 DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS   The information in this
Annual Report contains forward-looking statements with respect toNOVA Chemicals Corporation (NOVA
Chemicals), its subsidiaries and
affiliated companies. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
included in the forward-looking statements. The words believe, expect,
plan, intend, estimate, or anticipate and similar expressions, as well
as future or conditional verbs such as will, should, would, and could
often identify forward-looking statements. Specific forward-looking statements
contained in this Annual Report include, among others, statements regarding:
our expected financial performance in future periods; cyclical changes in the
demand for our products; changes in pricing policies by us or our competitors;
our competitive advantages and ability to compete successfully; our estimates
of the present value of our future net cash flows; changes in the costs of
energy and raw materials; our methods of raising capital; our levels of debt;
and general economic conditions. With respect to forward-looking statements
contained in this Annual Report, we have made assumptions regarding, among
other things: future oil, natural gas and benzene prices; our ability to obtain
raw materials; our ability to market products successfully to our anticipated
customers; the impact of increasing competition; and our ability to obtain
financing on acceptable terms. Some of the risks that could affect our future
results and could cause results to differ materially from those expressed in
our forward-looking statements include: commodity chemicals price levels (which
depend, among other things, on supply and demand for these products, capacity
utilization and substitution rates between these products and competing
products); feedstock availability and prices; operating costs; terms and
availability of financing; technology developments; currency exchange rate
fluctuations; starting-up and operating facilities using new technology;
realizing synergy and cost-savings targets; meeting time and budget targets for
significant capital investments; avoiding unplanned facility shutdowns; safety,
health, and environmental risks associated with the operation of chemical
plants and marketing of chemical products, including transportation of these
products; public perception of chemicals and chemical end-use products; the
impact of competition; changes in customer demand; changes in, or the
introduction of, new laws and regulations relating to our business, including
environmental, competition and employment laws; loss of the services of any of
our executive officers; and uncertainties associated with the North American,
European and Asian economies; and other risks detailed from time-to-time in the
publicly filed disclosure documents and securities commission reports of NOVA Chemicals and its subsidiaries or affiliated companies. The
forward-looking statements are expressly modified in their entirety by this
cautionary statement. The forward-looking statements are only made as of the
date of this Annual Report. NOVA Chemicals undertakes no obligation to publicly
update these forward-looking statements to reflect new information, subsequent
events or otherwise.  1 
   Exhibit 2  Managements Discussion and Analysis  Managements Discussion and
Analysis includes reports on Olefins/Polyolefins, Styrenics and Corporate
activities up to and including page 47. This discussion should be read in
conjunction with information contained in the consolidated financial statements
and the notes thereto starting on page 50. The consolidated financial
statements have been prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP). References to  and net income (loss) to common
shareholders before unusual items should be read in conjunction with the
discussion of Supplemental Measures on page 40. This Managements Discussion
and Analysis is prepared as of February 12, 2004.  The Business of Commodity Chemicals  NOVAChemicals operates two commodity chemical
businesses, Olefins/Polyolefins and Styrenics. In both product chains, earnings
are driven by three basic elements: price, sales volume and cost. These three
factors are the main determinants of the margin that we receive for our
products and consequently are the most important components influencing
earnings and cash flow generation.   MARGINS   The supply/demand balance of our products, not necessarily the cost of
feedstocks, is the primary driver of margins in our industry. Margin, on a unit
basis, is defined as the difference between the selling price of our products
and the direct cost to produce and sell them. During peak conditions, when
operating rates are high and products are in short supply, margins may increase
rapidly as customers attempt to secure scarce supply for their own production.
Conversely, in trough conditions, when operating rates are low, producers often
must compete for volume and market share by reducing prices. In the trough
portion of our cycle, margins can fall to the point where they may or may not
cover the cash costs of operating the business. As a result, margin, rather
than price, is the better indicator of profitability.  During downturns, companies
are reluctant to add capacity. Recently, relatively little new capacity has
been added in our product categories and demand is now absorbing excess supply.
Sustained operating rates, in excess of 90% in polyethylene and 92% in styrene
monomer, are typical inflection points at which margins may begin to expand.   PRICE   The prices for our commodity
polymer products are based on what customers are willing to pay when they
compare the price of our products to the price of similar products. Prices can
change quickly as a result of fluctuations in the supply/demand balance and
feedstock costs. Volatile feedstock costs over the last two years made it
essential that we shorten the time it takes to realize price increases. While
thirty-day price notification terms remain in place, we are working hard to
eliminate the past practice of providing extended price protection to our
customers beyond that notification period.   COSTS   Variable
costs are the single largest component of total
cost, and account for more than three quarters of the total cost of our
products. Feedstock costs account for the majority of our total variable costs.  Fixed costs consist
of plant operating costs, selling, general and administrative costs, and
research and development costs that do not vary with production; they are the
key controllable piece of our operating cost structure. In order to be the
low-cost producer of the products we make, we set aggressive fixed-cost reduction
targets each year, and we continually look to improve processes that facilitate
the reduction of fixed costs.   VOLUME   Our commodity sales volumes
are most heavily influenced by customer demand and price, while our
higher-value product sales volumes are most heavily influenced by product
quality and service. Our share of industry demand is the result of the
performance properties and price of our products versus our competitors. Our
objective is to compete on the basis of product performance. However, we sell
primarily commodity products, so being able to earn good returns while we price
our products at competitive levels is essential. A low-cost position is
critical to successfully compete in commodity chemicals, even with a strong
portfolio of higher-margin products.  2 
   The following table
illustrates how changes in various factors would increase our profitability,
assuming all other factors were held constant. Changes in the opposite
direction would have the opposite effect.  ESTIMATED (MILLIONS OF $)
  
  (BILLIONS OF LBS.)POTENTIAL
  IMPACT TO NOVA CHEMICALS PROFITABILITY OF:
  
  ANNUAL
  BEFORE-TAX
  INCOME
  INCREASE
  
  ANNUAL
  AFTER-TAX
  INCOME
  INCREASE(1)
  
  ANNUAL
  PRODUCTION
  CAPACITY(2)Increase
  ofU.S. 1¢ per pound in profit marginEthylene(3)
  
  $
  48
  
  $
  32
  
  4.8Polyethylene(4)
  
  35
  
  23
  
  3.5Styrene(5)
  
  33
  
  22
  
  3.3Styrenic
  polymers  North America(6)
  
  22
  
  15
  
  2.2Styrenic
  polymers  Europe(6)
  
  13
  
  9
  
  1.3Propylene
  
  10
  
  7
  
  1.0Decrease
  in cost of natural gas byU.S.
  10¢ per mmBTU
  
  11
  
  7
  
  Decrease
  in cost of benzene byU.S.
  5¢ per gallon
  
  17
  
  11
  
  Decrease
  in Canadian dollar of 1¢ vs.U.S. dollar
  
  7
  
  5
  
    
 (1)Based on an assumed tax rate of 34%. (2)Estimate based on current production capacity
assuming utilization of 100%. On average in 2003, our ethylene plants operated
at 83% of capacity, our polyethylene plants operated at 83% of capacity, our
styrene plants operated at 69% of capacity, and our styrenic polymer plants
operated at 70% of capacity. (3)Excludes cost-of-service third-party sales. (4)Assumes a 275 million pound polyethylene line
at our St. Clair River facility will be shut down as planned on May 31, 2004. (5)Includes long-term purchase agreements. (6)Includes solid polystyrene and expandable
polystyrene.   NOVA Chemicals Highlights  (MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE
  AMOUNTS AND WHERE NOTED)
  
  2003
  
  2002
  
  2001Net income (loss) before unusual itemsOlefins/Polyolefins
  
  $
  14
  
  $
  (5
  )
  $
  (2
  )Styrenics
  
  (130
  )
  (102
  )
  (181
  )Corporate
  
  (10
  )
  (15
  )
  44Methanex
  
  37
  
  5
  
  11Net loss before preferred securities dividends and
  distributions and unusual items
  
  (89
  )
  (117
  )
  (128
  )Preferred securities dividends and distributions
  
  (29
  )
  (31
  )
  (33
  )Net loss to common shareholders before unusual
  items
  
  (118
  )
  (148
  )
  (161
  )Unusual items (after-tax)(1)Gains on sales of assets
  
  125
  
  36
  
  Bayport charge
  
  (8
  )
  
  
  117
  
  36
  
  Net loss to common shareholders
  
  $
  (1
  )
  $
  (112
  )
  $
  (161
  )Loss per share before unusual items Basic and diluted
  
  $
  (1.36
  )
  $
  (1.72
  )
  $
  (1.88
  )Loss per share Basic and diluted
  
  $
  (0.02
  )
  $
  (1.30
  )
  $
  (1.88
  )Weighted-average common shares outstanding
  (millions)(2)
  
  87
  
  86
  
  85  
 (1)Effective March 28, 2003, new Securities
and Exchange Commission (SEC) rules in the U.S. came into effect with respect
to non-GAAP financial measures, and accordingly, certain information in prior
periods has been restated. Unusual items have been limited to those items or
events, which do not occur with any frequency and are outside of normal
operations. The sale of our interests in non-strategic assets and the explosion
and fire at our Bayport, Texas, styrene monomer production facility have no
ongoing impact on operations. See Supplemental Measures on page 41 for a
complete listing of unusual items. (2)Common shares outstanding at February 12,
2004 were 87,242,653 million.  3 
   Changes in NOVA Chemicals Net Loss  (MILLIONS OF U.S. DOLLARS)
  
  2003 vs.
  2002
  
  2002 vs.
  2001Higher net unit margins
  
  $
  5
  
  $
  65Higher sales volumes
  
  34
  
  65Higher gross margins
  
  39
  (1)
  130
  (1)Lower (higher)SG&A and R&D
  
  (16
  )
  23Lower restructuring charges
  
  5
  
  7Higher depreciation and amortization
  
  (32
  )
  (36
  )Lower (higher) interest expense
  
  (2
  )
  1Lower tax recovery before unusual items
  
  
  
  (47
  )Other gains
  
  
  
  (58
  )Higher (lower) equity earnings in Methanex
  
  34
  
  (9
  )Decrease in net loss before preferred securities
  dividends and distributions and unusual items
  
  28
  
  11Unusual items (after-tax)(2)
  
  81
  
  36Lower preferred securities dividends and
  distributions
  
  2
  
  2Decrease in net loss to common shareholders
  
  $
  111
  
  $
  49  
 (1)Calculated as revenue less feedstock and
operating costs. (2)Unusual items in 2003 included $125 million in
after-tax gains from non-strategic asset sales and an $8 million after-tax
charge related to the explosion and fire at our Bayport, Texas styrene monomer
production facility. Unusual items in 2002 were limited to the $36 million
after-tax gain on the sale of our interest in the Cochin Pipeline.   Our Results  Our financial performance in
2003 continued to reflect trough conditions that began late in 2000.  This trough has been longer
than usual and we have experienced losses in each of the last three years.
During this period, we have taken action to ensure that our liquidity and
financial position remain strong. We have sold non-strategic assets, reduced
working capital to minimal levels and restricted capital spending. As a result
of these actions, at the end of 2003, we had$459
million of cash and available credit facility and a net debt to total capitalization
ratio of 32%.  TheU.S. economy began to show signs of recovery late in 2003, which resulted in
slightly improved margins in the fourth quarter. Revenues increased $858
million, or 28%, from $3,091 million in 2002 to $3,949
million in 2003. Higher volumes, particularly in styrene monomer and Advanced SCLAIRTECH resins, accounted for the majority of our revenue and margin
improvement. Higher average selling prices across all of our products were
partially offset by increased feedstock and utility costs. As a result, EBITDA improved only marginally to $223 million in 2003, from $195
million in 2002. Our net loss to common shareholders before unusual items
improved to $118 million in 2003, compared with a loss of $148
million in 2002. Our net loss to common shareholders after unusual items
improved to a loss of $1 million in 2003 from a loss of $112
million in 2002, primarily from the sale of our investments in Methanex
Corporation and the Fort Saskatchewan Ethylene Storage Facility in 2003. These
sales resulted in $125 million in gains in 2003, as compared to
the $36 million gain we realized on the Cochin
Pipeline sale in 2002. For a discussion of EBITDA and unusual items,
see Supplemental Measures on page 40.  Our financial performance in
2002 improved over 2001, but conditions remained challenging due to continued
excess supply in our Olefins/Polyolefins and Styrenics businesses. While lower
average prices led to lower revenues during 2002, overall demand for our
products increased, which led to higher sales volumes and slightly higher
margins. Although revenue decreased from$3,194 million in 2001 to $3,091
million in 2002, lower average feedstock prices, combined with improved
volumes, resulted in our EBITDA increasing by $160 million from $35
million in 2001 to $195 million in 2002. As a result, our net loss
to common shareholders improved to $112 million in 2002 from a $161
million loss in 2001. Similarly, our net loss to common shareholders before
unusual items improved to a $148 million loss in 2002 from a $161
million loss in 2001. For a discussion of EBITDA and unusual items,
see Supplemental Measures on page 40.  4 
   Olefins/Polyolefins Business   PETROCHEMICAL AND FEEDSTOCK ECONOMICS   Our largest volume product is
ethylene, which is central to the production of both polyethylene and styrene
monomer. Seventy-five percent of our ethylene is produced at our Joffre,
Alberta site; the remaining 25% is manufactured at our Corunna, Ontario plant
in a flexi-cracker.  All ethylene plants at Joffre
use ethane as their primary feedstock. We purchase natural gas to replace the
energy value of the ethane extracted from the gas stream. Ethane is extracted
and delivered under medium- to long-term contracts with natural gas liquids
extraction and fractionation plants located in Alberta. We manage our ethane
balance through our inventories and short-term spot purchases. We also have the
capability to use propane for up to 10% of our feedstock requirements in
Joffre. In 2003, propane represented 3% of Joffres ethylene feedstock. We use
propane when the economics of cracking propane versus ethane are favorable. All
of our Joffre polyethylene products are manufactured from internally produced
ethylene.  We enjoy a cost advantage on
the ethylene produced at our Joffre site versus ethylene produced from
ethane/propane on the United States Gulf Coast (USGC). Our Joffre site is the largest ethylene complex in the world and has,
on average, a lower cost of production than similar plants in North America. In
2003 and 2002, this advantage was approximately 4¢ per pound, down from about
5¢ per pound in 2001, and down from a 14-year historical average of 6¢ per
pound. In 2002 and for most of 2003, excess supply reduced the price for ethane
relative to natural gas on the USGC
and caused our cost advantage to
decline. However, during the fourth quarter of 2003, demand for ethane improved
on the USGC, which caused our ethylene advantage to
increase to 5¢ per pound for the quarter and 6¢ per pound in December. While
Joffres ethylene advantage will continue to fluctuate from year-to-year, we
expect that the structural advantages associated with lower-cost natural gas
and the efficiency gained from our large-scale facilities will enable us to
maintain the historical average cost advantage of 6¢ per pound over the
long-term.  We sell a portion of our
Joffre ethylene production to third parties via contracts that allow us to flow
through feedstock costs to customers. As a result,NOVA Chemicals consumption of ethylene for our own production of
polyethylene is approximately 40% of our total ethylene capacity at Joffre.  Our Corunna, Ontario ethylene
plant has the flexibility to switch part of its feedstock slate between natural
gas liquids and crude oil derivatives, depending on market conditions.
Feedstock decisions are made by using a model that calculates the most
profitable mix of end products that can be produced from the optimal feedstock
slate.  Feedstocks for our Corunna
olefins facility are obtained from a wide variety of sources. The majority of
the feedstocks are crude oil and crude oil derivatives and condensates, with
the remainder being propane, butane, and ethane. The crude oil and derivatives
are supplied from western Canada, the United States and from overseas.
Condensate, a lighter feedstock than crude oil, yields a higher proportion of
olefins feedstocks than heavier crude oil products and is sourced primarily
from outside North America. Propane, butane and ethane are sourced from western
Canada, local producers andU.S.
sources. All of the polyethylene
produced in eastern Canada is manufactured from internally produced ethylene.  5 
    POLYETHYLENE ECONOMICS   Financial results in our
Olefins/Polyolefins business are driven in large part by the supply/demand
balance for polyethylene. Polyethylene is a globally traded commodity with
established merchant markets. When the polyethylene supply/demand balance
tightens, operating rates increase and margins can be expected to expand. Peak
market conditions for polyethylene margins typically exist when nameplate
operating rates for polyethylene are at, or above, 90% for a sustained period
of time. On average in 2003, our polyethylene plants operated at 83% of
capacity.  Olefins /Polyolefins Financial Highlights  (MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE
  AMOUNTS AND WHERE NOTED)
  
  2003
  
  2002
  
  2001Revenue(1)
  
  $
  2,559
  
  $
  1,930
  
  $
  2,014Operating income
  
  $
  92
  
  $
  67
  
  $
  57Depreciation and amortization
  
  187
  
  166
  
  132SegmentEBITDA(2)
  
  $
  279
  
  $
  233
  
  $
  189Net income (loss)(3)
  
  $
  14
  
  $
  (5
  )
  $
  (2
  )Average capital employed(4)
  
  $
  1,898
  
  $
  1,764
  
  $
  1,689After-tax return on capital employed(5)
  
  2.5
  %
  1.6
  %
  1.6
  %  
 (1)Before intersegment eliminations. (2)See Supplemental Measures on page 40 for the
definition of segment EBITDA. (3)Before distributions and dividends on
preferred securities. (4)Average capital employed equals cash expended
on plant, property and equipment (less accumulated depreciation and
amortization) and working capital and excludes assets under construction.
Amounts are converted to U.S. dollars using current exchange rates. Average
capital employed increased $223 million in 2003 as a result of exchange rate
fluctuation. (5)Equals net income (loss) plus after-tax
interest expense divided by average capital employed.    OLEFINS/POLYOLEFINS OPERATING RESULTS, 2003 VERSUS
2002   Our results improved in 2003
with net income of$14 million compared with a $5
million loss in 2002. Despite a significant increase in feedstock costs during
2003, prices for our polyethylene and ethylene products increased at a slightly
faster pace. Polyethylene volumes were up 6%, while ethylene volumes were down
slightly. Most of the increase in polyethylene volumes came from our Advanced SCLAIRTECH resins, which were up 46% to 600 million pounds. In 2004, these volumes
are expected to increase to roughly 750 million pounds.  Natural gas and crude oil
costs rose rapidly in the first quarter of 2003.NYMEX natural gas rose 67%, averaging $5.44 per mmBTU in 2003 compared with $3.25 per mmBTU in 2002, while WTI crude oil prices rose 19%, from $26.08 per barrel to $31.04
per barrel. We implemented product surcharges in polyethylene to mitigate the
impact of these rising costs. Price increases implemented throughout 2003,
coupled with strong chemical and energy co-product pricing from the Corunna
ethylene flexi-cracker, helped to offset some of the negative impact of
increasing costs. Feedstock and operating costs increased $575
million, or approximately 36%, from $1,596 million in 2002 to $2,171
million in 2003.  Higher feedstock costs and
increased demand in late 2003 and early 2004 caused us to announce further
price increases. We announced a 4¢ per pound polyethylene price increase
effective December 1, 2003 and a 5¢ per pound increase effective
February 1, 2004. Implementation of announced price increases depends on
many factors, including market conditions, the supply/ demand balance for each
particular product and feedstock costs. Price increases have varying degrees of
success. They are typically phased in and can differ by product or market.
Benchmark price indices sometimes lag behind price increase announcements due
to the timing of publication.  6 
   Operating Highlights  2003
  
  ANNUAL(U.S. DOLLARS PER POUND EXCEPT WHERE NOTED)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  2003
  
  2002
  
  2001Benchmark Principal Product Prices
  (per pound)(1):Ethylene(2)
  
  $
  0.28
  
  $
  0.30
  
  $
  0.27
  
  $
  0.28
  
  $
  0.29
  
  $
  0.22
  
  $
  0.26Polyethylene (weighted-average)(3)
  
  $
  0.46
  
  $
  0.51
  
  $
  0.48
  
  $
  0.50
  
  $
  0.49
  
  $
  0.38
  
  $
  0.39Benchmark Raw Material Prices:NYMEXNatural Gas (per mmBTU)(4)
  
  $
  6.60
  
  $
  5.49
  
  $
  5.10
  
  $
  4.58
  
  $
  5.44
  
  $
  3.25
  
  $
  4.38WTICrude Oil (per barrel)
  
  $
  33.86
  
  $
  28.91
  
  $
  30.20
  
  $
  31.18
  
  $
  31.04
  
  $
  26.08
  
  $
  25.97  
 (1)Average benchmark prices are not intended to
be actual prices realized by NOVA Chemicals or any other petrochemical company. (2)Source: Chemical Market Associates, Inc.
(CMAI)-USGC Net Transaction Price. (3)Benchmark prices weighted according to NOVA
Chemicals sales volume mix in North America. Source for benchmark prices:
Townsend Polymers Services Information. (4)Source: NYMEX Henry Hub 3-Day Average Close.   Polyethylene Sales Volumes  (MILLIONS OF POUNDS)
  
  2003
  
  2002
  
  2001NOVAPOL®ResinsJoffreLLDPE
  
  1,256
  
  1,229
  
  1,129MooreLDPE
  
  261
  
  265
  
  265MooreHDPE
  
  392
  
  349
  
  381SCLAIR®Resins
  
  500
  
  592
  
  617AdvancedSCLAIRTECHResins
  
  600
  
  410
  
  188Total
  
  3,009
  
  2,845
  
  2,580  An August power
disruption, impacting the midwestern and northeastern United States and
Ontario, reduced earnings in 2003 by approximately$9
million.  SegmentEBITDA, or operating income before depreciation and amortization, increased $46
million, or 20%, to $279 million in 2003 from $233
million in 2002. This margin improvement was mainly due to prices rising faster
than feedstock costs.  In 2003, we announced the
permanent shutdown of A-Line, one of our polyethylene production lines at the
St. Clair River Site, in Corunna, Ontario. The A-Line shutdown is scheduled to
occur during the second quarter of 2004 and will reduce linear low-density
polyethylene capacity by 275 million pounds per year. Approximately 80% of the
highest-margin A-Line products will be moved to lower-cost production lines,
including about 30% to the AdvancedSCLAIRTECH polyethylene
plant in Joffre, Alberta. The shutdown will eliminate 8% of our polyethylene
capacity and about 0.6% of total North American polyethylene capacity. This
initiative will also impact 60 positions and reduce fixed costs by $5
million to $10 million per year.  7 
    OLEFINS/POLYOLEFINS OPERATING RESULTS, 2002 VERSUS
2001   Our Olefins/Polyolefins
business reported a net loss of$5 million in 2002,
compared to a net loss of $2 million in 2001. The 2002 results were
impacted by higher depreciation costs due to the full-year operation of our new
Advanced SCLAIRTECH polyethylene plant. Segment EBITDA increased by $44 million, or 23%, from $189
million in 2001 to $233 million in 2002. The increase resulted
from higher sales volumes. Polyethylene volumes were up 10%, or 265 million
pounds, over 2001 with the majority of this increase coming from Advanced SCLAIRTECH resin sales in the United States. Volume gains were mainly offset by
lower prices for most polyethylene grades. While average margins were similar
in both 2001 and 2002, the trends were quite different. During 2001, margins
deteriorated through the year, bottoming out in the fourth quarter. In 2002,
margins generally increased through the first three quarters of the year, but
fell off somewhat in the fourth quarter.  Feedstock and operating costs
decreased$119 million, or approximately 7%, from $1,715
million in 2001 to $1,596 million in 2002. Average prices for
natural gas and crude oil were flat to down versus 2001 levels. Despite
additional costs for the Advanced SCLAIRTECH
polyethylene plant, our fixed
costs declined due to other cost reduction efforts.   Styrenics Business   PETROCHEMICAL AND FEEDSTOCK ECONOMICS   Styrene is produced from
benzene and ethylene. All of the ethylene and a significant portion of the
benzene requirements for our Sarnia styrene facility are supplied from our
Corunna, Ontario olefins facility. The balance of the benzene feedstock is
competitively purchased from nearby petroleum refineries. Except for
approximately 30% obtained through swaps, the balance of ethylene and the
entire benzene requirement for the Bayport and Channelview facilities is
purchased from external sources.  Our global styrenic polymer
feedstock requirements are currently satisfied through internal styrene monomer
production and long-term supply arrangements. To acquire styrene monomer in
Europe, we use a series of trans-Atlantic arrangements with other producers, at
local-producer economics.  Three separate acquisitions
of styrenics assets fromARCO
Chemical Company, Huntsman
Corporation and The Shell Petroleum Company Limited (Shell) in 1996, 1998 and
2000, respectively, resulted in us being net sellers of styrene monomer. Our
current styrene monomer production capacity, together with long-term supply
contracts, exceeds our annual requirements for styrenic polymer production by
approximately 1 billion pounds. In a tight market, our long styrene position
secures styrene for maximum styrenic polymer sales. It also allows us to sell
scarce monomer at high prices in the spot market. In contrast, when demand for
styrene and polystyrene weakens, we are forced to sell excess styrene monomer
at low spot prices, which negatively impacts our profit margins.   STYRENE MONOMER INDUSTRY DYNAMICS   Financial results in our
Styrenics business are driven in large part by the supply/demand balance for
styrene monomer, since there is less capacity to make styrene than there is to
consume it. Styrene monomer is a globally traded commodity with an established
merchant market. When the global styrene monomer supply/demand balance
tightens, operating rates increase and margins can be expected to expand once
rates reach peak conditions. Peak market conditions for styrene monomer margins
typically exist when nameplate operating rates for styrene monomer are at or
above 92% for a sustained period of time. In peak conditions, a long styrene
monomer position provides a source of earnings leverage.  8 
   Styrenics Financial Highlights  (MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE
  AMOUNTS AND WHERE NOTED)
  
  2003
  
  2002
  
  2001Revenue(1)
  
  $
  1,579
  
  $
  1,305
  
  $
  1,314Operating loss
  
  $
  (152
  )
  $
  (118
  )
  $
  (225
  )Depreciation and amortization
  
  111
  
  100
  
  98SegmentEBITDA(2)
  
  $
  (41
  )
  $
  (18
  )
  $
  (127
  )Net loss(3)
  
  $
  (130
  )
  $
  (102
  )
  $
  (181
  )Average capital employed(4)
  
  $
  1,323
  
  $
  1,248
  
  $
  1,392After-tax return on capital employed(5)
  
  (7.1
  )%
  (5.5
  )%
  (10.6
  )%  
 (1)Before intersegment eliminations. (2)See Supplemental Measures on page 40 for the
definition of segment EBITDA. (3)Before distributions and dividends on
preferred securities. (4)Average capital employed equals cash expended
on plant, property and equipment (less accumulated depreciation and
amortization) and working capital and excludes assets under construction.
Average capital employed increased $80 million in 2003 as a result of exchange
rate fluctuation. (5)Equals net loss plus after-tax interest
expense divided by average capital employed.    STYRENICS OPERATING RESULTS, 2003 VERSUS 2002   Styrenics business results
declined in 2003, bringing our net loss to$130
million from a $102 million loss in 2002. Price increases
implemented throughout 2003 kept pace with rapidly rising feedstock costs but
were more than offset by higher natural gas-based utilities and distribution
costs, as well as the negative impact of the outage on our Bayport styrene
monomer facility. As feedstock costs rose in late 2003, and continue to rise in
early 2004, we announced further price increases. These price increases were
announced for styrene monomer and our full slate of styrenic polymers in both
North America and Europe. The price increases were 3¢ to 6¢ per pound, with
effective dates between December 2003 and March 2004. Implementation
of announced price increases depends on many factors, including market
conditions, the supply/demand balance for each particular product and feedstock
costs. Price increases have varying degrees of success. They are typically
phased in and can differ by product or market. Benchmark price indices
sometimes lag behind price increase announcements due to the timing of
publication.  Revenues increased$274
million, or 21%, from $1,305 million in 2002 to $1,579
million in 2003 due to pricing improvement and strong styrene monomer sales.  Feedstock and operating costs
increased$290 million, or approximately 24%, from $1,215
million in 2002 to $1,505 million in 2003. Average benzene marker
prices in North America rose 29% from $1.19 per gallon in 2002
to an average of $1.54 per gallon in 2003. Average benchmark
prices for ethylene increased from $0.22 in 2002 to $0.29 in 2003.  On June 11, 2003, we had
an explosion, which resulted in a fire, in the ethylbenzene manufacturing unit
at our Bayport, Texas, styrene monomer production facility. The fire was
extinguished with no personal injuries and minimal environmental impact. We
fully supplied all global styrene monomer and polymer contract customers for
the duration of the outage. Styrene monomer production resumed at Bayport at
reduced rates on August 18, 2003, using shipments of ethylbenzene from our
Sarnia, Ontario production facility and supplemental purchases of ethylbenzene.
Ethylbenzene unit repairs have been completed at the Bayport facility, which
became fully operational on January 18, 2004. This outage reduced our 2003
earnings by approximately$10 million (after-tax) due to the higher costs
from purchasing and shipping ethylbenzene, lower operating rates and costs not
covered by insurance. Our styrene monomer plants operated at 69% of capacity,
somewhat lower than industry rates due to the outage at Bayport.  9 
   As a result of the damage,
and subsequent repair of the ethylbenzene unit, we are delaying our previously
announced debottleneck of the Bayport plant. Originally scheduled to be
complete in the fourth quarter of 2004, the debottleneck and turnaround will be
delayed by approximately six months. The delay will not have an impact on the
previously announced long-term styrene monomer supply contract withBASF Corporation (BASF). We are able to supply BASF from existing production.  Styrene monomer benchmark
contract prices in North America rose 8¢ per pound in 2003 from 33¢ per pound
in 2002. Weighted-average solid polystyrene prices rose 9¢ during the same
period due to higher feedstock costs.  Operating Highlights  2003
  
  ANNUAL(U.S. DOLLARS PER POUND EXCEPT WHERE NOTED)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  2003
  
  2002
  
  2001Benchmark Principal Product Prices
  (per pound)(1):Styrene monomer(2)
  
  $
  0.43
  
  $
  0.41
  
  $
  0.40
  
  $
  0.40
  
  $
  0.41
  
  $
  0.33
  
  $
  0.31Polystyrene (weighted-average)(3)
  
  $
  0.55
  
  $
  0.60
  
  $
  0.52
  
  $
  0.56
  
  $
  0.56
  
  $
  0.47
  
  $
  0.44Benchmark Raw Material Prices:Benzene (per gallon)(2)
  
  $
  1.78
  
  $
  1.48
  
  $
  1.41
  
  $
  1.49
  
  $
  1.54
  
  $
  1.19
  
  $
  1.02  
 (1)Average benchmark prices are not intended to
be actual prices realized by NOVA Chemicals or any other petrochemical company. (2)Source: CMAI Contract Market. (3)Benchmark prices weighted according to NOVA
Chemicals polystyrene sales volume mix in North America and Europe. Includes
solid and expandable polystyrene, but excludes high performance styrenic polymers,
DYLARK and other styrenic co-polymers. Source for benchmark prices: CMAI.
CMAIs published North American low-range contract/market high-heat crystal
benchmark polystyrene prices received a one-time downward, non-market
adjustment of 6¢ per pound beginning in June 2003. Months prior to
June 2003 were not restated by CMAI.  Styrenic polymer volumes
declined 3%, to 2,375 million pounds in 2003, from 2,461 million pounds in
2002, mainly as a result of lower demand. Styrene monomer volumes increased 4%
as a result of stronger demand.  Styrenic Sales Volumes  (MILLIONS OF POUNDS)
  
  2003
  
  2002
  
  2001Styrene monomer(1)
  
  1,305
  
  1,257
  
  1,014Polystyrene
  
  2,110
  
  2,180
  
  2,282High performance styrenics including DYLARK
  
  265
  
  281
  
  314Total
  
  3,680
  
  3,718
  
  3,610  
 (1)Third-party sales only.  Our Styrenics business
segmentEBITDA in 2003 was a loss of $41
million compared to a loss of $18 million in 2002. The decline over 2002 was
mainly due to lower margins.  10 
    STYRENICS OPERATING RESULTS, 2002 VERSUS 2001   Our Styrenics business
reported a net loss of$102 million in 2002, compared to a net loss of
$181 million in 2001. Margins improved in 2002, as feedstock costs were
lower than 2001. Segment EBITDA in 2002 was a loss of $18
million versus a loss of $127 million in 2001. The improvement over 2001
was mainly due to higher margins resulting from higher industry capacity
utilization rates and lower average feedstock costs. In addition to better
margins, our Styrenics business improved its performance by implementing
several cost-cutting initiatives, including asset rationalization and
restructurings.  Due to higher industry
utilization rates, 2002 was a stronger year for styrene monomer. In 2001,
market conditions for styrene monomer were weak, and we were forced to reduce
our own styrene monomer production to meet minimum purchase obligations. This
resulted in higher fixed-costs per pound on our produced styrene monomer. In
addition, we sold higher-cost purchased monomer into a weak styrene monomer
market. The negative impact on margins was approximately$65
million in 2001. In 2002, we did not reduce monomer production rates in our
plants to meet minimum supply obligations, so the impact of our long styrene
monomer position was neutral.  In addition, we also achieved$9 million (after-tax) in synergies related to
Shells European solid polystyrene and expandable polystyrene businesses
acquired in 2000.  Corporate and Other Items   ASSET SALES   Methanex
Investment. In June 2003, we sold our investment in
Methanex Corporation for net proceeds of $441 million. This
resulted in a before-tax gain of $29 million and an after-tax gain of $61
million. During the period we held our investment, we recorded tax expense on
equity earnings from Methanex. The recorded tax liability at the time of sale
was $32 million. The sale was completed with no
cash taxes payable, and accordingly, the previously recorded future income tax
provision of $32 million was not required and was taken into
income at the time of the sale.  Our share of Methanexs
earnings in 2003, up to the date of sale, was$37
million after-tax, compared with $5 million for the year 2002 and $11
million in 2001. These results included restructuring charges and asset
writedowns of $27 million in 2002 and $3
million in 2001. Global methanol prices improved throughout 2002 and into 2003
due to supply limitations and a recovery in demand.  Fort
Saskatchewan Ethylene Storage Facility. We
sold our interest in the Fort Saskatchewan Ethylene Storage Facility in 2003
for net proceeds of $123 million, which resulted in a before-tax
gain of $76 million and an after-tax gain of $64
million. The total gain on this transaction was $114 million before-tax,
of which $38 million has been deferred and will be
amortized over the 20-year term of the storage contract. The deferral will
partially offset our annual costs associated with this new Fort Saskatchewan
ethylene storage contract.  Cochin
Pipeline. We realized a gain in 2002 of $59
million before-tax ($36 million after-tax) from the sale of our
interest in the Cochin Pipeline.   OTHER OPERATING EXPENSES   Depreciation and amortization
expense increased by$32 million, or 12%, from $266
million in 2002 to $298 million in 2003. The increase in 2003 was
primarily due to higher Canadian dollar and euro denominated asset values when
translated into U.S. dollars. Depreciation and amortization also
increased in 2002 over 2001 by $36 million. The increase in 2002 was primarily
the result of additional depreciation associated with the full year operation
of our Advanced SCLAIRTECH polyethylene plant and related infrastructure.
In June 2004, the cost-of-service contract for our second ethylene cracker
(E2) in Joffre, Alberta will expire. As a result, depreciation and amortization
will be reduced by approximately $30 million annually as this facility will be
fully depreciated at that time.  11 
   Research and development spending
increased$6 million, or 15%, from $39
million in 2002, to $45 million in 2003, and increased $5
million over 2001. This increase in spending reflects our continued investment
and focus on Advanced SCLAIRTECH and Styrenics higher-margin growth products.  Selling, general and
administrative (SG&A) expenses increased $10
million, or 6%, from $169 million in 2002, to $179
million in 2003 due to the higher Canadian dollar and euro. Continued cost
reduction and streamlining efforts offset some of this currency related
increase.   RESTRUCTURING CHARGES   In 2003, a restructuring
charge of$15 million ($10 million after-tax) was
related to the announced shutdown of one of our polyethylene production lines
at our St. Clair River Site, in Corunna, Ontario. This charge was comprised
mainly of asset writedown and severance costs. In 2002, a charge of $20
million ($15 million after-tax) was related to
streamlining our operations in many areas of our company and was primarily
severance related. In 2001, we had a charge of $27 million ($17
million after-tax), which related to employee severance, as well as project and
other asset writedown costs.   INTEREST EXPENSE   Net interest expense in 2003
remained essentially flat at$89 million as compared to
$87 million in 2002. In 2001, interest costs were $88
million, however, we capitalized $18 million of interest costs relating to the
Joffre expansion in 2001.   INCOME TAXES   Income tax recoveries
increased significantly in 2003 to$61 million from $13
million in 2002, and declined slightly from $83 million in 2001. The
increase in 2003 was primarily the result of reversing previously recorded
income tax provisions, which were no longer required as a result of
nonstrategic asset sales and other matters. The decline from $83
million in 2001 to $13 million in 2002 was due to reduced losses
in 2002, as well as additional tax benefits from unusual items in 2001.   NET LOSS TO COMMON SHAREHOLDERS   For 2003, we reported a net
loss to common shareholders of$1 million compared to a
net loss to common shareholders of $112 million in 2002 and a net loss to common
shareholders of $161 million in 2001. Our performance improved
in 2003, over 2002 and 2001, as demand recovered slightly over the period and
price increases kept ahead of volatile feedstock costs. In addition, the sale
of our interest in Methanex and the Fort Saskatchewan Ethylene Storage Facility
resulted in gains of $125 million after-tax in 2003.   Liquidity and Cash Flow  Our principal sources of
liquidity in 2003 were cash flows from asset sales, operations, accounts
receivable securitization programs and borrowings under our revolving credit
facility. Our principal uses of cash were capital expenditures, debt reduction
and debt service.   CASH FLOW   Increasing total cash flow
from the business was our top priority in 2003. We sold non-strategic assets,
which allowed us to reduce debt by$114 million and increase
our cash and cash equivalents on hand to $212 million. We also
invested in working capital during the year, primarily due to higher Cash Flow
Cycle Time of 28 days versus an unsustainably low 20 days at the end of 2002.
This is in contrast to 2002, when we significantly reduced working capital.  12 
   A summary of the cash inflows
and outflows which contributed to our debt reduction is shown below:  (MILLIONS OF DOLLARS)
  
  2003
  
  2002
  
  2001InflowsFunds generated from operations
  
  $
  140
  
  $
  153
  
  $
  94Reduction (increase) in operating working capital
  
  (125
  )
  206
  
  184Cash generated from operations
  
  15
  
  359
  
  278Asset sale proceeds
  
  564
  
  82
  
  Foreign exchange and other
  
  
  
  12
  
  14Total inflows
  
  579
  
  453
  
  292OutflowsCapital expenditures (net of project advances)
  
  (119
  )
  (70
  )
  (168
  )Turnaround costs, long-term investments and other
  assets
  
  (57
  )
  (18
  )
  (156
  )Dividends and distributions
  
  (54
  )
  (54
  )
  (56
  )Foreign exchange and other
  
  (37
  )
  
  
  Total outflows
  
  (267
  )
  (142
  )
  (380
  )Reduction (increase) in cash
  
  (198
  )
  (4
  )
  17Debt Reduction (Addition)
  
  $
  114
  
  $
  307
  
  $
  (71
  )  Inflows of Cash.Funds from operations were $140
million in 2003, down from $153 million in 2002 and up from $94
million in 2001. Working capital increased by $125 million in 2003, due
to higher-priced inventories and accounts receivables. We continued our focus
on Cash Flow Cycle Time (CFCT), which is measured as operating working
capital divided by average sales. In 2002 we reduced our investment in working
capital to a very low 20 days. We ended 2003 with 28 days CFCT. We believe we can sustain CFCT
between 25 and 30 days of sales,
over the long-term, which will allow us sufficient working capital to meet
growing demand. In total, we generated $15 million in cash from
operations versus $359 million in 2002 and $278
million in 2001.  Asset sales contributed the
most significant amount of cash in 2003. The sale of our interest in Methanex
Corporation generated net cash of$441 million; and the Fort
Saskatchewan Ethylene Storage Facility sale contributed an additional $123
million.  Outflows of Cash.We increased our capital spending program to $119
million, (net of project advances) in 2003 compared to the $70
million spent in 2002. Capital spending was $168 million in 2001. From
2003 to 2007, our capital expenditures, net of project advances, are expected
to average about $155 million per year, or approximately 50% of
depreciation charges. During 2003, we received $11 million in cash in the
form of project advances, (2002  $1 million and 2001  $nil),
which reduced the cash required for capital expenditures.  We also spent$29
million in 2003 for scheduled maintenance of facilities, known as turnarounds.
We expect to spend approximately $6 million on scheduled turnarounds in 2004.   COMMITMENTS   We have various commercial
commitments, including operating leases for office space and railcars and
unconditional purchase obligations related to minimum amounts of feedstock and
other raw material purchases pursuant to agreements entered into to secure
short- and long-term supply. Prices are typically based on market or a
cost-plus basis, and fluctuate with changes in the underlying raw material
indices. Obligations have been calculated using current pricing for purposes of
the chart below.  13 
   Contractual Cash Obligations  PAYMENTS
  DUE BY PERIODAS AT DECEMBER 31, 2003(MILLIONS OF DOLLARS)
  
  TOTAL
  
  2004
  
  2005-2006
  
  2007-2008
  
  AFTER 2008Long-term debt(1)
  
  $
  1,101
  
  $
  
  
  $
  405
  
  $
  4
  
  $
  692Capital leases
  
  
  
  
  
  
  
  
  
  Operating leases(2)
  
  594
  
  48
  
  83
  
  68
  
  395Unconditional purchase obligations(3)
  
  7,734
  
  2,124
  
  2,236
  
  1,502
  
  1,872Total contractual cash obligations
  
  $
  9,429
  
  $
  2,172
  
  $
  2,724
  
  $
  1,574
  
  $
  2,959  
 (1)Includes current portion and bank loans. (2)Includes property, railcar and other equipment
leasing commitments. (3)We could mitigate the impact of excess
quantities of raw materials and feedstock commodities resulting from fixed
purchase commitments by reselling these products at market prices.   LIQUIDITY   We meet our short-term
liquidity needs through the generation of funds from operations, cash-on-hand,
our accounts receivable securitization programs, and borrowing capacity under
our revolving credit facility. In addition, we continue to consider the sale of
certain non-strategic assets.  Senior Notes Offering.On January 13, 2004, we issued $400
million of 6.50% Senior Notes due 2012. These Senior Notes were issued with
investment-grade covenants and are identical in all material respects to the
covenants on our existing bonds. Net proceeds of the offering will be used to
redeem, on March 1, 2004, the 9.04% preferred securities due 2048 and the
9.50% preferred securities due 2047. The two issues of preferred securities
total $382.5 million. The balance of the proceeds
will be used for general corporate purposes. These transactions will reduce
annual financing costs by approximately $10 million.  Credit Facility.As of December 31, 2003, we had no
borrowings under our $300 million secured credit facility, except
for operating letters of credit of $53 million. In conjunction with the Senior
Notes offering described above, we amended the credit facility to extend its
expiration date to April 1, 2007, relaxed the Minimum Cash Flow to
Interest Expense covenant for the first and second quarters of 2004, and
adjusted the definition of debt to consolidated debt, which will include all
cash with the exception of any restricted cash. The covenants related to this
revised facility are as follows:  DECEMBER 31,
  2003COVENANT
  
  REQUIREMENT
  
  ACTUAL
  
  PRO
  FORMA(4)Minimum Cash Flow to Interest Expense(1):12 months ending December 31, 2003
  
  1.25 : 1.0
  
  1.82
  
  1.9612 months ending March 31, 2004
  
  1.50 : 1.0
  
  
  
  12 months ending June 30, 2004
  
  1.75 : 1.0
  
  
  
  12 months ending September 30, 2004, and
  thereafter
  
  2.00 : 1.0
  
  
  
  Maximum Net Debt to Total Capitalization(2):
  
  55
  %
  36.1
  %
  49.1
  %Minimum Shareholders Equity(3):
  
  $1.0 billion plus 50of positive earnings
  %
  $1.9 billion
  
  $1.5 billion  
 (1)As defined in the revolving credit facility,
cash flow equals consolidated net income (loss), in accordance with Canadian
GAAP, adding back interest expense, income taxes, depreciation and
amortization, extraordinary gains or losses (including gains and losses on
sales of assets) and other non-cash items. Interest expense includes preferred
securities dividends and distributions. (2)As defined in the revolving credit facility,
net debt includes items not in accordance with Canadian GAAP, such as
obligations under operating leases (if in excess of a specified percentage of
consolidated assets) and amounts outstanding under the accounts receivable
securitization program. The definition also provides for debt to be offset by
cash, other than restricted cash, in arriving at net debt for purposes of this
covenant. (3)Shareholders Equity is defined in accordance
with Canadian GAAP and includes changes in the cumulative translation
adjustment account (CTA). Previously, the calculation excluded changes in CTA
after December 31, 2002. (4)Pro forma calculations assume that the
issuance of $400 million of Senior Notes and the redemption of preferred
securities as described above occurred on December 31, 2003, with respect
to net debt to total capitalization and shareholders equity, and on
January 1, 2003 with respect to cash flow to interest expense.  We are in compliance with the
amended covenants under the revolving credit facility.  14 
   Off-Balance-Sheet
Arrangements  Accounts Receivable Securitization. Our
off-balance-sheet financing activities are limited to participation in accounts
receivable securitization programs. We have been engaged in the current
programs since 1999 to obtain lower financing rates than those available to us
from other sources. During 2003, the programs were renewed until July 12,
2004. We expect the programs will be renewed prior to July 12, 2004. In the
event they are not renewed, we expect we would have sufficient cash and
available credit facilities to repay any amounts outstanding. We sell trade
accounts receivable to third parties, on a revolving basis, to a maximum of $195
million (see Note 3 to the Consolidated Financial Statements). At
December 31, 2003, $177 million in receivables were sold under the
programs. Of this amount, $117 million was sold via a special purpose
entity (SPE) that is 100% owned by NOVA Chemicals. The SPE isolates the sold receivables and the related
cash collections for the exclusive benefit of the purchasers. We have no right
to any cash collected from these receivables; therefore, neither the
receivables nor any obligation to the purchasers is reflected in our financial
statements. We conduct no other business through SPEs.  Total Return
Swap. In connection with the acquisition of
styrenics assets from Huntsman Corporation in 1998, our subsidiary, NOVA Chemicals Inc., issued retractable preferred shares with a liquidation
preference of $198 million as partial consideration. Holders
of the retractable preferred shares have the right to exchange the shares (a
retraction) for NOVA Chemicals common shares (plus preferred
shares if the market value of such common shares is less than $198
million).  During 2001, 2002, and 2003,
certain changes were made to the terms of the retractable preferred shares and
related stockholder agreements. These changes provide us with the right to call
the retractable preferred shares on or after December 15, 2001 and
repurchase the retractable preferred shares prior to any retraction intoNOVA Chemicals common shares. If we do not exercise our repurchase rights
prior to March 15, 2005, the market-based exchange rate at which the
retractable preferred shares may be retracted into NOVA Chemicals common shares (and, accordingly, the effective price at which
the common shares would be issued) will be fixed on that date. The number of NOVA Chemicals common shares issuable upon a retraction remains limited to a
maximum of 8.5 million shares with the balance of the obligation, if any, met
through the issuance of NOVA Chemicals preferred shares. The dividend rate
on the retractable preferred shares is 2% per year.  We also entered into a total
return swap, which terminates on March 15, 2005, with respect to the
retractable preferred shares. Under the terms of the total return swap: (i) the
counterparty pays us an amount equal to the fixed dividend on the retractable
preferred shares; (ii) we pay the counter-partyLIBOR plus a spread; (iii) we are obligated under the swap to provide initial
margin (cash, government securities or a letter of credit) equal to 20% of the
original notional amount of $191 million, which is currently satisfied by a
letter of credit issued by a third-party for which we pay a fee; (iv) we are
also required to provide maintenance margin in the form of restricted cash for
any negative changes in the equity value of the retractable preferred shares;
and (v) the counterparty pays us for any positive changes in the equity value
of the retractable preferred shares.  We have provided$65
million of restricted cash to reduce the notional amount of the swap from $191
million to $126 million. As a result, prior to
March 15, 2005, we can redeem the potentially dilutive security for an
additional $126 million.  Beginning in 2004, changes in
the equity value of the retractable preferred shares during the term of the
swap will be determined based on changes in the average price of the
outstanding 7% Senior Notes due 2005 and 7% Medium-Term Notes due 2006 issued
byNOVA Chemicals (see Note 8 to the Consolidated
Financial Statements).  15 
   If we default on other debt
with an aggregate principal amount of$25 million or more, or
the closing price of NOVA Chemicals common shares is $12.00
U.S. or less, and upon certain other credit events, the counterparty will have
the right to sell the retractable preferred shares to a third-party and
terminate the swap. We would then owe the counterparty the difference between
the actual sale price received by the counterparty and the most recent adjusted
notional equity value of the retractable preferred shares (in the event the
difference was negative).  Capitalization. At
the end of 2003 our net debt to total capitalization ratio was at 32%, after
deducting cash and cash equivalents from total debt. In August 2003, we
redeemed at par our $150 million of 7% debentures due
August 15, 2026, from available cash. We have no current debt outstanding
at December 31, 2003. Our next long-term debt maturity occurs in 2005 for $100
million.  Financial Ratios  DECEMBER 31(MILLIONS OF DOLLARS, EXCEPT AS NOTED)
  
  2003
  
  2002
  
  2001Long-term debt(1)
  
  $
  1,101
  
  $
  1,215
  
  $
  1,522Less: cash and cash equivalents
  
  (212
  )
  (14
  )
  (10
  )Total debt net of cash and cash equivalents
  
  889
  
  1,201
  
  1,512Shareholders equity
  
  1,890
  
  1,561
  
  1,614Total capitalization(2)
  
  $
  2,779
  
  $
  2,762
  
  $
  3,126Net debt to total capitalization(3)
  
  32.0
  %
  43.5
  %
  48.4
  %Interest coverage (deficiency) on long-term debt(4)
  
  0.9
  x
  (0.1
  )x
  (1.7
  )x  
 (1)Includes current portion and bank loans. (2)Total capitalization reflects shareholders
equity and total debt net of cash and cash equivalents. (See Supplemental
Measures below). (3)If cash and cash equivalents are not netted
against long-term debt, the debt to total capitalization ratio would be 37%. (4)Interest coverage (deficiency) on long-term
debt is equal to net income (loss) before interest expense on long-term debt
and income taxes divided by annual interest requirements on long-term debt.  Credit
Ratings. Our current senior unsecured debt ratings are
as follows: DBRS  BBB (low) (stable); Standard & Poors  BB+ (negative);
and Moodys  Ba2 (stable). In January 2004, Standard & Poors lowered
our outlook from stable to negative coincident with the private placement of $400
million aggregate principal amount of 6.50% Senior Notes due 2012.    SUPPLEMENTAL MEASURES   In addition to providing measures
in accordance with CanadianGAAP, we present certain supplemental measures.
These are EBITDA (defined below) and net income (loss) to
common shareholders before unusual items. We also define total capitalization
to be net of cash and cash equivalents in accordance with the debt covenants
for our $300 million revolving credit facility. These
measures do not have any standardized meaning prescribed by Canadian GAAP and are, therefore, unlikely to be comparable to similar measures
presented by other companies.  Due to newU.S. SEC rules, certain items are no longer excluded when presenting non-GAAP financial measures. EBITDA
no longer excludes restructuring
charges and net income or loss to common shareholders before unusual items also
does not exclude restructuring charges, and certain other items previously
considered unusual in nature. Prior periods have been restated to reflect these
new determinations.  16 
   EBITDA. This
measure is provided to assist investors in determining our ability to generate
cash from operations. Under the Corporations definition, EBITDA can be determined from the consolidated statements of income (loss) by
adding back income taxes, interest expense, other gains and losses, equity in
the earnings (losses) of affiliate, and depreciation and amortization to net
income (loss).  2003
  
  2002
  
  2001Net income (loss)
  
  $
  28
  
  $
  (81
  )
  $
  (128
  )Income tax recovery
  
  (61
  )
  (13
  )
  (83
  )Other (gains) and losses
  
  (92
  )
  (59
  )
  (58
  )Equity in earnings of affiliate
  
  (39
  )
  (5
  )
  (14
  )Interest expense (net)
  
  89
  
  87
  
  88Depreciation and amortization
  
  298
  
  266
  
  230EBITDA
  
  $
  223
  
  $
  195
  
  $
  35  SegmentEBITDA is determined as segment operating income or loss before depreciation
and amortization.  Net Loss to
Common Shareholders Before Unusual Items. This
measure is provided to assist investors in assessing earnings performance from
ongoing operations. Certain items such as gains and losses from sales of assets
are excluded if they are not considered to be in the ordinary course of
business. A listing of unusual items (after-tax) for the periods presented is
as follows:  YEAR ENDED DECEMBER 31(MILLIONS OF DOLLARS)
  
  2003
  
  2002
  
  2001Net loss to common shareholders before unusual items
  
  $
  (118
  )
  $
  (148
  )
  $
  (161
  )Unusual items:Gain on sale of Methanex Corporation
  
  61
  
  
  
  Gain on sale of Fort Saskatchewan Ethylene Storage
  Facility
  
  64
  
  
  
  Gain on sale of Cochin Pipeline
  
  
  
  36
  
  Bayport charge
  
  (8
  )
  
  
  Total unusual items
  
  $
  117
  
  $
  36
  
  $
  Net loss to common shareholders after unusual items
  
  $
  (1
  )
  $
  (112
  )
  $
  (161
  )  Effective March 28,
2003, newSEC rules in the U.S. came into effect with
respect to non-GAAP financial measures, and accordingly, certain
information in prior periods has been restated. Unusual items have been limited
to those items or events which do not occur with any frequency and are outside
of normal operations. The sale of our interests in non-strategic assets, and
the explosion and fire at our Bayport, Texas styrene monomer production
facility have no ongoing impact on operations.   DIVIDENDS AND DISTRIBUTIONS   Common Share
Dividends. We have paid dividends on our common shares at
the current rate of $0.10 Canadian dollars per quarter. In 2003, we
paid $25 million in dividends on our common shares.
There are currently no material contractual restrictions on our ability to
declare and pay dividends on our common shares. The declaration and payment of
dividends is at the discretion of our Board of Directors, who will consider
earnings, capital requirements, our financial condition and other relevant
factors. It is, however, our intention to retain most of our earnings to
support current operations, further reduce debt and continue to pay dividends
at historic levels.  Preferred
Securities Distributions. We pay distributions on
our preferred securities on a quarterly basis, at an annual rate of 9.50% on $210
million of preferred securities due 2047 and 9.04% on $172.5
million of preferred securities due 2048. On March 1, 2004, we will redeem
the preferred securities from the net proceeds of a Senior Notes offering
described on page 38.  17 
   Retractable
Preferred Share Dividends. We pay 2% annual
dividends on the $198 million retractable preferred shares.
These dividends are deducted from income when determining diluted earnings per
share. Holders of the retractable preferred shares have the right to exchange
the shares (retraction) for our common shares (plus our preferred shares if the
market value of such common shares is less than $198 million).  If the retractable shares are
not retired or the conversion date extended, the market-based exchange rate at
which the retractable preferred shares may be retracted into our common shares
(and accordingly the effective price at which the common shares would be
issued) would be determined on March 15, 2005.   APPLICATION OF CRITICAL ACCOUNTING ESTIMATES   We believe the following
represent the estimates most critical to the application of our accounting
policies. Management has discussed the development and selection of these
critical accounting estimates with the Audit, Finance and Risk Committee of our
Board of Directors and the Audit, Finance and Risk Committee has reviewed our
disclosure relating to such estimates in this Managements Discussion and
Analysis.  Plant,
Property and Equipment (PP&E). Judgmental aspects of
accounting for PP&E involve estimates of the life of the assets, the
selection of an appropriate method of depreciation over the life of the assets
and determining whether an impairment of our assets exists. These assessments
are critical due to their potential impact on our earnings.  Canadian andU.S. GAAP require that if the sum of the future net cash flows, together with the
residual value expected to result from a companys assets, undiscounted and
without interest charges, is less than the reported value of the asset, asset
impairment must be recognized in the financial statements by a charge to
earnings.  Our Olefins/Polyolefins
business has an established long-term record of profitability and, based on
current asset carrying values and expected future cash flows, we have concluded
the carrying value of its assets is appropriate. In 2003, we announced the
shutdown of a single polyethylene line at our St. Clair River facility in
Corunna, Ontario. As a result, we wrote off the remaining assets, resulting in
a$6 million (after-tax) charge to earnings in
the third quarter of 2003.  Our Styrenics business has
not been as profitable, and in recent years has reduced production capacity due
to poor market conditions. In 2002, we temporarily idledEPS units at our Carrington, United Kingdom plant and shut down several
reactors in Europe and North America. Despite these actions we have determined
that the undiscounted sum of the expected future cash flows from all of our
Styrenics plants exceed the recorded value of those plants and, as a result,
there is no impairment under Canadian or U.S. GAAP.  Our estimate of future cash
flows is based on historical operating performance and the assumption that the
business cycle pattern will continue in the future. Historically, there have
been peaks in earnings performance, characterized by a tight supply/demand
balance and improving margins, followed by trough periods when supply exceeds
demand and lower margins result. We have assumed that we will earn margins in
the future that are similar to margins earned in the past and that we will have
a similar cost structure.  In addition, we are able to
choose from alternative methods of depreciation. We have chosen the
straight-line method rather than other methods, such as unit of production,
because the straight-line method is more conservative, requires less estimation
and judgment, and is a systematic and rational basis reflecting the period over
which the assets benefit is recognized.  Environmental
Liabilities. Canadian GAAP requires companies to
record liabilities associated with future plant decommissioning and site
restoration costs on both active and inactive plants at their fair value based
on a discounted value of the expected costs to be paid when the assets are
retired.  18 
   At December 31, 2003, we
had$31 million of accumulated reserve for these
activities. This accumulated reserve is comprised of approximately $12
million anticipated to be required for the decommissioning and site restoration
of plant sites that have been divested or are no longer in use and
approximately $19 million for currently operating plant
sites.  For currently operating plant
sites, we have undertaken an evaluation of the costs to conduct decommissioning
and site restoration required to satisfy our projected obligations under
applicable environmental requirements upon termination of operations at these
sites. CanadianGAAP requires that we record the present value of
inflation-adjusted decommissioning and site restoration costs as increases to
the carrying values of the assets and depreciate this amount over the estimated
remaining lives of the assets. We have determined a further $112
million, in todays dollars, may be required to decommission and restore
operating plant sites. This amount does not include any deduction for salvage
or land value that may be realized, however, these will be taken into
consideration as the assets are depreciated. Since these plants may be in
operation in excess of 40 years, significant uncertainty exists concerning the
nature of the decommissioning and site restoration activities that may be
required. Furthermore, significant judgment is involved in the estimation
process, since the value of salvage, degree of natural attenuation, evolution
of new technologies and potential future land uses may mitigate future
environmental liabilities and potential costs.  The amount of$112
million is approximately $225 million to $250 million after
adjusting for inflation as is required by Canadian GAAP. The present value of this future amount (using a credit-adjusted
risk-free rate of 10.5% to discount the estimated future cash flows) is
approximately $19 million, which has been accrued in
anticipation of these activities. This estimated liability of $19
million will increase, or accrete, each year 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 resulting expense is referred to as
accretion expense and is included in operating expenses.  Pensions. Canadian
GAAP requires that actuarial gains and losses be
recognized in our income using a systematic and consistent methodology. We have
chosen to amortize such gains and losses over the estimated remaining service
lifetime 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. We
chose this alternative because it avoids recognizing into income large
unrealized gains or losses in individual years. Immediate recognition of such
gains and losses would introduce significant volatility into our earnings.
Cumulative unrealized actuarial gains and losses have ranged from a $61
million gain at December 31, 1999, to a $118 million loss at
December 31, 2003.  We also make assumptions
concerning factors such as mortality, termination, retirement and other rates
as well as the expected return on plan assets, rate of increase in future
compensation and discount rate. These assumptions can impact our pension
obligations and pension expense. We use the latest published mortality rate
tables and select other assumptions in line with our actual experience, always
choosing the conservative end of the range. The expected return on plan assets
reflects our estimate of asset returns over the life of the pension plans, not
our actual return in any given year. Changes in these assumptions would need to
be dramatic to cause a material impact to our pension obligation or pension
expense amounts. For example, a 1% change in the expected return on plan assets
would only impact earnings by approximately$3
million after-tax, and a 1% change in our discount rate would impact earnings
by approximately $8 million after-tax.  We contributed$17
million to all of our defined benefit pension plans in 2003. The contributions
were based on the most recently filed valuations with pension regulators in
various countries. Funding for our pension plans is largely driven by the North
American pension plans, as they constitute the significant portion of our
pension plan assets and obligations. For 2004, funding is expected to rise to $27
million for all of our plans as employees accrue additional pension benefits
and special payments are made to cover the shortfall between assets and
liabilities. Further increases in contributions are anticipated in 2005, when
the next valuation is done on the Canadian defined benefit plan.  19 
    ACCOUNTING STANDARDS   Asset
Retirement Obligations.
In March 2003, the CICA issued new recommendations regarding
accounting for asset retirement obligations, which are effective for fiscal
years beginning on or after January 1, 2004. This standard harmonizes
Canadian GAAP with U.S. Financial Accounting
Standards Board Statement No. 143, Accounting for Asset Retirement
Obligations, which became effective January 1, 2003. We chose to adopt
the CICA recommendations early, effective
January 1, 2003, to be consistent with U.S. GAAP reporting.  The new standard changes the
method for recognition of obligations, or liabilities, associated with the
retirement of plant, property and equipment. The liabilities are initially
recorded at their estimated fair value, which is based on a discounted value of
the expected costs to be paid when the assets are retired. The amount is added
to the carrying values of the assets and depreciated over the estimated
remaining lives of the assets. The liability increases each period as the
amount of the discount decreases over time. The resulting expense is referred
to as accretion expense and is included in operating expenses. The liability
and associated capital assets are also adjusted for any changes in the
estimated amount or timing of the underlying future cash flows. Previously,
asset retirement obligations were accrued over the estimated remaining useful
lives of the plants. See Note 20 to the consolidated financial statements for
further information.  Stock-Based
Compensation. In 2003, the Canadian Accounting Standards
Board (ASB) issued revisions to CICA Handbook Section 3870, Stock-Based Compensation. Public companies
will now be required to expense all stock-based compensation awards including
those made to employees, senior executives and board members effective
January 1, 2004. Prior to January 1, 2004, we utilized the
intrinsic-value method of accounting where compensation expense, if any, was
measured based on the excess of the market price of the stock over the options
exercise price on the date of grant. As options are generally granted at the
market price on the date of grant, no compensation cost resulted. We will
change our method of accounting for stock options to the fair-value based
method beginning January 1, 2004 on a retroactive basis with no
restatement of prior periods. We have provided disclosures of what net income
(loss) would have been had we followed the fair-value method in 2001 to 2003.
These disclosures are provided in Note 13 to the consolidated financial
statements.  Derivative
Instruments and Hedging Activities. In 2003, the ASB issued Accounting for Derivative Instruments and Hedging Activities (CICA Accounting Guideline 13) effective January 1, 2004. This statement
requires that all derivative instruments not used in qualifying hedging
activities must be recorded on the balance sheet at fair value and
marked-to-market through earnings. Certain derivative instruments commonly used
in NOVA Chemicals commodity risk management program
will not qualify for hedge accounting treatment and changes in their market
value will be reflected in earnings.    DISCLOSURE OF MARKET AND REGULATORY RISK   The Audit, Finance and Risk
Committee of our Board of Directors regularly reviews foreign exchange,
interest rate and commodity hedging activity and monitors compliance with our
hedging policy. Our policy prohibits the use of financial instruments for
speculative purposes and limits hedging activity to the underlying net economic
exposure.  Foreign
Exchange Hedging. We conduct business in various countries where
certain revenues and expenses are determined in currencies other than the U.S. dollar. Our earnings exposure to the Canadian dollar was hedged, through
March 2003, with forward contracts to fix the exchange rate. The Canadian
dollar averaged 0.65¢ per U.S. dollar during the first quarter of 2003, which
was lower than the fixed rates in the forward contracts. As a result, after-tax
earnings in 2003 was $3 million lower than it would have otherwise
been.  We have not hedged our
exposure to fluctuations in the Canadian dollar since March 2003 nor have
we hedged fluctuations in any other currency.  20 
   Commodity
Hedging and Feedstock Acquisition. We manage our exposure to
fluctuating commodity prices on our physical feedstock requirements by varying
our mix of fixed and floating price contracts and by entering into commodity
futures contracts, swaps and options. The extent to which hedging instruments
are used depends on market conditions and requires adherence to our hedging
policy. We also limit our positions in futures markets to our feedstock
requirements and do not use hedging instruments for speculative purposes.  Our feedstock acquisition
team manages our exposure in the volatile natural gas and crude markets in an
effort to moderate the risks of fluctuations in feedstock prices and to reduce
overall feedstock costs. As a result of our hedging activities, after-tax
earnings in 2003 decreased by$5 million compared to an
increase of $9 million in 2002. On December 31, 2003,
the unrecognized after-tax, mark-to-market value of all outstanding commodity
positions was a net gain of $4 million ($3 million after-tax)
which includes $12 million ($8 million after-tax)
related to certain liquidated natural gas and crude positions. Liquidated gains
are recognized in earnings over the remaining terms of the related feedstock
purchase commitments to March 2005.  Interest
Rate Hedging. We use interest rate swaps to manage our mix
between fixed and floating interest rate exposure. In October and
November of 2003, we entered into floating-for-fixed interest rate swap
transactions on $550 million of Medium-Term Notes. As a result,
at December 31, 2003, 48% of our debt had fixed interest rates averaging
7.5% and 52% of our debt had floating interest rates averaging 4.8%. These
positions had an estimated fair-market value of $4 million at
December 31, 2003.  Credit Risk
Management. We are exposed to credit risk on financial
instruments given the possibility a counterparty to an instrument in which we
are entitled to receive payment of an unrealized gain fails to perform. NOVA Chemicals has established a limit on contingent exposure for each
counterparty, based on the counterpartys credit rating. Credit exposure is
managed through credit approval and monitoring procedures.  Concentration of credit risk
can result primarily from our receivables, as certain customer groups are
located in the same geographic area and operate in the same industry. We manage
our credit risk relating to these receivables through credit approval and
monitoring procedures. For further details on our hedging activities, please
see Note 23 to the consolidated financial statements.   SUMMARIZED
QUARTERLY FINANCIAL INFORMATION   THREE MONTHS ENDED(UNAUDITED; MILLIONS
  OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
  
  2003
  
  2002MAR 31
  
  JUNE 30
  
  SEPT 30
  
  DEC 31
  
  MAR 31
  
  JUNE 30
  
  SEPT 30
  
  DEC 31Revenue
  
  $
  977
  
  964
  
  967
  
  1,041
  
  $
  662
  
  777
  
  806
  
  846Operating income (loss)
  
  $
  14
  
  (36
  )
  (56
  )
  3
  
  $
  (53
  )
  1
  
  (1
  )
  (18
  )Net income (loss)
  
  $
  12
  
  82
  
  (58
  )
  (8
  )
  $
  (23
  )
  (14
  )
  (5
  )
  (39
  )Net income (loss) per share Basic
  
  $
  0.05
  
  0.86
  
  (0.75
  )
  (0.18
  )
  $
  (0.35
  )
  (0.25
  )
  (0.14
  )
  (0.56
  ) Diluted
  
  $
  0.05
  
  0.79
  
  (0.75
  )
  (0.18
  )
  $
  (0.35
  )
  (0.25
  )
  (0.14
  )
  (0.56
  )Weighted-average common
  shares outstanding (millions) Basic
  
  86.7
  
  86.8
  
  86.8
  
  87.0
  
  86.0
  
  86.3
  
  86.4
  
  86.5 Diluted
  
  87.4
  
  96.0
  
  86.8
  
  87.0
  
  86.0
  
  86.3
  
  86.4
  
  86.5  21