenics business results declined in 2005, bringing NOVA Chemicals’ net lossto $221 million from a $73 million net loss in 2004. Price increasesimplemented throughout 2005 did not keep pace with rapidly rising feedstockcosts, which caused margins to fall.

 

***EBITDA.***In2005, the Styrenics business EBITDA decreased by $192 million from $45 millionin 2004 to a loss of $147 million in 2005.

 

NOVA Chemicals Styrenicsreported EBITDA losses of $83 million in 2005 compared to EBITDA of $56 millionin 2004. European Styrenic Polymers reported EBITDA losses of $64 million in2005 compared to losses of $11 million in 2004. The year-over-year reduction inboth NOVA Chemicals’ Styrenics business and European Styrenic Polymers EBITDAwas principally due to weak global demand growth and increased feedstock costs,which were only partially offset by increasing prices.

 

***Revenue.***Revenuefrom the Styrenics business decreased $65 million, or 3%, from $2,324 millionin 2004 to $2,259 million in 2005.

 

Styrene monomer benchmarkprices were up 9% and styrene monomer volumes were flat. In 2005, NorthAmerican average benchmark polystyrene prices were up 16% in 2005 over 2004.NOVA Chemicals’ styrenic polymer volumes decreased 16% to 1.2 billion pounds in2005 from 1.4 billion pounds in 2004.

 

European Styrenic Polymersreported average benchmark polystyrene prices in Europe were up 3% over 2004.European styrenic polymers volumes decreased 3% to 993 million pounds in 2005from 1.0 billion pounds in 2004. This reduction was a result of decreasedmarket-wide demand.

 

Styrenics PerformanceProducts sales volumes in 2005 were 117 million pounds, up 2 million poundsfrom 2004. Volumes of new products offset lower DYLARK resin sales in theautomotive market.

 

***Feedstock and Operating Costs.***Feedstock and operating costs increased $104million, or approximately 5%, from $2,165 million in 2004 to $2,269 million in2005. Average benchmark benzene prices in North America were $2.88 per gallonin 2004, relatively flat compared to an average of $2.90 per gallon in 2005.Average benchmark prices for ethylene increased from $0.34 in 2004 to $0.44 in2005.

 

***2004 versus 2003***

 

***Net Loss.***Styrenicsbusiness results improved in 2004 to a net loss of $73 million compared to anet loss of $140 million in 2003. Numerous price increases implementedthroughout 2004 in North America and Europe allowed margins to improve despiterising feedstock costs. Contributing to this loss reduction were improvingglobal demand and improved operations from the Bayport styrene monomerfacility. In 2003, Bayport experienced an outage, the result of an explosionand fire in the ethylbenzene unit at the facility.

 

***EBITDA.***TheStyrenics business EBITDA increased $81 million, or 225%, from a loss of $36million in 2003 to earnings of $45 million in 2004. The improvement over 2003was mainly due to improving global demand and multiple price increaseimplementations.

 

***Revenue.***Revenuefor the Styrenics business increased $745 million, or 47%, from $1,579 millionin 2003 to $2,324 million in 2004. Average benchmark polystyrene prices were up29% over 2003 across all polymer businesses, while styrene monomer benchmarkprices were up 41%. Styrenic polymer volumes increased 2%, to 2,417 millionpounds in 2004, from 2,375 million pounds in 2003, mainly as a result of higherdemand. Styrene monomer volumes increased 36% over 2003 as a result of strongerdemand and availability of styrene produced at Bayport.

 

***Feedstock and Operating Costs.***Feedstock and operating costs increased $665million, or approximately 44%, from $1,500 million in 2003 to $2,165 million in2004. Average benchmark benzene prices in North America rose 87% from $1.54 pergallon in 2003 to an average of $2.88 per gallon in 2004. Average benchmarkprices for ethylene increased from $0.29 in 2003 to $0.34 in 2004.

 

19

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***Outlook for Styrenics Business***

 

During the next two to threeyears, expected GDP growth should tighten supply/demand balances, and allowhigher industry operating rates and stronger chain margins. Benzene prices areexpected to return to their historic range of 150% to 225% of crude oil, whichshould provide for downstream styrenic polymer prices to be set at a morecompetitive level to alternative materials, thereby promoting demand growth.

 

In addition to these marketimprovements, NOVA Chemicals expects to realize the financial benefits ofactions taken in 2005 to lower the cost and improve the competitiveness of itsstyrenic polymers, rebalance its styrene monomer position and accelerate thedevelopment and commercialization of Performance Products and downstreambusiness opportunities.

 

**Figure 8.  Global Styrene Monomer Operating RatesProjected Demand Growth of 4.1% 2005–2008**

 

 

**Figure 9.  BenzenePrice Trend**

 

 

20

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** **

**Corporateand Other Items**

 

A listing of after-taxcorporate and other items for the periods presented is as follows:

 
| **(MILLIONS OF U.S. DOLLARS)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Stock-based  compensation and profit sharing  | ** ** | **$**      | **21**     | ** ** | $          | (60      | )          | $ | (7 | ) |
| Forward  transactions                         | ** ** | **(10**    | **)**      | —     |       | —   |       |
| Restructuring                                 | ** ** | **(125**   | **)**      | (5         | )          | (10      | )          |
| Tax  settlement                               | ** ** | **5**      | ** ** | 101        |       | —   |       |
| Bayport  charge                               | ** ** | **—** | ** ** | —     |       | (8       | )          |
| Non-cash  insurance charge                    | ** ** | **(15**    | **)**      | —     |       | —   |       |
| Gain on sale  of investments:                 |       |       | ** ** |       |       |     |       |
| AEGS                                          | ** ** | **—** | ** ** | 40         |       | —   |       |
| Methanex                                      | ** ** | **—** | ** ** |       |       | 61       |       |
| Fort Saskatchewan Ethylene Storage            | ** ** | **—** | ** ** | —     |       | 64       |       |
| ** **                                    |       | **$**      | **(124**   | **)**      | $          | 76       |       | $ | 100 |   |

 

***Stock-Based Compensation, Profit Sharing and Forward Transactions***

 

NOVA Chemicals has twocash-settled stock-based incentive compensation plans that are marked-to-marketwith changes in the value of its common stock price. In November 2005,NOVA Chemicals entered into forward transactions with two financialinstitutions in order to hedge that portion of its stock-based compensation,which is subject to quarterly mark-to-market accounting adjustments.Mark-to-market rules have resulted in material quarterly earningsvariations during the past few years. The forward transactions are cash-settledat the end of a three-year term (November 2008), or at any time prior tothat at the option of NOVA Chemicals, based on the difference between NOVAChemicals’ common stock price and the execution price plus accrued interest.

 

The transactions effectivelygive NOVA Chemicals the same economic effect as if it had borrowed money,purchased NOVA Chemicals’ common shares and held them as assets. The averageexecution price was $37.56 on 3.6 million shares, which approximates the numberof outstanding shares related to the stock-based compensation units as of November 2005.As NOVA Chemicals’ stock price changes, the mark-to-market impact related tothe stock-based compensation liability is effectively neutralized by themark-to-market impact related to the forward contracts.

 

Additionally, aprofit-sharing program, available to most employees, is maintained and based onthe achievement of shareholder return on equity targets.

 

***2005***

 

***Restructuring Charges.***On January 19, 2006, NOVA Chemicals announced its intention topermanently close its Chesapeake, Virginia, site. As a result, NOVA Chemicalsrecorded a non-cash $76 million ($46 million after-tax) write-down for thisplant in the fourth quarter of 2005.

 

On October 1, 2005, NOVAChemicals and Innovene combined their European polystyrene businesses into a50:50 joint venture known as NOVA Innovene. In accordance with Canadian GAAP,NOVA Chemicals will account for the joint venture on a proportionateconsolidation basis.

 

On October 11, 2005,NOVA Innovene announced its plans to cease expandable polystyrene production atBerre, France, and permanently shut down the previously idled expandablepolystyrene plant at its Carrington, United Kingdom, facility. Accordingly,NOVA Chemicals took a write-down on the value of the plants on September 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 carryforwards by $9 million, as the utilization likelihood is reduced due to theformation of the joint venture and closure of the plants. Certain othernon-productive assets were written off amounting to $9 million ($6 millionafter-tax) in the third quarter of 2005. Additional restructuring charges of $7million ($4 million after-tax) were incurred in the fourth quarter to accruefor severance costs related to these plant closures. The total amount of therestructuring charge for 2005 is $177 million ($125 million after-tax).

 

21

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***Non-Cash Insurance Charge.***NOVA Chemicals incurred a $22 million ($15million after-tax) non-cash charge in the second quarter of 2005 related to itsshare of incremental future payments required to meet losses in the insurancepools in which the Company participates.

 

***2004***

 

***Restructuring Charges.***In 2004, a restructuring charge of $8 million ($5 million after-tax) wastaken for additional dismantling and severance costs related to the May 2004shutdown of the A-Line at NOVA Chemicals’ St. Clair River polyethylene plantsite at Corunna, Ontario.

 

***Tax Settlement.***During 2004, a $122 million ($101 million after-tax) settlement wasrecorded, which resulted from a tax dispute related to the deductibility offoreign taxes in certain returns filed with the United States Internal RevenueService prior to 1982. An additional amount of $6 million ($5 millionafter-tax) was recorded in 2005.

 

***Gain on Sale of Investments.***In 2004, NOVA Chemicals sold its interest inAEGS for cash proceeds of $78 million and recorded a gain of $53 million ($40million after-tax). The Company continues to transport ethane as one of severalshippers on AEGS under existing long-term ethane transportation agreements. Inaddition, NOVA Chemicals operates and maintains the system under a contractwith the new owner. The new owner is responsible for the commercial aspects ofoperating the pipeline.

 

***2003***

 

***Restructuring Charges.***In 2003, NOVA Chemicals incurred a restructuring charge of $15 million($10 million after-tax) for asset write-down and severance costs related to theshutdown of the A-Line at its St. Clair River polyethylene plant in Corunna,Ontario.

 

***Bayport Charge.***In 2003, NOVA Chemicals had an explosion and fire at its Bayport, Texas,styrene monomer manufacturing facility and as a result incurred a charge of $13million ($8 million after tax) primarily related to the amount of propertydamage not covered by insurance.

 

***Gain on Sale of Investments.***In 2003, NOVA Chemicals sold its investment inMethanex Corporation for a gain of $29 million ($61 million after-tax). Taxexpense was recorded on the equity earnings from Methanex during the period inwhich the investment was held. The recorded tax liability at the time of salewas $32 million. The sale was recorded with no cash taxes payable andaccordingly, the previously recorded future income tax provision of $32 millionwas not required and was taken into income at the time of the sale. NOVAChemicals’ share of Methanex Corporation’s earnings in 2003, up to the date ofsale in June, was $37 million after-tax.

 

In 2003, NOVA Chemicals soldits interest in the Fort Saskatchewan Ethylene Storage Facility for a gain of$76 million ($64 million after-tax). The total before-tax gain on thistransaction was $114 million, of which $38 million was deferred and is beingamortized over the 20-year term of the storage contract entered into at thetime of the sale. The deferral will partially offset the Company’s annual costsassociated with this ethylene storage contract.

 

22

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**Liquidityand Capital Resources**

 

NOVA Chemicals’ principalsources of liquidity are cash flows from operations, accounts receivablesecuritization programs, and borrowings under the Company’s revolving creditfacility. NOVA Chemicals’ principal uses of cash are capital expenditures anddebt service.

 

***Cash Flow***

 

The following is a summary ofthe cash inflows and outflows, which contributed to the changes in NOVAChemicals’ cash and debt:

 
| **(MILLIONS OF U.S. DOLLARS)**                             | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Inflows                                                    |       |     | ** ** |       |       |     |       |
| Funds from operations                                      | ** ** | **$**    | **270**    | ** ** | $          | 412      |       | $ | 99 |   |
| Increase in operating working capital                      | ** ** | **(42**  | **)**      | (78        | )          | (125     | )          |
| Cash generated from (used in) operations                   | ** ** | **228**  | ** ** | 334        |       | (26      | )          |
| Proceeds on sale of assets and other  capital transactions | ** ** | **5**    | ** ** | 103        |       | 564      |       |
| Tax-related settlement                                     | ** ** | **116**  | ** ** | 12         |       | —   |       |
| Common shares issued                                       | ** ** | **13**   | ** ** | 37         |       | 9        |       |
| Total inflows                                              | ** ** | **362**  | ** ** | 486        |       | 547      |       |
| Outflows                                                   |       |     | ** ** |       |       |     |       |
| Capital expenditures (net of project  advances)            | ** ** | **(419** | **)**      | (227       | )          | (119     | )          |
| Turnaround costs, long-term investments and  other assets  | ** ** | **(178** | **)**      | (9         | )          | (57      | )          |
| Common shares repurchased                                  | ** ** | **(125** | **)**      | (188       | )          |     |       |
| Stock options retired for cash                             | ** ** | **(11**  | **)**      | (18        | )          | —   |       |
| Common shares dividends                                    | ** ** | **(27**  | **)**      | (28        | )          | (25      | )          |
| Foreign exchange and other                                 | ** ** | **(6**   | **)**      | (15        | )          | (34      | )          |
| Total outflows                                             | ** ** | **(766** | **)**      | (485       | )          | (235     | )          |
| (Decrease) increase in cash                                | ** ** | **$**    | **(79**    | **)**      | $          | 33       |       | $ | 198 |   |
| Debt  addition (reduction)                                 | ** ** | **$**    | **325**    | ** ** | $          | 32       |       | $ | (114 | ) |

 

***Inflows of Cash.***Funds from operations decreased to $270 million in 2005 from $412million in 2004 primarily due to lower sales volumes. Funds from operations in2004 of $412 million were up substantially from $99 million in 2003.Improvement in the economy, stronger demand for our products and priceincreases resulted in improved business earnings.

 

Operating working capitalincreased by $42 million in 2005 primarily due to higher priced feedstockinventories. Operating working capital increased by $78 million in 2004, due tohigher priced inventories and accounts receivable as well as buildinginventories to meet growing demand and a series of planned plant maintenanceoutages for 2005. NOVA Chemicals measures the effectiveness of its workingcapital management through Cash Flow Cycle Time (CFCT). CFCT measures workingcapital from operations in terms of the number of days of sales (calculated asworking capital from operations divided by average daily sales). This metrichelps us to determine which portion of changes in NOVA Chemicals’ workingcapital results from factors other than price movements. CFCT was 29 days as ofDecember 31, 2005, compared to 35 days as of December 31, 2004, and28 days as of December 31, 2003. The decrease as of December 31, 2005was due primarily to destocking of crude oil based inventories. The increase in2004 was primarily a result of building inventories for the planned maintenanceshutdowns in 2005 as well as a seasonal sales decline in December 2004.

 

In total, NOVA Chemicalsgenerated $228 million in cash from operations in 2005 versus $334 million in2004, and used $26 million of cash in operations in 2003.

 

NOVA Chemicals soldnon-strategic assets in 2004, which resulted in $103 million of net cashproceeds. The sale of the Company’s interests in the Ethylene Delivery System(EDS) and Alberta Ethane Gathering System (AEGS) contributed $19 million and$78 million, respectively, in 2004. A total of $564 million was received in2003 from the sale of the Company’s interest in Methanex, which generated netcash of $441 million, and the sale of its interest in the Fort SaskatchewanEthylene Storage Facility, which generated net cash of $123 million.

 

23

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Cash collections of $116million in 2005 and $12 million in 2004 were received from the settlement of atax dispute related to the deductibility of foreign taxes in certain returnsfiled with the U.S. Internal Revenue Service prior to 1982.

 

In October 2005, NOVAChemicals issued $400 million of senior floating rate notes due 2013. In September 2005,the Company repaid the $100 million of 7% notes upon maturity. In 2004, NOVAChemicals issued $400 million of 6.50% senior notes due 2012, from which $383million of net proceeds was used to redeem two series of preferred securitiesdue 2047 and 2048.

 

Cash generation in 2005 wasprimarily due to earnings and receipt of cash from the tax-related settlement;whereas cash generation in 2004 was principally a result of improving businessconditions and earnings. Cash generation in 2003, in contrast to 2005 and 2004,was primarily attributable to non-strategic asset sales.

 

***Outflows of Cash.***NOVA Chemicals’ capital expenditures, net of third-party advances, were$419 million in 2005 compared to $227 million in 2004 and $119 million in 2003.The increase in capital expenditures is primarily related to the Corunnaethylene plant maintenance and modernization project, the Bayport expansionproject and the ARCEL expansion project — all of which increased the Company’sproduction capacity. Capital expenditures for 2006 are expected to beapproximately $250 million. During 2005, NOVA Chemicals spent $178 million forturnaround costs at Corunna and Bayport and the deferred start-up costs atCorunna, compared to turnaround costs of $9 million and $57 million for 2004and 2003, respectively.

 

In July 2005, a sharerepurchase program for up to approximately 7.2 million shares was announced.This repurchase program will terminate on July 26, 2006, unless themaximum number of shares is purchased prior to that date. As of December 31,2005, the Company had not repurchased any shares under this program. In July 2004,a share repurchase program for up to approximately 7.5 million shares wasinitiated. NOVA Chemicals purchased the entire amount of shares available underthat program for an aggregate cost of $313 million, or an average cost of$41.60 per share. The Company also paid stock option exercise values in cash of$11 and $18 million in 2005 and 2004, respectively, in lieu of issuing stock.

 

***Commitments***

 

NOVA Chemicals has variouscommercial commitments, including operating leases for office space, railcarsand unconditional purchase obligations related to minimum amounts of feedstockand other raw material purchases pursuant to agreements entered into to secureshort-term and long-term supply. While the Company has some fixed price rawmaterials agreements, prices are typically based on market or a cost-plusbasis, and fluctuate with changes in the underlying raw material indices.Obligations have been calculated using current pricing for purposes of thechart below.

 

**ContractualCash Obligations as of December 31, 2005**

 
| ** **                             | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| **(MILLIONS OF U.S. DOLLARS)**         | ** ** | **TOTAL**                  | ** ** | **2006** | ** ** | **2007 TO 2008** | ** ** | **2009 TO 2010** | ** ** | **AFTER 2010** | ** ** |
|                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt(1)                     | ** ** | **$**                      | **2,039**  |   | $ | 302 |   | $ | 209 |   | $ | 475 |   | $ | 1,053 |   |
| Operating  leases(2)                   | ** ** | **543**                    |       | 48 |   | 80 |   | 81 |   | 334 |   |
| Unconditional  purchase obligations(3) | ** ** | **11,034**                 |       | 3,825 |   | 2,375 |   | 1,158 |   | 3,676 |   |
| Total  contractual cash obligations    | ** ** | **$**                      | **13,616** |   | $ | 4,175 |   | $ | 2,664 |   | $ | 1,714 |   | $ | 5,063 |   |

 

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(1)          Includes current portion and bank loans.

(2)          Includes property, railcar and other equipmentleasing commitments.

(3)          NOVA Chemicals could mitigate the impact ofexcess quantities of raw materials and feedstock commodities resulting fromfixed purchase commitments by reselling these products at market prices.

 

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***Liquidity***

 

NOVA Chemicals is able to meetshort-term liquidity needs through the generation of funds from operations,cash-on-hand, accounts receivable securitization programs, and borrowingcapacity under a revolving credit facility. At December 31, 2005, theCompany had $166 million cash on hand in addition to $288 million (net ofletters of credit) of available borrowing capacity under its revolving creditfacility. Additionally, borrowing capacity of $147 million was available underits accounts receivable securitization program for total liquidity of $601million. In addition to this, on January 20, 2006, NOVA Chemicalsestablished a new unsecured revolving credit facility of $100 million.

 

***Senior Notes.***In October 2005, NOVA Chemicals issued $400 million of seniorfloating rate notes due 2013. These senior notes were issued withinvestment-grade covenants and are identical in all material respects to thecovenants on existing bonds. The debt was issued to ensure the Corporation hassufficient liquidity to repay the $300 million medium-term notes in May 2006.In September 2005, $100 million of 7%, 10-year notes matured and wereretired for cash.

 

In January 2004, NOVAChemicals issued $400 million of 6.5% senior notes due 2012. These senior noteswere issued with investment-grade covenants and are identical in all materialrespects to the covenants on our existing bonds. In March 2004,approximately $383 million of the net proceeds of the offering was used toredeem the Company’s 9.04% preferred securities due 2048 and its 9.5% preferredsecurities due 2047. The balance of the proceeds was used for general corporatepurposes. These transactions reduced NOVA Chemicals’ annual financing costs byapproximately $10 million.

 

***Credit Facility.***As of December 31, 2005, NOVA Chemicals had no direct borrowingsunder its $375 million secured revolving credit facility, except for operatingletters of credit of $87 million. On January 20, 2006, NOVA Chemicalsestablished an additional revolving credit facility in the amount of $100million. This new facility is unsecured and expires in March 2011.

 

On June 30, 2005, NOVAChemicals re-negotiated its revolving credit facility to increase the borrowingcapacity from $300 million to $375 million, to extend the maturity from March 2007to June 2010, and to amend certain covenants, as follows:

 
| ** **                                 | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | **DECEMBER 31, 2005** | ** **   |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------|--------------|
| **COVENANT**                               | ** ** | **PREVIOUS REQUIREMENT**                | ** ** | **CURRENT REQUIREMENT**                 | ** ** | **ACTUAL**                      | ** **   |
|                                       |       |                                         |       |                                         |       |                            |         |
| Interest  Coverage(1)                      |       | 2.0x                                         |       | 2.0x when  net debt to total                 |       | 3.6                             | x            |
|                                       |       |                                         |       | capitalization  ratio > 40%               |       |                            |         |
| Net Debt to  Total Capitalization(2)       |       | 55%                                          |       | 55%                                          |       | 54                              | %            |
| Consolidated  Shareholders’ Equity(3) |       | $1.00  billion plus 50% of positive earnings |       | $1.25  billion plus 50% of positive earnings |       | $                               | 1.42 billion |   |
|                                       |       | ** **                                   |       |                                         |       |                            |         |
| Distribution  Test                         |       | Debt to  capitalization                      |       | Eliminated                                   |       | Not applicable                  |         |
|                                       |       | < 50%                                     |       |                                         |       |                            |         |
|                                            |            |                                              |            |                                              |            |                                 |              |  |

 

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(1)   As defined in NOVA Chemicals’ revolving creditfacility, cash flow equals consolidated net income (loss), in accordance withCanadian GAAP, adding back interest expense, income taxes, depreciation andamortization, extraordinary gains or losses (including gains and losses onsales of assets) and other non-cash items.

(2)   As defined in NOVA Chemicals’ revolving creditfacility, net debt includes items not in accordance with Canadian GAAP, such asobligations under operating leases (if in excess of a specified percentage ofconsolidated assets) and amounts outstanding under the company’s accountsreceivable securitization programs. The amended definition also provides fordebt to be offset by cash, other than restricted cash, and the amount of NOVAChemicals’ wholly owned subsidiary (NOVA Chemicals Inc.) preferred shares to beexcluded in arriving at debt for purposes of this covenant.

(3)   Shareholders’ equity is defined in accordancewith Canadian GAAP plus the amount of the Series A preferred shares.

 

The Company is currently incompliance with all covenants under this facility.

 

***Off-Balance Sheet Arrangements — Accounts Receivable Securitization.***NOVA Chemicals’ off-balance sheet financingactivities are limited to participation in accounts receivable securitizationprograms. NOVA Chemicals has engaged in the current programs since 1999 toobtain lower financing rates than those available from other sources. In 2005,the Company amended the programs to extend the maturity until June 2010and increase the capacity to $300 million from $250 million. Under theseprograms, we sell trade accounts receivable to a third party, on a revolvingbasis, to a maximum of $300 million. At December 31, 2005, $153 million inreceivables were sold under the programs. The total amount at year-end was soldvia a special purpose entity (SPE) that is 100% owned by NOVA Chemicals. TheSPE isolates the sold receivables and the related cash collections for theexclusive benefit of the purchasers. The Company has no right to any cashcollected from these receivables; therefore, neither the receivables nor anyobligation to the purchasers is reflected in NOVA Chemicals’ ConsolidatedFinancial Statements. No other business is conducted through SPEs.

 

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***Total Return Swap.***In connection with the acquisition of styrenics assets from HuntsmanCorporation in 1998, the Corporation’s subsidiary, NOVA Chemicals Inc., issuedretractable preferred shares with a liquidation preference of $198 million aspartial consideration. Holders of the retractable preferred shares originallyhad the right to exchange the shares (a retraction) for NOVA Chemicals’ commonshares (plus NOVA Chemicals’ preferred shares if the market value of suchcommon shares was less than $198 million) on or after April 1, 2001. In September 2005,the terms of the retractable preferred shares were amended to eliminate thisright. In connection with this amendment, the retractable preferred shares werere-designated as Series A preferred shares. Additionally, the dividendrate on the Series A preferred shares was reduced from 2% to 0.5% in December 2005.

 

NOVA Chemicals has the rightto repurchase the Series A preferred shares at any time.

 

NOVA Chemicals also enteredinto a total return swap, which terminates on March 15, 2007, with respectto the Series A preferred shares. Under the terms of the total returnswap: (i) the counterparty pays NOVA Chemicals the total return on thepreferred shares (periodic dividends plus positive changes in the equity valueof the Series A preferred shares upon termination of the swap; and(ii) NOVA Chemicals pays the counterparty a spread to London Inter-BankOffered Rate (LIBOR), as well as any negative changes in the equity value ofthe Series A preferred shares upon termination of the swap.

 

If the equity value of theSeries A preferred shares decreases by approximately 24% or more at anytime, NOVA Chemicals is required to post maintenance collateral. Once themargin-posting requirement is triggered, if the equity value of theSeries A preferred shares increases by 5% or more, any excess margin may bereturned to NOVA Chemicals. Changes in equity value of the Series Apreferred shares during the term of the swap will be determined based onchanges in the average price of the outstanding 6.5% senior notes due 2012,issued by NOVA Chemicals.

 

If NOVA Chemicals defaults onother debt of at least $25 million or the closing price of our common shares is$12.00 or less and upon certain other events, the counterparty would have theright to sell the Series A preferred shares to a third party and terminatethe swap. NOVA Chemicals would then owe the counterparty the difference betweenthe actual sale price received by the counterparty and $126 million ($191million fair value less $65 million restricted cash). Subsequent to thetermination of the swap, NOVA Chemicals may, at its option, repurchase thepreferred shares for $198 million plus accrued and unpaid dividends.

 

***Capitalization***

 

NOVA Chemicals’ net debt tototal capitalization ratio was 59.7% at December 31, 2005, compared to48.5% at December 31, 2004, and 51.8% at December 31, 2003. On January 1,2005, NOVA Chemicals adopted new Canadian accounting standards that require thepreferred shares of its subsidiary to be classified as debt, which resulted inan increase of its net debt to total capitalization ratio. The Company’s $100million of 7% senior notes due September 2005 were repaid in September 2005from cash on hand. In May 2006, $300 million of 7% medium-term notes willmature. These notes may be repaid through available cash and lines ofcredit.

 

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**FinancialRatios**

 
| **DECEMBER 31 (MILLIONS OF  U.S. DOLLARS, EXCEPT AS NOTED)** | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
|                                                              |       |      |       |       |       |     |       |
| Long-term  debt(1)                                                | ** ** | **$**     | **2,039**  | ** ** | $          | 1,714    |       | $ | 1,682 |   |
| Less: cash,  cash equivalents and restricted cash                 | ** ** | **(231**  | **)**      | (310       | )          | (277     | )          |
| Total debt,  net of cash, cash equivalents and restricted cash    | ** ** | **1,808** | ** ** | 1,404      |       | 1,405    |       |
| Shareholders’  equity                                        | ** ** | **1,219** | ** ** | 1,493      |       | 1,309    |       |
| Total  capitalization(2)                                          | ** ** | **$**     | **3,027**  | ** ** | $          | 2,897    |       | $ | 2,714 |   |
| Net debt to  total capitalization(3)                              | ** ** | **59.7**  | **%**      | 48.5       | %          | 51.8     | %          |

 

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(1)   On January 1, 2005, NOVA Chemicalsadopted new Canadian accounting standards, which require NOVA Chemicals’preferred shares to be classified as debt. Prior periods have been restatedaccordingly. Maturity dates for NOVA Chemicals’ current and long-term debtrange from May 2006 to August 2028. Long-term debt includes currentportion of long-term debt and bank loans.

(2)   Total capitalization reflects shareholders’equity and total debt, net of cash, cash equivalents and restricted cash (seeSupplemental Measures below).

(3)   Computed after taking into account thereclassification of the preferred shares (see Supplemental Measures below).

 

**Senior DebtRatings**(1)

 
| ** **                       | ** ** | **SENIOR UNSECURED DEBT** | ** ** |
|----------------------------------|------------|---------------------------|------------|
| DBRS                             |       | BBB (low) (stable)        |       |
| Fitch  Ratings                   |       | BB+ (stable)              |       |
| Moody’s                     |       | Ba2 (negative)            |       |
| Standard &  Poor’s |       | BB+ (negative)            |       |

 

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(1)          Credit ratings are not recommendations topurchase, hold or sell securities and do not comment on market price orsuitability for a particular investor. There is no assurance that any ratingwill remain in effect for any given period of time or that any rating will notbe revised or withdrawn entirely by a rating agency in the future.

 

***Supplemental Measures***

 

In addition to providingmeasures in accordance with Canadian GAAP, NOVA Chemicals presents certainsupplemental measures as follows. The following supplemental measures do nothave any standardized meaning prescribed by Canadian GAAP and are thereforeunlikely to be comparable to similar measures presented by other companies.

 

•***                 ******Averagecapital employed***equalscash expended on plant, property and equipment (less accumulated depreciationand amortization) and working capital and excludes assets under construction.Amounts are converted to U.S. dollars using current exchange rates. Thismeasure is provided to assist investors in determining the amount of capitalNOVA Chemicals has invested in its business.

 

•***                 ******After-taxreturn on capital employed***equalsnet income (loss) plus after-tax interest expense divided by average capitalemployed. This measure is useful for investors to determine the return NOVAChemicals earns on capital invested.

 

•***                 ******Cash FlowCycle Time***equals workingcapital from operations divided by average daily sales. This measure helps todetermine which portion of changes in working capital results from factorsother than price movements and helps to assess NOVA Chemicals’ performanceagainst its goal to minimize investment in working capital.

 

•***                 ******EBITDA***equals net income (loss) before restructuringcharges, income taxes, interest expense, other gains and losses, equity in theearnings of affiliates and depreciation and amortization. This measure isprovided to assist investors in determining NOVA Chemicals’ ability to generatecash from operations.

 

•***                 ******Net debt tototal capitalization***equalslong-term debt, net of cash, cash equivalents and restricted cash divided bythe sum of the net debt, as defined above, and shareholders’ equity. Thismeasure is useful for investors to analyze the leverage of the Company.

 

•***                 ******Net income(loss) from the businesses***equalsthe total net income (loss) from the Olefins/Polyolefins and Styrenicsbusinesses, which equals NOVA Chemicals’ net income less net income from equityinvestments and corporate and other items.

 

Thismeasure allows the investor to analyze the performance of the on-going businessof the Company.

 

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***EBITDA***

 

This measure is provided toassist investors in determining the ability of NOVA Chemicals to generate cashfrom operations.

 
| **(MILLIONS OF U.S. DOLLARS)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Net income  (loss)                            | ** ** | **$**      | **(104**   | **)**      | $          | 252      |       | $ | (1 | ) |
| Income tax  (recovery) expense                | ** ** | **(5**     | **)**      | 81         |       | (73      | )          |
| Other gains                                   | ** ** | **(8**     | **)**      | (177       | )          | (92      | )          |
| Equity in  earnings of affiliate              | ** ** | **—** | ** ** | —     |       | (39      | )          |
| Restructuring  charges                        | ** ** | **168**    | ** ** | 8          |       | 15       |       |
| Interest  expense (net)                       | ** ** | **113**    | ** ** | 108        |       | 130      |       |
| Depreciation  and amortization                | ** ** | **290**    | ** ** | 297        |       | 298      |       |
| EBITDA                                        | ** ** | **$**      | **454**    | ** ** | $          | 569      |       | $ | 238 |   |

 

***Dividends and Distributions***

 

***Common Share Dividends.***Historically, NOVA Chemicals has paid dividends on its common shares atthe rate of $0.10 Canadian per quarter. In 2005, a total of $27 million individends was paid on the Company’s common shares. There are currently nomaterial contractual restrictions on NOVA Chemicals’ ability to declare and paydividends on its common shares. The declaration and payment of dividends is atthe discretion of NOVA Chemicals’ Board of Directors, which will considerearnings, capital requirements, financial condition and other relevant factors.It is, however, the Company’s intention to retain most of its earnings tosupport current operations and reduce debt. The current intent is to continueto pay dividends at historic levels.

 

***Series A Preferred Share Dividends.***NOVA Chemicals had paid 2% but now pays 0.5%annual dividends on the $198 million Series A preferred shares of itssubsidiary. On January 1, 2005, NOVA Chemicals adopted new Canadianaccounting standards that require these instruments to be classified, on aretroactive basis, as liabilities rather than equity. In addition, anydividends associated with these preferred shares have been reclassified tointerest expense. All prior periods have been restated.

 

**Applicationof Critical Accounting Estimates**

 

The following informationrepresents the estimates most critical to the application of NOVA Chemicals’accounting policies. For a summary of the Company’s significant accountingpolicies, please see Note 2 to the Consolidated Financial Statements.Management has discussed the development and selection of these criticalaccounting estimates with the Audit, Finance and Risk Committee of NOVAChemicals’ Board of Directors and the Audit, Finance and Risk Committee hasreviewed the disclosure relating to such estimates in this Management’sDiscussion & Analysis.

 

***Inventories.***NOVA Chemicals carries inventory at the lower of cost and net realizablevalue. Cost is determined on a first-in, first-out (FIFO) basis with noallocation of fixed production overhead. Most of NOVA Chemicals’ competitorsdetermine cost on a last-in, first-out (LIFO) basis. As a result of thisdifference in methodology used to account for costs, significant differences inthe timing of quarterly earnings can occur during periods when feedstock costsare volatile. NOVA Chemicals uses the FIFO method because it believes the FIFObasis is a better method to match the actual costs incurred with the relatedrevenue.

 

***Plant, Property and Equipment (PP&E).***PP&E consists primarily of manufacturingequipment, land and buildings for producing petrochemicals. NOVA Chemicalsvalues PP&E at historical cost. Financing costs incurred during majorconstruction are capitalized as part of the cost of the asset until the assetis available for use. Costs related to turnaround activities are capitalizedand amortized over the period remaining to the next turnaround activity, whilemaintenance and repair costs are expensed as incurred.

 

Judgmental aspects of accountingfor PP&E involve estimates of the life of the assets, the selection of anappropriate method of depreciation and determining whether an impairment ofNOVA Chemicals’ assets exists. These assessments are critical due to theirpotential impact on earnings.

 

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Canadian and United StatesGAAP require that if the sum of the future net cash flows, together with theresidual value expected to result from a company’s assets, undiscounted andwithout interest charges, is less than the reported value of the asset, assetimpairment must be recognized in the financial statements by a charge toearnings.

 

NOVA Chemicals’Olefins/Polyolefins business has an established long-term record ofprofitability and, based on current asset carrying values and expected futurecash flows, NOVA Chemicals concluded that the carrying value of its assets isappropriate. In 2003, the shutdown of a single polyethylene line at the St.Clair River facility in Corunna was announced, resulting in a $6 millionafter-tax charge to earnings in the third quarter of 2003.

 

NOVA Chemicals Styrenicsbusiness has not been profitable, and in recent years NOVA Chemicals hasreduced production capacity due to poor market conditions. In October 2005,NOVA Chemicals and Innovene combined their European polystyrene businesses intoa 50:50 joint venture known as NOVA Innovene. On October 11, 2005, NOVAInnovene announced its plans to cease expandable polystyrene production at itsBerre, France, plant and permanently shut down the previously idled expandablepolystyrene plant in Carrington, United Kingdom. Accordingly, the value ofthese assets was written off as of September 30, 2005, resulting in a $60million after-tax charge to earnings in the third quarter of 2005. On January 19,2006, NOVA Chemicals announced its intention to permanently close itsChesapeake, Virginia, polystyrene plant. As a result, we recorded a $46 millionafter-tax charge to earnings in the fourth quarter of 2005. Based on currentasset carrying values and expected future cash flows of the remaining assets,NOVA Chemicals has concluded that the carrying value of these assets isappropriate.

 

NOVA Chemicals’ estimate offuture cash flows is based on historical operating performance and theassumption that the business cycle pattern will continue in the future.Historically, there have been peaks in earnings performance, characterized by atight supply/demand balance and improving margins, followed by trough periodswhen supply exceeds demand and lower margins result. The assumption is thatmargins earned in the future will be similar to margins earned in the past andthat a similar cost structure will be maintained.

 

In addition, NOVA Chemicalsis able to choose from alternative methods of depreciation. The straight-linemethod was chosen rather than other methods, such as units of production,because the straight-line method is more conservative, requires less estimationand judgment, and is a systematic and rational basis reflecting the period overwhich the assets’ benefit is realized.

 

***Asset Retirement Obligations.***United States and Canadian GAAP requirecompanies to record liabilities associated with future plant decommissioningand site restoration costs on both active and inactive plants at their fairvalue based on a discounted value of the expected costs to be paid when theassets are retired. At December 31, 2005, NOVA Chemicals had $26 millionof accumulated reserve for these activities. This accumulated reserve iscomprised of approximately $18 million anticipated to be required for thefuture decommissioning and site restoration of currently active plant sites, $3million for plant sites that have been divested or are no longer in use andapproximately $5 million for ongoing environmental management and planneddismantling of currently operating plant sites.

 

During 2005, there were nobusiness conditions or decisions that resulted in a requirement to increase ordecrease the asset retirement obligations associated with active sites. Theobligations were increased as a result of the accretion of the liabilities. Forinactive sites or sites that became inactive in 2005, the reserves weregenerally considered adequate for the environmental remediation work required.

 

During 2004, NOVA Chemicalsreduced the reserve that was carried for inactive sites by $5 million due toseveral projects either being complete or at a stage of completion that allowedreassessment of the estimated costs to complete. After review of theseprojects, it was determined that NOVA Chemicals accumulated reserve forinactive sites was too high.

 

In 2003, the Companyundertook an evaluation of the costs to conduct decommissioning and siterestoration required to satisfy the projected obligations under applicable environmentalrequirements upon termination of operations at currently operating plant sites.Canadian GAAP required that the present value of inflation adjusteddecommissioning and site restoration costs be recorded as increases to thecarrying values of the assets at that time and depreciate this amount over theestimated remaining lives of the assets. NOVA Chemicals determined that $131million, at that time, may be required to decommission and restoreoperating plant sites. This amount does not include any deduction for salvageor land value that may be realized, however these will be taken intoconsideration as the assets are depreciated. Because these plants may bein operation in excess of

 

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40 years, significantuncertainty exists concerning the nature of the decommissioning and siterestoration activities that may be required. Furthermore, significantjudgment is involved in the estimation process, because the value of salvage,degree of natural attenuation, evolution of new technologies and potentialfuture land uses may mitigate future environmental liabilities andpotential costs.

 

The amount of $131 millionwas approximately $225 million to $250 million after adjusting for inflation asis required by Canadian GAAP. The present value of this future amount (using acredit adjusted risk-free rate of 10.5% to discount the estimated future cashflows) was approximately $19 million, and was accrued in 2003 in anticipationof these activities. This estimated liability will increase, or accrete, eachyear over the lives of the active plants until it reaches the $225 million to$250 million expected to be incurred on closure of the plants. The resultingexpense is referred to as accretion expense and is included in operatingexpenses. For 2005, 2004 and 2003, this expense was $2 million, $2 million and$1 million, respectively.

 

***Pension Plans.***NOVA Chemicals sponsors both defined benefit and defined contributionpension arrangements covering substantially all of its employees. NOVAChemicals’ pension obligations and pension expense are recognized in thefinancial statements. For the defined contribution plans, the cost is expensedas earned by employees. For the defined benefit plans, obligations and expenseare determined using actual discount rates and assumptions for mortality,termination, retirement and other rates, as well as the expected return on planassets and the rate of increase for future compensation. The Company usespublished mortality rate tables and selects other assumptions in line with pastexperience. The return on plan assets is not the actual return but an expectedrate based on estimated asset returns over the life of the pension plans andthe investment strategy of the plans. The discount rate is based on actualmarket interest rates at the measurement date on high quality debt instrumentswith cash flows that match the timing and amount of expected benefit paymentsof NOVA Chemicals’ plans. Changes in these assumptions would need to be dramaticto cause a material impact to NOVA Chemicals’ pension obligation or pensionexpense amounts. For example, a 1% change in the expected return on the planassets would impact earnings by approximately $4 million after-tax; and a 1%change in NOVA Chemicals’ discount rate would impact earnings by approximately$10 million after-tax.

 

Canadian GAAP requires thatactuarial gains and losses be recognized in NOVA Chemicals’ income using asystematic and consistent methodology. For defined benefit pensions, theCompany amortizes such gains and losses over the estimated remaining servicelifetime of the employee group to the extent these gains or losses exceed 10%of the greater of the accrued benefit obligation or market value of assets.This alternative avoids recognizing into income large unrecognized gains orlosses in individual years. Immediate recognition of such gains and losseswould introduce significant volatility into NOVA Chemicals’ earnings.Cumulative unrealized actuarial gains and losses have ranged from a $61 milliongain at December 31, 1999 to a $195 million loss at December 31,2005.

 

A total of $49 million, $26million and $17 million was contributed in 2005, 2004 and 2003, respectively,to all of NOVA Chemicals’ defined benefit pension plans. The contributions werebased on the most recently filed valuations with pension regulators in variouscountries. Contributions to the defined contribution plans were $7 million in2005.

 

Funding for NOVA Chemicals’defined benefit pension plans is largely driven by the North American pensionplans, as they constitute a significant portion of the Company’s pension planassets and obligations. For 2006, funding is expected to be approximately $60million as employees accrue additional pension benefits and special paymentsare made to cover the shortfall between assets and liabilities. Contributionsto the defined contribution plans for 2006 are estimated to be $7 million.

 

***Income Taxes.***The objective of accounting for income taxes is to recognize the amountof taxes payable or refundable for the current and future years for events thathave been recognized in NOVA Chemicals’ financial statements or tax returns.Judgment is required in assessing future tax consequences. Variations in theactual outcome of these future tax consequences could materially impact NOVAChemicals’ financial position or results of operations.

 

NOVA Chemicals has a taxreserve that is available to settle periodic tax disputes and ongoing taxadjustments. This reserve is assessed from time-to-time for adequacy and, in2003 and 2004, the reserve was determined to be over-provided. During 2004, thereserve was reduced by $11 million ($20 million in 2003). The 2005 assessmentshowed the reserve to be at the appropriate level and no adjustment was made.

 

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**AccountingStandards**

 

***Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity.***The Canadian Institute of Chartered Accountants (CICA) implemented newaccounting standards, which harmonize accounting standards with United StatesGAAP for some types of mandatorily redeemable shares and other financialinstruments. Beginning on January 1, 2005, these instruments are requiredto be classified, on a retroactive basis, as liabilities rather than equity. Asa result, the preferred shares of the Corporation’s subsidiary, NOVA ChemicalsInc., have been classified as debt. In addition, any dividends associated withthese Series A preferred shares have been reclassified to interestexpense. All prior periods have been restated.

 

**Market andRegulatory Risk**

 

The Audit, Finance and RiskCommittee of NOVA Chemicals’ Board of Directors regularly reviews foreignexchange, interest rate and commodity hedging activity and monitors compliancewith the Company’s hedging policy. NOVA Chemicals’ policy prohibits the use offinancial instruments for speculative purposes and limits hedging activity tothe underlying net economic exposure.

 

***Foreign Exchange Hedging.***NOVA Chemicals conducts business in various countries where certainrevenues and expenses are determined in currencies other than the U.S. dollar.The Company has not hedged its exposure to fluctuations in any currency inrecent years.

 

***Commodity Hedging and Feedstock Acquisition.***NOVA Chemicals manages exposure to fluctuatingcommodity prices on its physical feedstock requirements by varying the mix offixed- and floating-price contracts and by entering into commodity futurescontracts, swaps and options. The extent to which hedging instruments are useddepends on market conditions and requires adherence to the Company’s hedgingpolicy. NOVA Chemicals also limits its positions in futures markets toproprietary feedstock requirements and does not use hedging instruments forspeculative purposes.

 

The Company’s feedstockacquisition team manages its position in the volatile natural gas and crudemarkets in an effort to moderate the risks of fluctuations in feedstock pricesto lower overall feedstock costs. As a result of hedging activities, after-taxearnings in 2005 and 2004 increased by $14 and $16 million, respectively. In 2003, after-tax earnings decreased by$5 million.

 

***Interest Rate Hedging.***Interest rate swaps are used to manage the mix between fixed- andfloating-interest rate exposure. At December 31, 2005, 54% of NOVAChemicals’ debt had fixed-interest rates averaging 7.2%, and 46% of its debthad floating-interest rates averaging 7.8%.

 

***Equity Forward Contracts.***Equity forward contracts are used to manage exposures to fluctuations inNOVA Chemicals’ stock-based compensation costs, as the costs of the plans varyas the market price of the underlying common shares changes. For furtherdetails of NOVA Chemicals’ forward contracts, please see Corporate and OtherItems, Stock-Based Compensation, Profit Sharing and Forward Transactions.

 

***Credit Risk Management.***NOVA Chemicals is exposed to credit risk on financial instruments giventhe possibility a counter-party to an instrument in which we are entitled toreceive payment of an unrealized gain fails to perform. The Company hasestablished a limit on contingent exposure for each counterparty based on thecounterparty’s credit rating. Credit exposure is managed through creditapproval and monitoring procedures. Concentration of credit risk can resultprimarily from receivables, as certain customer groups are located in the samegeographic area and operate in the same industry. NOVA Chemicals’ manages itscredit risk relating to these receivables through credit approval and monitoringprocedures.

 

***Government Regulation and Environmental Protection.***Like other companies in the plastics andchemical industry, NOVA Chemicals is subject to extensive environmental lawsand regulations at all levels of government concerning the manufacture,processing and importation of certain petrochemical substances, discharges orreleases (whether to air, land or water) and the generation, handling, storage,transportation, treatment, disposal and clean-up of regulated materials.

 

Although NOVA Chemicalsbelieves that its businesses, operations and facilities are being operated inmaterial compliance with applicable environmental laws and regulations, theoperation of any petrochemical facility and the distribution of petrochemicalproducts involve the risks of accidental discharges of hazardous materials,personal injury and property and environmental damage.

 

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Furthermore, applicableenvironmental laws and regulations provide for substantial fines, regulatorypenalties and criminal sanctions in the event of non-compliance. There can beno assurance that NOVA Chemicals will not incur material costs or liabilitiesas a result of such occurrences or the enforcement of environmental laws.

 

From time-to-time, NOVAChemicals has entered into various consent agreements or been subject toadministrative orders for pollution abatement or remedial action in connectionwith its businesses. The Company is currently involved in investigations andclean-ups under the U.S. Comprehensive Environmental Response, Compensation andLiability Act and comparable state laws at four sites in connection withhazardous substances that in the past had been transported to third partydisposal sites. NOVA Chemicals does not believe that its share of responsecosts at any such sites will, individually or in the aggregate, result in amaterial liability. It is possible that, based upon the nature of the hazardoussubstances generated at existing and discontinued operations, the Company may beinvolved in investigations and clean-ups at additional sites in the future.

 

NOVA Chemicals hasimplemented the Responsible Care Program, a comprehensive program that wasinitiated by the Canadian Chemical Producers’ Association (CCPA) and has beenadopted by the American Chemistry Council (ACC) in the United States as well asby chemical industry associations in more than 52 countries worldwide, as thebasis for its overall safety, health, environment and risk program.

 

NOVA Chemicals is active in anumber of voluntary environmental initiatives to reduce emissions and wastesfrom its facilities. In addition to participation in the CCPA’s NationalEmissions Reduction Masterplan, we are also participating in Canada’sAccelerated Reduction and Elimination of Toxics and greenhouse gas emissionsmanagement programs. Through an aggressive emissions management program, we arecommitted to economically viable solutions to climate change concerns,including, for example, participation in the joint venture with ATCO PowerCanada Ltd. and EPCOR Power Development Corporation to operate a naturalgas-fired cogeneration power plant at the Company’s production site in Joffre,Alberta. This project has substantially reduced greenhouse gas emissions whencompared with continuing to supply the electrical needs of the Joffre site fromAlberta’s primarily coal-fired electrical generation facilities. The Company isalso directly involved in the Canadian Chemical Industry’s EnvironmentalPerformance Memoranda of Understanding with the Federal, Ontario and Albertagovernments.

 

The Kyoto Protocol to theUnited Nations Framework Convention on Climate Change took effect during thefirst quarter of 2005. As a result of the Canadian government’s decision toratify the Kyoto Protocol, Canada is required to reduce its greenhouse gasemissions by 6% below 1990 levels during the years 2008 through 2012 andlegally binding greenhouse gas emission reduction targets may be imposedon NOVA Chemicals’ operations in Canada. In addition, Canada has recentlyimplemented modifications to the Canadian Environmental Protection Act, whichgives the government the ability to legislate reductions in greenhouse gasemissions. Similarly, NOVA Innovene’s operations are located in countries wheregreenhouse gas emission targets may be imposed. There is no nationalgreenhouse gas emission reduction program that imposes reduction targets in theUnited States, but some states have announced an intention to implement suchprograms and NOVA Chemicals’ operations in the United States could also havetargets imposed. In view of the uncertainty of how, when and if implementationwill occur, we cannot estimate compliance costs or whether they will bematerial.

 

**SummarizedQuarterly Financial Information**

 
| **THREE MONTHS ENDED;**                                   | ** ** | **2005**   | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------|------------|------------|------------|-------------|------------|
| **MILLIONS OF U.S. DOLLARS, (EXCEPT PER SHARE  AMOUNTS)** | ** ** | **DEC 31** | ** ** | **SEPT 30** | ** ** | **JUN 30** | ** ** | **MAR 31** | ** ** | **DEC 31** | ** ** | **SEPT 30** | ** ** | **JUN 30** | ** ** | **MAR 31** | ** ** |
| Revenue                                                   | ** ** | **$**      | **1,433**  | ** **  | **1,366**  | ** ** | **1,329** | ** ** | **1,488** |   | $ | 1,527 |   | 1,379 |   | 1,238 |   | 1,126 |   |
| Operating income  (loss)                                  | ** ** | **$**      | **(79**    | **)**       | **(96**    | **)** | **1** | ** ** | **170** |   | $ | 51 |   | 96 |   | 76 |   | 41 |   |
| Net income (loss)                                         | ** ** | **$**      | **(68**    | **)**       | **(105**   | **)** | **(25** | **)** | **94** |   | $ | 162 |   | 56 |   | 27 |   | 7 |   |
| Net income (loss)  per common share                       |       |       |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                     | ** ** | **$**      | **(0.82**  | **)**       | **(1.28**  | **)** | **(0.29** | **)** | **1.12** |   | $ | 1.91 |   | 0.64 |   | 0.31 |   | 0.08 |   |
| Diluted                                                   | ** ** | **$**      | **(0.82**  | **)**       | **(1.28**  | **)** | **(0.29** | **)** | **1.06** |   | $ | 1.78 |   | 0.60 |   | 0.30 |   | 0.08 |   |
| Weighted-average  common shares outstanding (millions)    |       |       |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                     | ** ** | **82.4**   | ** ** | **82.3**    | ** ** | **82.3** | ** ** | **83.2** |   | 84.8 |   | 87.2 |   | 87.6 |   | 87.3 |   |
| Diluted                                                   | ** ** | **82.4**   | ** ** | **82.3**    | ** ** | **82.3** | ** ** | **90.0** |   | 92.4 |   | 95.9 |   | 96.9 |   | 89.2 |   |

 

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***Quarterly Earnings Trends.***In 2004, strengthening demand combined withlimited capacity additions, resulted in increased sales volume and prices.Margins expanded for all products despite feedstock cost increases. Net incomein the fourth quarter of 2004 includes a $91 million after-tax gain on atax-related settlement and $40 million after-tax gain on the sale of theinvestment in AEGS. Net income in the first quarter of 2005 was favorablyimpacted by strong industry operating rates and co-product sales in NOVAChemicals’ Olefins/Polyolefins business. Net losses in the second and thirdquarters of 2005 were primarily caused by several unusual events, including theCorunna power outage, the Joffre ethane interruption, the non-cash insuranceaccrual, and the non-cash write-down related to the new European joint venture.The net loss in the fourth quarter was caused by the decline in the salesvolumes primarily as a result of Corunna being shut down for an extendedturnaround for maintenance and modernization work and the non-cash write-downof the Chesapeake, Virginia, facility.

 

Historically, sales volumesin the plastics and chemical industry during the last quarter of a calendaryear are lower than the first three quarters due to seasonal factors. 2005 wasno exception for NOVA Chemicals. Polyethylene sales volumes in the fourthquarter were lower than any of the prior three quarters; however, this wasprimarily attributable to the outage at the Corunna, Ontario manufacturingfacility rather than typical seasonal factors. Styrene monomer, polystyrene andexpandable polystyrene sales volumes also followed the historical pattern ofbeing lowest in the fourth quarter. Ethylene constraints limited the salespotential for styrene monomer in the fourth quarter of 2005. Polystyrene salesvolumes were down in the first half of the fourth quarter due to the forcemajeure caused by a hurricane and they were down in the second half of thefourth quarter as customers positioned themselves for 2006 contractnegotiations. Expandable polystyrene sales volumes were down in the fourthquarter due to seasonal slowing in the packaging and construction markets aswell as the widening price gap caused by increased Asian imports.

 

**Figure 10.Polyethylene & Polystyrene Industry Quarterly Growth, 2004 and 2005**

 

 

The polyethylene andpolystyrene quarterly growth chart above illustrates the trend in demand growthon a quarterly basis for 2004 and 2005. In the first three quarters of 2004,strong economic growth combined with rising energy prices and high operatingrates (in the case of polyethylene) stimulated fundamental demand growth and aninventory build downstream from producers, as buyers hedged against rising prices.Later in the year, typical seasonality of demand, coupled with a pull-back inenergy prices, resulted in weaker demand. In the first quarter of 2005,inventory de-stocking downstream created follow-on weakness in polyethylene,while polystyrene demand recovered as is traditionally the case after a weakfourth quarter. The middle two quarters saw mostly strengthening demand.Seasonal strength in fundamental demand combined with rising energy pricescaused buyers to attempt to re-build depleted inventories. However, the twohurricanes of late August and late September 2005 createdunprecedented supply disruptions. Prices increased rapidly and supply waslimited. These conditions resulted in abnormally weak demand growth in thefourth quarter of 2005. The supply shortages, from feedstock through topolymer, caused many suppliers to declare force majeure and limit purchasesearly in the quarter. Later, very high prices strained working capitalresources of many converters, limiting purchases. At the end of the quarter,initial signs of price weakness caused converters to deplete inventory further.

 

***Fourth Quarter 2005 Overview.***During the fourth quarter of 2005, we reporteda net loss to common shareholders of $68 million, or $0.82 per share, comparedto net income of $162 million, or $1.78 per share, in the fourth quarter of2004. This quarter-over-quarter decrease of $230 million was primarilyattributable to the following: a $91 million after-tax

 

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gain on a tax-relatedsettlement in the fourth quarter of 2004; a $40 million after-tax gain on thesale of NOVA Chemicals’ investment in AEGS in the fourth quarter of 2004; a $46million after-tax restructuring charge taken in the fourth quarter of 2005related to the announcement of the closure of the Chesapeake, Virginia, site;and a reduction in earnings of $37 million and $48 million of theOlefins/Polyolefins and Styrenics businesses, respectively. These factors wereslightly offset by a $26 million increase in earnings as a result of themark-to-market changes (net of the effects of the forward transaction) in thevalue of NOVA Chemicals’ common stock price as it relates to its twocash-settled, stock-based incentive compensation plans.

 

Depreciation expense wasrelatively flat when comparing the fourth quarter of 2005 with the fourthquarter of 2004. Interest expense increased $5 million before-tax in the fourthquarter of 2004 compared to 2005 due to the issuance of $400 million in seniorfloating-rate notes in October 2005.

 

Net income in theOlefins/Polyolefins business decreased $37 million, or 45%, from $82 million inthe fourth quarter of 2004 to $45 million in the fourth quarter of 2005. Thedecrease in the Olefins/Polyolefins business fourth quarter net income wasprimarily related to the decline in polyethylene and co-product sales as aresult of the outage at the Corunna, Ontario facility. Despite the fact thatthere were lower sales volumes, there was margin expansion in the fourthquarter of 2005. The increases in ethylene and polyethylene prices outpaced theincreases in the flow-through cost of feedstock.

 

The net loss in the Styrenicsbusiness increased $48 million, or 282%, from a $17 million net loss in thefourth quarter of 2004 to a $65 million net loss in the fourth quarter of 2005.The increase in the Styrenics business fourth quarter net loss was primarilyattributable to operating problems, lower margins and lower polystyrene salesvolumes caused by constraints on ethylene supplies during the fourth quarter of2005.

 

**Share Data**

 

**CommonShares Issued and Outstanding**

 
| **(NUMBER OF SHARES)**          | ** ** | **FOR THE PERIOD ENDED FEBRUARY 13, 2006** | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Beginning of  period            |       | 82,364,899                                      | ** ** | **84,268,293** | ** ** | 87,099,781 |       | 86,527,812 |       |
| Issued upon exercise of options |       | 115,603                                         | ** ** | **695,157**    | ** ** | 2,103,112  |       | 571,969    |       |
| Repurchased                     |       | —                                          | ** ** | **(2,598,551** | **)**      | (4,934,600 | )          | —     |       |
| End of  period                  |       | 82,480,502                                      | ** ** | **82,364,899** | ** ** | 84,268,293 |       | 87,099,781 |       |

 

**Employee Incentive Stock Options**

 
| **(NUMBER OF OPTIONS)** | ** ** | **FOR THE PERIOD ENDED FEBRUARY 13, 2006** | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|----------------|------------|------------|------------|-----------|------------|
| Beginning of  period    |       | 5,107,611                                       |       | **5,849,131**  | ** ** | 8,822,440  |       | 8,625,532 |       |
| Granted                 |       | 8                                               |       | **532,750**    | ** ** | 271,300    |       | 999,700   |       |
| Exercised               |       | (169,848                                        | )          | **(1,257,857** | **)**      | (3,204,731 | )          | (571,969  | )          |
| Cancelled               |       | (100                                            | )          | **(16,413**    | **)**      | (39,878    | )          | (230,823  | )          |
| End of  period          |       | 4,937,671                                       |       | **5,107,611**  | ** ** | 5,849,131  |       | 8,822,440 |       |

 

**DisclosureControls and Procedures**

 

NOVA Chemicals’ management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness, as at December 31, 2005, of NOVAChemicals’ disclosure controls and procedures (as defined in Rules 13a-15eand 15 d-15e under the United States Securities Exchange Act of 1934) and hasconcluded that such disclosure controls and procedures are effective.

 

**Changes InInternal Control Over Financial Reporting**

 

There have been no changes inNOVA Chemicals’ internal control over financial reporting during the year endedDecember 31, 2005, that have materially affected, or are reasonably likelyto materially affect, its internal control over financial reporting.

 

**AdditionalInformation**

 

Additional informationrelating to NOVA Chemicals, including the Annual Information Form, is filedwith Canadian securities administrators and can be accessed through the systemfor Electronic Document Analysis and Retrieval (SEDAR) at *www.sedar.com*. This same information isfiled with the U.S. Securities and Exchange Commission and can be accessed viatheir Electronic Data Gathering, Analysis and Retrieval System (EDGAR) at *www.sec.gov/edgar.shtml.*

 

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