Exhibit 99.3  Disclosure Regarding Forward-Looking
Statements   This Annual Report contains forward-looking statements
with respect to NOVA Chemicals. By their nature, forward-looking statements
require us to make assumptions and are subject to inherent risks and
uncertainties. There is significant risk that predictions, forecasts,
conclusions and projections will not prove to be accurate, that our assumptions
may not be correct and that actual results may differ materially from such
predictions, forecasts, conclusions or projections. Forward-looking statements
for the time periods beyond 2007 involve longer-term assumptions and estimates
than forward-looking statements for 2007 and are consequently subject to
greater uncertainty. We advise readers of this Annual Report not to place undue
reliance on our forward-looking statements as a number of factors could cause
actual results, conditions, actions or events to differ materially from the
targets, expectations, estimates or intentions expressed in the forward-looking
statements.  The words believe, expect, plan, intend, estimate,
or anticipate and similar expressions, as well as future or conditional verbs
such as will, should, would, and could often identify forward-looking
statements. Specific forward-looking statements contained in this Annual Report
include, among others, statements regarding: our expected financial performance
in future periods; our cost savings and potential benefits related to the 2006
restructuring and other cost-reduction initiatives and NOVA Innovene s restructuring;
savings related to the expiration of styrene monomer contracts; our
expectations regarding the strategic options available to us relating to our
non-core STYRENIX business unit; our expectations regarding future improvements
in underlying EBITDA from our Olefins/Polyolefins and Performance Styrenics
businesses due to our Performance Products; forecast growth in North American
and global Gross Domestic Product rates; NOVA Chemicals expectations of favorable
market conditions in the future and our ability to benefit from those
conditions; our expectations of the supply/demand balance and global and North
American operating capacity and rates in future periods; changes in the demand
for our products; expected sales volume and revenue growth of our standard and
Performance Products; how changes in various factors could affect NOVA
Chemicals profitability; our expectations for new end-use applications for our
products; changes in our historical average cost advantage for ethylene
produced at our Joffre, Alberta site and our ability to maintain our Alberta
Advantage at the historical average over the long-term; changes in pricing
policies by us or our competitors; our competitive advantages, including our
belief that our Performance Products will generate higher, more sustainable
margins and enhanced earnings stability throughout the chemical cycle; our
ability to compete successfully; our plans to increase our production capacity,
including our capacity to manufacture Performance Products; our beliefs
concerning capturing value from our downstream business ventures and licensing
opportunities; the impact of Canadian tax rate and public policy actions on our
business; our belief that our reserves are adequate to cover any outstanding
claims; our estimates for capital expenditures and funding for pension benefits
for 2007; changes in the costs of energy and raw materials; our methods of
raising capital; our level of debt; our intended quarterly dividend; and general
economic conditions.  With respect to forward-looking statements contained in
this Annual Report, we have made assumptions regarding, among other things:
future crude oil, natural gas, natural gas liquids and benzene prices; our
ability to obtain raw materials; our ability to market products successfully to
our anticipated customers; our ability to obtain financing on acceptable terms;
and the impact of increasing competition. Some of our assumptions are based
upon internal estimates and analyses of current market conditions and trends,
management plans and strategies, economic conditions and other factors and are
necessarily subject to risks and uncertainties inherent in projecting future
conditions and results.  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, including customer acceptance of our
Performance Products; changes in, or the introduction of new laws or
regulations relating to our business, including environmental, competition and
employment laws; loss of the services of any of our executive officers;
uncertainties associated with the North American, South American, European, and
Asian economies; terrorist attacks; severe weather events; and other risks detailed
from time to time in the publicly filed disclosure documents and securities
commission reports of NOVA Chemicals.  NOVA Chemicals forward-looking statements are
expressly qualified in their entirety by this cautionary statement. In
addition, the forward-looking statements are made only as of the date of this
Annual Report. We undertake no obligation to publicly update these
forward-looking statements to reflect new information, subsequent events or
otherwise, except as required by applicable law.  2006 Financial Review Table of Contents  30
  Managements
  Discussion & Analysis
  72
  Consolidated Six-Year Review
  80
  Notes to Consolidated Financial Statements
  115
  Trademark Information73
  Consolidated Financial Statements
  
  116
  Investor Information


Managements
Discussion & Analysis  The following discussion and analysis should be read in
conjunction with information contained in the Consolidated Financial Statements
and the notes thereto starting on page 73. This Managements Discussion and
Analysis is based upon financial statements prepared in accordance with
Canadian Generally Accepted Accounting Principles (GAAP). These accounting
principles are different in some respects from those generally accepted in the
United States, and the significant differences are described in Note 23 to the
Consolidated Financial Statements. References may be made to several non-GAAP
measures throughout this Managements Discussion and Analysis. These measures
are discussed in Supplemental Measures on page 62. This Managements Discussion
and Analysis is the responsibility of management. The Board of Directors
carries out its responsibility for review of this disclosure principally
through its Audit, Finance and Risk Committee comprised exclusively of
independent directors. The Audit, Finance and Risk Committee reviews this
disclosure and recommends its approval by the Board of Directors. This
Managements Discussion and Analysis was prepared as of Feb. 8, 2007.  All references in this Annual Report, including the
Managements Discussion and Analysis, to NOVA Chemicals, the Company, we,
us and similar terms refer to NOVA Chemicals Corporation alone or together
with its consolidated subsidiaries and affiliates, depending on the context in
which such terms are used. All amounts are presented in U.S. dollars unless
otherwise noted.  Plastics and Chemicals NOVA Chemicals is a plastics
and chemical company that operates three business units:  Core Business Units 1.The Olefins/Polyolefinsbusiness unit manufactures and sells ethylene, co-products, and
polyethylene (PE) resins .  2.The Performance
Styrenicsbusiness unit manufactures and sells expandable
polystyrene (EPS) and higher-value styrenic Performance Products. This business
unit also has interests in joint ventures and downstream business developments
for end-use consumer and industrial applications.  Non-Core Business Unit 3.The STYRENIXbusiness unit manufactures and sells styrene monomer and solid
polystyrene (SPS). This business unit also holds NOVA Chemicals interest in
NOVA Innovene, the 50:50 European styrenic polymer joint venture with INEOS.  NOVA Chemicals products are
used in a wide variety of applications, including rigid and flexible packaging,
industrial materials, electronics packaging, appliances and a variety of
consumer goods.  In addition to producing
standard, commodity plastic resins (standard products), NOVA Chemicals
Olefins/Polyolefins and Performance Styrenics business units have developed a
range of Performance Products. These products have unique physical-property attributes
that deliver higher value to customers, and therefore can earn a margin premium
over standard products.  By its nature, profitability
in the chemical industry is cyclical. NOVA Chemicals low-cost position
provides for earnings leverage during the peak of the commodity business cycle,
while Performance Products deliver the prospect of enhanced earnings stability throughout
the entire cycle.  Restructuring and Cost Reduction On June 26, 2006, NOVA Chemicals
announced it would restructure its business in order to better align resources
and reduce costs. The Company created a new business unit, STYRENIX, which
includes its styrene monomer and SPS assets and its interest in NOVA Innovene,
the 50:50 European joint venture with INEOS. STYRENIX is not part of NOVA
Chemicals core business. The restructuring allows NOVA Chemicals to operate
its core businesses  Olefins/Polyolefins and Performance Styrenics  more
efficiently and focus on its advantaged feedstock and manufacturing positions
and its differentiated technologies.  30   Managements Discussion & Analysis


The Company set a
cost-reduction target of $125 million per year to be achieved by the end of
2007. The total cost savings will be achieved by a combination of workforce
reductions, the closure of the Chesapeake, Virginia SPS facility, the
expiration of longterm styrene monomer contracts, and synergies related to the
NOVA Innovene joint venture. NOVA Chemicals has already taken actions to
achieve cost savings of $ 1 2 7 million in 2007. In total, the Company expects
to save $140 million annually commencing in 2008. The table below summarizes
the expected cost savings.  Expected Annual Savings(millions of U.S. dollars per year)
  
  2007
  
  2008STYRENIX  North American restructuring
  
  $
  12
  
  $
  12NOVA Innovene improvements (NOVA Chemicals
  share)
  
  37
  
  41Styrene Monomer contract expiration
  
  22
  
  30Total STYRENIX
  
  $
  71
  
  $
  83Other company-wide cost savings
  
  56
  
  57Total
  
  $
  127
  
  $
  140  Reportable Segments Based on the results of a
routine, periodic review of NOVA Chemicals financial statements by the U.S.
Securities and Exchange Commission (SEC), NOVA Chemicals has increased the
number of reportable business segments from three to seven.  These new reporting segments
have been grouped according to NOVA Chemicals business structure:  Olefins/Polyolefins
  
  Performance
  Styrenics
  
  STYRENIXJoffre Olefins
  
  Performance Styrenics
  
  Styrene MonomerCorunna Olefins
  
  
  
  North American Solid PolystyrenePolyethylene
  
  
  
  NOVA
  Innovene European Joint Venture  This change increases the
amount of detail disclosed but does not impact the operation of the business
units or the previously reported financial position, results of operations or
cash flows. Current and future financial reports will reflect this reporting
structure. Prior periods have been restated accordingly.  Key Drivers of Financial Performance NOVA Chemicals earnings and
cash flow are primarily influenced by the margins earned on the products it
manufactures. Margin, on a unit basis, is defined as the difference between the
selling price of products and the direct cost to produce and distribute them.
Margins are impacted by changes in the supply/demand balance, which drive the
relationship between production cost, selling price, and sales volume.  Supply/Demand Balance The supply/demand balance for
NOVA Chemicals products is best represented by industry operating rates. Peak
conditions occur when operating rates are high. During peak conditions, prices
and margins tend to increase rapidly as customers attempt to secure scarce
supply to meet their production needs. Conversely, trough conditions exist when
there is ample supply and operating rates are low. Margins tend to decrease in
trough conditions.  Product supply in the
chemical industry is primarily determined by the size and availability of
manufacturing capacity. New capacity is typically added in large increments and
generally requires significant capital as well as lead-time of four to six
years to complete.  Demand is driven by economic
growth and is principally related to Gross Domestic Product (GDP). Market
demand for polyethylene and polystyrene typically has grown at multiples of one
to two times GDP, depending on the region of the world. Sustained industry operating
rates in excess of 90% for polyethylene and 92% for styrene monomer typically
represent peak conditions that enable margin expansion for the industry and
NOVA Chemicals.  In North America, Europe and
Latin America, relatively little new capacity has been added in recent years, or
is expected in the short- to medium-term. New capacity is primarily being added
in the Middle East and Asia to meet growing demand for petrochemicals and
plastics in developing nations such as China and India, as well as other
Southeast Asian countries and South America.  Managements Discussion & Analysis   31


Despite these capacity
additions, NOVA Chemicals expects the supply/demand balance to remain
relatively tight as the Chinese and Indian economies continue to register near
double-digit growth rates for plastics and chemicals  and the economies of
North America and Europe continue to grow at historical rates. In addition,
some of these planned capacity expansions  particularly in the Middle East 
are experiencing construction delays or cancellations due to shortages of
skilled labor, increased lead times for fabricated components, and increased
costs.  Global economic conditions
are forecast to remain relatively healthy during the next five years. Economic
consultant Global Insightforecasts
average GDP growth rates of approximately 3% in North America and 3.5% globally
during this period. Due to the combination of solid GDP growth, global new
capacity delays, and little new domestic capacity, NOVA Chemicals expects both
global and North American polyethylene operating rates to remain at peak levels
through at least 2008.  Figure 1. Global Polyethylene Operating Rates    Source: Global Insight, NEXANT Chemsystems, Chemical
Market Associates, Inc. and NOVA Chemicals.  Price Pricing for NOVA Chemicals
polymer products is based on the amount its customers are willing to pay for
these products relative to the prices of competing products. Competing products
include other polymers or other materials such as paper or metal. Prices can
change quickly as a result of fluctuations in supply/demand balances and
feedstock costs.  While feedstock costs heavily
influence the price of NOVA Chemicals products, the supply/demand balance
drives margin and profitability.  Volume Sales volumes for plastics
and chemical products are most heavily influenced by economic growth, a key
driver of demand. Sales volumes may also be influenced by short-term changes in
customer buying patterns, which are driven primarily by expectations of price
volatility. Anticipation of higher prices or limited product availability may
motivate customers to purchase beyond short-term needs and build inventories.
Conversely, expectations of lower prices may motivate customers to delay
purchases and consume inventories. While these short-term buying patterns may
create quarterly earnings volatility for chemical producers, they are not necessarily
representative of longer-term profitability.  NOVA Chemicals market share
is a result of the price, quality, performance properties, and terms of sale of
its products versus those of competitors.  32   Managements Discussion & Analysis


Cost Variable feedstock costs are
the single largest component of NOVA Chemicals costs and account for 60-80% of
the total cost of its products. NOVA Chemicals primary feedstocks include
ethane, propane, butane, crude oil and benzene. Feedstock costs heavily
influence the price of NOVA Chemicals products and, in recent years, feedstock
cost volatility has often led to rapid changes in product prices.  Fixed costs, which are costs
that do not vary with production, consist of plant operating and distribution
costs; selling, general and administrative costs (SG&A); and research and
development costs (R&D). SG&A costs represent all direct and most
indirect expenses incurred in directing and managing the Company. R&D costs
relate to technical activities that support the development and
commercialization of new products, technologies and applications.  The following table
illustrates how changes in various factors could affect NOVA Chemicals
profitability, assuming all other factors a re held constant. Changes in the
opposite direction would have the opposite effect.  Potential Impact to NOVA Chemicals
Profitability of: (billions of pounds)
  
  (millions of U.S. $)Annual
  
  Annual
  
  AnnualAnnual
  
  Before-Tax
  
  After-Tax
  
  EarningsProduction
  
  Income
  
  Income
  
  Per Share(as of December 31, 2006)
  
  Capacity
  (1)
  Increase
  
  Increase
  (2)
  Increase
  (3)Increase of U.S. 1¢ per pound in profit
  marginEthylene(4)
  
  5.0
  
  $
  50
  
  $
  34
  
  $
  0.41Polyethylene
  
  3.5
  
  35
  
  23
  
  0.28Styrene monomer(5)
  
  3.3
  
  33
  
  22
  
  0.27Styrenic polymers  North America(6)
  
  1.5
  
  15
  
  10
  
  0.12Styrenic polymers  Europe(7)
  
  1.0
  
  10
  
  7
  
  0.08Decrease in natural gas cost by U.S. 10¢
  per mmBTU(8)
  
  
  
  12
  
  8
  
  0.10Decrease in benzene cost by U.S. 5¢ per
  gallon
  
  
  
  18
  
  12
  
  0.15Decrease in Canadian dollar of 1¢ vs. U.S.
  dollar
  
  
  
  11
  
  7
  
  0.08 (1)Estimate based on current production
capacity assuming 100% utilization.  (2)Based on an assumed tax rate of 33%.  (3)Based on 82.6 million shares.  (4)Represents NOVA Chemicals ethylene
capacity of 6.65 billion pounds per year, less the 1.6 billion pounds ethylene
capacity that is subject to toll and margin-sharing agreements.  (5)Includes up to 500 million pounds of
long-term purchase agreements.  (6)Includes SPS and EPS, excludes Performance
Products.  (7)Represents NOVA Chemicals 50% share of
NOVA Innovene production.  (8)Natural gas cost includes gas purchased
for ethane extraction and gas consumed as fuel at production sites.  Managements Discussion & Analysis   33


2006
Financial Overview NOVA
Chemicals Highlights (millions of U.S. dollars, except per share amounts and where noted)
  
  2006
  
  
  2005
  (1)
  2004
  (1)Total assets
  
  $
  4,155
  
  
  $
  5,217
  
  $
  5,047Total long-term liabilities
  
  $
  2,420
  
  
  $
  2,726
  
  $
  2,673Total revenue
  
  $
  6,519
  
  
  $
  5,616
  
  $
  5,270Net income (loss)Olefins/PolyolefinsJoffre Olefins
  
  $
  324
  
  
  $
  154
  
  $
  132Corunna Olefins
  
  25
  
  
  2
  
  56Polyethylene
  
  32
  
  
  71
  
  67Eliminations
  
  (2
  )
  
  9
  
  (7
  )Total Olefins/Polyolefins
  
  379
  
  
  236
  
  248Performance Styrenics
  
  (29
  )
  
  (14
  )
  (6
  )STYRENIXStyrene Monomer
  
  (61
  )
  
  (81
  )
  (12
  )North American Solid Polystyrene
  
  (44
  )
  
  (33
  )
  (16
  )NOVA Innovene
  European Joint Venture
  
  (47
  )
  
  (92
  )
  (44
  )Eliminations
  
  
  
  
  
  
  6Total STYRENIX
  
  (152
  )
  
  (206
  )
  (66
  )Corporate and Other Items
  
  (901
  )
  
  (117
  )
  77Net income (loss)
  
  $
  (703
  )
  
  $
  (101
  )
  $
  253Net income (loss) per common shareBasic
  
  $
  (8.52
  )
  
  $
  (1.22
  )
  $
  2.92Diluted
  
  $
  (8.52
  )
  
  $
  (1.22
  )
  $
  2.72Dividends per share (in Canadian dollars)
  
  $
  0.40
  
  
  $
  0.40
  
  $
  0.40Weighted-average common shares outstanding
  (millions)Basic
  
  83
  
  
  83
  
  87Diluted
  
  83
  
  
  83
  
  95 (1)Restated  see Note 2 to the Consolidated
Financial Statements.  Changes in
NOVA Chemicals Net Income (Loss)  (millions
  of U.S. dollars)
  
  
  
  2006 vs. 2005
  
  
  2005 vs. 2004
  (1)Higher net unit margin
  
  
  
  $
  60
  
  
  $
  11Higher (lower) sales volumes
  
  
  
  86
  
  
  (193
  )Higher (lower) operating margin(2)
  
  
  
  146
  
  
  (182
  )(Higher) lower SG&A and R&D
  
  
  
  (3
  )
  
  73Higher restructuring charges
  
  
  
  (817
  )
  
  (160
  )(Higher) lower depreciation and
  amortization
  
  
  
  (9
  )
  
  7Higher interest expense
  
  
  
  (55
  )
  
  (5
  )Lower income tax expense
  
  
  
  143
  
  
  82Lower other gains
  
  
  
  (7
  )
  
  (169
  )Decrease in net income
  
  
  
  $
  (602
  )
  
  $
  (354
  ) (1)Restated  see Note 2 to the Consolidated
Financial Statements.  (2)Operating margin equals revenue less
feedstock and operating costs.  34   Managements Discussion & Analysis


Consolidated Financial Results of
Operations 2006 versus 2005 Net Loss.During 2006, NOVA Chemicals reported a net
loss of $703 million, or $8.52 per share loss, compared to a net loss of $101
million, or $1.22 per share loss, in 2005. NOVA Chemicals results in 2006 were
negatively impacted by a number of unusual events totaling $847 million after-
tax.  Unusual Events in 2006
  
  Estimated after-tax impact (in millions)STYRENIX non-cash asset write-down
  
  $
  (772
  )Carrington, UK, plant closure
  
  (46
  )North American restructuring
  
  (33
  )Corunna facility start-up delay
  
  (25
  )Mutual insurance company wind-up costs
  
  (13
  )Chesapeake, Virginia, site closure accrual
  
  (10
  )Corunna facility outage (June)
  
  (8
  )Canadian tax-rate reduction benefit
  
  60Impact to 2006
  
  $
  (847
  )  Revenue.Revenue increased $903 million, or 16%, from
$5,616 million in 2005 to $6,519 million in 2006. The increase was primarily due
to higher sales volumes due to improved operations at the Companys
manufacturing sites in 2006, as well as higher product selling prices. In 2005,
a series of planned and unplanned outages of the Joffre and Corunna ethylene
and polyethylene assets limited production. In addition, weighted-average
benchmark prices for NOVA Chemicals products increased in 2006.  Feedstock
and Operating Costs.Feedstock
and operating costs increased $757 million, or 15%, from $4,906 million in 2005
to $5,663 million in 2006. The increase was primarily attributed to higher
feedstock consumption, driven by increased production at NOVA Chemicals
plants. In addition, higher crude oil and benzene prices increased the Companys
total feedstock costs in 2006.  Depreciation
and Amortization.Depreciation
and amortization expense increased $9 million, or 3%, from $290 million in 2005
to $299 million in 2006. Expenses were higher in 2006 as the Company began to
depreciate new assets installed as part of the Corunna ethylene flexi-cracker
and Bayport, Texas styrene monomer modernization projects. Expenses were also
higher in 2006 as the Company began to amortize the costs of the Corunna
maintenance turnaround that occurred in late 2005.  Selling,
General and Administrative.SG&A
costs increased $2 million, or 1%, from $199 million in 2005 to $201 million in
2006. Costs were lower in 2005 due to a favorable mark-to-market impact related
to stock-based compensation plans. The hedging of this exposure in November 2005
has mitigated this impact. Despite higher expenses in 2006, the Company
realized savings in the fourth quarter related to its restructuring and
cost-reduction efforts.  Research
and Development.R&D
costs increased $1 million, or 2%, from $50 million in 2005 to $51 million in
2006. The increase was primarily related to ongoing development of Performance
Products.  Restructuring
Charges.Restructuring
charges were $985 million before-tax in 2006, up from $168 million before-tax
in 2005. The charges in 2006 were related to the write-down of STYRENIX assets;
the North American restructuring announced on June 26; costs related to the
shutdown of the Carrington, UK SPS facility; and severance costs related to the
Chesapeake, Virginia SPS facility closure. Refer to Note 14 on page 96 for
details related to NOVA Chemicals restructuring charges.  Interest
Expense (Net).Net
interest expense increased $55 million, or 49%, from $113 million in 2005 to
$168 million in 2006. Interest expense was higher in 2006 than 2005 due to
higher average debt levels and higher interest rates.  Other
Gains.Other gains
decreased $7 million, or 88%, from $8 million in 2005 to $1 million in 2006.
The 2005 gains primarily relate to a tax settlement with the U.S. Internal
Revenue Service.  Income
Tax Recovery.Income
tax recovery increased $143 million from a $1 million recovery in 2005 to a
$144 million recovery in 2006. This increased recovery is largely the result of
the tax recovery related to the write-down of STYRENIX assets in 2006.  Managements Discussion
& Analysis   35


2005 versus 2004 Net
Income (Loss).During
2005, NOVA Chemicals reported a net loss of $101 million, or $1.22 per share
loss, compared to net income of $253 million, or $2.72 per share diluted, in
2004. NOVA Chemicals results in 2005 were negatively impacted by a series of
unusual events that totaled $240 million after-tax.  Unusual Events in 2005
  
  Estimated after-tax impact (in millions)NOVA Innovene joint venture plant closures
  and severance costs
  
  $
  (79
  )Delayed Corunna start-up
  
  (55
  )Non-cash write-down of Chesapeake, VA
  facility
  
  (46
  )Joffre ethane interruption
  
  (24
  )Power outage at Corunna
  
  (21
  )Insurance accrual
  
  (15
  )Impact to 2005
  
  $
  (240
  )  Revenue.Revenue increased $346 million, or 7%, from
$5,270 million in 2004 to $5,616 million in 2005. The increase was principally due
to higher selling prices. Weighted-average benchmark prices for NOVA Chemicals
polymers increased throughout 2005. Total sales volumes in polyethylene and
styrenic polymers declined due to scheduled maintenance turn a rounds,
unplanned outages and lower demand for styrenic polymers.  Feedstock
and Operating Costs.Feedstock
and operating costs increased $528 million, or 12%, from $4,378 million in 2004
to $4,906 million in 2005. The increase was primarily attributed to rising
feedstock costs. Prices of West Texas Intermediate (WTI) crude oil and natural
gas increased 37% and 40%, respectively, from 2004 to 2005. From 2004 to 2005,
average annual benzene prices remained relatively flat and ethylene prices
increased 29%.  Depreciation
and Amortization.Depreciation
and amortization expense decreased $7 million, or 2%, from $297 million in 2004
to $290 million in 2005, principally because NOVA Chemicals second ethylene
cracker at Joffre, Alberta was fully depreciated during the second quarter of
2004.  Selling,
General and Administrative.SG&A
costs decreased $75 million, or 27%, from $274 million in 2004 to $199 million
in 2005. The decrease in SG&A costs was primarily attributed to a reduction
in stock-based compensation expenses due to a decrease in NOVA Chemicals
common stock price. In November 2005, NOVA Chemicals hedged this mark-to-market
exposure to mitigate the impact going forward. This reduction was partially
offset by a non-cash expense of $22 million ($15 million after-tax) related to
its share of estimated incremental costs in the insurance pools in which it
participated, and a $14 million increase in insurance premiums due to losses
sustained by the insurance industry.  Research
and Development.R&D
costs increased $2 million, or 4%, from $48 million in 2004 to $50 million in
2005. This increase was primarily attributed to ongoing development of
Performance Products.  Restructuring
Charges.Restructuring charges
in 2005 were $168 million, primarily the result of a decision by NOVA Innovene
to cease EPS production at its Berre, France facility and permanently shut down
its SPS plant at Carrington, UK; and a decision by NOVA Chemicals to
permanently close the Chesapeake, Virginia SPS plant. Restructuring charges
incurred in 2004 were $8 million.  Interest
Expense (Net).Net
interest expense in 2005 increased to $113 million, compared to $108 million in
2004. NOVA Chemicals issued $400 million of senior notes in October 2005 that
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 primarily related to a tax
settlement. Gains were $177 million in 2004, related to 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 gain of $122 million.  Income
Tax Recovery (Expense).Income
tax expense decreased $82 million from an $81 million expense in 2004 to a
$1 million recovery in 2005. This decrease in income tax expense was
primarily attributed to a decrease in earnings.  36   Managements Discussion & Analysis


Olefins/Polyolefins Business Unit The Olefins/Polyolefins
business unit manufactures and sells ethylene, co-products, and polyethylene
resins and contains three reportable segments:  1)Joffre Olefins, which produces and sells ethylene and
includes the Joffre, Alberta sites three ethylene crackers.  2)CorunnaOlefins, which produces and sells ethylene and
co-products and includes the Corunna, Ontario ethylene flexi-cracker.  3)Polyethylene, which produces and sells PE and includes
both the Alberta- and Ontario-based PE assets. In addition, the Polyethylene
segment licenses its proprietary process technology and catalysts.  Market Overview Ethylene.Ethylene is the most
widely produced petrochemical in the world and is the primary feedstock used in
the production of polyethylene. It is a key building block for a variety of
polymers and other chemicals used to manufacture products such as packaging,
containers, films and construction products. Ethylene is primarily transported
via pipeline and is regionally traded. Ethylene margins typically reach peak
conditions when operating rates are at or above 90% of nameplate capacity.  Polyethylene.Polyethylene (PE) is used to produce consumer
end-use applications, such as packaging film, plastic bags, toys and bottles
and is the most widely used plastic material in the world. Industrial
applications include storage drums, industrial wrap, retail packaging, and
building products. PE is a globally traded commodity with established merchant
markets. PE margins typically reach peak conditions when operating rates exceed
90% of nameplate capacity.  Co-products.Co-products are produced in the ethylene
manufacturing process and can be grouped into two categories: chemical co-products
and energy co-products. Chemical co-products include propylene, benzene, and
butadiene  building blocks that are used to make items such as tires, carpet
and clothing fibers, or household goods. Energy co-products include gasoline
additives and fuel oil. The profitability of co-products depends on energy
prices and the supply/demand balance for each co-product. Feedstock mix
determines the type and volume of co-products manufactured.  Business Overview NOVA Chemicals
largest-volume product is ethylene, which is central to the production of both
PE and styrene monomer. NOVA Chemicals produces ethylene and co-products at its
Joffre, Alberta and Corunna, Ontario manufacturing complexes, which are large,
energy efficient, and among the lowest-cost in the world.  Joffre
Olefins.The Joffre Olefins
segment produces and sells ethylene and includes three world-scale ethylene
crackers in Joffre, Alberta, where NOVA Chemicals owns and operates the largest
ethylene and polyethylene complex in the world. Total ethylene production
capacity at the Joffre site is 6.2 billion pounds per year. Excluding Dows 50%
interest in the Ethylene 3 (E3) cracker, NOVA Chemicals share of production
from the Joffre crackers is 4.8 billion pounds per year, representing
approximately 75% of the Companys total ethylene production. Approximately 43%
of NOVA Chemicals ethylene production at Joffre supports PE production, while
the remainder is sold to third parties.  The ethylene crackers at
Joffre use ethane as their primary feedstock. Ethane is extracted from natural
gas by third-party extraction plant operators and delivered to the site via
pipeline. Unlike its U.S. Gulf Coast (USGC) peers that pay market prices for
ethane, NOVA Chemicals pays only for the heating value of ethane plus a fee for
extraction and delivery. The Company also directly purchases ethane. The
majority of ethane used at the Joffre site is extracted and delivered under
medium- to long-term contracts. In addition to using ethane, NOVA Chemicals has
the flexibility to use propane to meet a portion of its feedstock requirements.
Propane is delivered to Joffre via pipeline and is used when the economics are
favorable.  The Joffre site benefits from
Albertas historically lower-cost natural gas prices, large-scale ethane
extraction plants and efficient natural gas infrastructure. In addition, the
Joffre site has the lowest cost of production in North America due to the
facilitys scale and energy efficiency. Collectively referred to as the Alberta
Advantage, the combination of these factors has yielded an average cash-cost
advantage for the past three years of 8¢ per pound of ethylene versus a typical
USGC ethylene cracker. As a result of this strengthened advantage in recent
years, the long-term historical Alberta Advantage has increased to 7¢ per
pound.  Managements Discussion & Analysis   37


In 2006, NOVA Chemicals
realized an average cash-cost advantage of 11¢ per pound of ethylene, the
highest in company history. The Alberta Advantage reached record levels in 2006
as strong demand for ethane on the USGC, coupled with high energy prices, pushed
USGC ethane prices to near record levels. In comparison, Alberta ethane prices,
which closely track natural gas prices, remained stable for most of the year.
After reaching an all-time high of 17¢ per pound in the third quarter, the
Alberta Advantage moderated to 7¢ per pound in the fourth quarter as USGC
ethane demand fell and ethane costs in Alberta rose due to higher natural gas
prices.  While this ethylene advantage
will continue to fluctuate from year to year, NOVA Chemicals expects that the
structural advantages associated with lower-cost natural gas in Alberta and the
efficiency gained from its large-scale Joff re facility will enable the Company
to maintain its Alberta Advantage at the average of 7¢ per pound for the
long-term.    Source: NOVA Chemicals  Corunna
Olefins.The Corunna Olefins
segment produces and sells ethylene, as well as co-products that result from
the manufacture of ethylene and processing of crude oil and other feedstocks.
This segment includes the Corunna ethylene flexi-cracker, which will have
annual production capacity of 1.85 billion pounds of ethylene and 4.7 billion
pounds of co-products following completion of an expansion and modernization
project early in 2007. NOVA Chemicals PE and styrene monomer assets in Sarnia,
Ontario consume most of Corunnas ethylene production.  The Corunna facility has a
number of advantages that allow NOVA Chemicals to enhance its profitability.
The facilitys location in the Sarnia, Ontario region gives it access to a
large variety of feedstocks from both local and global sources. For example,
Corunna can access NGLs such as ethane, propane, and butane from local
producers, Western Canada, or the United States. The Corunna facility can also
access crude oil and condensates from North American sources as well as from
overseas locations via marine transportation and pipelines.  Corunnas manufacturing
assets have the flexibility to process a large range of feedstocks and produce
diverse chemical and energy co-products. The facility quickly adjusts its
feedstock slate between crude oil, crude oil derivatives, and NGLs to maximize
margins as market conditions fluctuate. Corunnas crude oil processing unit
allows NOVA Chemicals, unlike most of its peers, to purchase crude oil and
produce its own naphtha when it is economically favorable to do so  while most
producers must purchase this feedstock. Finally, Corunnas location in the
heart of major markets for both the U.S. and Canada greatly reduces freight
costs as well as delivery times to customers.  38   Management's Discussion &
Analysis


In 2005, NOVA Chemicals
initiated a modernization and expansion project of the Corunna facility, which
will increase its annual ethylene and propylene production capacity by 250
million and 150 million pounds respectively, depending on feedstock mix, and
improve the energy efficiency of the olefins unit by up to 15%. In addition,
the project increased Corunnas feedstock flexibility. This expansion and
modernization project was substantially completed in 2006, with final upgrades
to be completed early in 2007.  Polyethylene.The Polyethylene segment produces and sells
standard polyethylene products including linear low-density polyethylene
(LLDPE), low-density polyethylene (LDPE), and high-density polyethylene (HDPE).
NOVA Chemicals also manufactures and sells higher value PE Performance Products
under the trade names SURPASS®and SCLAIR®, which are
manufactured using Advanced SCLAIRTECHTMtechnology. SURPASS resins
deliver a unique combination of properties not found in traditional PE resins
and are used in film applications such as frozen food packaging; injection
molding applications such as ice cream containers and packaging lids; and
rotational molding applications such as dumpsters and industrial storage
containers. SCLAIR resins are used in a variety of flexible packaging
applications.  NOVA Chemicals has
approximately 3.5 billion pounds of annual PE production capacity from its
Mooretown and St. Clair River sites in Ontario and its two units in Joffre,
Alberta, one of which  Polyethylene 2 (PE2)  utilizes Advanced SCLAIRTECHTMtechnology. NOVA Chemicals Polyethylene segment sells primarily into
North American markets. Approximately 10% to 15% of the Companys standard PE
volume is sold in China, other Asian countries, and Europe.  NOVA Chemicals is one of only
three polyethylene companies worldwide with independent, patented process and
catalyst technologies that enable the Company to produce differentiated PE
Performance Products. Made with patented Advanced SCLAIRTECH technology and
proprietary single-site catalysts, NOVA Chemicals PE Performance Products
deliver enhanced value to customers and therefore are expected to generate
higher, more sustainable margins throughout the chemical industry cycle.  In 2006, sales of PE products
made with Advanced SCLAIRTECH technology totaled 854 million pounds, or 100% of
the Joffre PE2 units capacity. Sales of Performance Products made from
Advanced SCLAIRTECH technology grew to 60% of plant capacity, up from 52% in
2005. New grades commercialized during the past two years accounted for 20% of
PE Performance Products sales in 2006.  During the year, NOVA
Chemicals resolved a quality problem that previously restricted the pace of
transition from standard PE products to Performance Products. This problem was
resolved and there are no longer production barriers associated with
tran-sitioning sales to PE Performance Products. NOVA Chemicals plans to
primarily sell PE Performance Product grades from the Joffre PE2 unit by the
end of 2008.  Figure 3. Advanced SCLAIRTECH Technology Polyethylene
Sales Volume(millions of
pounds)    Management's Discussion
& Analysis   39


Licensing.NOVA Chemicals licenses its proprietary
SCLAIRTECH technology and NOVACATTMfamily of catalysts. The Companys
SCLAIRTECH technology is now used in 11 licensed plants around the world. In
India, one of the fastest growing economies in the world, NOVA Chemicals
SCLAIRTECH technology is now used in nearly 40% of the countrys total
polyethylene production.  NOVACAT catalysts are a
series of advanced Ziegler-Natta catalysts designed specifically for gas-phase
PE reactors. NOVACAT catalysts are capable of producing butene and hexene LLDPE
with improved performance characteristics.  Olefins/Polyolefins Financial Highlights  (millions of U.S. dollars,
  except as noted)
  
  2006
  
  
  2005
  
  2004RevenueJoffre Olefins(1)
  
  $
  1,744
  
  
  $
  1,704
  
  $
  1,417Corunna Olefins(1)
  
  1,997
  
  
  1,430
  
  1,406Polyethylene(1)
  
  1,922
  
  
  1,628
  
  1,469Eliminations
  
  (1,382
  )
  
  (1,176
  )
  (1,062
  )$
  4,281
  
  
  $
  3,586
  
  $
  3,230EBITDA(2)Joffre Olefins
  
  $
  558
  
  
  $
  313
  
  $
  300Corunna Olefins
  
  83
  
  
  67
  
  142Polyethylene
  
  120
  
  
  202
  
  188Eliminations(3)
  
  (5
  )
  
  14
  
  (8
  )$
  756
  
  
  $
  596
  
  $
  622Operating
  income(4)Joffre Olefins
  
  $
  506
  
  
  $
  262
  
  $
  228Corunna Olefins
  
  24
  
  
  17
  
  93Polyethylene
  
  52
  
  
  137
  
  128Eliminations(3)
  
  (5
  )
  
  14
  
  (8
  )$
  577
  
  
  $
  430
  
  $
  441Net IncomeJoffre Olefins
  
  $
  324
  (6)
  
  $
  154
  
  $
  132Corunna Olefins
  
  25
  (6)
  
  2
  
  56Polyethylene
  
  32
  (6)
  
  71
  
  67Eliminations(3)
  
  (2
  )
  
  9
  
  (7
  )$
  379
  
  
  $
  236
  
  $
  248Sales Volumes
  (millions of pounds)Polyethylene(5)Standard Products
  
  2,726
  
  
  2,403
  
  2,996Performance Products
  
  513
  
  
  438
  
  2893,239
  
  
  2,841
  
  3,285  (1)
  Before inter-segment eliminations between the
  business units.(2)
  See Supplemental Measures on Page 62.(3)
  Represents inter-segment profit eliminations.(4)
  To conform with changes in internal segment analysis
  and reporting, beginning with the first quarter of 2007, NOVA Chemicals will
  no longer allocate interest, taxes or corporate charges to the business
  segments and accordingly will only report segment results down to the
  operating income (loss) line.(5)
  The Joffre site produces Standard Products as well as
  Performance Products, including SCLAIR and SURPASS resins that are produced
  using Advanced SCLAIRTECH technology. The other sites produce Standard
  Products.(6)
  One-third of $60 million benefit from Canadian
  tax-rate reductions was allocated to each reportable segment within the
  Olefins/Polyolefins business unit.  40   Management's Discussion &
Analysis


Olefins/Polyolefins Operating Highlights  2006
  
  
  Annual(U.S. dollars per pound, except
  where noted)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2006
  
  
  2005
  
  2004Benchmark
  Principal Product Prices:(1)Ethylene(2)
  
  $
  0.50
  
  $
  0.47
  
  $
  0.51
  
  $
  0.45
  
  
  $
  0.48
  
  
  $
  0.44
  
  $
  0.34Polyethylene  linear low-density butene
  liner(3)
  
  0.69
  
  0.63
  
  0.69
  
  0.58
  
  
  0.65
  
  
  0.60
  
  0.48Polyethylene  weighted-average benchmark(4)
  
  0.70
  
  0.66
  
  0.71
  
  0.61
  
  
  0.67
  
  
  0.63
  
  0.50Benchmark
  Raw Material Prices:(1)AECO natural gas (dollars per mmBTU)(5)
  
  6.54
  
  5.35
  
  5.03
  
  6.07
  
  
  5.75
  
  
  7.25
  
  5.02NYMEX Natural Gas (dollars per mmBTU)(6)
  
  9.07
  
  6.82
  
  6.53
  
  6.62
  
  
  7.26
  
  
  8.55
  
  6.09WTI Crude Oil (dollars per barrel)(7)
  
  63.48
  
  70.69
  
  70.48
  
  60.21
  
  
  66.21
  
  
  56.56
  
  41.41  (1)
  Average benchmark prices do not necessarily reflect
  actual prices realized by NOVA Chemicals or any other petrochemical company.(2)
  Source: Chemical Market Associates, Inc. (CMAI) 
  USGC Net Transaction Price.(3)
  LLDPE butene liner. Source: Townsend Polymer Services
  Information (TPSI).(4)
  Benchmark prices weighted according to NOVA
  Chemicals sales volume mix in North America. Source for benchmark prices:
  TPSI.(5)
  Source: Canadian Gas Price Reporter, weighted-average
  daily spot gas prices, values in millions of British Thermal Units (mmBTU).(6)
  Source: NYMEX Henry Hub 3-Day Average Close, values
  in mmBTU.(7)
  Source: NYMNEX WTI daily spot-settled price average
  for calendar month.  Discussion of Financial Results Joffre Olefins, 2006 versus 2005 Revenue.Revenue from Joffre
Olefins increased $40 million to $1,744 million in 2006 from $1,704 million in
2005. Revenue increased as higher ethylene and co-product selling prices in
2006 more than offset lower sales volumes.  Weighted-average selling
prices for ethylene and co-products were 6% higher in 2006. Total sales volumes
were 4% lower in 2006 due to slightly weaker demand from third-party ethylene
customers.  Feedstocks
and Operating Costs.Feedstock
and operating costs decreased $207 million to $1,146 million in 2006 from
$1,353 million in 2005. The decrease was primarily due to lower AECO natural
gas prices, which were 21% lower in 2006 compared to 2005.  In 2006, NOVA Chemicals
realized an average cash-cost advantage of 11¢ per pound of ethylene, the
highest in Company history, compared to 6¢ per pound in 2005. The Alberta
Advantage reached record levels in 2006 as strong demand for ethane on the
USGC, coupled with high energy prices, pushed USGC ethane prices to near-record
levels. Alberta ethane costs, which closely track natural gas prices, remained
stable for most of the year.  EBITDA.EBITDA increased $245 million, or
approximately 78%, to $558 million in 2006 from $313 million in 2005. EBITDA
increased in 2006 due to lower feedstock costs and higher selling prices.  Net
Income.Joffre Olefins
reported net income of $324 million in 2006, compared to net income of $154
million in 2005. Average margins were higher
in 2006 due to higher selling prices for ethylene and co-products and lower
feedstock costs. In addition, a favorable tax adjustment related to reductions
in Canadian federal and Alberta provincial tax rates in 2006 improved the
segments net income by $20 million.  Joffre Olefins, 2005 versus 2004 Revenue.Revenue from Joffre
Olefins increased $287 million, or 20%, to $1,704 million in 2005 from $1,417
million in 2004. Revenue increased as higher average selling prices during 2005
more than offset lower sales volumes.  Average third-party prices
for Joffre Olefins ethylene in 2005 increased 31% over 2004 averages. Ethylene
volumes were 11% lower in 2005 as a tornado that damaged third-party NGL
extraction facilities constrained ethane supply to the Joffre site.  Feedstocks
and Operating Costs.Feedstock
and operating costs increased $272 million, or approximately 25%, to $1,353
million in 2005 from $1,081 million in 2004. The increase was primarily due to
higher AECO natural gas prices, which were 44% higher in 2005 compared to 2004.  Management's Discussion & Analysis   41


In 2005, the Alberta Advantage
averaged 6¢ per pound of ethylene compared to 7¢ per pound in 2004 primarily
due to a slight narrowing of the spread between USGC and Alberta ethane costs.  EBITDA.EBITDA increased $13
million, or approximately 4%, to $313 million in 2005 from $300 million in
2004. EBITDA increased in 2005 as higher revenue more than offset higher
feedstock costs.  Net
Income.Net income in
2005 was $154 million, compared to net income of $132 million in 2004. Net
income improved as increased selling prices more than offset higher feedstocks
costs and the negative impact to sales due to a tornado that damaged
third-party ethane extraction facilities in Alberta.  Corunna Olefins, 2006 versus 2005 Revenue.Revenue from Corunna
Olefins increased $567 million, or approximately 40%, from $1,430 million in
2005 to $1,997 million in 2006. Revenue was higher in 2006 as both average
selling prices and sales volumes were higher than in 2005.  Compared to 2005, average
ethylene sales prices were 18% higher in 2006, while energy and chemical
co-product prices were 22% higher in 2006. Energy co-product prices were driven
by higher crude oil prices in 2006, while chemical co-product prices were
driven by higher propylene and butadiene prices. The majority of Corunnas
co-products are sold to third parties while its ethylene is primarily used for
internal production.  Total sales volumes were
approximately 16% higher in 2006 due to improved operations at the Corunna
ethylene flexi-cracker. In 2005, the Corunna facility experienced an unplanned
shutdown in the second quarter due to a power outage, and a delayed re-start in
the fourth quarter following the facilitys expansion and modernization
project.  Feedstocks
and Operating Costs.Feedstock
and operating costs increased $551 million, or approximately 41%, to $1,885
million in 2006 from $1,334 million in 2005. Costs were higher in 2006 due to
higher feedstock prices and higher feedstock consumption driven by increased
production at the Corunna flexi-cracker.  EBITDA.EBITDA increased $16 million,
or 24%, to $83 million in 2006 from $67 million in 2005. EBITDA improved in
2006 as higher average selling prices and sales volumes more than offset higher
feedstock and operating costs.  Net
Income.Corunna Olefins
reported net income of $25 million in 2006, compared to net income of $2
million in 2005. Net income was higher in 2006 as higher sales volumes and
selling prices more than offset higher feedstock costs. In addition, a
favorable tax adjustment related to the reduction of the Canadian federal tax
rate improved net income of Corunna Olefins by $20 million in 2006.  Corunna Olefins, 2005 versus 2004 Revenue.Revenue from Corunna Olefins increased $24
million, or approximately 2%, to $1,430 million in 2005 from $1,406 million in
2004. The increase was primarily due to higher average selling prices during
2005, which were offset by lower sales volumes due to planned and unplanned
outages of the Corunna ethylene flexi-cracker.  Average prices for Corunna
Olefins products rose 19% in 2005 compared to 2004. Total sales volumes were
15% lower in 2005 due to an unplanned power outage at the Corunna facility in
April, the scheduled Corunna turn a round, and the delayed re-start of the
Corunna facility after its expansion and modernization project in the fourth
quarter.  Feedstocks
and Operating Costs.Feedstock
and operating costs increased $96 million, or approximately 8%, to $1,334
million in 2005 from $1,238 million in 2004. WTI crude oil prices rose steadily
throughout most of 2005 and rose 37% to $56.56 per barrel in 2005 from $41.41
per barrel in 2004. Higher feedstock prices in 2005 more than offset lower
feedstock consumption related to the Corunna ethylene flexi-crackers planned
and unplanned outages.  EBITDA.EBITDA decreased $75
million, or 53%, to $67 million in 2005 from $142 million in 2004. EBITDA
declined in 2005 as higher feedstock and operating costs more than offset
increased revenue.  Net
Income.Corunna Olefins
reported net income of $2 million in 2005, compared to net income of $56
million in 2004. Net income was lower in 2005 as higher feedstock and operating
costs more than offset higher revenue.  42   Management's Discussion &
Analysis


Polyethylene, 2006 versus 2005 Revenue.Revenue from the Polyethylene segment
increased $294 million, or about 18%, to $1,922 million in 2006 compared to
$1,628 million in 2005. Revenue grew in 2006 due to increased sales volumes and
higher average selling prices.  Sales volume was 14% higher
in 2006 due to improved ethylene availability from both the Joffre and Corunna
ethylene plants. In 2005, ethylene production at Joffre and Corunna was
constrained due to a tornado that damaged third-party NGL extraction facilities
in Alberta, as well as planned and unplanned outages at the Corunna
flexi-cracker. In addition, average PE prices were 4% higher in 2006.  International sales volumes
rose 6% to 423 million pounds in 2006 compared to 398 million pounds in 2005.
International sales increased in 2006, representing 13% of total PE sales
volume in 2006 versus 14% in 2005, as the Company pursued profitable export
opportunities, particularly in the fourth quarter.  In 2006, sales of total PE
made with Advanced SCLAIRTECH technology increased 17% to 854 million pounds.
In addition, PE Performance Products sales volume rose 17% to 513 million
pounds. During the year, NOVA Chemicals resolved a quality problem that had
previously restricted the pace of transition from standard products to
Performance Products. As a result of this quality issue, NOVA Chemicals fell
short of its EBITDA targets in 2006 for PE Performance Products made with
Advanced SCLAIRTECH technology. This problem was resolved and there are no
longer production barriers associated with transitioning sales to PE
Performance Products. NOVA Chemicals plans to primarily sell PE Performance
Products grades from its Joffre PE2 facility by the end of 2008.  Feedstocks
and Operating Costs.Feedstock
and operating costs increased $389 million, or approximately 29%, to $1,749
million in 2006 from $1,360 million in 2005. Feedstock and operating costs rose
in 2006 due to higher PE production and feedstock consumption, and higher
average prices for ethylene. NOVA Chemicals internally produces all of the
ethylene consumed by the Polyethylene segment.  EBITDA.EBITDA decreased $82 million, or 41%, to $120
million in 2006 from $202 million in 2005. EBITDA was lower in 2006 as higher
feedstock costs more than offset higher PE revenue.  Net
Income.The
Polyethylene segment reported net income of $32 million in 2006, compared to
net income of $71 million in 2005. Net income was lower in 2006 as higher
feedstock costs more than offset higher PE revenue. A favorable tax adjustment
related to the reduction of the Canadian federal tax rate improved net income
of the Polyethylene reporting segment by $20 million in 2006.  Polyethylene, 2005 versus 2004 Revenue.Revenue from the Polyethylene segment
increased $159 million, or 11%, to $1,628 million in 2005 compared to $1,469
million in 2004. The increase was due to higher average selling prices during
2005, which were partially offset by lower sales volumes due to planned and
unplanned outages.  Average prices for PE
products in 2005 were 28% higher than in 2004, while total PE sales volumes
were 13% lower. PE volume was lower in 2005 due to constrained ethylene
availability resulting from the unplanned outages at the Corunna flexi-cracker
in April, the Joffre ethane interruption in June due to a tornado that damaged
third-party ethane extraction facilities, and the delayed re-start of the
Corunna facility after its expansion and modernization project in the fourth
quarter.  International volumes
declined 17% to 398 million pounds in 2005 compared to 2004 and represented 14%
of total PE sales volume in 2005 versus 15% in 2004. In 2005, sales volumes of
PE Performance Products made with Advanced SCLAIRTECH  technology increased 52% to 438 million
pounds from 289 million pounds in 2004.  Feedstock
and Operating Costs.Feedstock
and operating costs increased $137 million, or 11%, to $1,360 million in 2005
from $1,223 million in 2004. Feedstock costs were higher in 2005 due to higher
average ethylene costs. The increase in ethylene costs more than offset the
decrease in feedstock costs due to lower PE production in 2005.  Management's Discussion & Analysis   43


EBITDA.EBITDA increased $14
million, or 7%, to $202 million in 2005 from $188 million in 2004. EBITDA
increased in 2005 as higher revenue more than offset higher feedstock and
operating costs.  Net
Income.The Polyolefins
segment reported net income of $71 million in 2005, compared to net income of
$67 million in 2004. Net income improved as higher revenue more than offset
higher feedstock costs.  Outlook for Olefins/Polyolefins Business Unit NOVA Chemicals expects strong
industry market conditions at least through 2008, due to projected PE operating
rates above 90% in North America and globally. This expectation is based on
North American and global GDP growth forecasts of 3% and 3.5% respectively;
limited capacity additions in North America; and NOVA Chemicals belief that
there will be continued delays in planned global capacity additions. Due to
NOVA Chemicals longstanding feedstock and manufacturing advantages, the
Company believes it is well positioned to benefit from a sustained period of
healthy margins. In addition, expected growth of PE Performance Products should
provide NOVA Chemicals with greater earnings stability throughout the chemical
industry cycle.  NOVA Chemicals anticipates
Canadian tax rate and public policy actions will further improve the positive
outlook for the Olefins/Polyolefins business unit. In 2006, the government of
Alberta and the Canadian federal government granted final approval for a series
of corporate tax reductions effective April 1, 2006. As a result, NOVA
Chemicals total Canadian corporate tax rate will decrease from 34%, prior to
this change, to 30% by 2010.  The Alberta government also
announced an initiative that would provide incentives to extract and consume
additional ethane in the province. While the details of this program have not
been finalized, private-sector response to the new policy could provide NOVA
Chemicals additional ethane feedstock to expand its world-scale Alberta
ethylene capacity at Joffre.  In 2006, NOVA Chemicals
described plans to increase the capacity of its Advanced SCLAIRTECH technology
polyethylene plant in Joffre. The expansion, anticipated to be complete in
2008, is expected to increase annual capacity by 150 million pounds (0.4% of
North American capacity) with minimal capital investment.    Source: American Plastics
Council, Nexant Chemsystems and NOVA Chemicals.  44   Management's Discussion &
Analysis


Performance Styrenics Business Unit In 2006, NOVA Chemicals restructured
into three business units in order to better align resources and reduce costs.
As part of this restructuring, NOVA Chemicals divided its traditional Styrenics
business into two separate units: Performance Styrenics, which remains part of
NOVA Chemicals core business, and STYRENIX.  The Performance Styrenics
business unit includes the following:  NOVA Chemicals North American expandable
polystyrene (EPS) operations  Styrenic Performance Products, including:  ARCEL®, DYLARK®, and
ZYLAR®resins  Downstream ventures including: IMxTMtechnology
for cups and containers, lightweight concrete, NOVA Chile, and NOVA Chemicals
joint venture interests in Accelerated Building Technologies and in NOVIDESA.  Business Overview This business unit sells EPS
resins, which are used in the production of packaging for food and consumer
products, and in insulation for the building and construction industry.  NOVA Chemicals Performance
Styrenics business unit also manufactures and sells unique styrenic Performance
Products and is engaged in downstream business ventures that aim to create and
capture value beyond the production and sale of polymers.  Styrenic Performance Products
are used in protective packaging, automotive interiors, food packaging,
consumer goods, medical devices, and appliances. Performance Products can earn
significant margins above standard polymers because of the value they create
for our customers and end-users. Growth of these products depends on the value
they deliver to customers and the rate at which customers accept them.  Styrene monomer is the
primary feedstock for the production of NOVA Chemicals EPS and styrenic
Performance Products. NOVA Chemicals interest in Lyondell Chemical Companys
Channelview, Texas propylene oxide/styrene monomer (PO/SM) facility supplies
400 million pounds per year of styrene to the Performance Styrenics business
unit, meeting virtually all of its styrene requirements.  In addition to producing and
marketing EPS and styrenic Performance Products, the Performance Styrenics unit
manufactures SPS at the Companys Belpre, Ohio site for the STYRENIX business
unit.  Expandable Polystyrene (EPS) NOVA Chemicals has the
capacity to produce 370 million pounds per year of EPS at its production
facilities in Monaca (Beaver Valley), Pennsylvania and Painesville, Ohio.  NOVA Chemicals continues to
leverage its EPS production and technology expertise to develop new grades of
EPS that create value for both molders (our customers) and end users
(consumers). In 2006, NOVA Chemicals introduced ULTRA LOW®pentane
EPS that targets construction applications and will enable business growth for
EPS molders whose production is constrained by emissions standards. The Company
also introduced EPS resins designed specifically for insulating concrete forms
(ICFs) used in construction applications.  Many of NOVA Chemicals
downstream business ventures build upon the benefits of EPS resin to create new
consumer applications that deliver enhanced value.  Performance Products NOVA Chemicals has combined
annual production capacity of approximately 265 million pounds for styrenic
Performance Products, which are manufactured at its Beaver Valley and Belpre
facilities and through tolling agreements with outside manufacturing partners.  Management's Discussion & Analysis   45


ARCELis a performance resin that is molded into
foam for protective packaging and used by producers of damage-sensitive goods
such as electronics, appliances, and furniture. Packaging made from ARCEL resin
is resilient, tough, and flexible and can reduce product breakage and returns.
In addition, packaging made from ARCEL resin is compact, reducing overall
package size and decreasing transportation costs for finished goods.  In 2006, annual production
capacity for ARCEL resin more than doubled from 30 million pounds to 70 million
pounds with the expansion of the Beaver Valley facility and the startup of the
new ARCEL finishing plant in Ningbo, China. This new plant provides a local
source of ARCEL resin in Asia and is operated under a long-term strategic
partnership with Loyal Chemical Industrial Corporation. With short lead-time and
minimal cost, ARCEL resin production capacity can be increased to 100 million
pounds per year.  NOVA Chemicals experienced
production outages and inventory uncertainties during the year as ARCEL resin
capacity was rapidly expanded. In order to conserve resin supplies for existing
customers, marketing efforts to grow sales were slowed while expansion work was
underway. As a result, ARCEL resin sales volumes did not meet the Companys
year-end targets in 2006. With the successful completion of expansion activities,
NOVA Chemicals renewed efforts to aggressively develop new ARCEL resin markets
and customers. With the establishment of new end-use applications and the
addition of a sales and marketing team headquartered in China, the Company
expects new sales records in 2007 and in 2008. As sales of ARCEL resins grow,
NOVA Chemicals expects to continue to add new increments of production
capacity.  Figure 5  ARCEL Resin Capacity Growth(millions of pounds)    DYLARKresins are used in automotive applications, such
as soft instrument panels, structural consoles, roof-mounted LCD video supports
and interior trim. DYLARK resins are specified for their temperature
resistance, stiffness and strength, lot-to-lot consistency and exceptional foam
adhesion.  The high-heat resistance and
stability of DYLARK resins resulted in the development of additional DYLARK
resin grades designed specifically for microwavable food packaging
applications. Marketed as DYLARK FG resins, these food packaging grades provide
superior low-temperature toughness and thermal stability required for
freezer-to-microwave performance. In 2006, NOVA Chemicals introduced a new line
of foamable DYLARK FG resins that are designed for take-out food containers and
home meal replacement packaging.  NOVA Chemicals plans to
increase production capacity for DYLARK FG resins with the start-up of a new
manufacturing line at the Belpre, Ohio facility in 2007.  ZYLARis a clear acrylic co-polymer that delivers
improved clarity and toughness for injection molded applications used in
consumer goods, medical devices and appliances. ZYLAR injection molding resins
continued to gain market acceptance and experienced 45% sales growth in 2006.  46   Management's Discussion & Analysis


During 2006, NOVA Chemicals
discontinued production of its ZYLAR®EX extrusion grades, which did
not meet the Companys financial objectives. The discontinuation of products is
a normal part of the product development process and demonstrates the discipline
that NOVA Chemicals applies to its Performance Products portfolio.  Downstream Ventures In 2006, NOVA Chemicals
Performance Styrenics business continued to implement downstream business
models that seek to capture value beyond the manufacturing and sale of plastic
resins. Through strategic relationships with downstream partners, NOVA
Chemicals can leverage its intellectual property and market expertise to earn
royalty revenue and create pull-through sales of the Companys basic polymers
and Performance Products. This combination of technology licensing and sales of
finished products is expected to generate and sustain profits throughout the
chemical industry cycle. Descriptions of the key ventures and 2006 business
activities follow:  Accelerated
Building Technologies, LLC This joint venture develops and manufactures durable, energy-saving,
composite construction products and systems for residential and light
commercial use. These systems combine the insulating and lightweight
characteristics of EPS with the strength of light-gauge steel framing.
Accelerated Building Technologies is a 50:50 joint venture between NOVA
Chemicals and Dietrich Metal Framing, a Worthington Industries company. The
joint venture was formed in 2006 and commercialized its first product in
January 2007.  IMx technology
for cups and containers
This venture produces labeled cups and containers in a single-step process.
Cups and containers produced with IMx technology combine the superb insulation
properties of EPS with the outstanding graphics quality traditionally offered
only by paper. This venture is pursuing both direct sales of cups, as well as
IMx technology licensing opportunities.  During 2006, NOVA Chemicals
received its first commercial orders for IMx cups and signed its first
technology licensing agreement in Europe.  Lightweight
Concrete Lightweight
concrete combines basic concrete with proprietary EPS beads to create a
building material that is up to 25% lighter than traditional concrete. This new
lightweight concrete maintains high levels of compression strength and delivers
superior insulating properties. NOVA Chemicals licenses lightweight concrete
technology and earns royalties on the sale of concrete as well as revenues from
pull-through sales of EPS resin .  In 2006, NOVA Chemicals
signed a licensing agreement with a leading supplier of pre-cast, pre-stressed
concrete panels for the U.S. construction industry. The first commercial-scale
structure using the Companys lightweight concrete was built in May 2006.  Insulating
Concrete Forms (ICFs)ICFs
are molded EPS forms that can be interlocked and filled with concrete to become
the foundations and walls of structures such as residential homes. Structures
built with ICFs are more energy efficient and require less maintenance than
traditional buildings. ICF structures can better withstand damage caused by
hurricanes and earthquakes, and are easy to assemble, potentially reducing both
construction time and labor costs. Currently, ICFs are produced and marketed
through the Companys joint venture in Mexico, NOVIDESA, and through NOVA
Chile, the Companys production facility in South America.  NOVIDESA NOVIDESA produces and sells building systems
such as ICFs and steel-reinforced EPS panels that target the rapidly growing
Mexican construction market. The joint venture also sells EPS and distributes
NOVA Chemicals SPS in Mexico. NOVIDESA is a 50:50 joint venture formed by NOVA
Chemicals and Grupo IDESA, a leading manufacturer of plastics and chemicals in
Mexico.  In 2006, NOVIDESA commenced
molding operations for ICFs and steel-reinforced EPS panels and received its
first commercial orders for each of these systems.  NOVA Chile NOVA Chemicals owns and operates two EPS
molding plants in Quilicura and El Tepual, Chile. These facilities produce
molded products for the Chilean fish packaging, housing, and construction
markets.  In 2006, NOVA Chile ceased
production of EPS resin to focus on the manufacture and sale of building
systems and packaging products for growing residential and industrial markets
in Chile.  Management's Discussion & Analysis   47


Performance Styrenics Financial Highlights  (millions of U.S. dollars,
  except where noted)
  
  2006
  
  
  2005
  
  2004Revenue
  
  $
  421
  
  
  $
  392
  
  $
  394EBITDA(1)
  
  $
  (24
  )
  
  $
  (5
  )
  $
  8Operating
  loss(2)
  
  $
  (36
  )
  
  $
  (18
  )
  $
  (4
  )Net loss
  
  $
  (29
  )
  
  $
  (14
  )
  $
  (6
  )Sales
  volumes(3)(millions of pounds)
  
  457
  
  
  396
  
  479  (1) See Supplemental Measures on Page 62.  (2) To conform with
changes in internal analysis and reporting, beginning with the first quarter of
2007, NOVA Chemicals will no longer allocate interest, taxes or corporate
charges to business segments and accordingly will only report segment results
down to the operating income (loss) line.  (3) Third-party sales.  Operating
Highlights  2006
  
  
  Annual(U.S. dollars per pound)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2006
  
  2005
  
  2004Benchmark
  Raw Material Prices:(1)Styrene monomer(2)
  
  $
  0.61
  
  $
  0.62
  
  $
  0.70
  
  $
  0.67
  
  
  $
  0.65
  
  $
  0.63
  
  $
  0.58  (1)
  Average benchmark prices
  do not necessarily reflect actual prices realized by NOVA Chemicals or any
  other petrochemical company.(2)
  Source: CMAI Contract Market.  Discussion of Financial Results 2006 versus 2005 Revenue.Revenue for the Performance Styrenics business
increased $29 million, or 7%, to $421 million in 2006 from $392 million in
2005.  Revenue improved in 2006 as
sales volumes for both EPS and styrenic Performance Products were higher than
in 2005 Demand grew as Performance Products, such as ARCEL resin and compounded
ZYLAR resin, continued to gain market acceptance. Total sales volumes which
were up 15% compared with 2005, were partially offset by lower average prices
for EPS.  Feedstocks
and Operating Costs.Feedstock
and operating costs increased $52 million, or 15%, to $399 million in 2006 from
$347 million in 2005. The increase in costs was due primarily to increased
feedstock consumption and higher styrene monomer feedstock price.  EBITDA.Performance Styrenics EBITDA loss in 2006 was
$24 million compared to EBITDA loss of $5 million in 2005. EBITDA was lower in
2006 as development costs, higher styrene monomer feedstock costs and lower EPS
selling prices more than offset higher sales volumes.  Styrenic Performance Products
EBITDA, a subset of the Performance Styrenics units financial results, was
positive in 2006 but fell short of the Companys goals, primarily as a result
of delays in sales of ARCEL resin. The Company experienced production outages
and inventory uncertainties during the year as ARCEL resin capacity rapidly
expanded. In order to conserve resin inventory for existing customers,
marketing efforts to grow sales were slowed while expansion work was underway.
As a result, ARCEL resin sales volumes did not meet the Companys year-end
targets in 2006. With the successful completion of capacity expansion
activities, NOVA Chemicals renewed efforts to aggressively develop ARCEL resin
markets and customers. With the establishment of new end-use applications and a
sales and marketing team headquartered in China, the Company expects new sales
records in 2007 and in 2008.  Net
Loss.The Performance
Styrenics business reported a net loss of $29 million in 2006, compared to net
loss of $14 million in 2005. The net loss increased in 2006 as higher feedstock
and operating costs more than offset higher revenue.  48   Management's Discussion &
Analysis


2005 versus 2004 Revenue.Performance Styrenics revenue for 2005 was
$392 million, consistent with revenue of $394 million in 2004. Revenue in 2005
was largely unchanged from 2004 as higher average selling prices were largely
offset by lower sales volume.  Feedstocks
and Operating Costs.Feedstock
and operating costs were $347 million in 2005, the same as in 2004. Costs were
unchanged in 2005 as lower feedstock purchases, driven by reduced EPS
production, were offset by higher feedstock prices.  EBITDA.Performance Styrenics
EBITDA loss in 2005 was $5 million, compared to an EBITDA gain of $8 million in
2004. The reduction in EBITDA was primarily due to higher Performance Products
development costs in 2005 as commercialization efforts were accelerated.  Net
Loss.The Performance
Styrenics business reported a net loss of $14 million in 2005, compared to a
net loss of $6 million in 2004. The decline from 2004 was primarily due to
higher Performance Products development costs in 2005.  Outlook for Performance Styrenics Business In 2006, NOVA Chemicals took
measurable steps to develop and commercialize styrenic Performance Products and
to establish and grow its downstream business ventures. In 2007, NOVA Chemicals
expects to capture increased revenues through the sales growth of these unique
products and development ventures. NOVA Chemicals will continue the
acceleration of its development efforts and expects that by 2008, Performance
Styrenics will contribute a significant portion of the Companys total
Performance Products EBITDA.  In addition, the Company
plans to improve the cost position of the EPS business through operating
efficiency gains and fixed-cost reductions, and expects to drive sales of new
EPS grades such as ULTRA LOW pentane EPS resin.  STYRENIX Business Unit STYRENIX is NOVA Chemicals
non-core business unit and includes NOVA Chemicals styrene monomer and North
American SPS operations, and its 50% interest in the NOVA Innovene European
joint venture. STYRENIX has three reportable segments:  1)Styrene Monomer, which produces and sells styrene monomer. This segment includes
styrene monomer plants in Bayport, Texas and Sarnia, Ontario.  2)North American Solid Polystyrene, which produces and sells SPS. This segment
includes the Decatur, Alabama; Springfield, Massachusetts; Montréal, Québec
assets, as well as SPS production from NOVA Chemicals Belpre, Ohio facility.  3)NOVA Innovene European joint venture, which is NOVA Chemicals 50% interest in
NOVA Innovene. The joint venture produces and sells SPS and EPS in Europe.  Market Overview A globally-traded commodity,
styrene monomer is a key feedstock in the production of styrenic polymers such
as SPS and EPS. Polystyrene is used to make products such as electronics
packaging, small appliances, construction components, and food packaging. While
SPS resin production accounts for approximately two-thirds of global styrene
monomer demand, styrene monomer is also used in other styrenic polymers such as
ABS, synthetic rubber and unsaturated polyesters.  Margins in the styrene monomer
and polystyrene industries are primarily driven by supply/demand dynamics.
Styrene monomer (also called styrene) is the supply bottleneck in the styrenics
chain and therefore the key indicator of supply/demand tightness for both
styrene and SPS. Operating rates in excess of 92% for styrene monomer generally
lead to margin expansion. Profitability in the global styrenics industry has
been poor in the last several years, primarily due to the over-supply of
styrene monomer and relatively high cost of benzene feedstock.  Management's Discussion & Analysis   49


Business Overview Styrene
Monomer.STYRENIX can
produce and purchase under contract approximately 3.2 billion pounds of styrene
monomer. Approximately 65% of STYRENIX styrene monomer production is consumed
internally for the manufacture of styrenic polymers, with the balance sold to
third parties.  NOVA Chemicals has capacity
to manufacture approximately 2.7 billion pounds per year of styrene at its facilities
in Bayport, Texas and Sarnia, Ontario. All of the ethylene and approximately
half of the benzene requirements for NOVA Chemicals Sarnia styrene plant are
supplied from its Corunna facility. The balance of benzene feedstock is
obtained from nearby petroleum refineries. At the Bayport facility, ethylene
and benzene requirements are purchased, with the exception of some ethylene
swaps.  NOVA Chemicals engages in
transatlantic swap arrangements with other styrene producers and purchases up
to 500 million pounds per year through a long-term supply contract to meet
approximately 1 billion pounds per year of NOVA Innovenes styrene monomer
requirements.  Styrene monomer purchased
under contract is generally more costly than the Companys own production, and
at times, honoring these contracts has forced NOVA Chemicals to reduce
operating rates at its facilities. During 2006, NOVA Chemicals had two supply
contracts that resulted in average estimated higher costs of $30 million per
year for the past several years. On Dec. 31, 2006 the first of the two supply
contracts, for 400 million pounds of styrene annually, expired and will reduce
fixed costs by $22 million per year starting Jan. 1, 2007. The second supply
contract, for up to 500 million pounds per year, will expire on Dec. 31, 2007
and is expected to reduce costs, at current styrene economics, by approximately
$8 million per year starting Jan. 1, 2008. In addition to reducing costs,
expiry of these contracts allows NOVA Chemicals to operate its own, efficient
styrene plants at higher rates.  North
American Solid Polystyrene.NOVA Chemicals has the capacity to produce approximately 1.1 billion
pounds per year of SPS, for which styrene monomer is the primary feedstock.
Styrene feedstock is supplied from NOVA Chemicals production facilities or
from the Companys purchase and swap agreements.  In June 2006, NOVA Chemicals
ceased SPS production at its Chesapeake, Virginia facility, while compounding
operations stopped in September 2006. The closure of the site reduced NOVA
Chemicals annual SPS production capacity by 300 million pounds and reduced
fixed costs by approximately $15 million per year. NOVA Chemicals accrued
severance costs related to the closure of approximately $10 million after-tax
in 2006. Compounding is now being performed through third-party toll
manufacturers.  NOVA
Innovene European Joint Venture.NOVA
Innovene, NOVA Chemicals 50:50 European joint venture with INEOS, is Europes
largest styrenic polymer producer. At 2006 year-end, the joint venture had
combined manufacturing capacity of approximately 2 billion pounds of SPS and
EPS, representing approximately 23% of Western Europes total capacity.  Since its inception in
October 2005, NOVA Innovene has aggressively reduced costs through asset
rationalizations, reductions in corporate overhead expenses, and through
operating synergies. As of 2006 year-end, the joint venture had achieved
annualized cost-savings of $66 million and is on-track to reduce annual costs
by more than $80 million by the end of 2007, double the original target. The
benefit of these cost reductions is shared equally between NOVA Chemicals and
INEOS.  During 2006, NOVA Innovene
shut down the Carrington, UK SPS and the Berre, France EPS facilities, which
decreased annual styrenic polymer capacity by 550 million pounds.  50   Management's Discussion &
Analysis


STYRENIX Financial Highlights  (millions of U.S. dollars,
  except where noted)
  
  2006
  
  
  2005
  
  2004RevenueStyrene Monomer(1)
  
  $
  1,889
  
  
  $
  1,828
  
  $
  1,820North American Solid Polystyrene(1)
  
  500
  
  
  545
  
  552NOVA Innovene European joint venture(1)(2)
  
  672
  
  
  616
  
  604Eliminations
  
  (909
  )
  
  (1,081
  )
  (997
  )$
  2,152
  
  
  $
  1,908
  
  $
  1,979EBITDA(3)Styrene Monomer
  
  $
  (17
  )
  
  $
  (61
  )
  $
  42North American Solid Polystyrene
  
  (39
  )
  
  (18
  )
  2NOVA Innovene European joint venture(2)
  
  (18
  )
  
  (64
  )
  (11
  )Eliminations(4)
  
  
  
  
  
  
  5$
  (74
  )
  
  $
  (143
  )
  $
  38Operating
  loss(5)Styrene Monomer
  
  $
  (72
  )
  
  $
  (113
  )
  $
  (1
  )North American Solid Polystyrene
  
  (60
  )
  
  (47
  )
  (28
  )NOVA Innovene European joint venture(2)
  
  (50
  )
  
  (94
  )
  (42
  )Eliminations(4)
  
  
  
  
  
  
  5$
  (182
  )
  
  $
  (254
  )
  $
  (66
  )Net lossStyrene Monomer
  
  $
  (61
  )
  
  $
  (81
  )
  $
  (12
  )North American Solid Polystyrene
  
  (44
  )
  
  (33
  )
  (16
  )NOVA Innovene European joint venture(2)
  
  (47
  )
  
  (92
  )
  (44
  )Eliminations(4)
  
  
  
  
  
  
  6$
  (152
  )
  
  $
  (206
  )
  $
  (66
  )Sales
  Volumes (millions of pounds)Styrene Monomer(6)
  
  1,649
  
  
  1,672
  
  1,772North American Solid Polystyrene
  
  736
  
  
  781
  
  925NOVA Innovene European joint venture(2)
  
  966
  
  
  991
  
  1,0223,351
  
  
  3,444
  
  3,719  (1)
  Before inter-segment eliminations between the
  business units.(2)
  The NOVA Innovene joint venture commenced operations
  Oct. 1, 2005. Prior to that date, figures represent Financial Highlights for
  NOVA Chemicals European assets.(3)
  See Supplemental Measures on Page 62.(4)
  Represents inter-segment profit eliminations.(5)
  To conform with changes in internal segment analysis
  and reporting, beginning with the first quarter of 2007, NOVA Chemicals will
  no longer allocate interest, taxes or corporate charges to the business
  segments, and accordingly will only report segment results down to the
  operating income (loss) line.(6)
  Third-party sales, including purchased volumes
  resold. Excludes sales to NOVA Innovene.  Management's Discussion & Analysis   51


STYRENIX Operating Highlights  2006
  
  
  Annual(U.S. dollars per pound, except
  where noted)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2006
  
  
  2005
  
  2004Benchmark principal product prices:(1)Styrene monomer(2)
  
  $
  0.61
  
  $
  0.62
  
  $
  0.70
  
  $
  0.67
  
  
  $
  0.65
  
  
  $
  0.63
  
  $
  0.58Solid polystyrene (weighted-average)(3)North America
  
  $
  0.86
  
  $
  0.84
  
  $
  0.93
  
  $
  0.95
  
  
  $
  0.89
  
  
  $
  0.86
  
  $
  0.77Europe
  
  $
  0.59
  
  $
  0.63
  
  $
  0.73
  
  $
  0.76
  
  
  $
  0.68
  
  
  $
  0.65
  
  $
  0.65Benchmark
  raw material prices:(1)Benzene (dollars per gallon)(4)
  
  $
  2.68
  
  $
  3.02
  
  $
  3.71
  
  $
  3.64
  
  
  $
  3.26
  
  
  $
  2.90
  
  $
  2.88  (1)
  Average benchmark prices do not necessarily reflect
  actual prices realized by NOVA Chemicals or any other petrochemical company.(2)
  Source: CMAI Contract Market.(3)
  Source for benchmark prices: CMAI.(4)
  A 10¢ per gallon change in the cost of benzene
  generally results in about a 1¢ per pound change in the variable cost of
  producing styrene monomer. Source of benzene benchmark prices: CMAI.  Discussion of Financial Results STYRENIX Asset Write-Down Each year, NOVA Chemicals
reviews the carrying value of its plant, property and equipment to determine if
this value will be recoverable through projected future cash flows from these
assets. To estimate future cash flows, NOVA Chemicals uses third-party
forecasts of market conditions and product margins. During 2006, the
third-party forecasts for products sold by the STYRENIX business unit were
revised to reflect weaker market conditions than were expected at the time of
the earlier forecast. It was determined that the carrying value of the STYRENIX
assets was greater than the estimated future cash flows. Accordingly, the
assets were written down to the estimated realizable value of the assets,
resulting in a non-cash charge of $860 million ($772 million after-tax). The
realizable value was estimated using discounted cash-flow analysis and
information gathered during the investigation of strategic options for
STYRENIX. The table below details the write-down.  (millions of U.S. dollars)
  
  Europe
  
  North
  America
  
  TotalBook valueBefore write-down
  
  $
  383
  
  $
  719
  
  $
  1,102After write-down
  
  63
  
  179
  
  242Write-down
  before tax
  
  $
  320
  
  $
  540
  
  $
  860Tax recovery
  at 36%
  
  
  
  
  
  (308
  )Tax
  valuation reserve(1)
  
  
  
  
  
  220Net tax
  recovery
  
  
  
  
  
  (88
  )Write-down,
  after-tax
  
  
  
  
  
  $
  772  (1)
  Recording the future income tax recovery on the
  write-down results in a future income tax asset of $220 million in the U.S.
  and Swiss subsidiaries. NOVA Chemicals established a valuation reserve that
  will reduce the amount of the tax benefit recorded in 2006.  The write-down will reduce
future depreciation charges. The Company estimates that annual depreciation
charges will decrease by about $80 million from 2007 to approximately 2017 as a
result of this write-down. In addition, there is a potential future income tax
benefit related to this write-down that will be recognized when and if the
business records profits. (See Note 14 in the Notes to the Consolidated
Financial Statements on page 96 for more details.)  52   Management's Discussion &
Analysis


Styrene Monomer 2006 versus 2005 Revenue.Revenue from the
Styrene Monomer segment increased $61 million to $1,889 in 2006 compared with
$1,828 million in 2005. Revenue was higher in 2006 primarily due to a 3%
increase in average styrene monomer prices compared to 2005, while third-party
sales volumes were relatively flat.  Feedstock
and Operating Costs.Feedstock
and operating costs increased $24 million, or approximately 1%, to $1,889
million in 2006 from $1,865 million in 2005. In 2006, benzene prices increased
12%, while ethylene prices increased by 9% from 2005. Higher feedstock costs in
2006 were partially offset by operating cost improvements due to efficiency
gains from the Bayport, Texas styrene monomer plant.  EBITDA.EBITDA loss for 2006
was $17 million, compared to an EBITDA loss of $61 million in 2005. EBITDA
improved in 2006 as higher revenues, driven by higher styrene prices, and
declining operating costs more than offset higher feedstock costs. In addition,
SG&A costs were lower in 2006 as restructuring savings were realized late
in the year.  Net
Loss.The Styrene
Monomer segment reported a net loss of $61 million in 2006, compared to a net
loss of $81 million in 2005. The net loss improved in 2006 due to higher
styrene monomer gross margins and lower SG&A costs.  2005 versus 2004 Revenue.Styrene Monomer revenue in 2005 was $1,828
million, essentially flat with 2004 revenue of $1,820 million. Average styrene
monomer prices in 2005 were 9% higher than 2004. The increase in average price
was roughly offset by a decrease in domestic sales volumes due to planned and
unplanned outages of the Bayport, Texas and Sarnia, Ontario styrene monomer
units in 2005.  Feedstock
and Operating Costs.Feedstock
and operating costs increased $110 million, or 6%, to $1,865 million in 2005
from $1,755 million in 2004. In 2005, benzene prices increased 1% while
ethylene prices increased by 29% as hurricane-related outages on the USGC
constrained ethylene availability.  EBITDA.EBITDA decreased $103 million to an EBITDA
loss of $61 million in 2005 from an EBITDA gain of $42 million in 2004. The
EBITDA decline was primarily due to higher feedstock costs.  Net
Loss.Styrene Monomer
reported a net loss of $81 million in 2005, compared to a net loss of $12
million in 2004. The increase in net loss was primarily due to higher feedstock
costs. In addition, 2005 results were impacted by a brief, unplanned shutdown
of the Bayport facility related to Hurricane Rita, as well as planned turn a
rounds at the Bayport and Sarnia styrene monomer units.  North American Solid Polystyrene 2006 versus 2005 Revenue.North American SPS revenue in 2006 was $500
million, compared to $545 million in 2005. Revenue declined in 2006 due to a
combination of lower sales volume and lower sales prices.  SPS sales volumes in 2006
were 6% lower than 2005 reflecting the decline in North American SPS demand.
Average third-party prices for North American SPS in 2006 were 4% lower than
2005 as weaker demand in North America did not support higher prices.  Management's Discussion & Analysis   53


Feedstock
and Operating Costs.Feedstock
and operating costs were $525 million in 2006, compared to $545 million in
2005. Feedstock costs were lower in 2006 primarily due to reduced feedstock
consumption driven by lower sales volume, and lower fixed costs related to the
restructuring.  EBITDA.EBITDA loss in 2006 was $39 million compared
to EBITDA loss of $18 million in 2006. EBITDA declined in 2006 as the decline
in revenue was greater than the decline in feedstock costs.  Net
Loss.North American SPS
reported a net loss of $44 million in 2006, compared to a net loss of $33
million in 2005. The net loss increased as declines in revenue outpaced lower
feedstock costs.  2005 versus 2004 Revenue.North American SPS revenue in 2005 was $545
million, down slightly from $552 million in 2004. Average third-party prices
for North American SPS in 2005 were 12% higher than 2004, while sales volumes
were 15% lower. In 2005, customers reduced purchases in response to higher SPS
prices caused by higher feedstock costs and volatility in natural gas pricing.  Feedstock
and Operating Costs.Feedstock
and operating costs in 2005 were $545 million, up slightly from $533 million in
2004. Higher styrene monomer feedstock unit costs were mostly offset by lower
feedstock purchases.  EBITDA.EBITDA loss in 2005 was $18 million, down from
EBITDA gain of $2 million in 2004. EBITDA declined in 2005 due to the
combination of higher feedstock and operating costs and lower revenue.  Net
Loss.North American SPS
net loss was $33 million in 2005, compared to a net loss of $16 million in
2004. The net loss increased in 2005 due to higher feedstock costs and lower
revenue.  NOVA Innovene European Joint Venture(1) 2006 versus 2005 Revenue.NOVA Innovene European
joint venture revenue in 2006 was $672 million, $56 million higher than 2005.
Revenue improved in 2006 as higher SPS and EPS pricing more than offset 3%
lower sales volume.  Average SPS and EPS prices
were higher in 2006 by 8% and 16%, respectively, due to tighter market
conditions in Europe. The supply/demand balance for the European EPS industry
improved in 2006 from 2005 with the closure of NOVA Innovenes Berre, France
and Carrington, UK EPS facilities.  Feedstock
and Operating Costs.Feedstock
and operating costs were $647 million in 2006, slightly higher than costs of
$634 million in 2005. Costs increased due to the higher cost of styrene monomer
feedstock, which rose 3% in 2006 compared to 2005. Higher feedstocks costs were
partially offset by lower operating costs related to closures of the
Carrington, UK and Berre, FR EPS facilities.  EBITDA.EBITDA loss in 2006
was $18 million, a $46 million improvement over 2005. EBITDA improved as higher
revenue more than offset higher feedstock costs. In addition, SG&A and
plant manufacturing costs were lower as NOVA Innovene realized cost synergies
during the year.  Net
Loss.The NOVA Innovene
European joint venture reported a net loss of $47 million in 2006, compared to
a net loss of $92 million in 2005 for nine months of stand-alone operations and
three months operating as part of the joint venture. Net loss improved due to
higher gross margins and lower operating and SG&A costs.  (1)
  2005 results for the NOVA Innovene segment reflect
  nine months of NOVA Chemicals operation and three months of NOVA Innovene
  joint venture operation.  54   Management's Discussion &
Analysis


2005 versus 2004 Revenue.Revenue was $616 million in 2005 compared to
$604 million in 2004.  Average European SPS and EPS
prices in 2005 increased 8% and 2%, respectively, over 2004. Sales volumes
decreased 3%, or 31 million pounds from 1,022 million pounds in 2004 to 991
million pounds in 2005.  Feedstock
and Operating Costs.Feedstock
and operating costs were $634 million in 2005 compared to $581 million in 2004.
The increase in costs was primarily due to higher styrene monomer feedstock
costs in 2005.  EBITDA.EBITDA loss in 2005 was $64 million, up from
an EBITDA loss of $11 million in 2004. EBITDA decreased as higher feedstock
costs more than offset higher revenue.  Net
Loss.The net loss was $92
million in 2005, compared to net loss of $44 million in 2004. The decline in
2005 was due to higher feedstock costs which more than offset higher revenue.  Outlook for STYRENIX As part of NOVA Chemicals
company-wide restructuring in 2006, the Company took a series of actions to
rapidly reduce costs in the STYRENIX unit. In addition, NOVA Chemicals
announced it would pursue all strategic options available for the unit
including: sale, formation of a joint venture with other producers, or a
spin-out. During the year, NOVA Chemicals exceeded its cost-reduction targets
and recorded a $772 million (after-tax) non-cash write-down of STYRENIX assets
 actions that are expected to improve the units future net income by
approximately $150 million per year.  In 2007, the Company will
continue to pursue strategic options to finalize a shareholder-value-adding
pathway for STYRENIX. The Company believes that its rapid cost reductions are a
good indicator of the potential benefits of industry consolidation and that the
STYRENIX unit is an ideal vehicle for consolidation.  Management's Discussion & Analysis   55


Corporate and Other Items  A listing of before-tax
corporate and other items for the periods presented is as follows:  (millions of U.S. dollars)
  
  2006
  
  
  2005
  
  2004Stock-based
  compensation and profit sharing
  
  $
  6
  
  
  $
  37
  
  $
  (104
  )Forward
  transactions on stock-based compensation
  
  (20
  )
  
  (15
  )
  Restructuring
  
  (985
  )
  
  (168
  )
  (8
  )Tax
  settlement
  
  
  
  
  8
  
  122Insurance
  charge
  
  (19
  )
  
  (22
  )
  Mark-to-market
  feedstock derivatives
  
  (21
  )
  
  12
  
  6Gain on sale
  of investments in AEGS
  
  
  
  
  
  
  53$
  (1,039
  )
  
  $
  (148
  )
  $
  69  A
listing of after-tax corporate and other items for the periods presented is as
follows:  (millions of U.S. dollars)
  
  2006
  
  
  2005
  
  2004Stock-based
  compensation and profit sharing
  
  $
  
  
  
  $
  20
  
  $
  (63
  )Forward
  transactions on stock-based compensation
  
  (13
  )
  
  (10
  )
  Restructuring
  
  (861
  )
  
  (125
  )
  (5
  )Tax
  settlement
  
  
  
  
  5
  
  101Insurance
  charge
  
  (13
  )
  
  (15
  )
  Mark-to-market
  feedstock derivatives
  
  (14
  )
  
  8
  
  4Gain on sale
  of investments in AEGS
  
  
  
  
  
  
  40$
  (901
  )
  
  $
  (117
  )
  $
  77  Stock-Based Compensation and Profit Sharing and Forward
Transactions NOVA Chemicals has two
cash-settled, stock-based incentive compensation plans that are
marked-to-market with changes in the value of its common stock price. In
November 2005, NOVA Chemicals entered into forward transactions with two
financial institutions in order to hedge the portion of its stock-based
compensation which is subject to quarterly mark-to-market accounting
adjustments. Mark-to-market rules had resulted in material quarterly earnings
variations prior to 2006. The forward transactions are cash-settled at the end
of a three-year term (November 2008), or at any time prior to that at the
option of NOVA Chemicals, based on the difference between NOVA Chemicals
common stock price and the execution price plus accrued interest.  The transactions effectively
give NOVA Chemicals the same economic effect as if it had borrowed money,
purchased NOVA Chemicals common shares and held them as assets. The average execution
price was $37.56 on approximately 3.6 million shares, which approximates the
number of 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 to the stock-based compensation liability is effectively
neutralized by the mark-to-market impact related to the forward contracts.  Stock-based compensation also
includes the amount expensed related to the fair value of stock options earned
by employees.  Additionally, a profit
sharing program, available to most employees, is based on the achievement of
shareholder return on equity targets.  Mark-to-Market Feedstock Derivatives Beginning in the first
quarter of 2006, NOVA Chemicals began classifying mark-to-market adjustments on
feedstock derivative positions as corporate items, as they are non-cash items
and are not relevant in measuring business performance. Previously, these
amounts were allocated to the Olefins/Polyolefins and Styrenics business units.
Prior periods have been restated.  2006 Restructuring
Charges.In 2006, NOVA
Chemicals recorded total restructuring charges of $985 million ($861 million
after-tax) related to the following: the write-down of the STYRENIX assets, the
write-down of the Carrington, UK SPS facility, severance costs for the North
American restructuring, severance costs for the Chesapeake, Virginia
polystyrene plant site closure and NOVA Innovene restructuring costs.  56   Management's Discussion &
Analysis


NOVA Chemicals recorded a
non-cash write-down of $860 million in 2006 ($772 million after-tax) related to
STYRENIX assets (see discussion on page 64 related to Plant, Property and
Equipment). The Company accrued $56 million ($46 million after-tax) of
restructuring costs related primarily to non-cash asset write-downs for the
Carrington, UK SPS facility closure. The Company also accrued $53 million ($33
million after-tax) of restructuring costs related to severance, pension and other
employee-related costs associated with the North American restructuring
announced on June 26, 2006. To date, $22 million has been paid to employees
related to the North American restructuring. NOVA Chemicals accrued $15 million
($10 million after-tax) related to severance costs for the Chesapeake, Virginia
polystyrene plant site closure. To date, $3 million has been paid to employees.
Lastly, $1 million (less than $1 million after-tax) of restructuring costs
related to actions taken by NOVA Innovene were accrued.  Insurance
Charge.NOVA Chemicals
is one of many participants in OIL and sEnergy  two mutual insurance companies
formed to insure against catastrophic risks. NOVA Chemicals recorded a $19
million ($13 million after-tax) charge in 2006 related to its share of
potential incremental future payments required to meet losses in the insurance
pools in which it participates. The Company continues to participate in OIL, an
insurance pool for property and liability; however, sEnergy, an insurance pool
for business interruption, is in the process of closing its operations. NOVA
Chemicals believes the Companys reserves are adequate to cover any outstanding
claims.  2005 Restructuring
Charges.In 2005, NOVA
Chemicals recorded total restructuring charges of $168 million ($125 million
after-tax) related to the following: write-down of the Berre, France and the
Carrington, UK EPS facilities and associated severance costs; write-down of the
Chesapeake, Virginia polystyrene plant; and the write-off of certain other
non-productive assets.  On October 1, 2005, NOVA
Chemicals and Innovene combined their European polystyrene businesses into a
50:50 joint venture known as NOVA Innovene. Shortly thereafter, NOVA Innovene
announced it would cease EPS production at Berre, France, and permanently shut
down the previously idled EPS plant at its Carrington, UK facility.
Accordingly, NOVA Chemicals took a write-down on the value of its 50% interest
in the value of the plants in the amount of $76 million ($60 million after-tax).
NOVA Chemicals also reduced the recorded benefit of certain tax loss carry
forwards by $9 million, as the utilization likelihood was reduced due to the
formation of the joint venture and closure of the plants. NOVA Chemicals
incurred additional restructuring charges of $7 million ($4 million after-tax)
for severance costs related to these plant closures.  NOVA Chemicals recorded a
non-cash $76 million ($46 million after-tax) write-down related to the
permanent closure of the Chesapeake, Virginia PS plant.  Certain other non-productive
assets were written off, amounting to $9 million ($6 million after-tax).  Insurance
Charge.NOVA Chemicals
incurred a $22 million ($15 million after-tax) charge in 2005 related to its
share of potential incremental future payments required to meet losses in the
sEnergy insurance pool in which it participates.  Tax
Settlement.An
additional amount of $8 million ($5 million after-tax) was recorded in 2005
related to the 2004 tax settlement that resulted from a tax dispute regarding
the deductibility of foreign taxes in certain returns filed with the U.S.
Internal Revenue Service prior to 1982.  2004 Restructuring
Charges.In 2004, a
restructuring charge of $8 million ($5 million after-tax) was taken for
additional dismantling and severance costs related to the May 2004 shutdown of
the A-Line at NOVA Chemicals St. Clair River PE plant at Corunna, Ontario. To
date, $8 million has been spent on severance costs representing substantially
all of such costs expected to be incurred. To date, $7 million has been spent
on dismantling activities and these activities will continue into 2007.  Tax
Settlement.During
2004, a $122 million ($101 million after-tax) settlement was recorded, which
resulted from a tax dispute related to the deductibility of foreign taxes in
certain returns filed with the U.S. Internal Revenue Service prior to 1982.  Gain
on Sale of Investments in AEGS.In 2004, NOVA Chemicals sold its interest in the Alberta Ethane
Gathering System (AEGS) for cash proceeds of $78 million and recorded a gain of
$53 million ($40 million after-tax). NOVA Chemicals continues to transport
ethane as one of several shippers on AEGS under existing long-term ethane
transportation agreements. In addition, NOVA Chemicals operates and maintains
the system under a contract with the new owner of AEGS. The new owner is
responsible for the commercial aspects of operating the pipeline.  Management's Discussion & Analysis   57


Liquidity and Capital Resources NOVA Chemicals principal
sources of liquidity are cash flows from operations, accounts receivable
securitization programs, and borrowings under its revolving credit facilities.
NOVA Chemicals principal uses of cash are operating expenditures, capital expenditures
and debt service.  Cash Flow The following is a summary of
the cash inflows and outflows, which contributed to the changes in NOVA
Chemicals cash and debt:  (millions of U.S. dollars)
  
  2006
  
  
  2005
  
  2004InflowsFunds
  generated from operations(1)
  
  $
  297
  
  
  $
  262
  
  $
  411Decrease
  (increase) in operating working capital
  
  27
  
  
  (43
  )
  (76
  )Cash
  generated from operations
  
  324
  
  
  219
  
  335Proceeds
  from sale of assets and other capital transactions
  
  3
  
  
  11
  
  103Common shares
  issued
  
  3
  
  
  13
  
  37Affiliate
  long term notes
  
  3
  
  
  
  
  Tax-related
  settlement
  
  
  
  
  116
  
  12Foreign
  exchange and other
  
  14
  
  
  
  
  Total inflows
  
  347
  
  
  359
  
  487OutflowsCapital
  expenditures (net of project advances)
  
  (198
  )
  
  (419
  )
  (227
  )Turnaround
  costs, long-term investments and other assets
  
  (48
  )
  
  (176
  )
  (4
  )Common share
  dividends
  
  (29
  )
  
  (27
  )
  (28
  )Stock
  options retired for cash
  
  (2
  )
  
  (11
  )
  (18
  )Common
  shares repurchased
  
  
  
  
  (125
  )
  (188
  )Foreign
  exchange and other
  
  
  
  
  (5
  )
  (21
  )Total outflows
  
  (277
  )
  
  (763
  )
  (486
  )Net debt
  reduction (addition)(2)
  
  $
  70
  
  
  $
  (404
  )
  $
  1  (1)
  See Supplemental Measures on page 62.(2)
  Including cash and foreign exchange changes.  Inflows of Cash Funds from operations
increased to $297 million in 2006 from $262 million in 2005 primarily due to an
improvement in business unit earnings despite the large non-cash asset
write-downs that occurred during 2006. Funds from operations in 2005 of $262
million were down substantially from $411 million in 2004 primarily as a result
of lower sales volumes following very strong demand in 2004.  Operating working capital
decreased by $27 million in 2006 primarily due to a decrease in receivables and
inventory. Operating working capital increased by $43 million in 2005 primarily
due to higher-priced feedstock inventories. Operating working capital increased
by $76 million in 2004, due to higher-priced inventories and accounts
receivable, as well as building inventories to meet growing demand and a series
of planned plant maintenance outages for 2005. NOVA Chemicals measures the
effectiveness of its working capital management through Cash Flow Cycle Time
(CFCT). CFCT measures working capital from operations in terms of the number of
days sales (see Supplemental Measures on page 62). This metric helps NOVA
Chemicals to determine which portion of changes in NOVA Chemicals working
capital results from factors other than price movements. CFCT was 27 days as of
December 31, 2006 compared to 26 days as of December 31, 2005 and 35 days as of
December 31, 2004. The increase as of December 31, 2006 was due primarily to an
increase in receivable days and a decrease in payable days partially offset by
a decrease in inventory days. The decrease as of December 31, 2005 was due
primarily to de-stocking of crude oil-based inventories.  58   Management's Discussion &
Analysis


In total, NOVA Chemicals
generated $324 million in cash from operations in 2006 versus $219 million in
2005, and $335 million in cash from operations in 2004.  NOVA Chemicals sold
non-strategic assets in 2004, which resulted in $103 million of net cash
proceeds. The sale of the Companys interests in the Ethylene Delivery System and
AEGS contributed $19 million and $78 million, respectively, in 2004.  Cash collections of $116
million in 2005 and $12 million in 2004 were received from the settlement of a
tax dispute related to the deductibility of foreign taxes in certain returns filed
with the U.S. Internal Revenue Service prior to 1982.  Cash generation in 2006 was
primarily due to earnings, whereas cash generation in 2005 was largely due to
earnings and the receipt of cash for a tax-related settlement. Cash generation
in 2004 was principally a result of improving business conditions and earnings.  Outflows of Cash NOVA Chemicals capital
expenditures, net of third-party advances, were $198 million in 2006 compared
to $419 million in 2005 and $227 million in 2004. The decrease in capital
expenditures reflects the substantial completion of the Corunna ethylene
flexi-cracker expansion and modernization project, which increased the Companys
production capacity. Capital expenditures in 2007 are expected to be
approximately $210 million. During 2006, NOVA Chemicals spent $48 million for
turnaround costs, long-term investments and other assets compared to $176
million and $4 million in 2005 and 2004, respectively. The Company incurred
significant turnaround costs in 2005 to ensure its plants were at peak
operating performance.  No share repurchase programs
were initiated in 2006. In July 2005, a share repurchase program, for up to
approximately 7.2 million shares, was announced. This repurchase program
terminated on July 26, 2006. The Company did not repurchase any shares under
this program. In July 2004, a share repurchase program for up to approximately
7.5 million shares was initiated. NOVA Chemicals purchased the entire number of
shares available under that 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 $2 million, $11 million and $18 million in 2006,
2005 and 2004, respectively, in lieu of issuing stock.  In May 2006, the Company
repaid $300 million of medium-term notes upon maturity. This debt repayment was
funded by an issuance, in October 2005, of $400 million of senior floating rate
notes due 2013. In September 2005, the Company repaid $100 million of 7% notes
upon maturity. This debt repayment was funded by cash on hand. In 2004, the
Company issued $400 million of 6.50% senior notes due 2012, from which $383
million in net proceeds was used to redeem two series of preferred securities
due 2047 and 2048.  Commitments NOVA Chemicals has 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. While NOVA Chemicals has some
fixed-price raw materials agreements, prices are typically based on a market or
a cost-plus basis, and fluctuate with changes in the underlying raw materials
indices. Obligations have been calculated using current pricing for purposes of
the chart below.  Contractual Cash Obligations  Payments
  due by periodas of December 31, 2006
  (millions of U.S. dollars)
  
  Total
  
  
  2007
  
  2008
  to 2009
  
  2010
  to 2011
  
  After
  2011Long-term
  debt(1)
  
  $
  1,877
  
  
  $
  262
  
  $
  258
  
  $
  306
  
  $
  1,051Operating
  leases(2)
  
  520
  
  
  46
  
  89
  
  76
  
  309Unconditional
  purchase obligations(3)
  
  9,200
  
  
  3,140
  
  1,821
  
  932
  
  3,307Total
  contractual cash obligations
  
  $
  11,597
  
  
  $
  3,448
  
  $
  2,168
  
  $
  1,314
  
  $
  4,667  (1)
  Includes current portion and bank loans.(2)
  Includes property, railcar and other equipment
  leasing commitments.(3)
  NOVA Chemicals 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.  Management's Discussion & Analysis   59


Liquidity NOVA Chemicals is able to
meet short-term liquidity needs through the generation of funds from operations,
cash-on-hand, accounts receivable securitization programs, and borrowing
capacity under revolving credit facilities. At Dec. 31, 2006, the Company had
$75 million cash-on-hand in addition to $421 million (net of letters of credit)
of available borrowing capacity under its revolving credit facilities.  In May 2006, the Company
repaid $300 million of medium-term notes upon maturity. This debt repayment was
funded by an issuance, in October 2005, of $400 million of senior floating rate
notes due 2013. In September 2005, the Company repaid $100 million of 7% notes
upon maturity. This debt repayment was funded by cash on hand. In 2004, the
Company issued $400 million of 6.50% senior notes due 2012, from which $383
million in net proceeds was used to redeem two series of preferred securities
due 2047 and 2048.  Credit Facilities During 2006, NOVA Chemicals
added two new $100 million revolving credit facilities expiring Dec. 31, 2007
and Mar. 20, 2011. These facilities are in addition to the existing $375 million
revolving credit facility that expires June 30, 2010. As of Dec. 31, 2006, NOVA
Chemicals had utilized $154 million of these facilities, of which $44 million
was in the form of letters of credit.  In late December 2006, NOVA
Chemicals amended the financial covenants in the relevant credit facilities to
allow for an exemption of any write-down of the STYRENIX assets up to $950
million and for the debt-to-capitalization ratio financial covenant to be
raised from 55% to 60%. These amendments are in effect for the period Dec. 31,
2006 to June 29, 2007. The Company is currently in discussions with its banks
and expects to restructure covenants to be consistent with the existing
maturity dates of the credit facilities prior to the expiry of the amendment. Using
the covenant methodology in the relevant revolving credit facilities, the
debt-to-capitalization ratio was 55% at Dec. 31, 2006. NOVA Chemicals continues
to comply with all financial covenants under the applicable facilities.  The amended financial covenants
are as follows:  Covenant
  
  Requirement
  
  December
  31, 2006 ActualInterest
  Coverage(1)
  
  2.0x when
  net debt to total capitalization ratio > 40%
  
  3.5
  xDebt to
  Total Capitalization(2)
  
  60%
  
  55
  %Consolidated
  Shareholders Equity(3)
  
  $1.25
  billion plus 50% of positive earnings
  
  $ 1.52 billion  (1)
  As defined in NOVA Chemicals revolving credit
  facility, interest coverage is the ratio of cash flow to interest expense for
  the preceding twelve-month period.(2)
  As defined in NOVA Chemicals revolving credit
  facility, 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 Companys accounts
  receivable securitization programs. The amended definition also provides for
  debt to be offset by cash, other than restricted cash, and the amount of NOVA
  Chemicals wholly-owned subsidiarys (NOVA Chemicals Inc.) preferred shares
  to be excluded in arriving at debt for purposes of this covenant.(3)
  Shareholders equity is defined in accordance with
  Canadian GAAP plus the amount of NOVA Chemicals wholly-owned subsidiarys
  (NOVA Chemicals Inc.) preferred shares and excludes any write-down up to $950
  million of NOVA Chemicals STYRENIX business that may occur during the period
  Dec. 31, 2006 to June 29, 2007.  As a result of the STYRENIX
asset write-down, the permitted amount of secured debt under the terms of our
public debt indentures was reduced. Accordingly, NOVA Chemicals reduced its
$375 million secured revolver to $325 million, effective February 5, 2007. The
remaining two revolving credit facilities were not affected as they are
unsecured.  Off-Balance
Sheet Accounts Receivable Securitization Programs.NOVA Chemicals off-balance sheet financing
activities are limited to participation in accounts receivable securitization
programs. NOVA Chemicals has engaged in the current programs since 1999 to
obtain lower financing rates than those available from other sources. In 2006,
the Company amended the programs to increase the capacity of trade accounts
receivable sold to a third party, on a revolving basis, to a maximum of $350
million from $300 million. At Dec. 31, 2006, $247 million in receivables were
sold under the programs. Of the total amount, $151 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. The Company has no right to any cash
collected from these receivables; therefore, neither the receivables nor any
obligation to the purchasers is reflected in NOVA Chemicals Consolidated
Financial Statements. No other business is conducted through SPEs.  60   Management's Discussion &
Analysis


NOVA
Innovene Accounts Receivable Securitization Program.In November 2006, the NOVA Innovene joint
venture entered into a five-year, 120 million accounts receivable
securitization program. Borrowings under this program are accounted for as
long-term debt. NOVA Chemicals 50% share of the outstanding balance was $33
million at Dec. 31, 2006. The program expires in November 2011.  Total
Return Swap.In
connection with the acquisition of styrenics assets from Huntsman Corporation
in 1998, the Companys subsidiary, NOVA Chemicals Inc., issued retractable
preferred shares with a liquidation preference of $198 million as partial
consideration. Holders of the retractable preferred shares originally had the
right to exchange the shares (a retraction) for NOVA Chemicals common shares
(plus NOVA Chemicals preferred shares if the market value of such common
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
this right. In connection with this amendment, the retractable preferred shares
were re-designated as Series A preferred shares. Additionally, the dividend
rate on the Series A preferred shares was reduced from 2% to 0.5% in December
2005.  NOVA Chemicals has the right
to repurchase the Series A preferred shares at any time. However, any such repurchase
may obligate NOVA Chemicals to pay an early termination fee under the terms of
the total return swap described below.  NOVA Chemicals also entered
into a total return swap with respect to the Series A preferred shares. Under
the terms of the total return swap: (i) the counterparty pays NOVA Chemicals
the total return on the preferred shares (periodic dividends plus positive
changes in the equity value of the Series A preferred shares upon termination
of the swap); and (ii) NOVA Chemicals pays the counterparty a spread to London
Inter-Bank Offered Rate (LIBOR), as well as any negative changes in the equity
value of the Series A preferred shares upon termination of the swap.  If the equity value of the
Series A preferred shares decreases by approximately 24% or more at any time,
NOVA Chemicals is required to post maintenance collateral. Once the margin-posting
requirement is triggered, if the equity value of the Series A preferred shares
increases by 5% or more, any excess margin may be returned to NOVA Chemicals.
Changes in equity value of the Series A preferred shares during the term of the
swap will be determined based on changes in the average price of the
outstanding 6.5% medium-term notes due 2012, issued by NOVA Chemicals.  If NOVA Chemicals defaults on
other debt of at least $25 million or the closing price of its common shares is
$12.00 or less and upon certain other events, the counterparty would have the
right to sell the Series A preferred shares to a third party and terminate the
swap. NOVA Chemicals would then owe the counterparty the difference between the
actual sale price received by the counterparty and $126 million. Subsequent to
the termination of the swap, NOVA Chemicals may, at its option, repurchase the preferred
shares for $198 million plus accrued and unpaid dividends.  The total return swap was
scheduled to terminate on March 15, 2007. However, in February 2007, NOVA
Chemicals and the counterparty agreed to extend the term until Oct. 31, 2007.  Capitalization NOVA Chemicals net
debt-to-total capitalization ratio was 76.0% at Dec. 31, 2006 compared to 59.7%
at Dec. 31, 2005 and 48.5% at Dec. 31, 2004. In May 2006, NOVA Chemicals repaid
$300 million medium-term notes upon maturity. In December 2006, NOVA Chemicals
wrote down the STYRENIX assets by $860 million ($772 million after-tax), which
negatively impacted shareholders equity.  Management's Discussion & Analysis   61


Financial Ratios  December 31 (millions of U.S.
  dollars, except as noted)
  
  2006
  
  
  2005
  
  2004Long-term
  debt(1)
  
  $
  1,878
  
  
  $
  2,039
  
  $
  1,714Less: cash
  and cash equivalents,
  
  (75
  )
  
  (166
  )
  (245
  )restricted
  cash and other assets
  
  (72
  )
  
  (72
  )
  (72
  )Total debt,
  net of cash, cash equivalents, restricted cash and other assets
  
  1,731
  
  
  1,801
  
  1,397Shareholders
  equity
  
  546
  
  
  1,215
  
  1,484Total capitalization(2)
  
  $
  2,277
  
  
  $
  3,016
  
  $
  2,881Net debt to
  total capitalization(3)
  
  76.0
  %
  
  59.7
  %
  48.5
  %  (1)
  On Jan. 1, 2005, NOVA Chemicals adopted new Canadian
  accounting standards, which require the preferred shares of NOVA Chemicals
  subsidiary, NOVA Chemicals Inc., to be classified as debt. Prior periods have
  been restated accordingly. Maturity dates for NOVA Chemicals current and
  long-term debt range from October 2007 to August 2028. Long-term debt
  includes current portion of long-term debt, the secured revolver, and bank
  loans.(2)
  Total capitalization reflects shareholders equity
  and total debt, net of cash, cash equivalents, restricted cash and other
  assets.(3)
  Computed after taking into account the
  reclassification of the preferred shares (see Supplemental Measures below).  Senior Debt Ratings(1)  Senior
  Unsecured DebtDBRS
  
  BB
  (negative)Fitch Ratings
  
  BB-
  (stable)Moodys
  
  Ba3
  (negative)Standard & Poors
  
  B+
  (stable)  (1)
  Credit ratings are not recommendations to purchase,
  hold or sell securities and do not comment on market price or suitability for
  a particular investor. There is no assurance that any rating will remain in
  effect for any given period of time or that any rating will not be revised or
  withdrawn entirely by a rating agency in the future.  Supplemental Measures In addition to providing
measures in accordance with Canadian GAAP, NOVA Chemicals presents certain
supplemental measures as follows. The following supplemental 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.  Cash
Flow Cycle Timeequals
working capital from operations divided by average daily sales. This measure
helps to determine which portion of changes in working capital results from
factors other than price movements and helps investors to assess NOVA Chemicals
performance against its goal to minimize investment in working capital.  EBITDAequals net income (loss) before income taxes,
interest expense, other gains and losses, and depreciation and amortization.
This measure is provided to assist investors in determining NOVA Chemicals
ability to generate cash.  Adjusted
EBITDAequals net
income (loss) before restructuring charges, income taxes, interest expense,
other gains and losses, equity in the earnings of affiliates and depreciation
and amortization. This measure is provided to assist investors in determining
NOVA Chemicals ability to generate cash.  Funds
generated from operationsRefer
to the Consolidated Statements of Cash Flows on page 79 for a reconciliation to
net income.  Net
debtequals long-term
debt, net of cash, cash equivalents, restricted cash, and other assets.  Net
debt to total capitalizationequals
net debt, as defined above, divided by the sum of net debt and shareholders
equity. This measure can be used to analyze the leverage of the Company.  62   Management's Discussion &
Analysis


Adjusted EBITDA  (millions of U.S. dollars)
  
  2006
  
  
  2005
  
  2004Net income
  (loss)
  
  $
  (703
  )
  
  $
  (101
  )
  $
  253Income tax
  (recovery) expense
  
  (144
  )
  
  (1
  )
  81Other gains
  
  (1
  )
  
  (8
  )
  (177
  )Restructuring
  charges
  
  985
  
  
  168
  
  8Interest
  expense (net)
  
  168
  
  
  113
  
  108Depreciation
  and amortization
  
  299
  
  
  290
  
  297Adjusted
  EBITDA
  
  $
  604
  
  
  $
  461
  
  $
  570  Dividends and Distributions Common
Share Dividends.Historically,
NOVA Chemicals has paid quarterly dividends on its common shares at the rate of
$0.10 Canadian per share, representing an aggregate of $0.40 Canadian per share
annually. In 2006, a total of $29 million in dividends was paid on the Companys
common shares. There are currently no material contractual restrictions on NOVA
Chemicals ability to declare and pay dividends on its common shares. The
declaration and payment of dividends is at the discretion of NOVA Chemicals
Board of Directors, which will consider earnings, capital requirements,
financial condition and other relevant factors. It is, however, the Companys
current intention to retain most of its earnings to support current operations,
reduce debt and continue to pay dividends at historic levels.  Series
A Preferred Share Dividends.NOVA
Chemicals pays 0.5% annual dividends on the $198 million Series A preferred
shares of its subsidiary. On Jan. 1, 2005, NOVA Chemicals adopted new Canadian
accounting standards that require these instruments to be classified, on a
retroactive basis, as liabilities rather than equity. In addition, any
dividends associated with these preferred shares have been reclassified to
interest expense. All prior periods have been restated.  Application of Critical Accounting Estimates The following represents the
estimates most critical to the application of NOVA Chemicals accounting
policies. For a summary of the Companys significant accounting policies,
please see Note 2 to the annual Consolidated Financial Statements. Management
has discussed the development and selection of these critical accounting
estimates with the Audit, Finance and Risk Committee of NOVA Chemicals Board
of Directors and the Audit, Finance and Risk Committee has reviewed the
disclosure relating to such estimates in this Managements Discussion &
Analysis.  Inventories.NOVA Chemicals carries inventories at the
lower of cost or net realizable value. Cost is determined on a first-in,
first-out (FIFO) basis with no allocation of fixed production overhead. Most of
NOVA Chemicals competitors determine cost on a last-in, first-out (LIFO)
basis. As a result of this difference in methodology used to account for costs,
significant differences in the timing of quarterly earnings can occur during
periods when feedstock costs are volatile. NOVA Chemicals uses the FIFO method
because it believes the FIFO basis is a better method to match the actual costs
incurred with the related revenue.  Plant,
Property and Equipment (PP&E).NOVA
Chemicals PP&E consists primarily of manufacturing equipment, land and
buildings for producing petrochemicals. NOVA Chemicals values PP&E at
historical cost. Financing costs incurred during major construction projects
are capitalized as part of the cost of the asset until the asset is available
for use. Costs related to turnaround activities are capitalized and amortized
over the period remaining until the next turnaround activity, while maintenance
and repair costs are expensed as incurred.  Judgmental aspects of
accounting for PP&E involve estimates of the life of the assets, the
selection of an appropriate method of depreciation and determining whether an
impairment of NOVA Chemicals assets exists and measuring such an impairment.
These assessments are critical due to their potential impact on earnings and
equity.  NOVA Chemicals is able to
choose from alternative methods of depreciation. The straight-line method was
chosen rather than other methods, such as units 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 realized.  Management's Discussion & Analysis   63


Net PP&E at Dec. 31, 2006
totaled $2,719 million. PP&E is tested for impairment at the lowest level
for which identifiable cash flows exist, which in NOVA Chemicals case is the
plant asset level. Impairment testing of the plant assets occurs whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. The Company assesses recoverability by comparing
the carrying amount of the asset group to the estimated future cash flows
expected to be generated by the assets, undiscounted and without interest
charges. If an asset is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the assets carrying amount
exceeds its fair value.  The estimate of PP&E fair
value is based on estimated discounted future cash flows expected to be
generated by the asset. The assumptions underlying cash flow projections
represent managements best estimates at the time of the impairment review.
Factors that management must estimate include: industry and market conditions,
sales volume and prices, costs to produce, inflation, etc. Changes in key
assumptions or actual conditions, which differ from estimates, could result in
an impairment charge. The Company uses reasonable, supportable and, where
available, third-party, industry expert assumptions when performing impairment
reviews.  NOVA Chemicals
Olefins/Polyolefins business has an established, long-term record of
profitability and, based on current asset carrying values and expected future
cash flows, NOVA Chemicals has concluded the carrying value of the assets of
the Olefins/Polyolefins business unit is appropriate.  During 2006, NOVA Chemicals
restructured its traditional Styrenics business into two new business units,
Performance Styrenics (which includes North American EPS and Styrenic
Performance Products) and STYRENIX (which includes the reportable segments of
Styrene Monomer, North American SPS and NOVA Chemicals interest in NOVA
Innovene, the 50:50 European joint venture with INEOS). Based on current asset
carrying values and expected future cash flows, NOVA Chemicals has concluded
that the carrying value of the assets of the Performance Styrenics business
unit is appropriate.  NOVA Chemicals STYRENIX
business unit has not been profitable, and in recent years NOVA Chemicals has
reduced production capacity due to poor market conditions. In 2005, NOVA
Chemicals and Innovene combined their European polystyrene businesses into a
50:50 joint venture known as NOVA Innovene. Subsequently, Innovene sold its
share in NOVA Innovene to INEOS. Shortly after the commencement of the joint
venture, NOVA Innovene announced it would cease EPS production at its Berre,
France, plant and permanently shut down the previously-idled EPS plant in
Carrington, U K. Accordingly, the value of these assets was written off as of
Sept. 30, 2005, resulting in a $60 million after-tax charge to earnings. On
Jan. 19, 2006, NOVA Chemicals announced its intention to permanently close its
Chesapeake, Virginia, SPS plant and accordingly wrote off the assets value,
resulting in a $46 million after-tax charge to earnings. On July 25, 2006, NOVA
Innovene announced its plans to permanently close its Carrington, UK, SPS
facility, resulting in a $46 million after-tax charge to earnings.  On July 20, 2006, NOVA
Chemicals announced as part of its restructuring that it would pursue all
strategic options available for the STYRENIX business unit including: sale,
formation of a joint venture with other producers, or spin-out. A number of
options were and continue to be aggressively pursued.  In assessing the
recoverability through projected future cash flows of the STYRENIX plant
carrying values, NOVA Chemicals used third-party forecasts of market conditions
and product margins. Third party information was used for key assumptions to
provide objectivity to the cash flow analysis and these assumptions were largely
in line with what management would have estimated.  During 2006, the third-party
forecasts for products sold by the STYRENIX business unit were revised to
reflect weaker market conditions than had been expected at the time of the
earlier forecast. It was determined that the carrying value of the STYRENIX
assets were greater than estimated future cash flows. The assets carrying
value at Dec. 31, 2006, prior to write-down, was $1.1 billion. Fair value was
estimated to be $242 million. Thus, the assets were written down to the
estimated fair value, resulting in a non-cash charge of $860 million ($772
million after-tax).  The write-down will reduce
future depreciation charges in the three reportable segments within the
STYRENIX business unit. The Company estimates that depreciation charges will
decrease by about $80 million per year from 2007 to approximately 2017 as a
result of this write-down. In addition, there is a potential future income tax
benefit related to this write-down that will be recognized when and if the
business records profits.  64   Management's Discussion &
Analysis


Asset
Retirement Obligations.United
States and Canadian GAAP require 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. At Dec. 31, 2006, NOVA
Chemicals had $26 million of accumulated reserve for these activities. This
accumulated reserve is comprised of approximately $19 million anticipated to be
required for the decommissioning and site restoration of currently active plant
sites; $4 million for plant sites that have been divested or are no longer in
use; and approximately $3 million for ongoing environmental management and
planned dismantling of currently operating plant sites.  During 2006 and 2005, there
were no business conditions or decisions that resulted in a requirement to
increase or decrease the asset retirement obligations associated with active or
divested sites. The obligations were increased as a result of the accretion of
the liabilities. For inactive sites or sites that became inactive in 2006 and
2005, the reserves were generally considered adequate for the environmental
remediation work required.  During 2004, NOVA Chemicals
reduced the reserve that was carried for inactive sites by $5 million due to
several projects either being completed or at a stage of completion that
allowed reassessment of the estimated costs to complete. After review of these
projects, it was determined that NOVA Chemicals accumulated reserve for
inactive sites was too high.  In 2003, the Company
undertook an evaluation of the costs to conduct decommissioning and site
restoration to satisfy the projected obligations under applicable environmental
requirements upon termination of operations at currently operating plant sites.
Canadian GAAP required that the present value of inflation-adjusted decommissioning
and site restoration costs be recorded as increases to the carrying values of
the assets at that time, and that this amount be depreciated over the estimated
remaining lives of the assets. NOVA Chemicals determined that $131 million, at
that time, 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. Because 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, because the degree of natural
attenuation, evolution of new technologies and potential land uses may mitigate
future environmental liabilities and potential costs. Management has reviewed
the initial estimates in light of todays circumstances and determined that no
adjustment is needed to this estimate.  After adjusting for inflation
as required by Canadian GAAP, the amount of $131 million was approximately $225
million to $250 million. The present value of this future amount (using a
credit-adjusted risk-free rate of 10.5% to discount the estimated future cash
flows) was approximately $19 million, and was accrued in 2003 in anticipation
of these activities. This estimated liability 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. In each of 2006, 2005 and 2004, this expense was $2 million.  Pension
Plans.NOVA Chemicals
sponsors both defined benefit and defined contribution pension arrangements
covering substantially all of its employees. For the defined contribution
plans, the cost is expensed as earned by employees. For the defined benefit
plans, obligations and expense are determined using actual discount rates and
assumptions for mortality, termination, retirement and other rates, as well as
the expected return on plan assets and the rate of increase for future
compensation. The Company uses current mortality rate tables commonly used for
actuarial calculations and selects other assumptions in line with past
experience and current economic conditions. The return on plan assets is not
the actual return, but an expected rate based on estimated asset returns over
the life of the pension plans and the investment strategy of the plans. The
discount rate is based on actual market interest rates at the measurement date
on high quality debt instruments with cash flows that match the timing and
amount of expected benefit payments of NOVA Chemicals plans.  Canadian GAAP requires that
actuarial gains and losses be recognized in NOVA Chemicals income using a
systematic and consistent methodology. For defined benefit pensions, the
Company amortizes 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.
This alternative avoids recognizing into income large unrealized gains or
losses in individual years. Immediate recognition of such gains and losses
would introduce significant volatility into NOVA Chemicals earnings.
Cumulative unrealized actuarial gains and losses have ranged from a $61 million
gain at Dec. 31, 1999 to a $195 million loss at Dec. 31, 2005. On Dec. 31,
2006, unrealized actuarial losses were $155 million.  Management's Discussion & Analysis   65


A total of $65 million, $49
million, and $26 million was contributed in 2006, 2005, and 2004, respectively,
to all of NOVA Chemicals defined benefit pension plans. The contributions were
based on the most recently filed valuations with pension regulators in various
countries. Contributions to defined contribution plans were $8 million, $7
million, and $7 million in 2006, 2005, and 2004, respectively.  Funding for NOVA Chemicals
defined benefit pension plans is largely driven by the North American pension
plans, as they constitute a significant portion of the Companys pension plan
assets and obligations. For 2007, funding is expected to be approximately $55
million as employees accrue additional pension benefits and special payments
are made to cover the shortfall between assets and liabilities. Contributions
to defined contribution plans for 2007 are expected to be $8 million.  Income
Taxes.The objective
of accounting for income taxes is to recognize the amount of taxes payable or
refundable for the current and future years for events that have been recognized
in NOVA Chemicals financial statements or tax returns. Judgment is required in
assessing future tax consequences. Variations in the actual outcome of these
future tax consequences could materially impact NOVA Chemicals financial
position or results of operations.  NOVA Chemicals has a tax
reserve to provide for uncertain tax positions. This reserve is assessed from
time-to-time for adequacy. In 2006, NOVA Chemicals reserve was determined to
be under-provided as a result of the STYRENIX write-down, and the reserve was
increased by $226 million. This increase is primarily related to uncertainty
with respect to the utilization of net operating loss carryforwards. In 2005,
no adjustments were made to the reserve. In 2004, NOVA Chemicals reserve was
determined to be over-provided, and the reserve was reduced by $11 million.  Accounting Standards EIC-162,
Stock-Based Compensation for Employees Eligible to Retire Before the Vesting
Date.This standard,
issued by the Emerging Issues Committee (EIC), is to be applied retroactively,
with restatement of prior periods, and is effective for interim and annual
periods ending on or after Dec. 31, 2006. EIC-162 clarifies inconsistencies
regarding accounting for stock-based awards granted to employees who are either
eligible for retirement at the grant date or will be eligible before the end of
the vesting period. Compensation costs for stock-based awards for employees
eligible to retire at the grant date must be recognized at the grant date.
Compensation costs for stock-based awards for employees who will become
eligible to retire during the vesting period should be recognized over the
period from the grant date to the date on which the employee becomes eligible
to retire. Application of this standard will result in acceleration of the
recognition of retirement compensation expenses. NOVA Chemicals adopted EIC-162
in the fourth quarter of 2006, with restatements for prior periods. The impact
on NOVA Chemicals 2006 Consolidated Financial Statements is an $11 million ($9
million after-tax) charge to retained earnings as of Jan. 1, 2006 and a $2
million increase ($1 million after-tax) in current year income. Canadian and
U.S. GAAP are mainly consistent on this issue.  CICA
3831, Non-Monetary Transactions.This standard is effective for periods beginning on or after Jan. 1,
2006. It requires commercially substantive, non-monetary transactions to be
measured at fair value rather than the carrying amount of the assets given up.
NOVA Chemicals had no transactions that occurred during 2006 to which this
standard was applicable.  CICA
3855, Financial Instruments  Recognition and Measurement and CICA 3865,
Hedges.These standards are
effective for fiscal years beginning on or after Oct. 1, 2006. CICA 3865
harmonizes Canadian and U.S. GAAP and IFRS by establishing standards for
recognition and measurement of financial assets, liabilities and non-financial
derivatives. Previous Canadian standards addressed disclosure and presentation
matters only. CICA 3865 sets standards for when and how hedge accounting may be
applied, further restricting which hedging relationships qualify for hedge
accounting. NOVA Chemicals adopted these standards on Jan. 1, 2007.  CICA
1530, Comprehensive Income.This standard is effective for interim and annual periods relating to
fiscal years beginning on or after Oct. 1, 2006 and was adopted by NOVA
Chemicals on Jan. 1, 2007. This standard harmonizes Canadian and U.S. GAAP and
IFRS. This statement defines the presentation of comprehensive income and its components.
Comprehensive income includes all changes in equity during the period including
items that are not in net income (loss).  CICA
1506, Changes in Accounting Policies and Estimates, and Errors.This standard became effective Jan. 1, 2007
and states an entity is permitted to change accounting policies only when it is
required by a primary source of GAAP, or when the change results in a reliable
and more relevant presentation in the financial statements.  66   Management's Discussion &
Analysis


Market and Regulatory Risk The Audit, Finance and Risk
Committee of NOVA Chemicals Board of Directors regularly reviews foreign
exchange, interest rate and commodity hedging activity and monitors compliance
with the Companys hedging policy. NOVA Chemicals policy prohibits the use of
financial instruments for speculative purposes and limits hedging activity to
the underlying net economic exposure.  Foreign Exchange Hedging NOVA Chemicals conducts
business in various countries where certain revenues and expenses are
determined in currencies other than the U.S. dollar. The Company has not hedged
its exposure to fluctuations in any currency in recent years.  Commodity Hedging and Feedstock Acquisition NOVA Chemicals manages
exposure to fluctuating commodity prices on its physical feedstock requirements
by varying the 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 the
Companys hedging policy. NOVA Chemicals also limits its positions in futures
markets to proprietary feedstock requirements and does not use hedging
instruments for speculative purposes.  The Companys feedstock
acquisition team manages its position in the volatile natural gas and crude
markets in an effort to moderate the risks of fluctuations in feedstock prices
to lower overall feedstock costs. As a result of hedging activities, after-tax
earnings in 2006, 2005 and 2004 increased by $10, $14 and $16 million,
respectively due to realized hedging gains. Gains are recorded through
feedstock and operating costs on the Consolidated Statements of Income (Loss)
on a pre-tax basis. Mark-to-market amounts on unrealized positions are recorded
in deferred credits and long-term liabilities on the Consolidated Balance
Sheets.  At Dec. 31, 2006,
approximately 59% of NOVA Chemicals debt had fixed-interest rates averaging
7.2%, and approximately 41% of its debt had floating-interest rates averaging
7.8%.  Equity Forward Contracts Equity forward contracts are
used to manage exposures to fluctuations in NOVA Chemicals stock-based
compensation costs, as the costs of the plans vary as the market price of the underlying
common shares changes. For further details on NOVA Chemicals equity forward
contracts, please see Corporate and Other Items, Stock-Based Compensation and
Profit Sharing and Forward Transactions on page 56.  Credit Risk Management NOVA Chemicals is exposed to
credit risk on financial instruments in cases where a counterparty to an
instrument fails to make payment of unrealized gains. The Company 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 receivables, as certain customer groups are located in the same
geographic area and operate in the same industry. NOVA Chemicals manages its
credit risk relating to these receivables through credit approval and
monitoring procedures.  Government Regulation and Environmental Protection Like other companies in the
plastics and chemical industries, NOVA Chemicals is subject to extensive
environmental laws and regulations at all levels of government. These laws and
regulations concern the manufacture, processing and importation of certain
petrochemical substances; discharges or releases (whether to air, land or
water); and the generation, handling, storage, transportation, treatment,
disposal and clean-up of regulated materials. Although NOVA Chemicals believes
that its businesses, operations and facilities are being operated in material
compliance with applicable environmental laws and regulations, the operation of
any petrochemical facility and the distribution of petrochemical products
involve the risk of accidental discharges of toxic or hazardous materials,
personal injury and property and environmental damage.  Management's Discussion & Analysis   67


Furthermore, applicable
environmental laws and regulations are complex, change frequently and provide
for substantial fines, regulatory penalties and criminal sanctions in the event
of non-compliance. In addition, substantial costs can sometimes result from
orders that require rectification of environmental conditions. NOVA Chemicals
cannot provide assurance that it will not incur substantial costs or
liabilities as a result of such occurrences or the enforcement of environmental
laws.  From time to time, NOVA
Chemicals has entered into various consent agreements or been subject to
administrative orders for pollution abatement or remedial action. Under some
environmental laws, NOVA Chemicals may be subject to strict and, under certain
circumstances, joint and several liability for the costs of environmental
contamination on or from its properties, and at off-site locations where NOVA
Chemicals disposed of or arranged for disposal or treatment of hazardous
substances, and may also incur liability for related damages to natural
resources. NOVA Chemicals has been named as a potentially responsible party
under the U.S. Comprehensive Environmental Response, Compensation and Liability
Act of 1980, or its state equivalents, at several third-party sites. NOVA Chemicals
cannot provide assurance that significant costs will not be incurred.  In 1985, NOVA Chemicals
adopted the Responsible Care initiative as the basis for its overall safety,
health, environment, security and risk program. Responsible Care is a global
chemical industry performance initiative created by the Canadian Chemical
Producers Association (CCPA) in 1985 and adopted by the American Chemistry
Council (ACC) in the United States in 1988. Responsible Care is currently
practiced by chemical industry associations in more than 52 countries
worldwide. Responsible Care requires participants to commit to the responsible
management of the total life cycle of their products. In 2006, the ACC honored
NOVA Chemicals as co-winner of their Responsible Care Leadership award in the
medium-sized company category. The award recognizes outstanding leadership and
performance under the Responsible Care initiative.  NOVA Chemicals is active in a
number of voluntary environmental initiatives to reduce emissions and wastes
from its facilities. In addition to participation in the CCPAs National
Emissions Reduction Masterplan, NOVA Chemicals also participates in Canadas
Accelerated Reduction and Elimination of Toxics. NOVA Chemicals is also
directly involved in the Canadian Chemical Industrys Environmental Performance
Memoranda of Understanding with the Federal, Ontario and Alberta governments,
which is a voluntary program designed to achieve reductions in air emissions
from the chemical industry. Through a greenhouse gas emissions management
program, NOVA Chemicals is committed to economically viable solutions to
climate change concerns. This includes NOVA Chemicals participation in the
joint venture with ATCO Power Canada Ltd. and EPCOR Power Development
Corporation to operate a natural gas-fired cogeneration power plant at its
production site at Joffre, Alberta. This joint venture has substantially
reduced greenhouse gas emissions when compared with supplying the electrical
needs of the Joffre site from Albertas primarily coal-fired electrical
generation facilities.  The Kyoto Protocol to the
United Nations Framework Convention on Climate Change took effect during the
first quarter of 2005. As a result of the Canadian governments decision to
ratify the Kyoto Protocol, Canada is required to reduce its greenhouse gas
emissions by 6% below 1990 levels during the years 2008 through 2012 and
legally binding greenhouse gas emission reduction targets will be imposed on
NOVA Chemicals operations in Canada. In view of the uncertainty of how and
when implementation will occur in Canada and the United States and Europe, NOVA
Chemicals cannot estimate compliance costs or whether they will be material.  68   Managements Discussion &
Analysis


Summarized Quarterly Financial Information  three months ended(millions of U.S. dollars,
  
  2006
  
  
  2005except per share amounts)
  
  Dec. 31
  
  Sept. 30
  
  Jun. 30
  
  Mar. 31
  
  
  Dec.
  31
  
  Sept.
  30
  
  Jun.
  30
  
  Mar.
  31Revenue
  
  $
  1,635
  
  $
  1,712
  
  $
  1,619
  
  $
  1,553
  
  
  $
  1,433
  
  1,366
  
  1,329
  
  1,488Operating
  income (loss)
  
  $
  (837
  )
  $
  13
  
  $
  107
  
  $
  37
  
  
  $
  (76
  )
  (98
  )
  5
  
  172Net income
  (loss)
  
  $
  (781
  )
  $
  (24
  )
  $
  106
  
  $
  (4
  )
  
  $
  (66
  )
  (107
  )
  (22
  )
  94Net income
  (loss) per common share Basic
  
  $
  (9.46
  )
  $
  (0.29
  )
  $
  1.28
  
  $
  (0.05
  )
  
  $
  (0.80
  )
  (1.29
  )
  (0.27
  )
  1.12 Diluted
  
  $
  (9.46
  )
  $
  (0.29
  )
  $
  1.27
  
  $
  (0.05
  )
  
  $
  (0.80
  )
  (1.29
  )
  (0.27
  )
  1.06Weighted-average
  common shares outstanding (millions) Basic
  
  82.6
  
  82.6
  
  82.5
  
  82.5
  
  
  82.4
  
  82.3
  
  82.3
  
  83.2 Diluted
  
  82.6
  
  82.6
  
  83.2
  
  82.5
  
  
  82.4
  
  82.3
  
  82.3
  
  90.0  Quarterly Earnings Trends The net loss in the first
quarter of 2006 was primarily the result of the extended Corunna facility
shutdown for maintenance and modernization work, and the accrued severance
costs associated with the closure of the Chesapeake, Virginia facility. In
addition, margins eroded due to selling prices falling at a faster rate than feedstock
costs. Net income in the second quarter was favorably impacted by Canadian tax
rate reductions of $60 million, the Corunna site beginning expanded operations
and improved ethylene and PE margins. The third-quarter loss was primarily
related to North American restructuring costs and the costs associated with the
closure of the Carrington, UK site. The third quarter also saw the highest
quarterly EBITDA for the Companys Olefins/Polyolefins business unit as
polyethylene and ethylene price increases out-paced higher feedstock costs. The
fourth quarter net loss was largely due to the one-time, non-cash write-down of
the STYRENIX business unit assets, however business operating performance also
suffered. Despite unusually high sales volumes in the Olefins/Polyolefins
business unit, polyethylene and ethylene pricing declined from the third
quarter 16% and 12%, respectively. This was due in large part to de-stocking as
converters worked off excess inventories in anticipation of the 2006 hurricane
season, which did not result in disruptions as in 2005. Similarly, styrene
monomer and the Performance Styrenics units products such as EPS also saw
price declines, although not as dramatic as in the Olefins/Polyolefins
business.  Net income in the first
quarter of 2005 was favorably impacted by strong industry operating rates and
co-product sales in NOVA Chemicals Olefins/Polyolefins business. Net losses in
the second and third quarters of 2005 were primarily caused by several unusual
events, including the Corunna power outage, the Joffre ethane interruption, the
non-cash insurance accrual, and the non-cash write-down related to the European
joint venture. The net loss in the fourth quarter was caused by the decline in
sales volumes primarily as a result of the Corunna facility being shut down for
extended maintenance and modernization work and the non-cash write-down of the
Chesapeake, Virginia facility.  Managements Discussion & Analysis   69


Historically, sales volumes
in the plastics and chemical industry during the last quarter of a calendar
year are lower than the first three quarters due to seasonal factors. However
this trend did not present itself in 2006 with fourth quarter volumes for
polyethylene and styrene monomer hitting the highest level all year and
Performance Styrenics volume remaining consistent with third quarter volumes.
In polyethylene and ethylene this was in part due to increased shipments
overseas as well as the Company positioning itself to capture the maximum value
through the chain. Styrene monomer volumes were higher in the fourth quarter as
the Company sold excess inventories on the spot market. North American SPS and
NOVA Innovene volumes were down in the fourth quarter as is typical in this
industry due to slowness in the packaging and construction markets.  In the fourth quarter of
2005, polyethylene sales volumes were lower than any of the prior three
quarters; however, this was primarily attributable to the outage at the
Corunna, Ontario manufacturing facility rather than the typical seasonal
factors. Styrene monomer, SPS and EPS sales volumes also followed the
historical pattern of being lowest in the fourth quarter of 2005. Ethylene
constraints limited the sales potential for styrene monomer in the fourth
quarter of 2005. SPS volumes were down in the first half of the fourth quarter
of 2005 due to the force majeure caused by a hurricane and they were down in
the second half of the fourth quarter as customers positioned themselves for 2006
contract negotiations. EPS sales volumes were down in the fourth quarter due to
seasonal slowing in the packaging and construction markets as well as the
widening price gap caused by increased Asian imports.  Fourth Quarter 2006 Overview The Company filed its
Managements Discussion & Analysis for the fourth quarter of 2006 (the Fourth
Quarter MD&A) with the Canadian securities administrators and the U.S.
Securities and Exchange Commission on Jan. 31, 2007. The Fourth Quarter
MD&A is hereby incorporated by reference into this Managements Discussion
and Analysis for the year ended Dec. 31, 2006.  Share Data  Common Shares Issued and Outstanding  For
  the period ended(number of shares)
  
  February
  8, 2007
  
  2006
  
  
  2005
  
  2004Beginning of
  period
  
  82,561,272
  
  82,364,899
  
  
  84,268,293
  
  87,099,781Issued upon
  exercise of options
  
  21,688
  
  196,373
  
  
  695,157
  
  2,103,112Repurchased
  
  
  
  
  
  
  (2,598,551
  )
  (4,934,600
  )End of
  period
  
  82,582,960
  
  82,561,727
  
  
  82,364,899
  
  84,268,293  Employee Incentive Stock Options  For
  the period ended(number of shares)
  
  February
  8, 2007
  
  2006
  
  
  2005
  
  2004Beginning of
  period
  
  5,478,697
  
  5,107,611
  
  
  5,849,131
  
  8,822,440Granted
  
  174,100
  
  1,007,259
  
  
  532,750
  
  271,300Exercised
  
  (152,353
  )
  (567,795
  )
  
  (1,257,857
  )
  (3,204,731
  )Cancelled
  
  (5,400
  )
  (68,378
  )
  
  (16,413
  )
  (39,878
  )End of
  period
  
  5,495,044
  
  5,478,697
  
  
  5,107,611
  
  5,849,131  70   Managements Discussion &
Analysis


Disclosure Controls and Procedures NOVA Chemicals management,
with the participation of the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), has evaluated the effectiveness, as at Dec. 31, 2006, of NOVA
Chemicals disclosure controls and procedures (as defined in Rules 13a-15e and
15d-15e under the United States Securities Exchange Act of 1934) and has
concluded that such disclosure controls and procedures are effective.  In response to a Comment
Letter from the SEC related to the Companys Form 40-F for the prior year, the
Company has increased the number of reportable segments in the current period
from three business segments plus corporate to seven business segments plus
corporate and restated the segmented disclosures of prior periods to be
consistent with the number of segments in the current year. Management,
including the CEO and CFO, has re-evaluated the Companys disclosure controls
and procedures at Dec. 31, 2005, to determine whether the restatement changes
their prior conclusion, and management has determined that it does not change
their prior conclusion that as at Dec. 31, 2005, disclosure controls and
procedures were effective. The restatement represents a change in judgment
under current practice as to the application of Statement of Financial
Accounting Standards No.131. Management believes that it had a reasonable basis
for its original segment presentation. The restatement only affected segmented
disclosures and there is no affect on the financial position, results of operations,
or cash flows of the prior periods.  Changes in Internal Control Over
Financial Reporting There have been no changes in
NOVA Chemicals internal control over financial reporting during the year ended
Dec. 31, 2006, that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting. Management
has determined that no change in internal control over financial reporting is
necessary due to the change in the number of reportable segments described above.  Additional Information Additional information
relating to NOVA Chemicals, including the Annual Information Form, is filed
with Canadian securities administrators and can be accessed through the System
for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. This
same information is filed with the U.S. Securities and Exchange Commission and
can be accessed via its Electronic Data Gathering, Analysis and Retrieval
System (EDGAR) at www.sec.gov/edgar.shtml.  Managements Discussion & Analysis   71