**Exhibit 99.2**

 

**CONSOLIDATED SIX-YEAR REVIEW**

 
| **(MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE  AMOUNTS, RATIOS AND MISCELLANEOUS DATA)** | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                     |       |      |       |       |       |     |       |     |       |     |       |     |       |
| **Operating Results**                                                                    |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Revenue                                                                                  | ** ** | **$**     | **5,616**  |       | 5,270      |     | 3,949      |     | 3,091      |     | 3,194      |     | 3,916      |   |
| Operating income (loss)(1)                                                               | ** ** | **$**     | **(4**     | **)**      | 264        |     | (75        | )        | (71        | )        | (195       | )        | 414        |   |
| Net income (loss)(2)                                                                     | ** ** | **$**     | **(104**   | **)**      | 252        |     | (1         | )        | (112       | )        | (161       | )        | 266        |   |
| Total assets                                                                             | ** ** | **$**     | **5,217**  | ** ** | 5,047      |     | 4,413      |     | 4,154      |     | 4,359      |     | 4,754      |   |
| **Capitalization**                                                                       |       |      | ** ** |       |       |     |       |     |       |     |       |     |       |
| Current bank loans                                                                       | ** ** | **$**     | **1**      | ** ** | —     |     | —     |     | 3          |     | 14         |     | 28         |   |
| Long-term debt(2)                                                                        | ** ** | **2,038** | ** ** | 1,714      |       | 1,682    |       | 1,793    |       | 2,089    |       | 2,004    |       |
| Less: Cash and cash equivalents(3)                                                       | ** ** | **(231**  | **)**      | (310       | )          | (277     | )          | (59      | )          | (88      | )          | (27      | )          |
| Net debt(1)                                                                              | ** ** | **$**     | **1,808**  |       | 1,404      |     | 1,405      |     | 1,737      |     | 2,015      |     | 2,005      |   |
| Shareholders’ equity                                                                | ** ** | **1,219** |       | 1,493      |       | 1,309    |       | 980      |       | 1,033    |       | 1,345    |       |
| Total capitalization net of cash and cash equivalents                                    | ** ** | **$**     | **3,027**  |       | 2,897      |     | 2,714      |     | 2,717      |     | 3,048      |     | 3,350      |   |
| **Cash Flow Data**                                                                       |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Capital expenditures (net of project advances)                                           | ** ** | **$**     | **419**    |       | 227        |     | 119        |     | 70         |     | 168        |     | 440        |   |
| Cash from (used in) operations                                                           | ** ** | **$**     | **228**    |       | 334        |     | (26        | )        | 314        |     | 239        |     | 314        |   |
| Net debt additions (repayments)                                                          | ** ** | **$**     | **317**    |       | 15         |     | (157       | )        | (307       | )        | 68         |     | (72        | ) |
| **EBITDA**(1)                                                                            | ** ** | **$**     | **454**    |       | 569        |     | 238        |     | 215        |     | 62         |     | 720        |   |
| **Data per Common Share**                                                                |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Net income (loss)                                                                        |       |      |       |       |       |     |       |     |       |     |       |     |       |
| — Basic                                                                             | ** ** | **$**     | **(1.26**  | **)**      | 2.91       |     | (0.02      | )        | (1.30      | )        | (1.88      | )        | 3.00       |   |
| — Diluted                                                                           | ** ** | **$**     | **(1.26**  | **)**      | 2.71       |     | (0.02      | )        | (1.30      | )        | (1.88      | )        | 2.84       |   |
| Common shareholders’ equity at year-end(1), (4)                                     | ** ** | **$**     | **14.81**  |       | 19.13      |     | 15.76      |     | 12.40      |     | 13.05      |     | 16.52      |   |
| **Ratios**                                                                               |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Return (loss) on average common equity(5)                                                | ** ** | **(7.7**  | **)%**     | 19.1       | %          | (0.1     | )%         | (11.1    | )%         | (13.5    | )%         | 19.5     | %          |
| Net debt to total capitalization(1)                                                      | ** ** | **59.7**  | **%**      | 48.5       | %          | 51.8     | %          | 63.9     | %          | 66.1     | %          | 59.9     | %          |
| Funds flow coverage of financial charges(1), (6)                                         | ** ** | **3.0**   | **x**      | 4.5        | x          | 1.7      | x          | 1.8      | x          | 1.2      | x          | 4.2      | x          |
| **Miscellaneous Data**                                                                   |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Employees at year-end                                                                    | ** ** | **3,600** |       | 4,100      |       | 4,300    |       | 4,300    |       | 4,600    |       | 4,700    |       |
| Closing share price                                                                      |       |      |       |       |       |     |       |     |       |     |       |     |       |
| — TSX ($Cdn)                                                                        | ** ** | **$**     | **38.81**  |       | 56.70      |     | 35.04      |     | 28.89      |     | 30.75      |     | 28.10      |   |
| — NYSE ($U.S.)                                                                      | ** ** | **$**     | **33.40**  |       | 47.30      |     | 26.95      |     | 18.30      |     | 19.27      |     | 18.81      |   |
| **Dividends and distributions**                                                          |       |      |       |       |       |     |       |     |       |     |       |     |       |
| Common shares                                                                            | ** ** | **$**     | **27**     |       | 28         |     | 25         |     | 23         |     | 23         |     | 23         |   |

 

----

(1)  Inaddition to providing measures in accordance with Canadian GAAP, NOVA Chemicalspresents certain supplemental measures. These measures do not have anystandardized meaning prescribed by Canadian GAAP, and are, therefore, unlikelyto be comparable to measures presented by other companies.

 

(2)  OnJanuary 1, 2005, NOVA Chemicals adopted new Canadian Accounting Standards,which require certain preferred shares and securities to be classified aslong-term debt as opposed to equity. Related dividends and distributions havebeen reclassified to interest expense, thereby reducing net income. Priorperiods have been restated accordingly. Long-term debt includes current portionof long-term debt.

 

(3)  Asa result of the reclassification of the preferred shares to long-term debt (see(2)), cash and cash equivalents include restricted cash associated with thepreferred shares, which is classified in investments and other assets in theConsolidated Balance Sheets. Prior periods have been restated accordingly.

 

(4)  Commonshareholders’ equity divided by outstanding common shares. Years prior to 2005assume the retractable preferred shares were exchanged for common shares, to amaximum of 8.5 million. Effective September 2005, the preferred shares are nolonger convertible to common shares.

 

(5)  Netincome (loss) divided by average common equity.

 

(6)  Fundsflow from operations plus interest expense (net) less interest income dividedby gross interest expense. As a result of the changes noted in (2), priorperiods have been restated.

 

1

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**MANAGEMENT’S REPORT**

 

**To the Shareholders of NOVA Chemicals Corporation**

 

The Consolidated Financial Statements and other financial informationincluded in this annual report have been prepared by management. It ismanagement’s responsibility to ensure that sound judgment, appropriateaccounting principles and methods and reasonable estimates have been used inthe preparation of this information. They also ensure that all informationpresented is consistent.

 

Management is also responsible for establishing and maintaining internalcontrols and procedures over the financial reporting process. The internalcontrol system includes an internal audit function and an established businessconduct policy that applies to all employees. In addition, the company hasadopted a code of ethics that applies to its Chief Executive Officer, ChiefFinancial Officer and Corporate Controller. The code of ethics can be viewed onNOVA Chemicals’ website (www.novachemicals.com). Management believes the systemof internal controls, review procedures and established policies providereasonable assurance as to the reliability and relevance of financial reports.Management also believes that NOVA Chemicals’ operations are conducted inconformity with the law and with a high standard of business conduct.

 

Each year we document the design and operating effectiveness of internalcontrol over external financial reporting. The results of this work have beensubjected to audit by the shareholders’ auditors. As at year end, we havereported that internal control over financial reporting is effective. Incompliance with Section 302 of the United States Sarbanes-Oxley Act of 2002,NOVA Chemicals’ Chief Executive Officer and Chief Financial Officer willprovide to the Securities and Exchange Commission a certification related toNOVA Chemicals’ annual disclosure document in the U.S. (Form 40-F). The samecertification will be provided to the Canadian Securities Administrators.

 

The Board of Directors is responsible for ensuring that managementfulfills its responsibilities for financial reporting and internal control. TheBoard carries out this responsibility principally through its Audit, Financeand Risk Committee. The Committee, which consists solely of independentdirectors, reviews the financial statements and annual report and recommendsthem to the Board for approval. The Committee meets with management, internalauditors and external auditors to discuss internal controls, auditing matters,and financial reporting issues. Internal and external auditors have full andunrestricted access to the Audit, Finance and Risk Committee. The Committeealso recommends a firm of external auditors to be appointed by theshareholders.

 

 
|                                         | *** *** |                                                      |
|-----------------------------------------|--------------|------------------------------------------------------|
| ***Jeffrey M. Lipton***                 | *** *** | ***Larry A. MacDonald***                             |
| President & Chief Executive Officer |         | Senior Vice President &  Chief Financial Officer |
|                                    |         |                                                 |
| February 15, 2006                       |         |                                                 |
| Calgary, Canada                         |         |                                                 |

 

2

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**MANAGEMENT’S ANNUAL REPORT ONINTERNAL CONTROLOVER FINANCIAL REPORTING**

 

The following report is provided by management in respect of NOVAChemicals’ internal control over financial reporting (as defined in Rules13a-15f and 15d-15f under the United States Securities Exchange Act of 1934):

 

1. NOVA Chemicals’ managementis responsible for establishing and maintaining adequate internal control overfinancial reporting for NOVA Chemicals.

 

2. Management has used theCommittee of Sponsoring Organizations of the Treadway Commission (COSO)framework to evaluate the effectiveness of NOVA Chemicals’ internal control overfinancial reporting. Management believes that the COSO framework is a suitableframework for its evaluation of NOVA Chemicals’ internal control over financialreporting because it is free from bias, permits reasonably consistentqualitative and quantitative measurements of NOVA Chemicals’ internal controls,is sufficiently complete so that those relevant factors that would alter aconclusion about the effectiveness of NOVA Chemicals’ internal controls are notomitted and is relevant to an evaluation of internal control over financialreporting.

 

3. NOVA Chemicals’Consolidated Financial Statements include the accounts of the NOVA Innovenejoint venture via proportionate consolidation in accordance with Canadian GAAP.Management has been unable to assess the effectiveness of internal controlwithin the joint venture due to the fact that NOVA Chemicals does not have theability to dictate or modify the controls of the joint venture and does nothave the ability, in practice, to assess those controls. Management’sconclusion regarding the effectiveness of internal controls does not extend tothe internal controls of the joint venture. The 2005 Consolidated FinancialStatements of NOVA Chemicals included $262 million and $162 million of totaland net assets, respectively, as of December 31, 2005, and $128 million and $28million of revenues and net loss, respectively, for the year then ended.

 

4. Management has assessedthe effectiveness of NOVA Chemicals’ internal control over financial reporting,as at December 31, 2005, and has concluded that such internal control overfinancial reporting is effective. There are no material weaknesses in NOVAChemicals’ internal control over financial reporting that have been identifiedby management.

 

5. Ernst & Young LLP, whohas audited the Consolidated Financial Statements of NOVA Chemicals for theyear ended December 31, 2005, has also issued a report on management’sassessment of internal controls over financial reporting under AuditingStandard No. 2 of the Public Company Accounting Oversight Board (UnitedStates). This report is located on Page 67 of this Annual Report.

 

 
| ******                                  | *** *** | ****                                                 |
|-----------------------------------------|--------------|------------------------------------------------------|
| ***Jeffrey M. Lipton***                 | *** *** | ***Larry A. MacDonald***                             |
| President & Chief Executive Officer |         | Senior Vice President &  Chief Financial Officer |
|                                    |         |                                                 |
|                                    |         |                                                 |
| February 15, 2006                       |         |                                                 |
| Calgary, Canada                         |         |                                                 |

 

3

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**INDEPENDENT AUDITORS’ REPORT ONFINANCIAL STATEMENTS**

 

Under Canadian GenerallyAccepted Auditing Standards and the Standards of the Public Company AccountingOversight Board (United States)

 

**To the Shareholders of NOVA Chemicals Corporation**

 

We have audited the Consolidated Balance Sheets of NOVA ChemicalsCorporation as at December 31, 2005, 2004, and 2003, and the ConsolidatedStatements of Income (Loss) and Reinvested Earnings and Cash Flows for each ofthe years in the three-year period ended December 31, 2005. These financialstatements are the responsibility of the Corporation’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with Canadian Generally AcceptedAuditing Standards and the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform anaudit to obtain reasonable assurance whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 2, in 2005, the Corporation changed its method ofaccounting for financial instruments with characteristics of both debt andequity, and for the measurement date for reporting related to defined benefitplans.

 

In our opinion, these Consolidated Financial Statements present fairly,in all material respects, the financial position of NOVA Chemicals Corporationas at December 31, 2005, 2004, and 2003 and the results of its operations andits cash flows for each of the years in the three-year period ended December31, 2005 in accordance with Canadian Generally Accepted Accounting Principles.

 

We have also audited, in accordance with the Standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of NOVAChemicals Corporation’s internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 15, 2006, expressed anunqualified opinion thereon.

 

 
| ******                      |
|-----------------------------|
| *** ***                |
| ***Ernst & Young LLP*** |
| Chartered Accountants       |
|                        |
| February 15, 2006           |
| Calgary, Canada             |

 

4

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**INDEPENDENT AUDITORS’ REPORT ONINTERNAL CONTROLS**

 

Under Standards of the PublicCompany Accounting Oversight Board (United States)

 

**To the Shareholders of NOVA Chemicals Corporation**

 

We have audited management’s assessment, included on page 65 of thisannual report, that NOVA Chemicals Corporation (NOVA Chemicals) maintainedeffective internal control over financial reporting as of December 31, 2005,based on criteria established in Internal Control – Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). NOVA Chemicals’ management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Corporation’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with Generally Accepted Accounting Principles. A company’s internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withGenerally Accepted Accounting Principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

As indicated in Management’s Annual Report on Internal Control OverFinancial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did not include theinternal controls of the NOVA Innovene joint venture, included in NOVAChemicals’ 2005 Consolidated Financial Statements and constituting $262 millionand $162 million of total and net assets, respectively, for the year endedDecember 31, 2005, and $128 million and $28 million of revenues and net loss,respectively, for the year then ended. Management did not assess theeffectiveness of internal control over financial reporting at the joint venturebecause NOVA Chemicals does not have the ability to dictate or modify thecontrols of the joint venture, nor the ability, in practice, to assess thosecontrols. Our audit of internal control over financial reporting of NOVAChemicals did not include an evaluation of the internal controls over financialreporting of NOVA Innovene.

 

In our opinion, management’s assessment that NOVA Chemicals maintainedeffective internal control over financial reporting as of December 31, 2005, isfairly stated, in all material respects, based on the COSO criteria. Also, inour opinion, NOVA Chemicals maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, based on theCOSO criteria.

 

We have also audited, in accordance with Canadian generally acceptedauditing standards and the standards of the Public Company Accounting OversightBoard (United States), the Consolidated Balance Sheets of NOVA Chemicals as atDecember 31, 2005, 2004 and 2003 and the Consolidated Statements of Income(Loss) and Reinvested Earnings and Cash Flows for each of the years in thethree-year period ended December 31, 2005, and our report dated February 15,2006, expressed an unqualified opinion thereon.

 

 
| ******                      |
|-----------------------------|
| *** ***                |
| ***Ernst & Young LLP*** |
| Chartered Accountants       |
|                        |
| February 15, 2006           |
| Calgary, Canada             |

 

5

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**CONSOLIDATED STATEMENTS OF INCOME(LOSS)AND REINVESTED EARNINGS**

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF U.S.  DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)** | ** ** | **2005**   |       | **2004(1)** | ** ** | **2003(1)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                                                                                  |       |       |       |        |       |        |       |
| **Revenue**                                                                                           | ** ** | **$**      | **5,616**  | ** **  | $          | 5,270       |       | $ | 3,949 |   |
| Feedstock and operating  costs                                                                        | ** ** | **4,911**  | ** ** | 4,380       |       | 3,476       |       |
| Depreciation and amortization                                                                         | ** ** | **290**    | ** ** | 297         |       | 298         |       |
| Selling, general and  administrative                                                                  | ** ** | **201**    | ** ** | 273         |       | 190         |       |
| Research and development                                                                              | ** ** | **50**     | ** ** | 48          |       | 45          |       |
| Restructuring charges  (Note 14)                                                                      | ** ** | **168**    | ** ** | 8           |       | 15          |       |
| ** **                                                                                            |       | **5,620**  | ** ** | 5,006       |       | 4,024       |       |
| Operating income (loss)                                                                               | ** ** | **(4**     | **)**      | 264         |       | (75         | )          |
| Interest expense (net)  (Note 8)                                                                      | ** ** | **(113**   | **)**      | (108        | )          | (130        | )          |
| Equity in earnings of  affiliate (Note 5)                                                             | ** ** | **—** | ** ** | —      |       | 39          |       |
| Other gains and losses  (net) (Note 15)                                                               | ** ** | **8**      | ** ** | 177         |       | 92          |       |
| ** **                                                                                            |       | **(105**   | **)**      | 69          |       | 1           |       |
| Income (loss) before  income taxes                                                                    | ** ** | **(109**   | **)**      | 333         |       | (74         | )          |
| Income tax (expense) recovery  (Note 16)                                                              | ** ** | **5**      | ** ** | (81         | )          | 73          |       |
| **Net Income (Loss)**                                                                                 | ** ** | **$**      | **(104**   | **)**       | $          | 252         |       | $ | (1 | ) |
| Reinvested earnings,  beginning of year                                                               | ** ** | **633**    | ** ** | 584         |       | 605         |       |
| Changes in accounting policies (Note 2)                                                               | ** ** | **—** | ** ** | (7          | )          | 5           |       |
| Common share repurchases (Note 10)                                                                    | ** ** | **(107**   | **)**      | (155        | )          | —      |       |
| Stock options retired for cash (Note 12)                                                              | ** ** | **(5**     | **)**      | (13         | )          | —      |       |
| Common share dividends                                                                                | ** ** | **(27**    | **)**      | (28         | )          | (25         | )          |
| Reinvested earnings, end  of year                                                                     | ** ** | **$**      | **390**    | ** **  | $          | 633         |       | $ | 584 |   |
| Weighted-average number of  common shares outstanding (millions)                                      |       |       | ** ** |        |       |        |       |
| — Basic                                                                                          | ** ** | **83**     | ** ** | 87          |       | 87          |       |
| — Diluted                                                                                        | ** ** | **83**     | ** ** | 95          |       | 87          |       |
| Net income (loss) per  common share (Note 10)                                                         |       |       | ** ** |        |       |        |       |
| — Basic                                                                                          | ** ** | **$**      | **(1.26**  | **)**       | $          | 2.91        |       | $ | (0.02 | ) |
| — Diluted                                                                                        | ** ** | **$**      | **(1.26**  | **)**       | $          | 2.71        |       | $ | (0.02 | ) |

 

See accompanying Notes toConsolidated Financial Statements.

 

----

(1)  Years 2004 and2003 have been restated due to a change in accounting policy — see Note 2.

 

6

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**CONSOLIDATED BALANCE SHEETS**

 
| **DECEMBER 31 (MILLIONS OF U. S.  DOLLARS)**         | ** ** | **2005**  | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
|------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
| **Assets**                                           |       |      |       |        |       |        |       |
| Current  assets                                      |       |      |       |        |       |        |       |
| Cash and cash equivalents                            | ** ** | **$**     | **166**    |        | $          | 245         |       | $ | 212 |   |
| Accounts receivable (Note 3)                         | ** ** | **564**   |       | 567         |       | 316         |       |
| Inventories (Note 4)                                 | ** ** | **680**   |       | 634         |       | 392         |       |
| ** **                                           |       | **1,410** |       | 1,446       |       | 920         |       |
| Investments  and other assets (Note 5)               | ** ** | **181**   |       | 147         |       | 157         |       |
| Plant,  property and equipment, net (Note 6)         | ** ** | **3,626** |       | 3,454       |       | 3,336       |       |
| ** **                                           |       | **$**     | **5,217**  |        | $          | 5,047       |       | $ | 4,413 |   |
|                                                 |       |      |       |        |       |        |       |
| **Liabilities  and Shareholders’ Equity**       |       |      |       |        |       |        |       |
| Current  liabilities                                 |       |      |       |        |       |        |       |
| Bank loans                                           | ** ** | **$**     | **1**      |        | $          | —      |       | $ | — |   |
| Accounts payable and accrued liabilities  (Note 7)   | ** ** | **996**   |       | 808         |       | 587         |       |
| Long-term debt due within one year (Note 8)          | ** ** | **301**   |       | 100         |       | —      |       |
| ** **                                           |       | **1,298** |       | 908         |       | 587         |       |
| Long-term  debt (Note 8)                             | ** ** | **1,737** |       | 1,614       |       | 1,682       |       |
| Deferred  credits and long-term liabilities (Note 9) | ** ** | **318**   |       | 355         |       | 249         |       |
| Future  income taxes (Note 16)                       | ** ** | **645**   |       | 677         |       | 586         |       |
| ** **                                           |       | **3,998** |       | 3,554       |       | 3,104       |       |
|                                                 |       |      |       |        |       |        |       |
| **Shareholders’  Equity**                       |       |      |       |        |       |        |       |
| Common  shares (Note 10)                             | ** ** | **494**   |       | 499         |       | 493         |       |
| Contributed  surplus (Note 11)                       | ** ** | **11**    |       | 8           |       | —      |       |
| Cumulative  translation adjustment                   | ** ** | **324**   |       | 353         |       | 232         |       |
| Reinvested  earnings                                 | ** ** | **390**   |       | 633         |       | 584         |       |
| ** **                                           |       | **1,219** |       | 1,493       |       | 1,309       |       |
| ** **                                           |       | **$**     | **5,217**  |        | $          | 5,047       |       | $ | 4,413 |   |
| Contingencies  and commitments (Notes 8, 20 and 22)  |       |      |       |        |       |        |       |

 

See accompanying Notes to Consolidated Financial Statements.

 

----

(1)  Years2004 and 2003 have been restated due to a change in accounting policy — seeNote 2.

 

On behalf of the board:

 
| ****                   |   | ****                    |
|------------------------|--------|-------------------------|
| ***Kerry L. Hawkins*** |   | ***Jeffrey M. Lipton*** |
| Director               |   | Director                |

 

7

----

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF U.S. DOLLARS)**                   | ** ** | **2005**   | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                                                     |       |       | ** ** |        |       |        |       |
| **Operating  Activities**                                                |       |       | ** ** |        |       |        |       |
| Net income  (loss)                                                       | ** ** | **$**      | **(104**   | **)**       | $          | 252         |       | $ | (1 | ) |
| Depreciation  and amortization                                           | ** ** | **290**    | ** ** | 297         |       | 298         |       |
| Future  income tax expense (recovery) (Note 16)                          | ** ** | **(73**    | **)**      | 36          |       | (90         | )          |
| Other gains  and losses (net) (Note 15)                                  | ** ** | **(8**     | **)**      | (177        | )          | (92         | )          |
| Stock option  expense (Note 12)                                          | ** ** | **4**      | ** ** | 4           |       | —      |       |
| Equity in  earnings of affiliate                                         | ** ** | **—** | ** ** | —      |       | (39         | )          |
| Methanex  dividends received                                             | ** ** | **—** | ** ** | —      |       | 14          |       |
| Restructuring  charges                                                   | ** ** | **161**    | ** ** | —      |       | 9           |       |
| Funds flow  from operations                                              | ** ** | **270**    | ** ** | 412         |       | 99          |       |
| Changes in  non-cash working capital (Note 17)                           | ** ** | **(42**    | **)**      | (78         | )          | (125        | )          |
| Cash from  (used in) operations                                          | ** ** | **228**    | ** ** | 334         |       | (26         | )          |
| **Investing  Activities**                                                |       |       | ** ** |        |       |        |       |
| Proceeds on  sales of assets, investments and other capital transactions | ** ** | **11**     | ** ** | 225         |       | 564         |       |
| Plant,  property and equipment additions                                 | ** ** | **(419**   | **)**      | (242        | )          | (130        | )          |
| Turnaround  costs, long-term investments and other assets                | ** ** | **(178**   | **)**      | (9          | )          | (57         | )          |
| Change in  non-cash working capital (Note 17)                            | ** ** | **110**    | ** ** | (110        | )          | 7           |       |
| ** **                                                               |       | **(476**   | **)**      | (136        | )          | 384         |       |
| **Financing  Activities**                                                |       |       | ** ** |        |       |        |       |
| Increase  (decrease) in current bank loans                               | ** ** | **1**      | ** ** | —      |       | (3          | )          |
| Long-term  debt additions                                                | ** ** | **419**    | ** ** | 400         |       | —      |       |
| Long-term  debt repayments                                               | ** ** | **(103**   | **)**      | (2          | )          | (152        | )          |
| Decrease in  revolving debt                                              | ** ** | **—** | ** ** | —      |       | (2          | )          |
| Preferred  securities redeemed (Note 8)                                  | ** ** | **—** | ** ** | (383        | )          | —      |       |
| Common  shares issued (Note 10)                                          | ** ** | **13**     | ** ** | 37          |       | 9           |       |
| Common share  repurchases (Note 10)                                      | ** ** | **(125**   | **)**      | (188        | )          | —      |       |
| Stock  options retired for cash (Note 12)                                | ** ** | **(11**    | **)**      | (18         | )          | —      |       |
| Common share  dividends                                                  | ** ** | **(27**    | **)**      | (28         | )          | (25         | )          |
| Project  advances from third parties                                     | ** ** | **—** | ** ** | 15          |       | 11          |       |
| Changes in  non-cash working capital (Note 17)                           | ** ** | **2**      | ** ** | 2           |       | 2           |       |
| ** **                                                               |       | **169**    | ** ** | (165        | )          | (160        | )          |
| Increase  (decrease) in cash and cash equivalents                        | ** ** | **(79**    | **)**      | 33          |       | 198         |       |
| Cash and  cash equivalents, beginning of year                            | ** ** | **245**    | ** ** | 212         |       | 14          |       |
| Cash and  cash equivalents, end of year                                  | ** ** | **$**      | **166**    | ** **  | $          | 245         |       | $ | 212 |   |
|                                                                     |       |       | ** ** |        |       |        |       |
| Cash tax  payments (receipts)                                            | ** ** | **$**      | **55**     | ** **  | $          | 11          |       | $ | (28 | ) |
| Cash  interest payments                                                  | ** ** | **$**      | **131**    | ** **  | $          | 107         |       | $ | 142 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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(1)Years 2004 and 2003 havebeen restated due to a change in accounting policy — see Note 2.

 

8

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

All amounts in U.S. dollars,unless otherwise noted.

 

**1. Basis of Presentation**

 

NOVA Chemicals Corporation is incorporated under the Canada Business CorporationsAct. Where used in these Consolidated Financial Statements, “NOVA Chemicals” or“the Corporation” means NOVA Chemicals Corporation alone or together with itssubsidiaries and affiliates, depending on the context in which such terms areused. The Consolidated Financial Statements include the accounts of theCorporation, its subsidiaries and the proportionate share of the accounts ofits joint ventures. Where reference is made to balances due to and from, andtransactions with, affiliate, “affiliate” means the NOVA Innovene jointventure. These transactions and balances arise from business conducted between NOVAChemicals and the NOVA Innovene joint venture.

 

These Consolidated Financial Statements have been prepared by managementon the historical cost basis in accordance with Canadian Generally AcceptedAccounting Principles (GAAP).  Theseaccounting principles are different in some respects from those generallyaccepted in the United States and the significant differences are described inNote 23, “United States Generally Accepted Accounting Principles” (U.S. GAAP).

 

The Corporation measures and reports its Consolidated FinancialStatements in U.S. dollars.

 

The preparation of these Consolidated Financial Statements in conformitywith Canadian GAAP requires management to make estimates and assumptions thataffect amounts reported and disclosed in the financial statements and relatednotes. Actual results could differ materially from those estimates due tofactors such as fluctuations in commodity prices, foreign exchange rates,interest rates, changes in economic conditions and regulatory changes. Examplesof significant estimates include: the estimated useful lives of assets; therecoverability of tangible assets; certain actuarial and economic assumptionsused in determining defined benefit pension costs, accrued pension benefitobligations and pension plan assets; and estimates of cash flows related toenvironmental site restoration and clean-up and the resulting asset retirementobligations.

 

**2.  Summary ofSignificant Accounting Policies**

 

***Changes in Accounting Policies***

 

***Measurement Date.***Effective January 1, 2005, NOVA Chemicalschanged the measurement date for reporting related to its defined benefit plansfrom December 31 to November 30.  Thischange in measurement date will be used consistently in future periods.

 

***Accounting for Financial Instrumentswith Characteristics of Both Debt and Equity.***On January 1, 2005, the Corporation adoptednew accounting standards as prescribed by the Canadian Institute of CharteredAccountants (CICA), which harmonize accounting standards with U.S. GAAP forcertain types of mandatory redeemable shares and other financialinstruments.  Beginning on January 1,2005, these instruments are required to be reclassified, on a retroactivebasis, as liabilities rather than equity. As a result, the preferred shares of NOVA Chemicals’ subsidiary, NOVAChemicals Inc., and the Corporation’s preferred securities have beenreclassified as debt. In addition, dividends and distributions associated withthese preferred shares and securities have been reclassified to interestexpense, reducing net income by $10 million in 2004 and $29 million in 2003 asthe presentation for all prior periods was restated.

 

***Stock-Based Incentive Plans.***On January 1, 2004, NOVA Chemicals adopted anew accounting standard related to stock-based compensation as prescribed bythe CICA. The recommendations require that the fair value of stock options beexpensed over their vesting period. Previously, NOVA Chemicals followed theintrinsic-value approach, where the granting and exercising of stock optionswere accounted for as equity transactions and no amounts were expensed. TheCorporation adopted the accounting policy on a retroactive basis with no restatementof prior periods. Accordingly, on January 1, 2004, reinvested earnings wasreduced and contributed surplus was increased by $7 million to account for thestock option expense that would have been charged to income (loss) in 2002 and2003 with respect to all options granted since January 1, 2002. NOVA Chemicalsuses the Black-Scholes option valuation model to calculate the fair value ofoptions at the date of grant.

 

***Derivative Financial Instruments.***Effective January 1, 2004, NOVA Chemicalsadopted the CICA accounting standard that requires all derivative positions,except those that qualify for hedge accounting treatment, to bemarked-to-market at each period end with any resulting gains or losses recordedin income (loss). NOVA Chemicals adopted the new accounting standard on aprospective basis. In accordance with the transitional provisions of the newaccounting standard,

 

9

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$10 million of unrealized gains and $18 million of crystallized lossesthat existed on January 1, 2004 were deferred on the Consolidated BalanceSheet. These amounts are recognized in income (loss) over the remaining term tomaturity of the previously hedged transaction.

 

***Asset Retirement Obligations.***On January 1, 2003, NOVA Chemicals adopted thenew accounting standard related to asset retirement obligations as prescribedby the CICA. The recommendations changed the method for recognition ofliabilities associated with the retirement of plant, property and equipment.The liabilities are initially recorded at their estimated fair value, based ona discounted value of the expected costs to be paid when the assets areretired. The amount is added to the carrying values of the assets anddepreciated over the estimated remaining lives of the assets. The liabilityincreases each period as the amount of the discount decreases over time. Theresulting expense is referred to as accretion expense and is included inoperating expenses. The liability is also adjusted for any changes in the estimatedamount or timing of the underlying future cash flows. The Corporation’s assetretirement obligations are comprised of expected costs to be incurred upontermination of operations and the closure of active manufacturing plantfacilities. Costs will be incurred for activities such as dismantling,demolition and disposal of facilities and equipment, and remediation andrestoration of sites. A change in accounting policy generally requiresretroactive restatement of financial statements presented for prior periods,however, as the effect of these recommendations was less than $1 million foreach prior period, reinvested earnings at January 1, 2003, was increased forthe $5 million cumulative effect on adoption.

 

***Cost of Service***

 

Under the terms of certain sales agreements, the Corporation soldethylene on a take-or-pay basis, for a price determined by a cost-of-serviceformula that included the cost of fuel and feedstock, operating expenses,depreciation, income taxes, return on capital and realized foreign exchangegains or losses in respect of debt service. The return on capital included a20% after-tax return on equity based on a deemed debt to equity ratio. NOVAChemicals’ cost-of-service agreements expired on June 30, 2004.

 

***Cash and Cash Equivalents***

 

Short-term investments with initial maturities not greater than 90 daysare considered to be cash equivalents, and are recorded at cost, whichapproximates current market value.

 

***Foreign Currency Translation***

 

The Corporation’s foreign operations are considered self-sustaining andare translated into U.S. dollars using the current rate method. Resultingtranslation gains or losses are deferred in the cumulative translationadjustment account until there is a realized reduction of the investment in theforeign operations.

 

***Derivative Instruments***

 

The Corporation sells petrochemical products at prices denominated invarious currencies, purchases energy commodities, invests in foreignoperations, issues short- and long-term debt, including amounts in foreign currencies,and utilizes a number of stock-based compensation plans. These activitiesresult in exposures to fluctuations in foreign currency exchange rates,commodity prices, interest rates, and common stock prices. NOVA Chemicals maychoose to modify these exposures by entering into contractual arrangements(derivatives), which reduce the exposure by creating offsetting positions.Derivative instruments are used only for economic hedges of foreign exchangerate, commodity price, interest rate and stock price volatility risks. Thesederivative instruments are not utilized for trading or speculative purposes.

 

NOVA Chemicals has U.S., Canadian and European-based petrochemicaloperations. The Corporation periodically manages its exposure to fluctuationsin Canadian and Euro dollar exchange rates by using forward exchange contracts.

 

NOVA Chemicals may choose to use commodity-based derivatives to manageits exposure to price fluctuations on crude oil, refined products and naturalgas transactions. The instruments are used to moderate against adverseshort-term price movements. Occasionally, longer-term positions will be takento manage price risk for anticipated supply requirements.

 

When considered appropriate, NOVA Chemicals enters into interest rateswaps in order to manage the fixed and floating

 

10

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interest rate mix on its long-term debt portfolio. The interest rateswap agreements generally involve the periodic exchange of payments without theexchange of the notional principal amounts upon which the payments are based.

 

Equity forward contracts are used to manage exposures to fluctuations inthe Corporation’s stock-based compensation costs, as the costs of the plansvary with changes in the market price of the underlying common shares.

 

Unrealized gains or losses on derivative instruments that do not qualifyfor hedge accounting are reflected in income (loss) each period as a result ofthe derivatives being marked-to-market. Gains or losses realized on settlement ofderivative instruments qualifying for hedge accounting are recognized in income(loss) in the same period and the same Statement of Income (Loss) category asthe revenues or expenditures arising from the hedged transaction.

 

Gains or losses on early termination or liquidation of derivativeinstruments qualifying for hedge accounting are deferred as current ornon-current assets or liabilities on the balance sheet, as appropriate, and arerecognized in income (loss) in the period in which the underlying hedgedtransaction is recognized. Gains or losses on early termination or liquidationof derivative instruments that do not qualify for hedge accounting arerecognized in income (loss) on termination or liquidation.

 

***Inventories***

 

Inventories are carried at the lower of cost and net realizable value.Cost is determined on a first-in, first-out basis with no allocation of fixedproduction overhead.

 

***Investments***

 

Investments in affiliates, over which the Corporation exercisessignificant influence, but not control, are accounted for by the equity method.Under this method, the investment is carried at cost plus the related share ofundistributed earnings, less dividends received. Other investments, exceptinvestments in joint ventures, are carried at cost. Investments are assessedannually for potential impairment.

 

***Joint Ventures***

 

NOVA Chemicals applies the proportionate consolidation method ofaccounting for its investments in joint venture operations. Under this method,NOVA Chemicals records, on a line-by-line basis within its financial statementsand notes, its pro rata share of the joint venture’s assets, liabilities,revenues, expenses and cash flows.

 

***Plant, Property and Equipment(PP&E)***

 

NOVA Chemicals’ PP&E consists primarily of manufacturing equipment, landand buildings for producing petrochemicals. PP&E are valued at historicalcost. Financing costs incurred during major construction are capitalized aspart of the cost of the asset until the asset is available for use. Costsrelated to turnaround activities are capitalized and amortized over the periodremaining to the next turnaround activity, while maintenance and repair costsare expensed as incurred.

 

The Corporation periodically reviews the carrying value of PP&E forimpairment when circumstances indicate an asset’s value may not be recoverable.If it is determined that an asset’s undiscounted cash flows are less than itscarrying value, the asset is written down to its net realizable value.

 

***Depreciation***

 

Plant and equipment are depreciated on a straight-line basis at annualrates ranging from 3% to 40%. These rates are designed to write-off the assetsto their salvage values over their estimated useful lives. The Albertacost-of-service ethylene plants and the hydrogen plant were depreciated over thelives of the related sales agreements.

 

***Deferred Start-Up Costs***

 

Costs associated with start-up activities on constructed plants aredeferred from the date of mechanical completion of the facilities until thedate the Corporation is ready to commence commercial service. Any revenuesearned during this period are recorded as a reduction in deferred start-upcosts. These costs are amortized on a straight-line basis over a five-yearperiod, commencing on the date of commercial service.

 

11

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***Leases***

 

Leases are classified as operating or capital depending upon the termsand conditions of the contracts. Leases that transfer substantially all thebenefits and risks of ownership to the Corporation are accounted for as capitalleases. Assets under capital leases are amortized on a straight-line basis overthe period of expected use and are classified with PP&E. Obligationsrecorded under capital leases are reduced by lease payments net of imputedinterest and are classified with long-term debt.

 

***Income Taxes***

 

Cost-of-service activities operated under billing structures thatallowed NOVA Chemicals to recover related income tax costs from customers basedon the taxes-payable method. NOVA Chemicals recorded income tax expense onthese operations equal to recoverable amounts. All cost-of-service agreementsexpired on June 30, 2004.

 

For non-cost-of-service operations, the liability method of taxallocation accounting is used. Under the liability method, future tax assets andliabilities are determined based on differences between the accounting and taxbasis of assets and liabilities and measured using the substantively enactedtax rates and laws that will be in effect when the differences are expected toreverse.

 

Under the liability method, future income taxes are also provided on thedifference between the accounting and tax basis of equity investments. One ofthese differences results from recording equity earnings (losses) foraccounting purposes. Accordingly, income tax expense (recovery) is provided onequity earnings (losses).

 

***Employee Future Benefits***

 

***Pension Plans.***NOVA Chemicals sponsors both defined benefitand defined contribution pension arrangements covering substantially allemployees.

 

The cost of defined benefit pensions is determined using the projectedbenefit method prorated on employment services and is expensed as the employeesprovide services. Adjustments arising from plan amendments are amortized on astraight-line basis over the estimated average remaining service lifetime(EARSL). Adjustments arising from changes in assumptions and experience gainsand losses are amortized over EARSL when the cumulative unamortized balanceexceeds 10% of the greater of accrued obligations or plan assets. Gains or lossesarising from plan curtailment and settlements are recognized in the year inwhich they occur. For purposes of calculating the expected return on planassets, pension assets are revalued at fair value. Liabilities are measured atmarket discount rates that reflect the yield at the latest valuation date on aportfolio of corporate bonds of similar duration as the Corporation’s pensionliabilities.

 

The cost of defined contribution benefits is expensed as earned byemployees. NOVA Chemicals makes contributions in accordance with all planagreements.

 

***Post-Retirement Benefits Other ThanPensions.***In NorthAmerica, NOVA Chemicals provides medical care and life insurance benefits toeligible retirees and their dependents. Post-retirement benefit costs are expensedas the employees provide service.

 

***Stock-Based Compensation***

 

The Corporation uses the fair-value method of accounting forequity-settled stock-based compensation awards granted to employees, such asoptions, where compensation expense is measured and recognized based on thefair value of the stock-based award. Amounts related to compensation costs areinitially credited to contributed surplus and then transferred to common sharesupon exercise of options, or reinvested earnings upon cancellation or retirementof options.

 

The Corporation uses the liability method of accounting for cash-settledstock-based compensation awards granted to employees, such as equityappreciation and restricted stock units. Units granted are marked-to-marketeach period based on the value of NOVA Chemicals common stock as reported onthe Toronto or New York Stock Exchanges, as applicable. Changes in value arerecorded in income (loss) over the vesting period, or for vested units as suchchanges arise.

 

12

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***Deferred Share Unit Plans***

 

Units issued under these plans are calculated based on annual managementincentive awards or director fees. The cost of the units earned is expensed asemployees and directors provide services. Any adjustments to the value of theunits as a result of expected changes in NOVA Chemicals’ common stock value areamortized on a straight-line basis over the estimated average remaining servicelifetime of individuals participating in the plans.

 

***Earnings Per Share***

 

The treasury stock method is used to calculate diluted earnings pershare. Under this method, the incremental number of common shares outstandingfor the diluted earnings per share calculation is determined assuming that theproceeds from exercise of dilutive options are used to repurchase common sharesat the average market price during the period.

 

***Securitizations***

 

Accounts receivable securitization transactions are recorded as sales ofassets based on the transfer of control to the purchaser. Transactions recordedin this manner result in the removal of the sold assets from the Corporation’sbalance sheet. Interest paid, net of servicing fees, on the portfolio of soldreceivables is recorded as interest expense.

 

***Revenue Recognition***

 

The Corporation recognizes revenue when the earnings process iscomplete. This generally occurs when products are shipped to the customer inaccordance with the terms of the sales agreement, title or risk of loss hasbeen transferred, and pricing is fixed or determinable. The Corporationaccounts for sales incentives as a reduction in revenue at the time revenue isrecorded.

 

***Research and Development***

 

Expenditures associated with research and development activities areexpensed as incurred.

 

***Investment Tax Credits***

 

The Corporation accounts for investment tax credits using the costreduction approach. Investment tax credits related to the acquisition of assetsare deducted from the related assets with depreciation calculated on the netamount. Investment tax credits related to current expenses are included in thedetermination of income (loss) for the period.

 

***Comparative Figures***

 

Certain comparative figures have been reclassified to conform to thecurrent year’s presentation.

 

**3. Accounts Receivable**

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Trade                                  | ** ** | **$**      | **350**    | ** ** | $          | 382      |       | $ | 239 |   |
| Affiliate  trade                       | ** ** | **27**     | ** ** | —     |       | —   |       |
| ** **                             |       | **377**    |       | 382        | ** ** | 239      |       |
| Allowance  for doubtful accounts(1)    | ** ** | **(6**     | **)**      | (10        | )          | (7       | )          |
| ** **                             |       | **371**    |       | 372        | ** ** | 232      |       |
| Proceeds  receivable(2)                | ** ** | **—** | ** ** | 110        |       | —   |       |
| Other                                  | ** ** | **137**    | ** ** | 79         |       | 73       |       |
| Due from  affiliate(3)                 | ** ** | **52**     | ** ** | —     |       | —   |       |
| ** **                             |       | **560**    |       | 561        | ** ** | 305      |       |
| Income taxes  receivable               | ** ** | **4**      | ** ** | 6          |       | 11       |       |
| ** **                             |       | **$**      | **564**    |       | $          | 567      | ** ** | $ | 316 |   |

 

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(1)  TheCorporation’s special purpose entity maintained an allowance for doubtfulaccounts of $nil million at December 31, 2005, (2004 – $nil million and 2003 –$5 million) related to securitized trade receivables.

 

(2)  In 2004, theCorporation recorded final resolution of a tax dispute related to thedeductibility of foreign taxes in certain returns filed with the U. S. InternalRevenue Service prior to 1982. In this regard, $110 million was received in2005 from a former affiliate of a company in which the Corporation previouslyhad an interest.

 

(3)  Includesadvances and notes receivable from affiliate. $43 million in unsecured notes receivablebear interest at 4.5% per annum.

 

13

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***Accounts Receivable Securitizations***

 

The Corporation sells undivided interests in certain trade accountsreceivable pursuant to revolving securitization transactions in which theCorporation retains servicing responsibilities. The receivables are sold at adiscount approximating the purchaser’s financing cost of issuing commercialpaper backed by the accounts receivable. The Corporation pays a fee on thissame basis plus a margin that varies with the Corporation’s interest coverageratio. The sale of receivables is reflected as a reduction of accountsreceivable and in operating cash flows. As collections reduce previously soldinterests, new accounts receivable are sold, to a maximum amount equal to thelesser of eligible receivables or $300 million (2004 - $250 million and 2003-$195 million).  Recourse on soldreceivables is limited to the receivables and certain reserves provided tocover credit losses and dilution (such as discounts, rebates, and othernon-cash reductions). During 2005, the Corporation amended its securitizationprograms to extend the maturity to June 2010 and to increase the size of theprograms from $250 million to $300 million.

 

Information regarding the Corporation’s securitization programs is asfollows:

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)**    | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                                        |       |     | ** ** |       |       |     |       |
| Amount sold at end of year                                                  | ** ** | **$**    | **153**    | ** ** | $          | 250      |       | $ | 177 |   |
| Loss, dilution and other reserves (as a %  of eligible accounts receivable) | ** ** | **16**   | **%**      | 16         | %          | 18       | %          |
| Interest expense, net of servicing fees                                     | ** ** | **$**    | **8**      | ** ** | $          | 4        |       | $ | 3 |   |

 

One of the Corporation’ssecuritization agreements involves the use of a special purpose entity (SPE).Information regarding the cash flows between the Corporation and the SPE are asfollows:

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF DOLLARS)**                            | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                                         |       |     | ** ** |       |       |     |       |
| Proceeds from (repayment of) new  securitizations                            | ** ** | **$**    | **(97**    | **)**      | $          | 73       |       | $ | 14 |   |
| Proceeds from collections reinvested in  revolving period securitizations(1) | ** ** | **$**    | **1,933**  | ** ** | $          | 1,646    |       | $ | 1,406 |   |
| Servicing fees received                                                      | ** ** | **$**    | **2**      | ** ** | $          | 2        |       | $ | 2 |   |
| Other cash flows received                                                    | ** ** | **$**    | **547**    | ** ** | $          | 452      |       | $ | 306 |   |

 

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(1)  Collections received by theSPE on accounts receivable previously sold are used to purchase interests innew accounts receivable.

 

**4.Inventories**

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                   |       |     | ** ** |       |       |     |       |
| Materials and supplies                 | ** ** | **$**    | **48**     | ** ** | $          | 47       |       | $ | 46 |   |
| Raw materials                          | ** ** | **340**  | ** ** | 255        |       | 170      |       |
| Finished goods                         | ** ** | **292**  | ** ** | 332        |       | 176      |       |
| ** **                             |       | **$**    | **680**    |       | $          | 634      | ** ** | $ | 392 |   |

 

**5.Investments and Other Assets**

 
| ** **                                       | ** ** | **2005**       | ** ** | **2004**     | ** ** | **2003**       | ** ** |
|--------------------------------------------------|------------|----------------|------------|--------------|------------|----------------|------------|
| ** **                                       | ** ** | ** **     | ** ** | **EQUITY**   | ** ** | ** **     | ** ** | **EQUITY** | ** ** | ** ** | ** ** | **EQUITY** | ** ** |
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **INVESTMENT** | ** ** | **EARNINGS** | ** ** | **INVESTMENT** | ** ** | **EARNINGS** | ** ** | **INVESTMENT** | ** ** | **EARNINGS** | ** ** |
|                                             |       |           |       |         |       |           |       |   |   |   |   |   |   |
| Methanex Corporation(1)                          | ** ** | **$**          | **—** | ** **   | **$**      | **—**     |       | $ | — |   | $ | — |   | $ | — |   | $ | 39 |   |
| Other investments(2)                             | ** ** | **28**         | ** ** | **—**   |       | 28             |       | — |   | 28 |   | — |   |
| Advances receivable from affiliate(3)            | ** ** | **10**         | ** ** | **—**   |       | —         |       | — |   | — |   | — |   |
| Other assets(4)                                  | ** ** | **143**        | ** ** | **—**   |       | 119            |       | — |   | 129 |   | — |   |
| ** **                                       | ** ** | **$**          | **181**    | ** **   | **$**      | **—**     |       | $ | 147 |   | $ | — |   | $ | 157 |   | $ | 39 |   |

 

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(1)  A total of$14 million of dividends received in 2003 were recorded as a reduction in theinvestment.

 

(2)  Includes aninvestment of $15 million (2004 and 2003 — $15 million) in a special purposeentity with respect to the accounts receivable securitization program describedin Note 3.

 

(3)  $8 million ofthe advances receivable is not scheduled for repayment until 18 months from thedate of commencement of the NOVA Innovene joint venture, and is subordinated tocertain notes receivable. The advance is repayable upon the achievement ofcertain accounts receivable performance targets in respect of the NOVAChemicals trade accounts receivable contributed to the joint venture.

 

(4)  See scheduleof Other Assets on page 77.

 

14

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***Methanex Corporation***

 

In June 2003, the Corporation sold its equity investment in MethanexCorporation for net proceeds of $441 million. This resulted in a before-taxgain of $29 million and an after-tax gain of $61 million. The sale wascompleted with no cash taxes payable and accordingly, a previously recordedincome tax provision of $32 million was taken into income at the time of thesale. The Corporation has no remaining equity interest in Methanex.

 

***Other Assets***

 

Other assets are comprised of the following:

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)**                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Restricted  cash on Series A preferred shares (Note 8) | ** ** | **$**    | **65**     |     | $          | 65       |       | $ | 65 |   |
| Deferred  debt issue costs(1)                          | ** ** | **23**   |       | 20       |       | 18       |       |
| Deferred  start-up costs(2)                            | ** ** | **27**   |       | 5        |       | 12       |       |
| Prepaid  pension                                       | ** ** | **2**    |       | 5        |       | —   |       |
| Other assets  and deferred costs                       | ** ** | **26**   |       | 24       |       | 34       |       |
|                                                   | ** ** | **$**    | **143**    |     | $          | 119      |       | $ | 129 |   |

 

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(1)  Debt issuecosts are amortized on a straight-line basis over the terms of the related debtinstruments.

 

(2)  Start-upcosts consist of the unamortized portion of operating costs, net of incidentalrevenues, incurred during the pre-operating period on constructed assets atJoffre, Alberta, and costs of $25 million incurred in 2005 associated with thestart-up of the Corunna facility after the maintenance turnaround and expansionand modernization project.

 

***Joint Ventures***

 

On October 1, 2005, the Corporation contributed its European styrenicpolymer assets, comprised of manufacturing facilities, accounts receivable andinventory, to the NOVA Innovene joint venture with Innovene in exchange for a50% interest in the joint venture. The joint venture will produce styrenicpolymers from NOVA Chemicals’ contributed plants and Innovene’s contributedplants. NOVA Chemicals accounted for its contribution to the joint venture asan exchange of 50% of its contributed non-monetary productive assets for a 50%interest in similar productive assets of Innovene. Consequently, the exchangewas recorded at the carrying value of the assets given up, with no gain or lossrecognized.

 

NOVA Chemicals sells the joint venture 50% of its styrene monomerrequirements and certain polystyrene products for distribution in Europe.During 2005, NOVA Chemicals recognized revenues of $60 million from the sale ofthese products to the joint venture.

 

NOVA Chemicals has provided a guarantee of $25 million to a financialinstitution to secure various obligations of the NOVA Innovene joint venture.

 

In addition, on October 1, 2005, the Corporation and GRUPO IDESA formeda 50:50 joint venture in Mexico, called NOVIDESA, S.A. de C.V. The jointventure produces expandable polystyrene from an existing GRUPO IDESA facilityfor applications such as construction and packaging in the growing Mexicanmarket.

 

In addition to the recently formed joint ventures, NOVA Chemicals owns a50% interest in an ethylene plant and a 20% interest in a cogeneration facilitylocated at Joffre, Alberta

 

The following is summarized financial information for NOVA Chemicals’interests in these joint ventures:

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF DOLLARS)**  | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                               |       |     | ** ** |       |       |     |       |
| Revenue                                            | ** ** | **$**    | **518**    | ** ** | $          | 260      |       | $ | 216 |   |
| Operating  expenses, depreciation and income taxes | ** ** | **(499** | **)**      | (236       | )          | (204     | )          |
| Net income                                         | ** ** | **$**    | **19**     | ** ** | $          | 24       |       | $ | 12 |   |

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)**          | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                            |       |     | ** ** |       |       |     |       |
| Current  assets                                 | ** ** | **$**    | **248**    | ** ** | $          | 37       |       | $ | 21 |   |
| Plant,  property and equipment and other assets | ** ** | **909**  | ** ** | 522        |       | 556      |       |
| Current  liabilities                            | ** ** | **(161** | **)**      | (26        | )          | (29      | )          |
| Long-term  liabilities                          | ** ** | **(130** | **)**      | (33        | )          | (33      | )          |
| Venturers’  equity                         | ** ** | **$**    | **865**    | ** ** | $          | 500      |       | $ | 515 |   |

 

15

----

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF DOLLARS)** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                              |       |     | ** ** |       |       |     |       |
| Cash inflows  (outflows) from:                    |       |     | ** ** |       |       |     |       |
| Operating activities                              | ** ** | **$**    | **127**    | ** ** | $          | 43       |       | $ | 51 |   |
| Financing activities                              | ** ** | **$**    | **(32**    | **)**      | $          | (2       | )          | $ | (5 | ) |
| Investing activities                              | ** ** | **$**    | **(3**     | **)**      | $          | 36       |       | $ | (9 | ) |

 

In December 2004 the Corporation sold its 33.3% interest in an ethanegathering system in Alberta for cash proceeds of $78 million, resulting in abefore-tax gain of $53 million ($40 million after-tax).

 

NOVA Chemicals also owned a 50% interest in the Fort SaskatchewanEthylene Storage Limited Partnership, which was sold in June 2003 for net cashproceeds of $123 million, resulting in an after-tax gain of $64 million. Thetotal before-tax gain on this transaction was $114 million, of which $38million was deferred (see Note 9) and is being recognized in earnings on astraight-line basis over the 20-year storage contract with the new owners.

 

**6. Plant, Property and Equipment**

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)** | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                   |       |        | ** ** |        |       |        |       |
| Plant and  equipment                   | ** ** | **$**       | **5,787**  | ** **  | $          | 5,962       |       | $ | 5,638 |   |
| Assets under  capital lease            | ** ** | **19**      | ** ** | —      |       |        |       |
| Land                                   | ** ** | **29**      | ** ** | 35          |       | 35          |       |
| Under  construction                    | ** ** | **643**     | ** ** | 351         |       | 169         |       |
| ** **                             |       | **6,478**   | ** ** | 6,348       |       | 5,842       |       |
| Accumulated  depreciation(2)           | ** ** | **(2,852**  | **)**      | (2,894      | )          | (2,506      | )          |
| Net book  value                        | ** ** | **$**       | **3,626**  | ** **  | $          | 3,454       |       | $ | 3,336 |   |

 

----

(1)  See Note 8 for discussion of security provided on thecommitted credit facility.

 

(2)  Accumulated depreciation for assets under capital leasewas $nil million at December 31, 2005.

 

During 2004, the Corporation sold its 100% interest in an ethylenedelivery system in Alberta and entered into a pipeline transportation agreementto lease back the pipeline. Net cash proceeds of $19 million were received fromthe sale, resulting in a gain of $19 million. The gain realized on the sale hasbeen deferred (see Note 9) and is being amortized to income on a straight-linebasis over the term of the pipeline transportation agreement, which expires in2016.

 

**7. Accounts Payable and Accrued Liabilities**

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)**          | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                            |       |       |       |     |       |     |       |
| Accounts  payable                               |       |       |       |     |       |     |       |
| Trade                                           | ** ** | **$**      | **617**    |     | $          | 581      |       | $ | 406 |   |
| Other                                           | ** ** | **22**     |       | 38       |       | 25       |       |
| ** **                                      |       | **639**    |       | 619      |       | 431      |       |
| Accrued  liabilities                            |       |       |       |     |       |     |       |
| Pension and post-retirement benefit obligations | ** ** | **52**     |       | 40       |       | 20       |       |
| Interest                                        | ** ** | **33**     |       | 30       |       | 18       |       |
| Dividends                                       | ** ** | **7**      |       | 7        |       | 6        |       |
| Deferred gains on interest rate swaps(1)        | ** ** | **4**      |       | 7        |       | 7        |       |
| Site clean-up and restoration                   | ** ** | **5**      |       | 4        |       | 4        |       |
| Deferred commodity hedging gains(2)             | ** ** | **—** |       | 2        |       | 9        |       |
| Advances and notes due to affiliate             | ** ** | **5**      |       |     |       | —   |       |
| Notes payable(3)                                | ** ** | **47**     |       | —   |       | —   |       |
| Trade accruals and other accrued liabilities    | ** ** | **204**    |       | 99       |       | 92       |       |
| ** **                                      |       | **357**    |       | 189      |       | 156      |       |
| ** **                                      |       | **$**      | **996**    |     | $          | 808      |       | $ | 587 |   |

 

----

(1)  Representsthe portion of deferred gains realized on liquidation of floating-for-fixedinterest rate swaps to be recognized within one year (see Note 22).

 

(2)  Representsthe portion of deferred gains realized on liquidation of natural gas optionpositions to be recognized within one year (see Note 22).

 

(3)  Includes $41million of unsecured notes payable, bearing interest at 4.5% per annum.

 

16

----

 

**8. Long-Term Debt**

 
| ** **                                                     | ** ** | ** **   | ** ** | **2005**   | ** ** | **2004**              | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|------------|------------|-----------------------|------------|------------|------------|
| ** **                                                     | ** ** | ** **   | ** ** | ** ** | ** ** | **WEIGHTED-**         | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** |
| ** **                                                     | ** ** | ** **   | ** ** | ** ** | ** ** | **AVERAGE**           | ** ** | ** ** | ** ** | **AVERAGE** | ** ** | ** ** | ** ** | **AVERAGE** | ** ** |
| ** **                                                     | ** ** | ** **   | ** ** | ** ** | ** ** | **YEAR-END**          | ** ** | ** ** | ** ** | **YEAR-END** | ** ** | ** ** | ** ** | **YEAR-END** | ** ** |
| **DECEMBER 31 (MILLIONS OF DOLLARS, UNLESS  OTHERWISE NOTED)** | ** ** | **MATURITY** | ** ** | **DEBT**   | ** ** | **INTEREST  RATE(1)** | ** ** | **DEBT**   | ** ** | **INTEREST  RATE(1)** | ** ** | **DEBT** | ** ** | **INTEREST  RATE(1)** | ** ** |
|                                                           |       |         |       |       | ** ** |                  |       |       |       |   |   |   |   |   |   |
| Unsecured  debentures and notes                                |       | 2010-2028    | ** ** | **$**      | **1,239**  | ** **            | **7.3**    | %          | $          | 933 |   | 7.1 | % | $ | 518 |   | 7.5 | % |
| Medium-term notes                                              |       | 2006-2009    | ** ** | **550**    | ** ** | **8.0**               | %          | 550        |       | 7.0 | % | 550 |   | 4.7 | % |
| Preferred shares  and securities                               |       | 2007         | ** ** | **198**    | ** ** | **7.6**               | %          | 198        |       | 8.1 | % | 581 |   | 7.7 | % |
| Other(2)                                                       |       | 2006-2020    | ** ** | **51**     | ** ** | **6.9**               | %          | 33         |       | 6.2 | % | 33 |   | 6.0 | % |
|                                                           |       |         | ** ** | **2,038**  | ** ** |                  |       | 1,714      |       |   |   | 1,682 |   |   |   |
| Less installments  due within one year                         |       |         | ** ** | **(301**   | **)**      |                  |       | (100       | )          |   |   | — |   |   |   |
|                                                           |       |         | ** ** | **$**      | **1,737**  | ** **            |       |       | $          | 1,614 |   |   |   | $ | 1,682 |   |   |   |

 

----

(1)  Weighted-averageyear-end interest rates include the effects of outstanding interest rate swaps(see Note 22).

 

(2)  Composedprimarily of non-recourse joint venture secured debt (2005 — $32 million, 2004and 2003 — $33 million), whereby security is limited to NOVA Chemicals’ netinvestment in the Joffre co-generation joint venture, and obligations undercapital leases (2005 — $19 million, 2004 and 2003 — $nil million).

 

***Unsecured Debentures And Notes***

 

On October 31, 2005, the Corporation issued $400 million Senior FloatingRate Notes due 2013.

 

On January 13, 2004 the Corporation issued $400 million 6.50% SeniorNotes due 2012. The net proceeds were used to repay the Corporation’s preferredsecurities.

 

On August 15, 2003, NOVA Chemicals redeemed at par its $150 million 7%debentures maturing August 15, 2026 from available cash, in accordance with theterms of the debenture.

 

The remaining debentures and notes are unsecured borrowings, which rank *pari passu*in all respects with otherunsecured and unsubordinated debt of the Corporation. Terms of the outstandingunsecured debentures and notes are as follows:

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS, UNLESS OTHERWISE NOTED)** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| **MATURITY**                                                   | ** ** | **STATED INTEREST RATE (%)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|                                                           |       |                         |       |       |       |       |       |   |   |
| 2005(1)                                                        |       | 7.0                          | ** ** | **$**      | **—** |       | $          | 100 |   | $ | 100 |   |
| 2010(2)                                                        |       | 7.85                         | ** ** | **214**    |       | 208        |       | 193 |   |
| 2012(3)                                                        |       | 6.5                          | ** ** | **400**    |       | 400        |       | — |   |
| 2013(4)                                                        |       | Floating                     | (5)        | **400**    |       | —     |       | — |   |
| 2025(6)                                                        |       | 7.875                        | ** ** | **100**    |       | 100        |       | 100 |   |
| 2028(7)                                                        |       | 7.25                         | ** ** | **125**    |       | 125        |       | 125 |   |
| ** **                                                     |       | ** **                   |       | **$**      | **1,239**  |       | $          | 933 |   | $ | 518 |   |

 

----

(1)  Matured and retired for cash in September 2005.

 

(2)  $250 million Canadian; callable at the option of theCorporation at any time.

 

(3)  Callable at the option of the Corporation at any time.

 

(4)  Callable at the option of the Corporation at any time.

 

(5)  LIBOR + 3.125%; 7.561% at December 31, 2005.

 

(6)  Callable at the option of the Corporation on or afterSeptember 15, 2005.

 

(7)  Redeemableat the option of the holders on August 15, 2008.

 

17

----

 

***Secured Loan***

 

The Corporation has a committed credit facility from a syndicate ofCanadian and U.S. banks. The facility provides for a floating-rate revolvingline of credit and the issuance of letters of credit, to a maximum of $375million. At December 31, 2005, the Corporation had utilized $87 million of thefacility in the form of letters of credit. The facility expires in June 2010and is secured by $1.2 billion (2004 and 2003 — $1.2 billion) in net book valueof assets in Canada, including real estate.

 

At December 31, 2005, NOVA Chemicals was in compliance with all requiredfinancial covenants under the credit facility.

 

***Unsecured Credit Facility***

 

On January 20, 2006, an unsecured floating-rate revolving creditfacility in the amount of $100 million was established. The facility expires inMarch 2011.

 

***Medium-Term Notes***

 

The notes are unsecured borrowings ranking *pari passu*with all other unsecured and unsubordinated debtof the Corporation. The $300 million 7% notes are due in May 2006 and are notredeemable by the Corporation or the holders prior to maturity. The $250million 7.4% notes are due in April 2009 and are redeemable by the Corporationat any time. As described in Note 22, the Corporation has a fixed-for-floatinginterest rate swap on the $300 million 7% notes due in May 2006.

 

***Preferred Securities***

 

On March 1, 2004 the Corporation redeemed its $172.5 million 9.04% and$210 million 9.50% preferred securities, which were due March 31, 2048 andDecember 31, 2047, respectively. Net proceeds from the 2004 issuance of $400million 6.5% Senior Notes were used to redeem the securities.

 

***Series A Preferred Shares***

 

In connection with the acquisition of styrenics assets from HuntsmanCorporation in 1998, a subsidiary of the Corporation issued retractablepreferred shares with a liquidation preference of $198 million as partialconsideration. Holders of the retractable preferred shares originally had theright, on or after April 1, 2001, to exchange the shares (a retraction) forNOVA Chemicals’ common shares (plus preferred shares if the market value ofsuch common shares was less than $198 million). In September 2005, the terms ofthe retractable preferred shares were amended to eliminate this right. Inconnection with this amendment, the retractable preferred shares werere-designated as Series A preferred shares. Additionally, in December, 2005,the dividend rate was reduced from 2% to 0.5%.

 

NOVA Chemicals has the right to repurchase the Series A preferred sharesat any time.

 

NOVA Chemicals also entered into a total return swap, which terminateson March 15, 2007, with respect to the Series A preferred shares. Under theterms of the total return swap: (i) the counterparty pays NOVA Chemicals thetotal return on the preferred shares (periodic dividends plus positive changesin the equity value of the Series A preferred shares upon termination of theswap); and (ii) NOVA Chemicals pays the counterparty a spread to LIBOR, as wellas any negative changes in the equity value of the Series A preferred sharesupon termination of the swap.

 

If the equity value of the Series A preferred shares decreases byapproximately 24% or more at any time, NOVA Chemicals is required to post maintenancecollateral. Once the margin-posting requirement is triggered, if the equityvalue of the Series A preferred shares increases by 5% or more, any excessmargin may be returned to NOVA Chemicals. Changes in the equity value of theSeries A preferred shares during the term of the swap will be determined basedon changes in the average price of the outstanding 6.5% Senior Notes due 2012,issued by NOVA Chemicals.

 

18

----

 

If NOVA Chemicals defaults on other debt with an aggregate principalamount of $25 million or more, or the closing price of the Corporation’s commonshares is $12.00 U.S. or less, and upon certain other events, the counterpartywould have the right to sell the Series A preferred shares to a third-party andterminate the swap. NOVA Chemicals would then owe the counterparty thedifference between the actual sale price received by the counterparty and $126million ($191 million fair value less $65 million restricted cash). Subsequentto the termination of the swap, NOVA Chemicals may, at its option, repurchasethe preferred shares for $198 million plus accrued and unpaid dividends.

 

Beginning in 2005, Canadian accounting standards require the Series Apreferred shares to be classified on the balance sheet as a liability. Allprior periods have been restated accordingly.

 

***Repayment Requirements***

 

Repayment requirements in respect of long-term debt are as follows:

 
| **(MILLIONS OF DOLLARS)** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2006                      |       | $          | 301        |   |
| 2007                      |       | 204        |       |
| 2008                      |       | 5          |       |
| 2009                      |       | 255        |       |
| 2010                      |       | 220        |       |
| Thereafter                |       | 1,053      |       |
|                      |       | $          | 2,038      |   |

 

***Interest Expense***

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF DOLLARS)**  | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                               |       |     | ** ** |       |       |     |       |
| Interest on  long-term debt                        | ** ** | **$**    | **108**    | ** ** | $          | 97       |       | $ | 84 |   |
| Interest on  preferred shares and securities       | ** ** | **9**    | ** ** | 12         |       | 41       |       |
| Interest on  bank loans, securitizations and other | ** ** | **14**   | ** ** | 8          |       | 8        |       |
| Gross  interest expense                            | ** ** | **131**  | ** ** | 117        |       | 133      |       |
| Interest  capitalized during plant construction    | ** ** | **(14**  | **)**      | (3         | )          | —   |       |
| Interest  income                                   | ** ** | **(4**   | **)**      | (6         | )          | (3       | )          |
| Interest  expense (net)                            | ** ** | **$**    | **113**    | ** ** | $          | 108      |       | $ | 130 |   |

 

19

----

 

**9. Deferred Credits and Long-Term Liabilities**

 
| **DECEMBER 31 (MILLIONS OF  DOLLARS)**                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                             |       |       | ** ** |       |       |     |       |
| Deferred  Credits                                                |       |       | ** ** |       |       |     |       |
| Deferred income                                                  | ** ** | **$**      | **29**     | ** ** | $          | 31       |       | $ | 12 |   |
| Deferred gain on sale of investments(1)                          | ** ** | **37**     | ** ** | 38         |       | 37       |       |
| Deferred gain on sale of asset(2)                                | ** ** | **15**     | ** ** | 20         |       | —   |       |
| Deferred gains on interest rate swaps(3)                         | ** ** | **5**      | ** ** | 9          |       | 16       |       |
| Deferred gain on sale of railcars                                | ** ** | **8**      | ** ** | 9          |       | 9        |       |
| Deferred commodity hedging gains(4)                              | ** ** | **—** | ** ** | 2          |       | 3        |       |
| Other deferred credits                                           | ** ** | **4**      | ** ** | 7          |       | 8        |       |
|                                                             | ** ** | **98**     | ** ** | 116        |       | 85       |       |
| Long-Term  Liabilities                                           |       |       | ** ** |       |       |     |       |
| Pension and post-retirement benefit  obligations (Note 18)       | ** ** | **70**     | ** ** | 88         |       | 92       |       |
| Equity appreciation plan obligations (Note  12)                  | ** ** | **43**     | ** ** | 87         |       | 12       |       |
| Accrued mark-to-market liability on equity  derivative (Note 22) | ** ** | **15**     | ** ** | —     |       | —   |       |
| Asset retirement obligations (Note 19)                           | ** ** | **21**     | ** ** | 23         |       | 27       |       |
| Deferred share unit plan obligations (Note  13)                  | ** ** | **24**     | ** ** | 23         |       | 20       |       |
| Restricted stock unit plan obligations  (Note 12)                | ** ** | **6**      | ** ** | 3          |       | —   |       |
| Other long-term liabilities                                      | ** ** | **41**     | ** ** | 15         |       | 13       |       |
|                                                             | ** ** | **220**    | ** ** | 239        |       | 164      |       |
|                                                             | ** ** | **$**      | **318**    | ** ** | $          | 355      |       | $ | 249 |   |

 

----

(1)  Representsthe long-term portion of deferred gains realized on the sale of a 50% interestin Fort Saskatchewan Ethylene Storage Limited Partnership (see Note 5).

 

(2)  Representsthe long-term portion of a deferred gain realized on the sale of an ethylenepipeline system (see Note 6).

 

(3)  Representsthe long-term portion of deferred gains realized on the liquidation offloating-for-fixed interest rate swaps (see Note 22).

 

(4)  Representsthe long-term portion of deferred gains realized on the liquidation of naturalgas option positions (see Note 22).

 

**10. Common Shares**

 

***Authorized***

 

Unlimited number of voting common shares without par value, non-votingfirst preferred shares and non-voting second preferred shares. Currently onlycommon shares are issued and outstanding.

 

***Issued And Outstanding***

 
| **YEAR  ENDED DECEMBER 31 (MILLIONS OF DOLLARS, EXCEPT NUMBER OF SHARES)** | ** ** | **2005**       | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------|------------|----------------|------------|-------------|------------|------------|------------|
| ** **                                                                 | ** ** | **SHARES**     | ** ** | **DOLLARS** | ** ** | **SHARES** | ** ** | **DOLLARS** | ** ** | **SHARES** | ** ** | **DOLLARS** | ** ** |
|                                                                       |       |           | ** ** |        | ** ** |       |       |   |   |   |   |   |   |
| Beginning of year                                                          | ** ** | **84,268,293** | ** ** | **$**       | **499**    | ** ** | 87,099,781 |   | $ | 493 |   | 86,527,812 |   | $ | 484 |   |
| Issued for cash  on exercise of stock options                              | ** ** | **570,547**    | ** ** | **13**      | ** ** | 1,917,735  |       | 37 |   | 571,969 |   | 9 |   |
| Issued on  exercise of stock options as share appreciation rights(1)       | ** ** | **124,610**    | ** ** | **—**  | ** ** | 185,377    |       | — |   |   |   | — |   |
| Compensation cost  of stock options exercised(2)                           | ** ** | **—**     | ** ** | **—**  | ** ** | —     |       | 2 |   | — |   | — |   |
| Repurchased(3)                                                             | ** ** | **(2,598,551** | **)**      | **(18**     | **)**      | (4,934,600 | )          | (33 | ) | — |   | — |   |
| End of year(4)                                                             | ** ** | **82,364,899** | ** ** | **$**       | **494**    | ** ** | 84,268,293 |   | $ | 499 |   | 87,099,781 |   | $ | 493 |   |

 

----

(1)  See Note 12.

 

(2)  Under thefair-value method of accounting for stock-based compensation, the compensationcost associated with options exercised is transferred from contributed surplusto common stock.

 

(3)  TheCorporation repurchased 2,598,551 (2004 – 4,934,600 and 2003 – nil million) ofits common shares with a carrying value of $18 million (2004 – $33 million and2003 – $nil million) on the Toronto Stock Exchange for cash of $125 million(2004 – $188 million and 2003 – $nil million). The difference between the cashpaid and the carrying value of the shares is charged to reinvested earnings.

 

(4)  Stated commonshare capital for legal purposes at December 31, 2005, is $1,628 million.

 

20

----

 

***Shares Reserved For Future Issue***

 
| **DECEMBER 31 (NUMBER OF SHARES)**                               | ** ** | **2005**      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|
|                                                             |       |          |       |       |       |       |       |
| Under the  employee incentive stock option plan(1),(2)           | ** ** | **7,874,725** |       | 8,569,882  |       | 10,672,994 |       |
| Under the  director compensation plan                            | ** ** | **47,800**    |       | 47,800     |       | 47,800     |       |
| Under the  terms of the retractable preferred share agreement(3) | ** ** | **—**    |       | 8,500,000  |       | 8,500,000  |       |
| ** **                                                       |       | **7,922,525** |       | 17,117,682 |       | 19,220,794 |       |

 

----

(1)  Under theemployee incentive stock option plan, options are outstanding to officers andemployees to purchase 4,667,898 shares at prices ranging from $20.234 to$58.240 (Canadian $TSX pricing) and 439,713 shares at prices ranging from$33.25 to $47.00 (U.S. $NYSE pricing) per share, with expiration dates betweenFebruary 15, 2006, and September 14, 2014. A total of 2,767,114 common sharesare reserved but unallocated. See Note 12 for further details regarding theplan.

 

(2)  A total of 13million common shares was initially approved by shareholders for issuance underthe employee incentive stock option plan.

 

(3)  See Note 8 fordiscussion of retractable, now Series A, preferred shares.

 

***Net Income (Loss) Per Share***

 

The following table outlines the calculation of basic and diluted netincome (loss), or earnings per common share (EPS):

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS,  EXCEPT PER SHARE AMOUNTS)** | ** ** | **2005**   | ** ** | **2004**    | ** ** | **2003**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-----------|------------|
| ** **                                                                  | ** ** | **BASIC**  | ** ** | **DILUTED** | ** ** | **BASIC** | ** ** | **DILUTED** | ** ** | **BASIC** | ** ** | **DILUTED** | ** ** |
|                                                                        |       |       |       |        |       |      |       |   |   |   |   |   |   |
| Net income (loss)                                                           | ** ** | **$**      | **(104**   | **)**       | **$**      | **(104**  | )          | $ | 252 |   | $ | 252 |   | $ | (1 | ) | $ | (1 | ) |
| Interest on retractable preferred shares                                    | ** ** | **—** | ** ** | **—**  |       | —    |       | 6 |   | — |   | — |   |
| Net income (loss) for EPS calculation                                       | ** ** | **$**      | **(104**   | **)**       | **$**      | **(104**  | )          | $ | 252 |   | $ | 258 |   | $ | (1 | ) | $ | (1 | ) |
| Weighted-average common shares outstanding                                  | ** ** | **82.6**   | ** ** | **82.6**    |       | 86.7      |       | 86.7 |   | 86.8 |   | 86.8 |   |
| Add effect of dilutive items:(1)                                            |       |       |       |        |       |      |       |   |   |   |   |   |   |
| Stock options                                                               | ** ** | **—** | ** ** | **—**  |       | —    |       | 2.6 |   |   |   | — |   |
| Retractable  preferred shares                                               | ** ** | **—** | ** ** | **—**  |       | —    |       | 6.1 |   | — |   | — |   |
| Weighted-average common shares for EPS calculation                          | ** ** | **82.6**   | ** ** | **82.6**    |       | 86.7      |       | 95.4 |   | 86.8 |   | 86.8 |   |
| Net income (loss) per common share                                          | ** ** | **$**      | **(1.26**  | **)**       | **$**      | **(1.26** | )          | $ | 2.91 |   | $ | 2.71 |   | $ | (0.02 | ) | $ | (0.02 | ) |

 

----

(1)  A total of 4.8million stock options have been excluded from the computation of dilutedearnings per share for the year ended December 31, 2005, (2004 – nil and 2003 –17 million, stock options and retractable preferred shares) as their impactwould not be dilutive. As of September 30, 2005, the retractable preferredshares are no longer convertible to NOVA Chemicals’ common shares and thereforeare no longer a dilutive factor in the earnings per share calculation. Norestatements were made to prior years.

 

***Shareholder Rights Plan***

 

In May 1999, NOVA Chemicals’ shareholders approved a shareholder rightsplan where one right was issued for each outstanding common share. The rightsremain attached to the shares and are not exercisable until the commencement orannouncement of a takeover bid for NOVA Chemicals’ common shares or until aperson acquires 20% or more of NOVA Chemicals’ common shares. The plan expiresin May 2009.

 

**11. Contributed Surplus**

 

On January 1, 2004, the Corporation adopted new accounting recommendationsrelated to stock options (see Notes 2 and 12). The recommendations require thatthe fair value of stock options be expensed over their vesting period, with acorresponding amount recorded to contributed surplus. On exercise of optionsfor common shares, amounts previously recorded to contributed surplus forcompensation costs are transferred to the common share account. On retirementor cancellation of options, amounts previously recorded to contributed surplusfor compensation costs are transferred to reinvested earnings.

 
| **YEAR ENDED DECEMBER 31  (MILLIONS OF DOLLARS)**             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                          |       |       | ** ** |       |       |     |       |
| Balance at  beginning of year                                 |       | **$**      | **8**      | ** ** | $          | —   |       | $ |   |   |
| Accounting  policy change (Note 2)                            | ** ** | **—** | ** ** | 7          |       | —   |       |
| Stock option  compensation cost                               | ** ** | **4**      | ** ** | 4          |       | —   |       |
| Transfers on  exercise, retirement or cancellation of options | ** ** | **(1**     | **)**      | (3         | )          | —   |       |
| Balance at  end of year                                       | ** ** | **$**      | **11**     | ** ** | $          | 8        |       | $ | — |   |

 

21

----

 

**12.Stock-Based Compensation**

 

***Employee Incentive Stock Option Plan***

 

The Corporation may grantoptions to its employees for up to 13 million common shares. During 2005, theCorporation amended its Employee Incentive Stock Option Plan such that options may begranted which are exercisable based on the Corporation’s New York StockExchange (NYSE) common share price. Accordingly, the exercise price of anoption may equal the closing market price, on the Toronto Stock Exchange(TSX) or the NYSE, of the Corporation’s common stock on the date of grant.Options may be exercised over a 10-year period and generally 25% of theoptions vest at the grant date with further vesting of 25% in each of the nextthree years.

 

On January 1, 2004, theCorporation adopted new accounting recommendations related to stock options(see Note 2). The Corporation adopted the accounting policy on a retroactivebasis with no restatement of prior periods. Accordingly, all options grantedsince January 1, 2002 are accounted for using the fair-value method. Therecommendations require that the fair value of stock options be expensed overtheir vesting period and reflected in earnings as the related services areprovided. The Corporation uses the Black-Scholes option-pricing model tocalculate the fair value of options at the date of grant.

 

Generally, options aresettled by issuance of common shares. Occasionally, options may beretired, whereby the option premium (the differential between the market priceand the exercise price) is paid in cash. Amounts paid are recorded as a chargeto reinvested earnings, net of related tax benefits. Options may also besettled periodically as share appreciation rights (SARs), whereby the optionpremium is settled by issuance of common shares. Options settled by issuance ofshares are cancelled whereas options settled by other means are returned to theunallocated pool of options available for issue.

 

A summary of the status ofthe Corporation’s employee incentive stock option plan, for options based onTSX pricing, as of December 31, 2005, 2004, and 2003, and changes duringthe years then ended is presented below:

 
| ** **                                | ** ** | **2005**      | ** ** | **2004**                | ** ** | **2003**    | ** ** |
|-------------------------------------------|------------|---------------|------------|-------------------------|------------|-------------|------------|
| ** **                                | ** ** | ** **    | ** ** | **WEIGHTED-**           | ** ** | ** **  | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** |
| ** **                                | ** ** | ** **    | ** ** | **AVERAGE**             | ** ** | ** **  | ** ** | **AVERAGE** | ** ** | ** ** | ** ** | **AVERAGE** | ** ** |
| ** **                                | ** ** | ** **    | ** ** | **EXERCISE PRICE** | ** ** | ** **  | ** ** | **EXERCISE PRICE** | ** ** | ** ** | ** ** | **EXERCISE PRICE** | ** ** |
| **YEAR ENDED DECEMBER 31** | ** ** | **OPTIONS**   | ** ** | **(CANADIAN $)**   | ** ** | **OPTIONS** | ** ** | **(CANADIAN $)** | ** ** | **OPTIONS** | ** ** | **(CANADIAN $)** | ** ** |
|                                      |       |          |       |                    |       |        |       |   |   |   |   |   |   |
| Outstanding at  beginning of year         | ** ** | **5,849,131** | ** ** | **$**                   | **27.952** |        | 8,822,440  |   | $ | 26.791 |   | 8,625,532 |   | $ | 26.662 |   |
| Granted                                   | ** ** | **91,450**    | ** ** | **$**                   | **58.135** |        | 271,300    |   | $ | 36.526 |   | 999,700 |   | $ | 25.788 |   |
| Exercised –  settled in shares       | ** ** | **(570,060**  | **)**      | **$**                   | **26.928** |        | (1,917,735 | ) | $ | 22.938 |   | (571,969 | ) | $ | 23.525 |   |
| Exercised –  retired for cash        | ** ** | **(469,091**  | **)**      | **$**                   | **29.214** |        | (860,750   | ) | $ | 26.161 |   |   |   | $ | — |   |
| Exercised –  settled as SARs(1)      | ** ** | **(218,219**  | **)**      | **$**                   | **24.799** |        | (426,246   | ) | $ | 25.682 |   | — |   | $ |   |   |
| Cancelled                                 | ** ** | **(15,313**   | **)**      | **$**                   | **29.151** |        | (39,878    | ) | $ | 30.284 |   | (230,823 | ) | $ | 25.723 |   |
| Outstanding at  end of year               | ** ** | **4,667,898** | ** ** | **$**                   | **28.685** |        | 5,849,131  |   | $ | 27.952 |   | 8,822,440 |   | $ | 26.791 |   |
| Exercisable at  end of year               | ** ** | **4,249,162** | ** ** | **$**                   | **28.181** |        | 5,054,171  |   | $ | 27.613 |   | 7,414,052 |   | $ | 26.448 |   |

 

----

(1)  In 2005, 124,610 shares were issued to settle optionsexercised as SARs (2004 - 185,377).

 

The following tablesummarizes information about employee incentive stock options, based on TSXpricing, outstanding at December 31, 2005:

 
| ** **                                  | ** ** | **OPTIONS OUTSTANDING** | ** ** | **OPTIONS EXERCISABLE**   | ** ** |
|---------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **WEIGHTED-AVERAGE**           | ** ** | **WEIGHTED-AVERAGE** | ** ** | ** ** | ** ** | **WEIGHTED-AVERAGE** | ** ** |
| **RANGE OF EXERCISE PRICES** | ** ** | **NUMBER**                   | ** ** | **REMAINING CONTRACTUAL** | ** ** | **EXERCISE PRICE** | ** ** | **NUMBER** | ** ** | **EXERCISE PRICE** | ** ** |
| **(CANADIAN $ )**                 | ** ** | **OUTSTANDING**              | ** ** | **LIFE (YEARS)**          | ** ** | **(CANADIAN $ )** | ** ** | **EXERCISABLE** | ** ** | **(CANADIAN $ )** | ** ** |
|                                        |       |                         |       |                           |       |   |   |   |   |   |   |
| $20.234 - $28.050                           |       | 3,082,521                    |       | 4.4                            |       | $ | 25.778 |   | 2,845,133 |   | $ | 25.774 |   |
| $30.750 - $37.510                           |       | 1,495,227                    |       | 4.7                            |       | $ | 32.894 |   | 1,378,327 |   | $ | 32.590 |   |
| $58.240 - $58.240                           |       | 90,150                       |       | 9.2                            |       | $ | 58.240 |   | 25,702 |   | $ | 58.240 |   |
|                                        |       | 4,667,898                    |       |                           |       |   |   | 4,249,162 |   |   |   |

 

22

----

 

During 2005, the Corporationgranted a total of 441,300 options with exercise prices based on the NYSEcommon share price, with a weighted-average exercise price of $46.78 U.S. At December 31,2005, after consideration of options exercised (487) and options cancelled(1,100), a total of 439,713 NYSE-based options are outstanding (111,885exercisable) with a weighted-average price of $46.78 U.S. and aweighted-average remaining contractual life of 9.2 years.

 

In 2005 and 2004, theCorporation recognized total compensation cost of $4 million and $4 million,respectively, for stock-based employee compensation awards. Had compensationcost for stock options been determined and expensed based on the fair-valuemethod in 2003, the following pro forma amounts would have resulted:

 
| **DECEMBER 31 (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|
|                                                                 |       |     |       |
| Compensation cost, net of tax                                        |       | $        | 2          |   |
| Net loss                                                             |       |     |       |
| As reported                                                          |       | $        | (1         | ) |
| Pro forma                                                            |       | $        | (3         | ) |
| Loss per share **—**  basic and diluted                         |       |     |       |
| As reported                                                          |       | $        | (0.02      | ) |
| Pro forma                                                            |       | $        | (0.04      | ) |

 

The fair value of each stockoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forstock options granted:

 
| **WEIGHTED-AVERAGE ASSUMPTIONS**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Expected dividend yield (%)                           | ** ** | **0.7**  |       | 1.1      |       | 1.4      |       |
| Expected volatility (%)                               | ** ** | **31.6** |       | 34.0     |       | 36.7     |       |
| Risk-free interest rate (%)                           | ** ** | **3.8**  |       | 2.7      |       | 4.2      |       |
| Expected life (years)                                 | ** ** | **4.0**  |       | 4.0      |       | 4.0      |       |
| Fair value of options granted during the  year (U.S.) | ** ** | **$**    | **13.40**  |     | $          | 8.43     |       | $ | 5.34 |   |
|                                                       |            |          |            |          |            |          |            |  |  |  |

 

***Equity Appreciation Plan***

 

The Corporation has an equityappreciation plan in which units are granted to key employees. The redemptionprice of a unit is determined by the closing market price on the NYSE of theCorporation’s common shares on the date of grant. Units may be redeemedfor cash over a 10-year period and generally 25% of the units vest at the grantdate with further vesting of 25% in each of the next three years. The value ofa unit on the redemption date is the difference between the price of theCorporation’s common shares on that date and the redemption price.

 

At December 31, 2005,the mark-to-market value of the vested units was approximately $43 million(2004 - $87 million and 2003 - $12 million).

 

A summary of the status ofthe Corporation’s equity appreciation plan as of December 31, 2005, 2004and 2003 and changes during the years then ended is presented below:

 
| ** **                        | ** ** | **2005**      | ** ** | **2004**         | ** ** | **2003**   | ** ** |
|-----------------------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                        | ** ** | ** **    | ** ** | **WEIGHTED-**    | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** |
| ** **                        | ** ** | ** **    | ** ** | **AVERAGE**      | ** ** | ** ** | ** ** | **AVERAGE** | ** ** | ** ** | ** ** | **AVERAGE** | ** ** |
| ** **                        | ** ** | ** **    | ** ** | **REDEMPTION**   | ** ** | ** ** | ** ** | **REDEMPTION** | ** ** | ** ** | ** ** | **REDEMPTION** | ** ** |
| **YEAR  ENDED DECEMBER 31**  | ** ** | **UNITS**     | ** ** | **PRICE (US $)** | ** ** | **UNITS**  | ** ** | **PRICE (US $)** | ** ** | **UNITS** | ** ** | **PRICE (CAN $)** | ** ** |
|                              |       |          |       |             |       |       |       |   |   |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **3,801,143** | ** ** | **$**            | **21.08**  |       | 3,292,987  |   | $ | 18.92 |   | 1,836,841 |   | $ | 31.22 |   |
| Granted                           | ** ** | **9,000**     | ** ** | **$**            | **30.59**  |       | 942,600    |   | $ | 27.90 |   | 1,499,400 |   | $ | 25.78 |   |
| Redeemed                          | ** ** | **(190,040**  | **)**      | **$**            | **19.69**  |       | (410,694   | ) | $ | 19.37 |   | (18,166 | ) | $ | 27.77 |   |
| Cancelled                         | ** ** | **(1,425**    | **)**      | **$**            | **24.77**  |       | (23,750    | ) | $ | 21.65 |   | (25,088 | ) | $ | 31.60 |   |
| Outstanding at  end of year       | ** ** | **3,618,678** | ** ** | **$**            | **21.18**  |       | 3,801,143  |   | $ | 21.08 |   | 3,292,987 |   | $ | 28.76 |   |
| Exercisable at  end of year       | ** ** | **2,786,063** | ** ** | **$**            | **20.54**  |       | 2,149,390  |   | $ | 20.06 |   | 1,554,934 |   | $ | 29.22 |   |

 

----

(1)   In February 2004 the definition of redemptionprice was amended to include NYSE pricing, reflecting the intent and design ofthe plan to provide the value of the awards in U.S. currency for U.S. residentemployees. Accordingly, the weighted-average redemption price at the beginningof 2004 has been restated to reflect the NYSE price.

 

23

----

 

The following tablesummarizes information about equity appreciation units outstanding at December 31,2005:

 
| ** **                                                           | ** ** | **UNITS OUTSTANDING** | ** ** | **UNITS EXERCISABLE**     | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **WEIGHTED-AVERAGE**       | ** ** | ** **                     | ** ** | **WEIGHTED-AVERAGE** | ** ** | ** ** | ** ** | **WEIGHTED-AVERAGE** | ** ** |
| ** **                                                           | ** ** | **NUMBER**                 | ** ** | **REMAINING CONTRACTUAL** | ** ** | **REDEMPTION PRICE** | ** ** | **NUMBER** | ** ** | **REDEMPTION PRICE** | ** ** |
| **RANGE OF REDEMPTION PRICES (US $ )** | ** ** | **OUTSTANDING**            | ** ** | **LIFE (YEARS)**          | ** ** | **(US $ )** | ** ** | **EXERCISABLE** | ** ** | **(US $ )** | ** ** |
|                                                                 |       |                       |       |                           |       |   |   |   |   |   |   |
| $17.42 - $21.72                                                      |       | 2,683,313                  |       | 6.3                            |       | $ | 18.86 |   | 2,317,098 |   | $ | 19.09 |   |
| $23.49 - $30.59                                                      |       | 935,365                    |       | 8.0                            |       | $ | 27.83 |   | 468,965 |   | $ | 27.71 |   |
|                                                                 |       | 3,618,678                  |       |                           |       |   |   | 2,786,063 |   |   |   |

 

***Restricted Stock Unit Plan***

 

The Restricted Stock UnitPlan is a phantom stock plan wherein the value of a restricted stock unit (RSU)is determined by the value of the Corporation’s common shares on the vestingdate and is paid to employees in cash or open market shares at the Corporation’sdiscretion. The value of the RSU is determined using the NYSE price for U.S.residents and the TSX price for residents of all other countries. Generally,the units vest and proceeds are distributed three years from the grant date.The value of any common share dividends declared during the vesting period iscredited to each RSU account. The value of the RSU’s is expensed over thevesting period and is marked-to-market.

 

At December 31, 2005, atotal of 417,730 RSU’s were outstanding (December 31, 2004 – 196,178 and December 31,2003 - nil). The mark-to-market liability for the RSU plan was $6 million at December 31,2005 ($3 million at December 31, 2004, and $nil million at December 31,2003).

 

**13.Deferred Share Unit Plans**

 

Under the Corporation’sDeferred Share Unit Plans (DSUP), key employees and non-employee directors may electon an annual basis to receive all or a portion of their management incentiveaward or director fees, respectively, in deferred share units (DSUs).

 

The amount of the managementincentive award that a key employee elects to have participate in the DSUP willbe converted to an equivalent number of DSUs based on the average closingprice, on the TSX for Canadian employees and on the NYSE for U. S. employees,of NOVA Chemicals’ common shares for the last five consecutive trading days ofthe month of December prior to the performance period.

 

The amount of fees that anon-employee director elects to have participate in the DSUP will be convertedto an equivalent number of DSUs based on the average closing price, on the TSXor NYSE, of NOVA Chemicals’ common shares for the last five consecutive tradingdays preceding the end of each fiscal quarter in which the fees are earned.

 

The units are redeemable uponretirement or termination from the Corporation.

 

A summary of the status ofthe Corporation’s deferred share unit plans as of December 31, 2005, 2004,and 2003, and changes during the years ended on those dates is presented below:

 
| **YEAR  ENDED DECEMBER 31**   | ** ** | **2005**    | ** ** | **2004**      | ** ** | **2003**   | ** ** |
|------------------------------------|------------|-------------|------------|---------------|------------|------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **AVERAGE**   | ** ** | ** ** | ** ** | **AVERAGE** | ** ** | ** ** | ** ** | **AVERAGE** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **PRICE**     | ** ** | ** ** | ** ** | **PRICE** | ** ** | ** ** | ** ** | **PRICE** | ** ** |
| **EMPLOYEE  DEFERRED SHARE UNITS** | ** ** | **UNITS**   | ** ** | **(U.S. $)**  | ** ** | **UNITS**  | ** ** | **(U.S. $)** | ** ** | **UNITS** | ** ** | **(U.S. $)** | ** ** |
|                               |       |        |       |          |       |       |       |   |   |   |   |   |   |
| Outstanding at  beginning of year  | ** ** | **508,593** | ** ** | **$**         | **18.75**  |       | 434,243    |   | $ | 17.29 |   | 379,114 |   | $ | 16.97 |   |
| Earned                             | ** ** | **12,292**  | ** ** | **$**         | **36.82**  |       | 116,116    |   | $ | 27.27 |   | 55,129 |   | $ | 19.44 |   |
| Redeemed                           | ** ** | **—**  | ** ** | **$**         | **—** |       | (41,766    | ) | $ | 27.21 |   | — |   | $ | — |   |
| Outstanding at  end of year        | ** ** | **520,885** | ** ** | **$**         | **19.18**  |       | 508,593    |   | $ | 18.75 |   | 434,243 |   | $ | 17.29 |   |

 

24

----

 
| **YEAR  ENDED DECEMBER 31**                 | ** ** | **2005**   | ** ** | **2004**      | ** ** | **2003**   | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** | ** ** | ** ** | **WEIGHTED-** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **AVERAGE**   | ** ** | ** ** | ** ** | **AVERAGE** | ** ** | ** ** | ** ** | **AVERAGE** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **PRICE**     | ** ** | ** ** | ** ** | **PRICE** | ** ** | ** ** | ** ** | **PRICE** | ** ** |
| **NON-EMPLOYEE  DIRECTORS DEFERRED SHARE UNITS** | ** ** | **UNITS**  | ** ** | **(CDN. $)**  | ** ** | **UNITS**  | ** ** | **(CDN. $)** | ** ** | **UNITS** | ** ** | **(CDN. $)** | ** ** |
|                                             |       |       |       |          |       |       |       |   |   |   |   |   |   |
| Outstanding at  beginning of year                | ** ** | **79,938** | ** ** | **$**         | **29.80**  |       | 79,676     |   | $ | 29.24 |   | 57,383 |   | $ | 29.90 |   |
| Earned                                           | ** ** | **8,329**  | ** ** | **$**         | **42.13**  |       | 14,636     |   | $ | 37.50 |   | 22,293 |   | $ | 27.57 |   |
| Redeemed                                         | ** ** | **(5,192** | **)**      | **$**         | **30.24**  |       | (14,374    | ) | $ | 34.57 |   | — |   | $ | — |   |
| Outstanding at  end of year                      | ** ** | **83,075** | ** ** | **$**         | **31.01**  |       | 79,938     |   | $ | 29.80 |   | 79,676 |   | $ | 29.24 |   |

 

The amount expensed inaggregate related to the award of units was approximately $1 million (2004 — $4million and 2003 — $3 million).

 

**14.Restructuring Charges**

 

During 2005, the Corporationprovided for $168 million before-tax ($125 million after-tax) in restructuringcharges related to the following: (1) $76 million before-tax ($60 millionafter-tax) write-down of the Berre, France EPS plant and the Carrington, UK,EPS plant following the announcement by NOVA Innovene to cease EPS productionat Berre, France, and permanently shutdown the EPS plant at Carrington, UK; (2) reductionin the recorded benefit of certain tax loss carry-forwards by $9 million, dueto the likelihood of their utilization being reduced as a result of theformation of the NOVA Innovene joint venture and closure of the plants; (3) write-offof certain other non-productive assets amounting to $9 million before-tax ($6million after-tax); (4) $76 million before-tax ($46 million after-tax)write-down of the Chesapeake, Virginia, plant value as a result of NOVAChemicals’ decision and January 19, 2006, announcement of its intention topermanently close the plant; and (5) $7 million before-tax ($4 millionafter-tax) charge related to NOVA Chemicals’ share of the NOVA Innovene jointventure’s restructuring charges associated with the Berre closure.

 

During 2004, the Corporationprovided for $8 million before-tax ($5 million after-tax) in restructuringcharges for additional dismantling costs related to the closure of its oldestand highest-cost polyethylene production line at the St. Clair River site,announced in 2003. During 2003, NOVA Chemicals recognized $15 millionbefore-tax ($10 million after- tax) in restructuring costs related to assetwrite-down, severance, and other costs associated with this closure.

 

**15. OtherGains and Losses**

 
| ** **                                                                                       | ** ** | **2005**       | ** ** | **2004**      | ** ** | **2003**       | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------|------------|---------------|------------|----------------|------------|
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS)**                   | ** ** | **BEFORE-TAX** | ** ** | **AFTER-TAX** | ** ** | **BEFORE-TAX** | ** ** | **AFTER-TAX** | ** ** | **BEFORE-TAX** | ** ** | **AFTER-TAX** | ** ** |
|                                                                                             |       |           |       |          |       |           |       |   |   |   |   |   |   |
| Tax related settlement(1)                                                                        | ** ** | **$**          | **6**      | ** **    | **$**      | **4**          |       | $ | 122 |   | $ | 101 |   | $ | — |   | $ | — |   |
| Gain on sale of 33.3% interest in Alberta Ethane  Gathering System  (Note 5)                     | ** ** | **—**     | ** ** | **—**    |       | 53             |       | 40 |   | — |   | — |   |
| Gain on sale of investment in Methanex (Note 5)                                                  | ** ** | **—**     | ** ** | **—**    |       | —         |       | — |   | 29 |   | 61 |   |
| Gain on sale of 50% interest in Fort Saskatchewan  Ethylene Storage Limited Partnership (Note 5) | ** ** | **—**     | ** ** | **—**    |       | —         |       | — |   | 76 |   | 64 |   |
| Bayport charge(2)                                                                                | ** ** | **—**     | ** ** | **—**    |       | —         |       | — |   | (13 | ) | (8 | ) |
| Other                                                                                            | ** ** | **2**          | ** ** | **1**         |       | 2              |       | 2 |   | — |   | — |   |
| Other gains and losses (net)                                                                     | ** ** | **$**          | **8**      | ** **    | **$**      | **5**          |       | $ | 177 |   | $ | 143 |   | $ | 92 |   | $ | 117 |   |

 

----

| (1)    | The Corporation recorded a  gain in 2005 and 2004 related to the resolution of a tax dispute. The dispute  related to the deductibility of foreign taxes in certain returns filed with  the United States Internal Revenue Service prior to 1982. $12 million was  received in 2004 and an additional $116 million was received in 2005 from an  affiliate of a company in which the Corporation previously had an interest. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | NOVA Chemicals had an  explosion, which resulted in a fire at its Bayport, Texas, styrene monomer  production facility and as a result, incurred a charge primarily related to  the amount of property damage not covered by insurance.                                                                                                                                                                                      |

 

25

----

 

**16. IncomeTaxes**

 

Income tax expense (recovery)varies from amounts computed by applying the Canadian federal and provincialstatutory income tax rates to income (loss) before income taxes as shown in thefollowing table:

 
| **YEAR ENDED DECEMBER 31(MILLIONS OF DOLLARS EXCEPT AS NOTED)**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                                   |       |       |       |       |       |     |       |
| Income (loss) before income taxes                                      | ** ** | **$**      | **(109**   | **)**      | $          | 333      |       | $ | (74 | ) |
| Statutory income tax rate                                              | ** ** | **33.62**  | **%**      | 33.87      | %          | 36.74    | %          |
| Computed income tax expense (recovery)                                 | ** ** | **$**      | **(37**    | **)**      | $          | 112      |       | $ | (27 | ) |
| Increase (decrease) in taxes resulting  from:                          |       |       | ** ** |       |       |     |       |
| Manufacturing  and processing deduction                                | ** ** | **—** | ** ** | —     |       | (2       | )          |
| Lower  effective foreign tax rates                                     | ** ** | **9**      | ** ** | 2          |       | 19       |       |
| Tax benefits  not recognized on restructuring charges                  | ** ** | **16**     | ** ** | —     |       | —   |       |
| Lower effective  tax rate on equity in earnings of affiliate           | ** ** | **—** | ** ** | —     |       | (12      | )          |
| Lower tax  rates and higher recoveries on asset sales                  | ** ** | **—** | ** ** | (5         | )          | (56      | )          |
| Non-provision  of future income taxes on cost-of-service operations(1) | ** ** | **—** | ** ** | 4          |       | 9        |       |
| Reduction in  tax reserve(2)                                           | ** ** | **—** | ** ** | (11        | )          | (20      | )          |
| Income tax  rate adjustments(3)                                        | ** ** | **—** | ** ** | (7         | )          | 15       |       |
| Lower tax  rate on gain related to tax settlement(4)                   | ** ** | **(2**     | **)**      | (21        | )          | —   |       |
| Other                                                                  | ** ** | **9**      | ** ** | 7          |       | 1        |       |
| Income tax expense (recovery)                                          | ** ** | **$**      | **(5**     | **)**      | $          | 81       |       | $ | (73 | ) |
| Current income tax expense (recovery)                                  | ** ** | **$**      | **68**     | ** ** | $          | 45       |       | $ | 17 |   |
| Future income tax expense (recovery)                                   | ** ** | **(73**    | **)**      | 36         |       | (90      | )          |
| Income tax expense (recovery)                                          | ** ** | **$**      | **(5**     | **)**      | $          | 81       |       | $ | (73 | ) |

 

----

(1)  Certain agreements for cost-of-service operations providefor the recovery of income taxes from customers. These agreements expired on June 30,2004. While the agreements were in effect, the Corporation recorded income taxexpense on these operations equal to the amounts recoverable under theagreements, resulting in no effect on net income (loss). Some agreementslimited the recoverable amount to current taxes payable. Accordingly, theprovision for income taxes excluded future income tax recoveries relating tothese operations.

 

(2)  NOVA Chemicals has a tax reserve, which is available tosettle periodic tax disputes and ongoing tax adjustments. NOVA Chemicalsassesses this reserve from time to time for adequacy and in 2004 and 2003,determined that it was over-provided.

 

(3)  In 2004, the Alberta Government substantively enacted atax rate reduction, which reduced income tax accruals for future taxliabilities by $7 million. This one-time benefit was recorded as a reduction ofincome tax expense. The Corporation recorded a similar item in 2003, however,rate increases resulted in a $15 million additional accrual to income taxliabilities.

 

(4)  The Corporation recorded a gain in 2005 and 2004 relatedto the resolution of a tax dispute. The dispute related to the deductibility offoreign taxes in certain returns filed with the United States Internal RevenueService prior to 1982.

 

The following table outlinesthe principal temporary differences comprising the future income tax assets(liabilities) at December 31, 2005:

 
| **DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|
|                                       |       |     |       |
| Basis difference in plant and equipment    | ** ** | **$**    | **(843**   | **)** |
| Unrealized foreign exchange gains          | ** ** | **(57**  | **)**      |
| Reserves not currently deductible          | ** ** | **113**  | ** ** |
| Losses available to be carried forward     | ** ** | **184**  | ** ** |
| Other                                      | ** ** | **(42**  | **)**      |
| Net future income tax liability            | ** ** | **$**    | **(645**   | **)** |

 

26

----

 

The following table outlinesthe income tax expense (recovery) arising from Canadian and Foreign operations:

 
| **YEAR ENDED DECEMBER 31(MILLIONS OF DOLLARS)** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                 |       |     |       |       |       |     |       |
| Income (loss) before income taxes                    |       |     |       |       |       |     |       |
| Canadian                                             | ** ** | **$**    | **204**    | ** ** | $          | 474      |       | $ | 63 |   |
| Foreign                                              | ** ** | **(313** | **)**      | (141       | )          | (137     | )          |
| ** **                                           |       | **$**    | **(109**   | **)**      | $          | 333      |       | $ | (74 | ) |
| Current income tax expense (recovery)                |       |     | ** ** |       |       |     |       |
| Canadian                                             | ** ** | **$**    | **81**     | ** ** | $          | 44       |       | $ | 14 |   |
| Foreign                                              | ** ** | **(13**  | **)**      | 1          |       | 3        |       |
| ** **                                           |       | **68**   | ** ** | 45         |       | 17       |       |
| Future income tax expense (recovery)                 |       |     | ** ** |       |       |     |       |
| Canadian                                             | ** ** | **(14**  | **)**      | 84         |       | (53      | )          |
| Foreign                                              | ** ** | **(59**  | **)**      | (48        | )          | (37      | )          |
| ** **                                           |       | **(73**  | **)**      | 36         |       | (90      | )          |
| Total income tax expense (recovery)                  | ** ** | **$**    | **(5**     | **)**      | $          | 81       |       | $ | (73 | ) |

 

**17. Changes in Non-Cash Working Capital**

 
| **YEAR ENDED DECEMBER 31(MILLIONS OF DOLLARS)** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                                     |       |     |       |       |       |     |       |
| Accounts receivable                                                      | ** ** | **$**    | **3**      | ** ** | $          | (251     | )          | $ | (67 | ) |
| Inventories                                                              | ** ** | **(46**  | **)**      | (242       | )          | (71      | )          |
| Accounts payable and accrued liabilities                                 | ** ** | **188**  | ** ** | 221        |       | 25       |       |
| Changes in non-cash working capital                                      | ** ** | **145**  | ** ** | (272       | )          | (113     | )          |
| Reclassification and other items not having  a cash effect               | ** ** | **(75**  | **)**      | 101        |       | 8        |       |
| Changes in non-cash working capital having  a cash effect                | ** ** | **$**    | **70**     | ** ** | $          | (171     | )          | $ | (105 | ) |
| These changes relate to the following  activities:                       |       |     | ** ** |       |       |     |       |
| Operating                                                                | ** ** | **$**    | **(42**    | **)**      | $          | (78      | )          | $ | (125 | ) |
| Investing                                                                | ** ** | **110**  | ** ** | (110       | )          | 7        |       |
| Financing(1)                                                             | ** ** | **2**    | ** ** | 17         |       | 13       |       |
| (Increase) decrease in working capital                                   | ** ** | **$**    | **70**     | ** ** | $          | (171     | )          | $ | (105 | ) |

 

----

(1)  Changes in non-cash working capital related to financingactivities include project advances of $nil million (2004 — $15 million and2003 — $11 million).

 

**18.Employee Future Benefits**

 

***Pension Plans***

 

NOVA Chemicals sponsors bothdefined benefit and defined contribution pension arrangements.

 

Defined benefit pensions atretirement are mainly related to years of service and remuneration during thelast years of employment with some plans having limited or conditional indexingprovisions. Actuarial reports are prepared regularly by independent actuariesfor accounting and funding purposes. The last actuarial valuation for allsignificant plans in North America and Europe was December 31, 2004. TheCorporation funds the plans using a valuation based on the projected unitcredit method as determined by independent actuaries.

 

Plan assets are measured atfair value while pension obligations are discounted using current yield ratesof corporate bonds with terms to maturity that approximate the duration of theCorporation’s pension liabilities. The plans’ assets consist primarily ofpublicly traded equity and fixed income securities. Prior to January 1,2005, the Corporation used a measurement date of December 31 for itspension and post-retirement plans. Effective January 1, 2005, theCorporation began using a measurement date of November 30 for its pensionand post-retirement plans.

 

Upon commencement of the NOVAInnovene joint venture in October 2005, the defined benefit pension plansof each pre-joint venture entity were retained with specific arrangements,whereby the responsibility for past service assets and liabilities is retainedby the pre-joint venture company and the responsibility for future serviceassets and liabilities is assumed by NOVA Innovene. Therefore, the amountspresented in the defined benefit pension tables represent NOVA Chemicals’ plansprior to October 1, 2005, and NOVA Chemicals’ obligations subsequent tothe creation of the NOVA Innovene joint venture.

 

27

----

 

Pension and post-retirementexpense (included in operating and selling, general and administrative costs)for all significant defined benefit plans consisted of the following:

 
| ** **                                                                                                                                                | ** ** | **PENSION PLANS** | ** ** | **POST-RETIREMENT PLANS** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------|------------|
| **YEAR ENDED  DECEMBER 31 (MILLIONS OF DOLLARS)**                                                                                                    | ** ** | **2005**          | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current service  cost                                                                                                                                     | ** ** | **$**             | **26**     | ** **                | $          | 24 |   | $ | 21 |   | **$** | **2** | ** ** | $ | 2 |   | $ | 2 |   |
| Interest cost on  projected benefit obligations                                                                                                           | ** ** | **39**            | ** ** | 34                        |       | 30 |   | **4** | ** ** | 4 |   | 4 |   |
| Actual return on  plan assets                                                                                                                             | ** ** | **(55**           | **)**      | (45                       | )          | (50 | ) | **—** | ** ** | — |   | — |   |
| Actual (gain)  loss on accrued benefit obligations                                                                                                        | ** ** | **2**             | ** ** | 25                        |       | 25 |   | **—** | ** ** | (2 | ) | 9 |   |
| Costs arising in  the period                                                                                                                              | ** ** | **12**            | ** ** | 38                        |       | 26 |   | **6** | ** ** | 4 |   | 15 |   |
| Differences between costs arising in the period and  costs recognized in the period in respect of the long-term nature of employee  future benefit costs: | ** ** | ** **        | ** ** |                      |       |   |   | ** ** | ** ** |   |   |   |   |
| Return on plan assets                                                                                                                                     | ** ** | **18**            | ** ** | 14                        |       | 24 |   | **—** | ** ** | — |   | — |   |
| Transitional (asset) obligation                                                                                                                           | ** ** | **(5**            | **)**      | (5                        | )          | (4 | ) | **1** | ** ** | 1 |   | 1 |   |
| Actuarial (gain) loss                                                                                                                                     | ** ** | **5**             | ** ** | (21                       | )          | (20 | ) | **1** | ** ** | 3 |   | (9 | ) |
| Past service and actual plan amendments                                                                                                                   | ** ** | **1**             | ** ** | 2                         |       | 1 |   | **—** | ** ** | — |   | — |   |
| Net defined  benefit cost recognized                                                                                                                      | ** ** | **$**             | **31**     | ** **                | $          | 28 |   | $ | 27 |   | **$** | **8** | ** ** | $ | 8 |   | $ | 7 |   |

 

The status of all significant defined benefitpension and post-retirement plans is as follows:

 
| ** **                                                                                                     | ** ** | **PENSION PLANS** | ** ** | **POST-RETIREMENT PLANS** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS, EXCEPT AS NOTED)** | ** ** | **2005**               | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Change in benefit  obligations                                                                                 |       |                   | ** ** |                           |       |   |   |   | ** ** |   |   |   |   |
| Benefit obligation at beginning of year                                                                        | ** ** | **$**                  | **668**    | ** **                     | $          | 569 |   | $ | 430 |   | **$** | **73** | ** ** | $ | 69 |   | $ | 53 |   |
| Current service cost                                                                                           | ** ** | **26**                 | ** ** | 24                             |       | 21 |   | **2** | ** ** | 2 |   | 2 |   |
| Interest cost                                                                                                  | ** ** | **39**                 | ** ** | 34                             |       | 30 |   | **4** | ** ** | 4 |   | 4 |   |
| Experience (gain) loss                                                                                         | ** ** | **85**                 | ** ** | 25                             |       | 24 |   | **(8** | **)** | 7 |   | 10 |   |
| Settlement/curtailment                                                                                         | ** ** | **—**             | ** ** | —                         |       | (2 | ) | **—** | ** ** | — |   | (1 | ) |
| Commuted value payments                                                                                        | ** ** | **(6**                 | **)**      | (7                             | )          | — |   | **—** | ** ** | — |   | — |   |
| Employee contributions                                                                                         | ** ** | **4**                  | ** ** | 5                              |       | 5 |   | **1** | ** ** | 1 |   | — |   |
| Medicare Act subsidy effect                                                                                    | ** ** | **—**             | ** ** | —                         |       | — |   | **—** | ** ** | (9 | ) | — |   |
| Benefits paid                                                                                                  | ** ** | **(21**                | **)**      | (21                            | )          | (20 | ) | **(3** | **)** | (3 | ) | (2 | ) |
| Foreign currency exchange rate loss                                                                            | ** ** | **2**                  | ** ** | 39                             |       | 81 |   | **1** | ** ** | 2 |   | 3 |   |
| Benefit obligation at end of year                                                                              | ** ** | **$**                  | **797**    | ** **                     | $          | 668 |   | $ | 569 |   | **$** | **70** | ** ** | $ | 73 |   | $ | 69 |   |
| Change in plan  assets                                                                                         |       |                   | ** ** |                           |       |   |   |   | ** ** |   |   |   |   |
| Fair value of plan assets at beginning of year                                                                 | ** ** | **$**                  | **506**    | ** **                     | $          | 425 |   | $ | 312 |   | **$** | **—** | ** ** | $ | — |   | $ | — |   |
| Actual return on plan assets                                                                                   | ** ** | **55**                 | ** ** | 45                             |       | 50 |   | **—** | ** ** | — |   | — |   |
| Employer and employee contributions                                                                            | ** ** | **52**                 | ** ** | 32                             |       | 20 |   | **3** | ** ** | 3 |   | 2 |   |
| Settlement/curtailment                                                                                         | ** ** | **—**             | ** ** | —                         |       | (2 | ) | **—** | ** ** | — |   | — |   |
| Benefits paid                                                                                                  | ** ** | **(27**                | **)**      | (28                            | )          | (20 | ) | **(3** | **)** | (3 | ) | (2 | ) |
| Foreign currency exchange rate gain (loss)                                                                     | ** ** | **(1**                 | **)**      | 32                             |       | 65 |   | **—** | ** ** | — |   | — |   |
| Fair value of plan assets at end of year                                                                       | ** ** | **$**                  | **585**    | ** **                     | $          | 506 |   | $ | 425 |   | **$** | **—** | ** ** | $ | — |   | $ | — |   |
| Funded status                                                                                                  |       |                   | ** ** |                           |       |   |   |   | ** ** |   |   |   |   |
| Plan assets in deficiency of benefit obligation                                                                | ** ** | **$**                  | **(212**   | **)**                          | $          | (162 | ) | $ | (144 | ) | **$** | **(70** | **)** | $ | (73 | ) | $ | (69 | ) |
| Unrecognized net transitional (asset) obligation                                                               | ** ** | **(44**                | **)**      | (47                            | )          | (49 | ) | **10** | ** ** | 11 |   | 10 |   |
| Unrecognized prior service cost                                                                                | ** ** | **3**                  | ** ** | 6                              |       | 7 |   | **—** | ** ** | — |   | — |   |
| Unrecognized net actuarial loss                                                                                | ** ** | **195**                | ** ** | 132                            |       | 118 |   | **11** | ** ** | 19 |   | 22 |   |
| December contribution                                                                                     | ** ** | **2**                  | ** ** | —                         |       | — |   | — | ** ** | — |   | — |   |
| Net amounts recognized in consolidated balance sheets                                                          | ** ** | **$**                  | **(56**    | **)**                          | $          | (71 | ) | $ | (68 | ) | **$** | **(49** | **)** | $ | (43 | ) | $ | (37 | ) |
| Weighted-average  assumptions                                                                                  |       |                   | ** ** |                           |       |   |   |   | ** ** |   |   |   |   |
| Discount rate                                                                                                  | ** ** | **5.2**                | **%**      | 5.6                            | %          | 5.9 | % | **5.6** | **%** | 5.8 | % | 6.1 | % |
| Assumed long-term rate of return on plan assets(1)                                                             | ** ** | **7.3**                | **%**      | 7.3                            | %          | 7.3 | % | **—** | ** ** | — |   | — |   |
| Rate of increase in future compensation                                                                        | ** ** | **3.6**                | **%**      | 3.2                            | %          | 3.2 | % | **—** | ** ** | — |   | 4.2 | % |
| Long-term health care inflation(2)                                                                             | ** ** | **—**             | ** ** | —                         |       | — |   | **4.9** | **%** | 5.0 | % | 5.0 | % |

 

----

| (1)    | NOVA Chemicals establishes  an appropriate long-term rate of return for each plan’s assets which reflects  asset allocations within each plan as well as independent views of long-term  rate of return expectations for each asset class. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                            |
| (2)    | Ultimate trend rate  expected to be achieved between 2011 and 2013. The assumed health care cost  trend rate used to measure the 2005 expected cost of benefits covered by the  plans is 11% on average.                                        |

 

28

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The plans are presented onthe basis of accrued benefit obligations, rather than accumulated benefitobligations. All of NOVA Chemicals’ pension plans have accrued benefitobligations that exceed the fair value of plan assets as of December 31,2005, and 2004. The accrued benefit obligation and the fair value of assets forthese plans were $797 million and $585 million, respectively, at December 31,2005, and $668 million and $506 million, respectively, at December 31,2004. Included in the accrued benefit obligation and fair value of plan assetsat December 31, 2003, are the following amounts in respect of plans thatare not fully funded: accrued benefit obligation – $563 million and fair valueof plan assets – $418 million.

 

Expected benefit payments forthe defined benefit pension plans are $34 million for 2006, $34 million for2007, $58 million for 2008, $41 million for 2009, $43 million for 2010 and $271million for the five years thereafter.

 

Expected benefit payments forthe post-retirement plans are $3 million for 2006, $3 million for 2007, $3million for 2008, $3 million for 2009, $4 million for 2010 and $21 million forthe five years thereafter.

 

In 2006, NOVA Chemicalsexpects to fund its defined benefit pension plans by $60 million.

 

***Defined Benefit Plan Assets***

 

The Corporation’s investmentstrategy for defined benefit plans is determined for each plan after takinginto consideration the plan structure, nature of the liabilities, the funded statusand cash flow requirements of the plan, the size of the assets, and thefinancial situation of the Corporation and its ability to withstandfluctuations in pension contributions. The assets of each plan are currentlyinvested in a variety of traditional financial instruments such as equities andfixed income securities using a combination of active and passive strategies.Non-traditional assets such as real estate and venture capital may also beconsidered in certain situations. Although the Corporation does not considerderivatives a separate asset class, they are permitted in order to manage theallocation of investments across asset classes, markets and currencies.However, under no circumstances can they be used for speculative purposes orhave the effect of leveraging the assets.

 

While most of the benefits ofdiversification are achieved by allocating across different asset classes, theCorporation also believes it may be appropriate to further diversify byusing multiple investment managers and employing different management styleswithin an asset class.

 

In Europe, the Corporationhas pension plans in several countries that vary considerably in membership,liability structure, pension arrangement, and asset size. Given thesedifferences, the asset allocation can vary significantly not only from theNorth American plans, but also by country. In addition, some European plans arere-insured with the investment strategy and asset allocation determined orheavily influenced by the re-insurer.

 

The Corporation’s Canadianand U.S. plans are the most significant to the Corporation with 81% of totalpension assets and 94% of total plan members in these plans. The assetallocation for these pension plans at the end of 2005, 2004, and 2003 and thetarget allocation for 2006, by asset category follows. This information hasbeen aggregated within a geographic segment as asset allocations are similarfor the Canadian and U.S. plans.

 

***North American Plans***

 
| **ASSET CATEGORY**              | ** ** | **TARGET ALLOCATION** | ** ** | **PERCENTAGE OF PLAN ASSETS** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| **YEAR ENDED DECEMBER 31** | ** ** | **2006**              | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                  |       |                          |       |   |   |   |   |
| Equities                        |       | 60                    | %          | **60**                        | **%**      | 60 | % | 61 | % |
| Fixed Income                    |       | 40                    | %          | **40**                        | **%**      | 40 | % | 39 | % |
| Total                           |       | 100                   | %          | **100**                       | **%**      | 100 | % | 100 | % |

 

29

----

 

***Post-Retirement Benefits Other Than Pensions***

 

The Corporation providesmedical care and life insurance benefits to eligible retirees and theirdependents in North America. The Corporation accrues the cost of providingpost-retirement benefits as the employees provide services. Post-retirementcosts are funded as they are incurred.

 

A 1% increase in the healthcare inflation rate would have increased the accumulated post-retirementbenefit obligation by an additional $6 million at December 31, 2005 forCanadian plans and $6 million for U.S. plans. A 1% decrease in the same healthcare inflation rate would have decreased the post-retirement benefit obligationby $5 million and $5 million for Canadian and U.S. plans, respectively.

 

***Defined Contribution Arrangements***

 

NOVA Chemicals has a numberof defined contribution arrangements providing pension benefits to certaingroups of employees. The total expense for the Corporation’s contributions tothese plans in 2005 was $7 million (2004 — $7 million and 2003 — $6 million).In 2006, NOVA Chemicals expects to fund its defined contribution plans byapproximately $7 million.

 

**19. AssetRetirement Obligations**

 

The Corporation’s assetretirement obligations are comprised of expected costs to be incurred upontermination of operations and the closure of active manufacturing plantfacilities. The total undiscounted amount of estimated cash flows expected tobe incurred on closure of active plants in 25 to 40 years is between $225million and $250 million. This amount is based on third-party cost estimatesobtained from reputable sources after an in-depth review of active plant sitesand required clean-up and restoration activities. In arriving at the estimatedasset retirement obligation, a credit-adjusted risk-free rate of 10.5% was usedto discount the estimated future cash flows. The estimated asset retirementobligation liability of $18 million at December 31, 2005 will increase, oraccrete, each year over the lives of active plants until it equals the $225million to $250 million expected to be incurred on closure of the plants. Inaddition to the liability for active sites, the Corporation also has an assetretirement obligation liability for decommissioning and restoration costsassociated with plant sites that have been divested or are no longer in use. Theaccrued liability associated with these sites is $3 million and is consideredto be adequate at this time.

 

**20.Contingencies and Commitments**

 

Various lawsuits and claimsare pending by and against the Corporation. It is the opinion of managementthat final determination of these claims will not materially affect thefinancial position or operating results of the Corporation.

 

The Corporation leases officespace and transportation equipment under various operating leases. The minimumlease payments are approximately $543 million in total with annual amounts of$48 million in 2006, $41 million in 2007, $39 million in 2008, $42 million in2009, $39 million in 2010, and $334 million thereafter. Rental expense underoperating leases was $63 million in 2005 (2004 — $59 million and 2003 — $53million).

 

The Corporation has enteredinto agreements for the purchase of minimum amounts of feedstock and other rawmaterials for short- and long-term supply. The resulting obligations, based onyear-end market prices, are approximately $11,034 million in total with annualamounts of $3,825 million in 2006, $1,494 million in 2007, $881 million in2008, $728 million in 2009, $430 million in 2010, and $3,676 millionthereafter.

 

The Corporation is obligatedunder a long-term styrene monomer supply agreement to supply the NOVA Innovenejoint venture with 50% of the joint venture’s styrene monomer feedstockrequirements.

 

30

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**21.Segmented Information**

 

The Corporation determines itsreportable segments based on the structure of its operations, which areprimarily focused in two principal business segments – Olefins/Polyolefins andStyrene/Styrenic Polymers (Styrenics). These operations involve the productionand marketing of ethylene and polyethylene resins, and styrene monomer andstyrenic polymers, respectively.

 

***Financial Information By Business Segment***

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                  |       |       |       |       |       |     |       |
| Revenue                                               |       |       |       |       |       |     |       |
| Olefins and  polyolefins                              | ** ** | **$**      | **3,586**  | ** ** | $          | 3,230    |       | $ | 2,559 |   |
| Styrenics                                             | ** ** | **2,259**  | ** ** | 2,324      |       | 1,579    |       |
| Intersegment  eliminations                            | ** ** | **(229**   | **)**      | (284       | )          | (189     | )          |
| ** **                                            |       | **$**      | **5,616**  | ** ** | $          | 5,270    |       | $ | 3,949 |   |
| Depreciation and amortization                         |       |       | ** ** |       |       |     |       |
| Olefins and  polyolefins                              | ** ** | **$**      | **166**    | ** ** | $          | 181      |       | $ | 187 |   |
| Styrenics                                             | ** ** | **124**    | ** ** | 116        |       | 111      |       |
| ** **                                            |       | **$**      | **290**    | ** ** | $          | 297      |       | $ | 298 |   |
| Operating income (loss)                               |       |       | ** ** |       |       |     |       |
| Olefins and  polyolefins                              | ** ** | **$**      | **437**    | ** ** | $          | 445      |       | $ | 98 |   |
| Styrenics                                             | ** ** | **(271**   | **)**      | (71        | )          | (147     | )          |
| Corporate  and other(1)                               | ** ** | **(170**   | **)**      | (110       | )          | (26      | )          |
| ** **                                            |       | **$**      | **(4**     | **)**      | $          | 264      |       | $ | (75 | ) |
| Net income (loss)                                     |       |       | ** ** |       |       |     |       |
| Olefins and  polyolefins                              | ** ** | **$**      | **241**    | ** ** | $          | 249      |       | $ | 2 |   |
| Styrenics                                             | ** ** | **(221**   | **)**      | (73        | )          | (140     | )          |
| Equity  investments                                   | ** ** | **—** | ** ** | —     |       | 37       |       |
| Corporate  and other(1)                               | ** ** | **(124**   | **)**      | 76         |       | 100      |       |
| ** **                                            |       | **$**      | **(104**   | **)**      | $          | 252      |       | $ | (1 | ) |
| Plant, property, and equipment additions  (net)       |       |       | ** ** |       |       |     |       |
| Olefins and  polyolefins                              | ** ** | **$**      | **256**    | ** ** | $          | 127      |       | $ | 74 |   |
| Styrenics                                             | ** ** | **163**    | ** ** | 115        |       | 56       |       |
| ** **                                            |       | **$**      | **419**    | ** ** | $          | 242      |       | $ | 130 |   |

 
| **DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
|                                                      |       |      | ** ** |       |       |     |       |
| Assets                                                    |       |      | ** ** |       |       |     |       |
| Olefins and  polyolefins                                  | ** ** | **$**     | **2,906**  | ** ** | $          | 2,510    |       | $ | 2,246 |   |
| Styrenics                                                 | ** ** | **1,917** | ** ** | 2,018      |       | 1,767    |       |
| Corporate  and other(2)                                   | ** ** | **394**   | ** ** | 519        |       | 400      |       |
| ** **                                                |       | **$**     | **5,217**  | ** ** | $          | 5,047    |       | $ | 4,413 |   |

 

----

(1)  Corporate and other operating income (loss) includes themark-to-market changes for stock-based compensation liabilities, profitsharing, restructuring, and other gains and losses.

 

(2)  Amounts include all cash and cash equivalents.

 

31

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***Financial Information By Geographic Area***

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
|                                                  |       |      |       |       |       |     |       |
| Revenue(1)                                            |       |      |       |       |       |     |       |
| Canada                                                | ** ** | **$**     | **1,976**  | ** ** | $          | 1,706    |       | $ | 1,414 |   |
| United  States                                        | ** ** | **2,478** | ** ** | 2,390      |       | 1,789    |       |
| Europe and  other                                     | ** ** | **1,162** | ** ** | 1,174      |       | 746      |       |
| ** **                                            |       | **$**     | **5,616**  | ** ** | $          | 5,270    |       | $ | 3,949 |   |
| Export sales from Canadian operations                 |       |      | ** ** |       |       |     |       |
| United  States                                        | ** ** | **$**     | **1,513**  | ** ** | $          | 1,393    |       | $ | 1,054 |   |
| Europe and  other                                     | ** ** | **255**   | ** ** | 248        |       | 148      |       |
| ** **                                            |       | **$**     | **1,768**  | ** ** | $          | 1,641    |       | $ | 1,202 |   |
| Operating income (loss)                               |       |      | ** ** |       |       |     |       |
| Canada                                                | ** ** | **$**     | **330**    | ** ** | $          | 386      |       | $ | 4 |   |
| United  States                                        | ** ** | **(147**  | **)**      | (94        | )          | (66      | )          |
| Europe and  other                                     | ** ** | **(187**  | **)**      | (28        | )          | (13      | )          |
| ** **                                            |       | **$**     | **(4**     | **)**      | $          | 264      |       | $ | (75 | ) |
| Equity in earnings of affiliates                      |       |      | ** ** |       |       |     |       |
| Canada                                                | ** ** | **$**     | **—** | ** ** | $          |     |       | $ | 39 |   |

 
| **DECEMBER 31 (MILLIONS OF DOLLARS)** | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
|                                                      |       |      | ** ** |       |       |     |       |
| Assets(2)                                                 |       |      | ** ** |       |       |     |       |
| Canada                                                    | ** ** | **$**     | **3,163**  | ** ** | $          | 2,943    |       | $ | 2,600 |   |
| United  States                                            | ** ** | **1,235** | ** ** | 1,303      |       | 1,113    |       |
| Europe and  other                                         | ** ** | **791**   | ** ** | 773        |       | 673      |       |
| Investments                                               | ** ** | **28**    | ** ** | 28         |       | 27       |       |
| ** **                                                |       | **$**     | **5,217**  |       | $          | 5,047    | ** ** | $ | 4,413 |   |

 

----

(1)  Based on location of customer.

(2)  Based on location of the operating facility.

 

**22.Financial Instruments**

 

***Financial Instrument Fair Values***

 

Financial instrument fairvalues represent a reasonable approximation of amounts NOVA Chemicals wouldhave received or paid to counterparties to unwind positions prior to theirmaturity. NOVA Chemicals has no plans to unwind these positions prior tomaturity and has no significant exposure to any individual customer orcounterparty.

 

The carrying amounts reportedon the balance sheets for cash and cash equivalents, accounts receivable, bankloans, and accounts payable approximate their fair value. Fair values andcarrying amounts for long-term debt are as follows:

 
| ** **                                                           | ** ** | **CARRYING AMOUNT(1)** | ** ** | **ESTIMATED FAIR VALUE(2)** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **DECEMBER 31 (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)** | ** ** | **2005**               | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt                                                       | ** ** | **$**                  | **2,038**  |                        | **$**      | 1,714 |   | **$** | 1,682 |   | **$** | **2,050** |   | **$** | 1,798 |   | **$** | 1,737 |   |
|                                                                      |            |                        |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  Includes debtinstallments due within one year.

 

(2)  The fair value of long-term debt is based on quotedmarket prices, where available. If market prices are not available, fair valuesare estimated using discounted cash flow analysis, based on NOVA Chemicals’current incremental borrowing rates for similar borrowing arrangements.

 

32

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***Foreign Exchange Risk Management***

 

NOVA Chemicals has U.S.,Canadian and European-based petrochemical operations. As a result, a portion ofthe Corporation’s expenditures are incurred in Canadian dollars and euros. At December 31,2005, NOVA Chemicals had no foreign currency forward exchange contractsoutstanding nor any plans to enter into any such contracts.

 

***Stock Price Volatility Risk Management***

 

In 2005, the Corporationentered into cash-settled share forward transactions to manage its exposure tofluctuations in its stock-based compensation costs related to its twocash-settled stock-based incentive compensation plans. Compensation costsassociated with the plans fluctuate as a result of changes in the market priceof the Corporation’s common stock. In 2005, the Corporation entered intoforward transactions for a total of 3,612,100 notional common shares with anaverage forward price of U.S. $45.66. The forward transactions are cash-settledat the end of a 3-year term (November 2008), or at any time prior to thatdate, at the option of the Corporation, based on the difference between theCorporation’s common stock price on the NYSE and the average execution price.If the Corporation’s common stock price is in excess of the average executionprice on the settlement date, the Corporation will receive the difference pershare in cash, and if the Corporation’s common stock price is less than theaverage execution price, the Corporation will pay the difference per share incash. The forward transactions include an interest component, which is accruedand payable by the Corporation on settlement of the forward transactions. Theaverage execution price is determined by reference to the average forwardprice, less the interest component, and is $37.56. If the Corporation’s commonstock price is in excess of the average execution price, an unrealized gain isrecorded and if the Corporation’s common stock price is below the averageexecution price, an unrealized loss is recorded. Unrealized gains and lossesassociated with the share forward transactions are recorded as part ofselling, general and administrative expenses, offsetting unrealized losses orgains on the cash-settled stock-based incentive compensation plans, and aslong-term receivables or payables. At December 31, 2005, themark-to-market value of the share forward transactions was a $15 millionunrealized loss, which is included in long-term liabilities.

 

***Commodity Price Risk Management***

 

NOVA Chemicals usescommodity-based derivatives to manage its exposure to price fluctuations oncrude oil, refined products and natural gas transactions. The instruments areused to moderate the risk of adverse short-term price movements.

Occasionally, longer-termpositions will be taken to manage price risk for anticipated supplyrequirements.

 

33

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At December 31, 2005,2004, and 2003, the notional volume and estimated fair value of outstandingderivative contracts for natural gas are as follows:

 
| **DECEMBER 31**                             | ** ** | ** **    | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|---------------|------------|------------|------------|----------|------------|----------|------------|
|                                             |       |          |       |       |       |     |       |     |       |
| Basis swaps                                      |       |          |       |       |       |     |       |     |       |
| Notional  volume                                 |       | mcf millions  | ** ** | **—** |       | 12.6     |       | 76.0     |       |
| Weighted-average  basis differential per mcf (1) |       | U.S.          | ** ** | **$**      | **—** |     | $          | 0.61     |       | $ | 0.52 |   |
| Estimated  fair value (2)                        |       | U.S. millions | ** ** | **$**      | **—** |     | $          | (3       | )          | $ | (18 | ) |
| Term to  maturity                                |       | Months        | ** ** | **—** |       | 1-3      |       | 1-15     |       |
| Options                                          |       |          |       |       |       |     |       |     |       |
| Notional  volume — calls                    |       | mcf millions  | ** ** | **—** |       | 1.1      |       | 3.6      |       |
| Notional  volume — puts                     |       | mcf millions  | ** ** | **—** |       | 8.6      |       | 33.5     |       |
| Weighted-average  price per mcf — calls     |       | U.S.          | ** ** | **$**      | **—** |     | $          | 5.05     |       | $ | 6.27 |   |
| Weighted-average  price per mcf — puts (3)  |       | U.S.          | ** ** | **$**      | **—** |     | $          | 2.50     |       | $ | 2.42 |   |
| Estimated  fair value (4)                        |       | U.S. millions | ** ** | **$**      | **—** |     | $          | 1        |       | $ | 1 |   |
| Term to maturity                                 |       | Months        | ** ** | **—** |       | 1-3      |       | 1-15     |       |

 

----

| (1) | The  Corporation will pay or receive the difference between the NYMEX market price  and the U.S. export market price, plus a fixed differential established in  the contract.                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Corporation crystallized the losses on  all of the basis swaps by placing offsetting positions. These crystallized  losses will be recognized in income at their originally intended maturity  dates. |
| (3) | The Corporation will pay the difference  between the NYMEX market price and the contract price (if contract is higher  than market).                                                                      |
| (4) | Unrealized before-tax gain (loss).                                                                                                                                                                        |

 

At December 31, 2005, 2004, and 2003,the notional volume and estimated fair value of outstanding derivativecontracts for crude oil, refined products, and alternative feedstock are asfollows:

 
| **DECEMBER 31**           | ** ** | ** **    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|---------------|------------|----------|------------|----------|------------|----------|------------|
|                           |       |          |       |     |       |     |       |     |       |
| Notional volume (1)            |       | bbls millions | ** ** | **5.4**  |       | 4.0      |       | 6.4      |       |
| Weighted-average price per bbl |       | U.S.          | ** ** | **$**    | **51.56**  |     | $          | 42.67    |       | $ | 29.96 |   |
| Estimated fair value (2)       |       | U.S. millions | ** ** | **$**    | **19**     |     | $          | 12       |       | $ | 9 |   |
| Mark-to-market (3)             |       | U.S. millions | ** ** | **$**    | **19**     |     | $          | 9        |       | $ | — |   |
| Term to maturity               |       | Months        | ** ** | **1-19** |       | 1-24     |       | 1-36     |       |

 

----

(1)  The year 2005includes 2.3 million bbls of crude contracts and 3.1 million bbls of lpgcontracts.

(2)  Unrealized gain (loss).

(3)  Recognized before-tax gain, equal to unrealized gain lessdeferred transitional gain.

 

At December 31, 2005,2004, and 2003, the notional volume and estimated fair value of outstandingderivative contracts for benzene are as follows:

 
| **DECEMBER 31**              | ** ** | ** **    | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|---------------|------------|------------|------------|----------|------------|----------|------------|
|                              |       |          |       |       |       |     |       |     |       |
| Notional volume                   |       | gls millions  | ** ** | **—** |       | 0.2      |       | —   |       |
| Weighted-average price per gl (1) |       | U.S.          | ** ** | **$**      | **—** |     | $          | 3.05     |       | $ | — |   |
| Estimated fair value (2)          |       | U.S. millions | ** ** | **$**      | **—** |     | $          | (2       | )          | $ | — |   |
| Mark-to-market (3)                |       | U.S. millions | ** ** | **$**      | **—** |     | $          | (2       | )          | $ | — |   |
| Term to maturity                  |       | Months        | ** ** | **—** |       | 1-3      |       | —   |       |

 

----

(1)  Benzene swaps, options, collars.

(2)  Unrealized loss.

(3)  Recognized before-tax loss.

 

34

----

 

In addition to thecrystallized and outstanding positions described in the tables above, theCorporation has liquidated certain natural gas and crude oil positions. Gainson these positions attributable to changes in value prior to January 1,2004 were deferred and are being recognized in income (loss) at the originalmaturity dates. The unamortized portion of liquidated gains was $nil million atDecember 31, 2005 (2004 – $3 million).

 

The Corporation hasrecognized a net pre-tax gain of $19 million from commodity risk managementactivities in income (loss) for the year ended December 31, 2005 (2004 –$24 million). This gain is the result of $7 million (2004 – $16 million) ofrealized net gains from settled, crystallized, and liquidated positions and $12million (2004 – $8 million) of net mark-to-market gains on unrealized positions.Gains and losses on commodity-based derivatives are included in feedstock andoperating costs.

 

***Interest Rate Risk Management***

 

When deemed appropriate, NOVAChemicals enters into interest rate swap agreements to manage its interest rateprice risk exposure on certain fixed-rate debt. The agreements generallyinvolve the receipt of fixed-rate amounts in exchange for floating-rate LIBORbased payments over the terms of the related debt. In 2005, the Corporation hadfixed-for-floating interest rate swaps outstanding on $300 million (2004 – $300million and 2003 – $550 million) of medium-term notes. These positions had anestimated fair-market value of $(3) million at December 31, 2005 ($(2) millionat December 31, 2004, and $4 million at December 31, 2003).

 

In prior years, a series ofinterest rate swaps on $550 million of fixed-rate debt were liquidated,resulting in a before-tax gain of $40 million in total. The gains have beendeferred and are being recognized in income (loss) as a reduction of interestexpense over the terms of the related debt instruments, which mature in 2006and 2009.

 

***Credit Risk Management***

 

Credit exposure on financialinstruments arises from the possibility that a counterparty to an instrument inwhich NOVA Chemicals is entitled to receive payment of an unrealized gain failsto perform. NOVA Chemicals has established a limit on contingent exposure foreach counterparty based on the counterparty’s credit rating. Credit exposure ismanaged through credit approval and monitoring procedures. NOVA Chemicals doesnot anticipate any counterparties that it currently transacts with will fail tomeet their obligations. At December 31, 2005, 2004, and 2003, NOVAChemicals’ credit exposure was $nil million for foreign currency instruments,$nil million (2004 – $nil million and 2003 – $4 million) for interest rateinstruments, $19 million (2004 – $11 million and 2003 – $3 million) forcommodity-based instruments and $nil million for share based instruments.

 

Concentration of credit riskrelates primarily to the Corporation’s receivables, as certain customer groupsare located in the same geographic area and operate in the same industry. TheCorporation manages its credit risk relating to these receivables throughcredit approval and monitoring procedures.

 

35

----

 

**23. UnitedStates Generally Accepted Accounting Principles**

 

***Reconciliation To Accounting Principles Generally Accepted In TheUnited States***

 

The Corporation prepares itsconsolidated financial statements in accordance with Canadian GAAP, which, insome respects, are different from U.S. GAAP. The effect of these differences onthe Corporation’s consolidated net income (loss) and balance sheet are asfollows:

 
| **YEAR ENDED DECEMBER 31(MILLIONS OF DOLLARS, EXCEPT PER SHARE  AMOUNTS)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                                            |       |       |       |       |       |     |       |
| Net income (loss) in accordance with  Canadian GAAP                             | ** ** | **$**      | **(104**   | **)**      | $          | 252      |       | $ | (1 | ) |
| Add (deduct) adjustments for:                                                   |       |       | ** ** |       |       |     |       |
| Start-up  costs (1)                                                             | ** ** | **(13**    | **)**      | 5          |       | 4        |       |
| Foreign  exchange derivative instruments and hedging activity (2)               | ** ** | **—** | ** ** | —     |       | 3        |       |
| Other  derivative instruments and hedging activity (2)                          | ** ** | **(3**     | **)**      | —     |       | (7       | )          |
| Inventory  costing (3)                                                          | ** ** | **4**      | ** ** | 4          |       | (1       | )          |
| Equity in  earnings of affiliate (4)                                            | ** ** | **—** | ** ** | —     |       | (1       | )          |
| Changes in  accounting policies (5)                                             | ** ** | **—** | ** ** | (7         | )          | 5        |       |
| Other gains  (6)                                                                | ** ** | **—** | ** ** | —     |       | 42       |       |
| Other                                                                           | ** ** | **1**      | ** ** | —     |       | 1        |       |
| Net income (loss) in accordance with U.S.  GAAP                                 | ** ** | **$**      | **(115**   | **)**      | $          | 254      |       | $ | 45 |   |
| Net income (loss) per share using U.S. GAAP                                     |       |       | ** ** |       |       |     |       |
| — Basic                                                                    | ** ** | **$**      | **(1.39**  | **)**      | $          | 2.93     |       | $ | 0.52 |   |
| — Diluted                                                                  | ** ** | **$**      | **(1.39**  | **)**      | $          | 2.73     |       | $ | 0.51 |   |
| Comprehensive income (loss) (net of tax)  (7)                                   |       |       | ** ** |       |       |     |       |
| Net income  (loss) in accordance with U.S. GAAP                                 | ** ** | **$**      | **(115**   | **)**      | $          | 254      |       | $ | 45 |   |
| Cumulative  translation adjustment (8)                                          | ** ** | **(29**    | **)**      | 121        |       | 395      |       |
| Less:  Reclassification of amounts included in net income (loss)                | ** ** | **—** | ** ** | —     |       | (54      | )          |
| Unrealized  gain on cash flow hedging instruments                               |       |       | ** ** |       |       |     |       |
| (less tax of  $(2) in 2003) (2)                                            | ** ** | **—** | ** ** | —     |       | 4        |       |
| Equity in  comprehensive loss of affiliate (4)                                  | ** ** | **—** | ** ** | —     |       | (3       | )          |
| Minimum  pension liability adjustments (less tax of $6, $nil and $2) (9)        | ** ** | **(9**     | **)**      | 1          |       | (3       | )          |
| Comprehensive income in accordance with  U.S. GAAP                              | ** ** | **$**      | **(153**   | **)**      | $          | 376      |       | $ | 384 |   |
| Accumulated other comprehensive income (7)                                      |       |       | ** ** |       |       |     |       |
| Cumulative  translation adjustment (8)                                          | ** ** | **$**      | **303**    | ** ** | $          | 332      |       | $ | 211 |   |
| Minimum  pension liability (9)                                                  | ** ** | **(12**    | **)**      | (3         | )          | (4       | )          |
| Accumulated other comprehensive income                                          | ** ** | **$**      | **291**    | ** ** | $          | 329      |       | $ | 207 |   |

 

36

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| **DECEMBER 31 (MILLIONS OF DOLLARS)**          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                                |       |       |       |       |       |     |       |
| Balance sheet items in accordance with U.S.  GAAP   |       |       |       |       |       |     |       |
| Current  assets (2),(3)                             | ** ** | **$**      | **1,455**  | ** ** | $          | 1,482    |       | $ | 959 |   |
| Investment  and other assets (1),(2),(4),(9)        | ** ** | **159**    | ** ** | 139        |       | 157      |       |
| Plant,  property, and equipment (net) (1),(5)       | ** ** | **3,604**  | ** ** | 3,429      |       | 3,311    |       |
| Current  liabilities (2)                            | ** ** | **(1,293** | **)**      | (893       | )          | (585     | )          |
| Long-term  debt (2),(5)                             | ** ** | **(1,742** | **)**      | (1,625     | )          | (1,703   | )          |
| Deferred  credits and long-term liabilities (2),(9) | ** ** | **(972**   | **)**      | (1,030     | )          | (829     | )          |
| Common  shareholders’ equity                   | ** ** | **$**      | **1,211**  | ** ** | $          | 1,502    |       | $ | 1,310 |   |

 

----

(1)  **Start-up Costs.**CanadianGAAP provides that when an entity starts up a new facility, expenditures incurredduring the pre-operating period may be deferred when certain criteria aremet. Under U.S. GAAP, all costs (except interest on constructed assets)associated with start-up activities must be expensed as incurred. See Note 5for information on the Corporation’s start-up costs.

 

(2)  **Derivative Instrumentsand Hedging Activities.**Canadian GAAP does not require therecognition of derivative instruments on the consolidated balance sheet at fairvalues, unless the derivative instrument does not qualify for hedge accountingunder Canadian Accounting Guideline 13, Hedging Relationships (AcG-13).Non-qualifying derivatives are adjusted to fair value through income (loss).Under U.S. GAAP, entities must follow the recommendations of Statement ofFinancial Accounting Standards (SFAS) No. 133, Accounting for DerivativeInstruments and Hedging Activities, which requires the recognition of allderivatives on the balance sheet at fair value. Derivatives that are not hedgesmust be adjusted to fair value through income (loss). If the derivative is ahedge, depending on the nature of the hedge, changes in the fair value ofderivatives will either be offset against the change in fair value of thehedged assets, liabilities, or firm commitments through earnings or recognizedin other comprehensive income until the hedged item is recognized in earnings.For derivatives that are designated and qualify as hedging instruments, theCorporation documents the hedging strategy, including hedging instrument andhedged item, based on the risk exposure being hedged. Based upon the designatedhedging strategy, effectiveness of the hedge in offsetting the hedged risk isassessed at inception and on an ongoing basis during the term of the hedge. Theineffective portion of a derivative’s change in fair value is immediatelyrecognized in earnings.

 

Theapplication of SFAS No. 133 for U.S. GAAP reporting results in differencesrelated to foreign exchange, commodity based and other derivative instrumentsused by the Corporation. For information regarding the Corporation’s use ofderivatives and hedging activities under Canadian GAAP, see Note 22.

 

(3)  **Inventory Costing.**CanadianGAAP allows fixed overhead costs associated with production activities to beexpensed during the period whereas U.S. GAAP requires an allocation of fixedproduction overhead to inventory.

 

(4)  **Equity in Earnings ofAffiliate.**NOVA Chemicals’ share of adjustments to financialinformation and results of operations of equity investments to comply with U.S.accounting principles.

 

(5)  **Changes in AccountingPolicies.**On January 1, 2005, NOVA Chemicals adopted theCanadian and U.S. GAAP recommendations for certain types of mandatorilyredeemable shares and other financial instruments, which require theseinstruments to be classified as liabilities rather than equity. See Note 2.

OnJanuary 1, 2004, NOVA Chemicals adopted the fair value method ofaccounting for equity settled stock-based compensation, as more fully describedin Note 2.

OnJanuary 1, 2003, the Corporation adopted SFAS No. 143, Accounting forAsset Retirement Obligations. This standard and the CICA standard, also adoptedon January 1, 2003, and discussed in Notes 2 and 19, are essentially thesame. However, under U.S. GAAP, the cumulative effect of adopting a newstandard is reflected in net income (loss) in the period of adoption, whereasunder Canadian GAAP, it is reflected as a charge or credit to reinvestedearnings.

 

(6)  **Other Gains.**Differencein gain on disposition of investment in Methanex resulting from different costbasis under U.S. GAAP.

 

(7)  **Comprehensive Income.**U.S.GAAP SFAS No. 130, Reporting Comprehensive Income, requires thepresentation of a statement containing the components of comprehensive income(loss) and the accumulated balance of other comprehensive income. Comprehensiveincome includes all changes in equity during the period including items thatare not in net income (loss). This statement is not currently required underCanadian GAAP.

 

(8)  **Cumulative TranslationAdjustment.**Under U.S. GAAP, unrealized gains (losses) resultingfrom translation of self-sustaining foreign operations are recorded in othercomprehensive income until there is a realized reduction in the investment.

 

(9)  **Minimum PensionLiability.**SFAS No. 87, Employer’s Accounting for Pensions,requires an employer to record an additional minimum liability (AML) if theunfunded accumulated benefit obligation exceeds the accrued pension liabilityor if there is a prepaid pension asset with respect to the plan. If an AML is recognized,an intangible asset, in an amount not exceeding the unrecognized prior servicecost, is also recognized. The excess of the AML, over the intangible asset, ifany, is charged to other comprehensive income, net of income tax effects. At December 31,2005, an AML and an intangible asset, in the amount of $22 million and $4million, respectively, have been recognized, resulting in a charge of $12million (net of tax) to other accumulated comprehensive income (loss).

 

(10)  **Joint Ventures.**NOVAChemicals accounts for its interests in joint ventures using the proportionateconsolidation method under Canadian GAAP. As permitted by specific UnitedStates Securities and Exchange Commission exemptions, adjustments to reflectequity accounting, as required under U.S. GAAP, have not been made. The equitymethod would not result in any changes in NOVA Chemicals’ net income (loss) orshareholders’ equity, however, all assets, liabilities, revenue, expenses andmost cash flow items would decrease when compared with the amounts that arepresented using proportionate consolidation.

 

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***Other Disclosures***

 

***Stock-based Compensation.***SFAS No. 123 Accounting for Stock-Based Compensation, defines afair-value based method of accounting for employee stock options and encouragesthe use of this method to account for stock compensation plans. NOVA Chemicalsadopted the fair-value method of accounting for stock-based compensation on January 1,2004.

 

The following table outlinesthe impact on the Corporation’s 2003 U.S. GAAP results had compensation expensefor the stock option plan been determined based on the fair value method asprescribed under SFAS No. 123:

 
| **YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS, UNLESS OTHERWISE  NOTED)** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|
|                                                                           |       |     |       |
| Net income in accordance with U.S. GAAP                                        |       |     |       |
| As reported                                                                    |       | $        | 45         |   |
| Pro forma                                                                      |       | $        | 38         |   |
| Earnings per share — basic                                                |       |     |       |
| As reported                                                                    |       | $        | 0.52       |   |
| Pro forma                                                                      |       | $        | 0.44       |   |
| Earnings per share — diluted                                              |       |     |       |
| As reported                                                                    |       | $        | 0.51       |   |
| Pro forma                                                                      |       | $        | 0.44       |   |

 

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