Exhibit
99.3  Disclosure Regarding Forward-Looking Information  This Annual Report contains forward-looking
information with respect to NOVA Chemicals. By its nature, forward-looking
information requires us to make assumptions and is subject to inherent risks
and uncertainties. There is significant risk that predictions, forecasts,
conclusions and projections that constitute forward-looking information will
not prove to be accurate, that our assumptions may not be correct and that
actual results may vary from the forward-looking information. Forward-looking
information for the time periods beyond 2008 involves longer-term assumptions
and estimates than forward-looking information for 2008 and is consequently
subject to greater uncertainty. We caution readers of this Annual Report not to
place undue reliance on our forward-looking information as a number of factors
could cause actual results, conditions, actions or events to differ materially
from the targets, expectations, estimates or intentions expressed in the
forward-looking information.  The words believe, expect, plan, intend,
estimate, or anticipate and similar expressions, as well as future or
conditional verbs such as will, should, would, and could often identify
forward-looking information. Specific forward-looking information contained in
this Annual Report includes, among others, statements regarding: our expected
financial performance in future periods; our beliefs about investing in our
stock and that the company is built for success in a high-cost energy
environment; our beliefs about and expectations for our Olefins/Polyolefins
business unit, including our belief that this business unit has tremendous
upside potential in a high-cost energy environment, our expectation that this
business unit may have a sustained period of strong earnings, our expectation
that ethylene/polyethylene markets conditions will remain strong through at
least 2009, our beliefs about future oil and natural gas prices and that our
Alberta Advantage has entered a new, higher range that will exceed the
long-term average for the foreseeable future, our beliefs about and
expectations for our Advanced SCLAIRTECH technology polyethylene business,
including our expectation that volumes will continue to grow and margins will
be more stable throughout the industry cycle, our expectations with respect to
the timing, costs and amounts of polyethylene capacity expansions and
modernization projects at our Alberta and Ontario facilities, and our beliefs
about expansion of ethane extraction capabilities in Alberta, including our
expectations concerning the potential production capacities of the proposed
development of an ethane extraction plant with Aux Sable Canada Ltd. and our
expectations concerning our letter of intent with Williams Energy Canada to
evaluate off-gas streams from the Alberta oil sands to extract ethane; our
beliefs and expectations regarding our Performance Styrenics business unit,
including our expectation that this business unit will become a meaningful
contributor to our revenue and earnings by the end of 2008, our beliefs about
our styrenic polymer Performance Products and the advantages they can provide
for our customers, our belief that our styrenic polymer Performance Products
can earn significant margins over standard products, and our plans for and
expectations of our downstream businesses and ventures, including our belief
that we are past the investment phase with respect to these businesses and
ventures and they are positioned for revenue growth; our beliefs and
expectations concerning our expanded joint venture with INEOS, including the
target of $80 million in additional per year synergies, and our beliefs
regarding the joint ventures future actions; our expectations with respect to
the global styrenics industry and our belief that there are improving market
fundamentals that will lead to increased operating rates and restored
profitability; our beliefs about INEOS NOVAs leverage to improvements in
industry profitability and how that will impact our earnings; our beliefs about
lower Canadian corporate tax rates; our competitive advantages; and ability to
compete successfully; and general economic conditions.  With
respect to forward-looking information contained in this Annual Report, we have
made material assumptions regarding, among other things: future oil, natural
gas, natural gas liquids and benzene prices; our ability to obtain raw
materials; our ability to market products successfully to our anticipated
customers; the impact of increasing competition; corporate tax rates; capacity
additions; global GDP growth; and our ability to obtain financing on acceptable
terms. Some of our assumptions are based upon internal estimates and analyses
of current market conditions and trends, management plans and strategies,
economic conditions and other factors and are necessarily subject to risks and
uncertainties inherent in projecting future conditions and results.  Some of the risks that could affect our future
results and could cause results to differ materially from those expressed in
our forward-looking information include: commodity chemicals price levels
(which depend, among other things, on supply and demand for these products,
capacity utilization and substitution rates between these products and
competing products); feedstock availability and prices; operating costs; terms
and availability of financing; technology developments; currency exchange rate
fluctuations; starting up and operating facilities using new technology;
realizing synergy and cost savings targets; our ability to implement our
business strategy; meeting time and budget targets for significant capital
investments; avoiding unplanned facility shutdowns; safety, health and
environmental risks associated with the operation of chemical plants and
marketing of chemical products, including transportation of these products;
public perception of chemicals and chemical end-use products; the impact of
competition; changes in customer demand, including customer acceptance of our
higher value polyethylene manufactured using Advanced SCLAIRTECH technology and
our styrenic polymer Performance Products; changes in, or the introduction of
new laws and regulations relating to our business, including environmental,
competition and employment laws; loss of the services of any of our executive
officers; uncertainties associated with the North American, South American,
European and Asian economies; terrorist attacks; severe weather and other risks
detailed from time to time in our publicly filed disclosure documents and
securities commission reports.  Our forward-looking information is expressly
qualified in its entirety by this cautionary statement. In addition, the
forward-looking information is made only as of the date of this Annual Report,
and except as required by applicable law, we undertake no obligation to update
publicly this forward-looking information to reflect new information,
subsequent events or otherwise.    2007 Financial Review Table of Contents24
  Managements Discussion & Analysis
  
  66
  Consolidated Six-Year Review
  
  75
  Notes to Consolidated Financial Statements65
  Trademark Information
  
  67
  Consolidated Financial Statements
  
  116
  Shareholder Value   23


Managements Discussion & Analysis  The following Managements Discussion and
Analysis (MD&A) should be read in conjunction with the information
contained in the Consolidated Financial Statements and the notes thereto
starting on page 67. This MD&A is based upon financial statements
prepared in accordance with Canadian Generally Accepted Accounting Principles
(GAAP). These accounting principles are different in some respects from those
generally accepted in the United States, and the significant differences are
described in Note 21 to the Consolidated Financial Statements. References may
be made to several non-GAAP measures throughout this MD&A. These measures
are discussed in Supplemental Measures on page 54. This MD&A is the
responsibility of management. The Board of Directors carries out its
responsibility for review of this disclosure principally through its Audit,
Finance and Risk Committee comprised exclusively of independent directors. The
Audit, Finance and Risk Committee reviews this disclosure and recommends its
approval by the Board of Directors. This MD&A was prepared as of Feb. 7,
2008.  All references in this Annual Report, including
the MD&A to NOVA Chemicals, the Company, we, us, and similar terms
refer to NOVA Chemicals Corporation alone or together with its consolidated
subsidiaries and affiliates, depending on the context in which such terms are
used. All amounts are presented in U.S. dollars unless otherwise noted.  NOVA Chemicals  A Plastics and Chemical Company  NOVA Chemicals is a plastics and chemical
company whose products are used in a wide variety of applications, including
food and electronics packaging, industrial materials, appliances and a variety
of consumer goods.  The Company operates two business units and
holds a 50% interest in a major joint venture with INEOS Group Limited (INEOS),
called INEOS NOVA.  BUSINESS UNITS ·Olefins/Polyolefinsmanufactures and sells
ethylene, polyethylene (PE) and chemical and energy co-products.  ·Performance Styrenicsmanufactures and sells
expandable polystyrene (EPS) in North America and higher-value styrenic
Performance Polymers. This business unit also has interests in EPS-based
downstream ventures and businesses for end-use consumer and industrial
applications.  INEOS NOVA ·INEOS NOVAis
a 50:50 joint venture between NOVA Chemicals and INEOS that manufactures and
sells styrene, solid polystyrene (SPS) and EPS.  Until
Sep. 30, 2007, NOVA Chemicals operated a commodity styrenics business unit
known as STYRENIX, which manufactured and sold styrene and SPS in North
America. It also manufactured and sold SPS and EPS in Europe through NOVA
Innovene, its 50:50 joint venture with INEOS.  On
Oct. 1 2007, NOVA Chemicals and INEOS expanded their European joint
venture to include the North American styrene and SPS businesses of both
companies. NOVA Chemicals no longer reports the results of its STYRENIX
business unit but rather its interest in INEOS NOVA. This MD&A includes
discussion and analysis of INEOS NOVAs results of operations and outlook, and
the styrenics market due to the Companys significant investment in INEOS NOVA.  Figure 1. NOVA Chemicals
business structure.  NOVA
  Chemicals
  
  
  
  INEOS NOVAOlefins/Polyolefins
  
  Performance StyrenicsEthylene
  
  ARCEL® and
  DYLARK® resins
  
  North American Styrene and
  SPSPolyethylene
  
  EPS-based Business Ventures
  
  European SPS and EPSCo-Products
  
  North American EPS
  
  SPS-based Specialty
  PolymersStyrene Equity Position   24Managements Discussion & Analysis


Key Drivers of Financial Performance  NOVA Chemicals earnings and cash flow are
primarily influenced by the margins earned on the products it manufactures.
Margin is the difference between the selling price of products and the direct
cost to produce and distribute them. Margins for companies in the plastics and
chemical industry are driven by the supply/demand balance and tend to be
cyclical.  SUPPLY/DEMAND BALANCE  THE KEY DRIVER OF PROFITABILITY The supply/demand balance, as measured by industry
operating rates, is generally the best indicator of profitability in the
plastics and chemical industry. During peak conditions, when operating rates
tend to be high, prices and margins tend to increase as customers attempt to
secure scarce supply to meet their production needs. Conversely, during trough
conditions, which tend to occur when operating rates are low, margins tend to
decrease since there is ample supply to meet customer demand.  NOVA Chemicals low-cost position provides for
enhanced earnings leverage during the peak of the commodity business cycle.  PLASTICS AND CHEMICAL INDUSTRY EARNINGS ARE CYCLICAL By its nature, profitability in the plastics and
chemical industry is cyclical. Demand growth is driven by economic growth,
which is relatively consistent over time. In contrast, new product supply grows
in large increments through the construction of large new plants, which
generally require significant capital and lead-time of four to six years to
complete.  As industry operating rates increase, prices and
producers margins tend to increase. Extended periods of profitability
encourage new investment in plants to serve growing demand. New supply added in
excess of demand growth causes industry operating rates and profitability to
decline. Periods of reduced profitability deter investment in new plants and
force high-cost, unprofitable producers to rationalize capacity. Continued
demand growth and lack of new investment lead to tightening capacity
utilization and a return to increased profitability. This alternating pattern
of supply surplus and shortage creates the earnings cycles that are typical in
commodity industries.  PRICE, VOLUME AND COST INFLUENCE PROFITABILITY Price is driven by feedstock costs Pricing for NOVA Chemicals polymer and chemical
products is based on the amount its customers are willing to pay for its
products compared to similar available or competing products. Prices can change
rapidly as a result of feedstock costs and fluctuations in the supply/demand
balance. While feedstock costs heavily influence the price of NOVA Chemicals
products, margins drive profitability.  Volume is driven by economic growth Sales volumes for plastics and chemical products
are most heavily influenced by economic growth, a key driver of demand. Sales
volumes may also be influenced by short-term changes in customer buying
patterns which are driven primarily by expectations of price volatility.
Anticipation of higher prices or limited product availability can motivate
customers to purchase beyond short-term needs and build inventories.
Conversely, expectations of lower prices can motivate customers to delay
purchases and consume inventories. These short-term buying patterns can create
quarterly earnings volatility for plastics and chemical producers and are not
necessarily representative of longer-term profitability.  Costs  feedstock cost advantage is critical to sustained
profitability Feedstock costs are the single largest component
of NOVA Chemicals costs and account for 70-80% of the total cost of its
products. NOVA Chemicals primary feedstocks include ethane, crude oil,
propane, butane and condensates, while INEOS NOVAs primary feedstocks are
benzene and ethylene. Feedstock costs heavily influence the price of NOVA
Chemicals products, and in recent years, feedstock cost volatility has led to
rapid changes in product prices. Since feedstock costs represent the most
significant portion of total production costs, a feedstock cost advantage, like
NOVA Chemicals Alberta Advantage, can lead to enhanced profitability relative
to industry peers and is the key to sustainable profitability throughout the
cycle.  The remaining 20-30% of total cost of the
Companys products consist of variable conversion costs and fixed costs such
as: plant operating and distribution costs; selling, general and administrative
costs (SG&A); and research and development costs (R&D). SG&A costs
represent all direct and most indirect expenses incurred in directing and
managing the Company. R&D costs relate to technical activities that support
the development and commercialization of new products, technologies and
applications.   Managements Discussion &
Analysis25


NOVA Chemicals Earnings Sensitivities  The following table illustrates
how changes in various factors could affect NOVA Chemicals profitability,
assuming all other factors are held constant. Changes in the opposite direction
would have the opposite effect.  Potential Impact to NOVA Chemicals Profitability of: (billions of pounds)
  (millions of U.S. $)Annual
  
  Annual
  
  AnnualAnnual
  
  Before-Tax
  
  After-Tax
  
  EarningsProduction
  
  Income
  
  Income
  
  Per Share(as of Jan. 1, 2008)
  
  Capacity
  (1)
  Increase
  
  Increase
  (2)
  Increase
  (3)Increase of U.S. 1¢ per pound
  in profit marginEthylene(4)
  
  5.0
  
  $50
  
  $35
  
  $0.42PE
  
  3.6
  
  36
  
  25
  
  0.30Styrene(5)
  
  1.9
  
  19
  
  19
  
  0.23SPS(5)
  
  1.9
  
  19
  
  19
  
  0.23EPS(6)
  
  0.4
  
  4
  
  4
  
  0.04Decrease in natural gas cost by
  U.S. 10¢ per mmbtu(7)
  
  
  
  11
  
  8
  
  0.10Decrease in benzene cost by
  U.S. 10¢ per gallon(5)
  
  
  
  20
  
  20
  
  0.30Decrease in Canadian dollar of
  1¢ vs. U.S. dollar(8)
  
  
  
  11
  
  7
  
  0.08  (1)Estimate
based on current production capacity assuming 100% utilization. (2)Assumes
31% corporate tax rate, except for styrene, SPS, and EPS which are not subject
to taxes due to use of net operating loss carry forwards. See Note 15 on page 97. (3)Based on
83.5 million shares. (4)Excludes
1.6 billion pounds ethylene capacity that is subject to toll and margin-sharing
agreements. (5)Represents
NOVA Chemicals 50% share of INEOS NOVAs production. (6)NOVA
Chemicals North American EPS production. (7)Natural
gas cost includes gas purchased for ethane extraction and gas consumed as fuel
at production sites. (8)Represents
impact to fixed costs and depreciation related to changes in the Canadian
dollar.   26Managements Discussion & Analysis


2007 Financial Overview  NOVA
  Chemicals Highlights(millions
  of U.S. dollars, except per share amounts and where noted)
  
  2007
  
  2006
  
  2005Total assets
  
  $4,836
  
  $4,077
  
  $5,178Total long-term
  liabilities
  
  $2,315
  
  $2,350
  
  $2,623Revenue
  
  $6,732
  
  $6,519
  
  $5,616Adjusted EBITDA(2)Olefins/PolyolefinsJoffre Olefins
  
  $   588
  
  $   587
  
  $   340Corunna Olefins
  
  209
  
  93
  
  79Polyethylene
  
  196
  
  141
  
  234Eliminations
  
  (18
  )
  (4
  )
  13Total
  Olefins/Polyolefins
  
  975
  
  817
  
  666Performance
  Styrenics
  
  (5
  )
  (17
  )
  7INEOS
  NOVA Joint Venture(1)
  
  17
  
  (43
  )
  (102
  )Corporate
  
  (102
  )
  (153
  )
  (110
  )Adjusted EBITDA(2)
  
  885
  
  604
  
  461Operating Income (loss)(2)
  
  $   553
  
  (680
  )
  3Net income (loss)
  
  $   347
  
  $(703
  )
  $(101
  )Net income (loss) per
  common shareBasic
  
  $  4.19
  
  $(8.52
  )
  $(1.22
  )Diluted
  
  $  4.16
  
  $(8.52
  )
  $(1.22
  )Dividends per share (in
  Canadian dollars)
  
  $  0.40
  
  $  0.40
  
  $  0.40Weighted-average common
  shares outstanding (millions)Basic
  
  83
  
  83
  
  83Diluted
  
  84
  
  83
  
  83  (1)     On Oct. 1, 2007, NOVA Chemicals expanded its European joint
venture to include NOVA Chemicals STYRENIX and INEOS North American styrenics
businesses. As a result, NOVA Chemicals re-segmented its business and restated
all prior periods accordingly. The 2007 annual INEOS NOVA joint ventures
results are comprised of the results from the first nine months of the former
NOVA Chemicals STYRENIX business unit and NAS® and ZYLAR® resins (formerly included in Performance
Styrenics), as well as NOVA Chemicals 50% share of INEOS NOVAs results for
the last three months of 2007. (2)     See Supplemental Measures on page 54.  Changes in
  NOVA Chemicals Net Income (Loss)(millions
  of U.S. dollars)
  
  
  
  2007 vs. 2006
  
  2006 vs. 2005
  (1)Higher operating margin(2)
  
  
  
  $278
  
  $ 146Lower (higher) research
  and development
  
  
  
  1
  
  (1
  )Lower (higher) selling,
  general and administrative
  
  
  
  2
  
  (2
  )Lower (higher)
  restructuring charges
  
  
  
  899
  
  (817
  )Lower (higher)
  depreciation and amortization
  
  
  
  53
  
  (9
  )Higher interest expense
  
  
  
  (7
  )
  (55
  )Higher (lower) gains and
  losses
  
  
  
  19
  
  (7
  )(Higher) lower income
  tax expense
  
  
  
  (195
  )
  143Increase (decrease) in
  net income
  
  
  
  $1,050
  
  $(602
  )  (1)Restated  See Note 2 to the
Consolidated Financial Statements. (2)Operating margin equals Revenue
less Feedstock and operating costs.   Managements Discussion &
Analysis27


Consolidated Financial Results of Operations  2007 VERSUS 2006 Net Incomewas
$347 million, or $4.16 per share diluted in 2007, compared to net loss of $703
million, or $8.52 per share loss in 2006. The Companys 2006 results were
negatively impacted by a number of items totaling $847 million after-tax. In
addition to lower restructuring changes in 2007, margins improved for ethylene
and PE as industry price increases, driven by record industry feedstock costs,
outpaced the Companys Alberta-based feedstock costs. In addition, costs were
significantly lower as a result of restructuring activities.  NOVA Chemicals had several items impacting its
2007 results that roughly offset each other.  Items Impacting 2007 Results
  
  After-tax
  impact (millions)Restructuring
  
  $(55
  )Impact
  of stronger Canadian dollar
  
  (25
  )Canadian
  rail strike
  
  (8
  )Sale
  of Chesapeake, Virginia, facility and other land
  
  14Canadian
  federal tax rate reduction benefit and foreign tax settlement
  
  78Total
  Impact
  
  $   4  Revenuewas
$6,732 million in 2007, up from $6,519 million in 2006. Average prices for all
of the Companys products increased in 2007, particularly in the second half of
the year. In addition, PE sales volume set a new record due to strong demand in
North American and global markets.  Feedstock and Operating Costswere
$5,598 million in 2007, down from $5,663 million in 2006. Despite higher crude
oil and benzene prices, the Companys total feedstock costs declined in 2007,
due primarily to lower feedstock purchases by INEOS NOVA. While industry
feedstock costs increased significantly, the Companys feedstock costs
increased less in comparison due largely to its advantaged Alberta-based
feedstock.  Depreciation and Amortizationexpense
was $246 million in 2007, down from $299 million in 2006. Expenses were lower
in 2007 due to NOVA Chemicals STYRENIX asset write-down that occurred at the
end of 2006. The impact of this reduction was partially offset by higher
depreciation expense resulting from a stronger Canadian dollar.  Selling, General and
Administrativeexpenses were $199
million in 2007, down slightly from $201 million in 2006. Costs were lower in
2007 as realized savings from cost-reduction efforts offset the increase in
stock based compensation expense (net of the forward transactions) and profit
sharing.  Research and Developmentexpenses
were $50 million in 2007, down slightly from $51 million in 2006.  Restructuring Chargeswere
$86 million before-tax ($55 million after-tax) in 2007, down from $985 million
before-tax ($861 million after-tax) in 2006. NOVA Chemicals has undertaken a
series of restructuring actions, both alone and with its partner INEOS, to
improve the cost structure of its styrenics business (see Note 13 on page 95
for details).  Interest Expense (Net)was
$175 million in 2007, up from $168 million in 2006. The increase in interest
expense is due to higher accounts receivable securitization balances, increased
draws on the revolving credit facilities and higher interest rates during 2007
compared to 2006.  Other Gainswere
$20 million before-tax ($14 million after-tax) in 2007, up from $1 million
before-tax in 2006. In 2007, NOVA Chemicals sold the previously shut-down
Chesapeake, Virginia, facility and other incidental land.  Income Tax Expense (Recovery)was
a $51 million expense in 2007, compared to a $144 million recovery in 2006. The
year-over-year change was due to strong earnings in Canada in 2007, which lead
to higher tax expense and the tax recovery related to the large write-down of
STYRENIX assets in 2006 (see page 56 for details).   28  Managements
Discussion & Analysis


2006 VERSUS 2005 Net
Lossin
2006 was $703 million, or $8.52 per share loss, due primarily to a number of
items totaling $847 million after-tax. The largest of these items was a $772
million STYRENIX non-cash asset write-down (see page 56 for details). 2006
results compare to a net loss of $101 million, or $1.22 per share loss, in
2005.  Items Impacting 2006 Results
  
  After-tax
  impact (millions)Restructuring
  (including STYRENIX non-cash asset write-down)
  
  $(861
  )Corunna
  facility start-up delay
  
  (25
  )Mutual
  insurance company wind-up costs
  
  (13
  )Corunna
  facility outage (June)
  
  (8
  )Canadian
  tax-rate reduction benefit
  
  60Total
  impact
  
  $(847
  )  Revenuewas
$6,519 million in 2006, up from $5,616 million in 2005. The increase was
primarily due to higher sales volumes due to improved operations at the Companys
manufacturing sites in 2006, as well as higher product selling prices. In 2005,
a series of planned and unplanned outages of the Joffre and Corunna ethylene
and PE plants limited production. Selling prices for NOVA Chemicals products
increased in 2006 as higher industry-wide feedstock costs and strong demand led
to price increases.  Feedstock and Operating Costswere
$5,663 million in 2006, up from $4,906 million in 2005. The increase was
primarily due to higher feedstock consumption, driven by increased production
at NOVA Chemicals plants and higher crude oil and benzene prices in 2006.  Depreciation and Amortizationexpense
was $299 million in 2006, up from $290 million in 2005. Expenses were higher in
2006 as the Company began to depreciate new assets installed as part of the
Corunna ethylene flexi-cracker and Bayport, Texas, styrene modernization
projects. Expenses were also higher in 2006 as the Company began to amortize
the costs of the Corunna maintenance turnaround that occurred in late 2005.  Selling, General and
Administrativeexpenses were $201
million in 2006, up slightly from $199 million in 2005. Despite higher expenses
in 2006, the Company realized savings in the fourth quarter related to its
restructuring and cost-reduction efforts.  Research and Developmentexpenses
were $51 million in 2006, up slightly from $50 million in 2005.  Restructuring Chargeswere
$985 million before-tax ($861 million after-tax) in 2006, up from $168 million
before-tax ($125 million after-tax) in 2005. NOVA Chemicals has undertaken a
series of restructuring actions, both alone and with its joint venture partner
INEOS, to improve the cost structure of its styrenics business. (See Note 13 on
page 95 for details).  Interest Expense (Net)was
$168 million in 2006, up from $113 million in 2005, due to higher average debt
levels and higher interest rates.  Other Gainswere
$1 million in 2006, down from $8 million in 2005. The 2005 gains primarily
relate to a tax settlement with the U.S. Internal Revenue Service.  Income Tax Recoverywas
$144 million recovery in 2006, up from $1 million recovery in 2005. The
increased recovery is largely the result of the tax recovery related to the
write-down of STYRENIX assets in 2006 (see page 56 for details).   Managements Discussion &
Analysis29


Olefins/Polyolefins Business Unit The Olefins/Polyolefins business unit produces
and sells ethylene, PE resins and co-products from its two manufacturing
centers located in Alberta and Ontario, Canada. The business is built on its
significant and growing feedstock cost advantage in Alberta, world-scale and
energy-efficient manufacturing facilities and proprietary Advanced SCLAIRTECHTM
and gas-phase polyethylene technology.  The Olefins/Polyolefins business unit contains
three reporting segments:  1)Joffre Olefins,which
produces and sells ethylene and co-products and includes the Joffre, Alberta,
sites three ethylene crackers.  2)Corunna Olefins,which
produces and sells ethylene and co-products and includes the Corunna, Ontario,
ethylene flexi-cracker.  3)Polyethylene,which
produces and sells PE and includes both the Alberta and Ontario based PE
assets. In addition, the Polyethylene segment licenses its proprietary process
technology and catalysts.  Figure 2. Olefins/Polyolefins
Business Unit Snapshot   Reporting Segment
  
  Primary Products
  
  Annual
  Capacity
  
  Manufacturing Sites
  
  Key FeedstocksJoffre Olefins
  
  Ethylene
  
  4.8 Blbs
  
  Joffre, Alberta
  
  EthaneCo-products
  
  0.8 BlbsCorunna Olefins
  
  Ethylene
  
  1.85 Blbs
  
  Corunna, Ontario
  
  Crude OilCo-products
  
  4.7 Blbs
  
  
  
  CondensatePropane and ButanePolyethylene
  
  Low-density PE
  
  3.6 Blbs
  
  Joffre, Alberta
  
  EthyleneHigh-density PE
  
  
  
  Mooretown, Ontario
  
  (internally supplied byLinear-low density PE
  
  
  
  St. Clair River, Ontario
  
  Joffre/Corunna Olefins)Advanced SCLAIRTECH PE  2007
OLEFINS/POLYOLEFINS HIGHLIGHTS Record Olefins/Polyolefins adjusted EBITDA of $975 million  Record Alberta Advantage of 17¢ per pound  Record PE sales volume of 3,375 million pounds, including a
record 624 million pounds of export sales  Record sales volume and adjusted EBITDA for PE produced using
Advanced SCLAIRTECH technology  Increased Joffre-based PE annual production capacity by 100
million pounds  Announced intent to evaluate two separate projects to expand
low cost ethane feedstock supply in Alberta  Market Overview ETHYLENEis
the most widely produced petrochemical in the world and is the primary
feedstock used in the production of PE. It is a key building block for a
variety of polymers and other chemicals used to manufacture products such as
packaging, containers, films and construction products. Ethylene is primarily
transported via pipeline and is regionally traded. Ethylene margins typically
reach peak conditions when operating rates are at or above 90% of nameplate
capacity.  POLYETHYLENEis
used to produce consumer end-use applications, such as packaging film, plastic
bags, toys and bottles, and is the most widely used plastic material in the
world. Industrial applications include storage drums, industrial wrap, retail
packaging and building products. PE resin is globally traded with established
merchant markets. PE margins typically reach peak conditions when operating
rates exceed 90% of nameplate capacity.    30   Managements Discussion & Analysis


CO-PRODUCTSare
produced in the ethylene manufacturing process and can be grouped into two
categories: chemical co-products and energy co-products. Chemical co-products
include propylene, benzene and butadiene - building blocks that are used to
make items such as tires, carpet and clothing fibers, and household goods.
Energy co-products include gasoline blending components and fuel oil. The
profitability of co-products depends on energy prices and the supply/demand
balance for each co-product. The choice of ethylene feedstock mix determines
the type and volume of co-products manufactured.  Business Overview NOVA Chemicals largest-volume product is
ethylene, which is the key feedstock for the production of PE. The Company
produces ethylene and co-products at its Joffre, Alberta, and Corunna, Ontario,
manufacturing complexes. These sites are large, energy-efficient and among the
lowest-cost in the world.  JOFFRE OLEFINSproduces
and sells ethylene and co-products and includes three world-scale ethylene
crackers in Joffre, Alberta, where NOVA Chemicals operates the largest ethylene
and PE complex in the world. NOVA Chemicals share of production capacity from
the Joffre crackers, which excludes Dow Chemical Companys 50% interest in the
Ethylene 3 (E3) cracker, is 4.8 billion pounds per year and represents
approximately 75% of the Companys total nameplate ethylene production
capacity. Approximately half of NOVA Chemicals production capacity at Joffre
supports internal PE production, while the remainder is sold to third parties.
The Joffre crackers have the capacity to produce approximately 830 million
pounds per year of ethylene co-products such as hydrogen, propylene, and C4 and
C5 hydrocarbons.  The primary feedstock of the Joffre ethylene
crackers is ethane, which is extracted from natural gas by third-party straddle
plant operators and delivered to the Joffre site via pipeline. The majority of
ethane used at the Joffre site is extracted and delivered under medium- to
long-term contracts. The Company can also directly purchase ethane and has the
flexibility to use propane to meet a portion of its feedstock requirements when
the economics are favorable.  ALBERTA ADVANTAGE  ETHYLENE
PRODUCTION COST ADVANTAGE  The Joffre site enjoys an ethylene production
cost advantage over similar U.S. Gulf Coast (USGC) ethylene plants, known as
the Alberta Advantage. This advantage is due to:  Structurally lower ethane costs Since there is no significant
commercial market for ethane in Alberta, NOVA Chemicals buys natural gas, plus
pays an extraction and delivery fee, to replace the energy content of the
ethane removed from the gas stream. Therefore, its feedstock costs are directly
linked to the natural gas price in Alberta. In comparison, its USGC peers pay a
market price for ethane, which often sells at a substantial premium to the
underlying natural gas value. Albertas historically lower cost of natural gas,
due to structural transportation differentials, and more efficient ethane
extraction plant infrastructure compared to the USGC, also contribute to the
Companys feedstock cost advantage.  Lower ethane-to-ethylene conversion costs The scale and efficiency of
NOVA Chemicals newer, larger ethylene crackers enable the Company to convert
feedstocks to ethylene at a lower cost than its USGC peers.  The combination of these factors has
historically yielded an average cash-cost advantage of 7¢ per pound of ethylene
versus a typical USGC natural gas liquid (NGL)-based ethylene cracker.  Alberta Advantage enters a
new, higher range  In 2007, NOVA Chemicals realized a record
cash-cost advantage of 17¢ per pound of ethylene, exceeding the previous record
of 11¢ per pound set in 2006. Strong demand for ethane on the USGC, coupled
with record high crude oil prices, pushed USGC ethane prices to record levels.
In comparison, Alberta ethane prices, which are linked to natural gas prices,
remained stable for most of the year. The Alberta Advantage increased each
quarter in 2007 and reached an all-time high of 27¢ per pound in the fourth
quarter. Since the only major use for ethane is as a feedstock for production
of ethylene, USGC ethane prices generally follow the prices of other ethylene
feedstocks such as propane and naphtha, which closely follow crude oil prices.
Figure 3 shows the strong link between USGC ethane prices and WTI crude oil.
Figure 4 shows the strong correlation between the Alberta Advantage and WTI
crude oil prices.    Managements
Discussion & Analysis   31


Figure 3.
  
  Figure 4.
  While
this ethylene cost advantage will continue to fluctuate from year to year, NOVA
Chemicals expects that the structural advantages associated with the lower cost
of ethane feedstock in Alberta and the efficiency gained from its large-scale
Joffre facility are sustainable. The Company believes that the Alberta
Advantage has entered a new, higher range that will exceed the long term
average for the foreseeable future due to the:  ·Continued strong link between
crude oil prices and USGC ethane costs.  ·Likelihood that WTI crude oil
prices will remain well above historical averages.  ·Prospect of stable North
American natural gas prices due to start-up of new gas pipelines and new
liquefied natural gas (LNG) import capacity.  Future Ethane Feedstock Supply In
2007, NOVA Chemicals announced it was evaluating opportunities to expand the
supply of advantaged ethane feedstock in Alberta.  NOVA Chemicals reached an agreement with
Williams to evaluate processing current and future off-gas streams from the
Alberta oil sands to extract ethane for use in the Companys Joffre, Alberta,
facility. Under the terms of the agreement, Williams would modify the existing
oil sands off-gas liquids fractionation facility near Redwater, Alberta, to
enable extraction of ethane and ethylene. Development of this project is
progressing well. This facility is expected to produce up to 20,000 barrels per
day of ethane and begin operating as early as 2011.  NOVA
Chemicals and Aux Sable Canada Ltd. are exploring alternatives for the removal
of ethane from the Alliance Pipeline.  CORUNNA OLEFINSproduces
and sells ethylene and co-products that result from the manufacture of ethylene
and processing of crude oil and other feedstocks. The Corunna ethylene
flexi-cracker has annual production capacity of 1.85 billion pounds of ethylene
and 4.7 billion pounds of co-products following the recent completion of an
expansion and modernization project. Most of Corunnas ethylene production is
consumed by NOVA Chemicals PE plants and INEOS NOVAs styrene monomer plant in
Sarnia, Ontario, while the majority of its co-products are sold to third
parties.  Corunna Flexi-crackers Advantages The Corunna facility has three distinct
advantages relative to typical USGC naphtha based crackers:  1)Access
to a diverse range of feedstock types from various geographies  2)Flexibility
to process a wide range of feedstock types  3)Access
to end-use markets    32   Managements Discussion & Analysis


The facilitys location in the Sarnia, Ontario,
region gives it access to a large variety of feedstocks from both local and
global sources. The Corunna facility can access NGLs such as propane and butane
from local producers, Western Canada or the United States. The Corunna facility
can also access crude oil and condensates from North America and overseas via
marine transportation and pipelines.  Corunnas manufacturing assets have the
flexibility to process a large range of feedstocks and produce diverse chemical
and energy co-products. NOVA Chemicals is able to quickly adjust Corunnas
feedstock slate between crude oil, crude oil derivatives and NGLs to maximize
margins as market conditions fluctuate. Corunnas crude oil processing unit
allows NOVA Chemicals, unlike most of its peers, to purchase crude oil and
produce its own naphtha when it is economically favorable to do so - while most
producers must purchase naphtha at market prices. Finally, Corunnas location
in the heart of major markets for both the U.S. and Canada greatly reduces
freight costs and delivery times to customers.  POLYETHYLENEproduces
and sells linear low-density polyethylene (LLDPE), low-density polyethylene
(LDPE) and high-density polyethylene (HDPE).  NOVA Chemicals has approximately 3.6 billion
pounds of annual PE production capacity from its Mooretown and St. Clair River
sites in Ontario and its two units in Joffre, Alberta. During 2007, the Company
increased the capacity of its two Joffre PE plants by 50 million pounds each,
for a total of 100 million pounds, with minimal capital investment.  Advanced SCLAIRTECH technology enables production of
differentiated PE One of the Joffre PE plants  PE2  utilizes
Advanced SCLAIRTECH technology to manufacture and sell higher value SURPASS®
and SCLAIR® PE resins. SURPASS resins deliver a unique combination
of properties not found in traditional PE resins and are used in film
applications, such as food packaging; injection molding applications, such as
ice cream containers and packaging lids; and rotational molding applications,
such as dumpsters and industrial storage containers. SCLAIR resins are used in
a variety of flexible packaging applications.  NOVA Chemicals is one of only three PE companies
worldwide with independent, patented process and single-site catalyst
technologies which enable the Company to produce differentiated higher-value PE
resins on a commercial scale. Made with patented Advanced SCLAIRTECH technology
and proprietary single-site catalysts, NOVA Chemicals octene co-polymer resins
deliver enhanced value to customers because of their performance attributes and
processing benefits. They therefore are expected to generate higher, more
sustainable margins throughout the chemical industry cycle.  In 2007, NOVA Chemicals sold 885 million pounds
of PE produced using Advanced SCLAIRTECH technology, selling out the Joffre PE2
units capacity. In response to the growing demand for resins made with Advanced
SCLAIRTECH technology, NOVA Chemicals increased the annual capacity of the
Joffre PE 2 plant by 50 million pounds in 2007. By early 2009, the Company
plans to increase annual capacity by another 100 million pounds to a total of 1
billion pounds with minimal capital investment.  Figure 5.     Managements Discussion &
Analysis   33


PE exports  logistical advantage NOVA Chemicals PE is primarily sold into North
American markets. The Company has also historically sold 10 - 15% of its total
sales volume to China, other Asian countries and Europe. In 2007, NOVA
Chemicals exported a record 624 million pounds, which represents 19% of its
total PE sales. Higher international PE selling prices, driven by high global
feedstock costs and strong demand, created significant export opportunities for
North American producers.  NOVA Chemicals has a distinct advantage over its
USGC peers when exporting PE to China through its packaging joint venture
located in Tianjin, China. The Company ships bulk PE resin out of the Port of
Vancouver to Tianjin where it is bagged for distribution to customers in China.
The combination of efficient packaging operations and favorable bulk shipping
rates from Vancouver allow the Company to enjoy a logistics advantage exporting
to China compared to its USGC peers.  PE Technology Licensing  capturing value from proprietary
technology NOVA Chemicals licenses its proprietary
SCLAIRTECHTM technology and NOVACAT TM family of
catalysts. The Companys SCLAIRTECH technology is licensed for use in 11 plants
around the world. In India, one of the fastest growing economies in the world,
NOVA Chemicals SCLAIRTECH technology is now used in nearly 40% of the countrys
total PE production.  Since Joffres PE2 plant is now fully
commercialized, NOVA Chemicals intends to license Advanced SCLAIRTECH technology.  NOVACAT catalysts are a series of advanced
Ziegler-Natta catalysts designed specifically for gas-phase PE reactors that
can produce butene and hexene LLDPE with improved performance characteristics
and manufacturing economics.  Outlook for Olefins/Polyolefins Business Unit NOVA Chemicals believes that there are several
factors supporting a sustained period of strong earnings from Olefins/Polyolefins:  1. CONTINUED STRONG ETHYLENE/PE MARKET CONDITIONS THROUGH AT
LEAST 2009 NOVA Chemicals expects global PE supply and
demand balances to remain strong through at least 2009 based on the following
expectations:  ·Limited capacity additions in
North America  ·Continued delays in planned
global PE capacity additions due to shortages of skilled labor, increased lead
times for fabricated components, and increased costs  ·Global GDP growth of 3.5% from
2008-2012 as forecasted by economic consultant Global
Insight.The Chinese and
Indian economies continue to register near double-digit growth rates for
plastics and chemicals and the developed economies of the world continue to
grow.    34   Managements Discussion
& Analysis


Figure 6. Figure
  6 (left) shows NOVA Chemicals global PE operating rate forecast until 2012.
  This forecast includes NOVA Chemicals view of new capacity additions and Global InsightsFeb. 14, 2008,
  global GDP forecast, which calls for a recession in the U.S. in the first
  half of 2008, and assumes that global PE demand grows at 1.5 times GDP. Even
  with a significant U.S. economic slowdown, the Company expects strong global
  PE operating rates through at least 2009.
   2. ALBERTA ADVANTAGE IN A NEW, HIGHER RANGE Record high crude oil prices, strong demand for
USGC ethane and moderate North American natural gas prices contributed to the
record Alberta Advantage in 2007. Continued high crude oil prices are expected
to continue to support high USGC ethane prices. In contrast, continued high
natural gas inventories in North America along with the start-up of new natural
gas pipelines and increased LNG import capacity would support moderate natural
gas prices. Continued dislocation of natural gas prices relative to crude oil
prices would likely lead to a sustained Alberta Advantage that is well above
the historical average of 7¢ per pound.  3. NOVA CHEMICALS FAST PAYBACK PE DEBOTTLENECK OPPORTUNITIES In 2007, NOVA Chemicals increased the production
capacity of its two Joffre-based PE plants by a total of 100 million pounds and
has announced plans to further expand capacity by another 150 million pounds
(50 million pounds at the gas-phase PE plant and 100 million pounds at the
Advanced SCLAIRTECH PE plant) by early 2009 with minimal capital investment.  In January 2008, the Company also announced
plans for a series of modernization and expansion projects at its two PE sites
in the Sarnia, Ontario, region. These projects are expected to increase annual
capacity by up to 250 million pounds, improve reliability, and upgrade the
product slate at these sites. These projects, which will be implemented in
stages in 2008 and 2009, are expected to cost a total of $80 million and should
have approximately a two-year payback.  4. LOWER CANADIAN CORPORATE TAX RATES In
2007, the Canadian federal government announced a series of reductions to the
corporate income tax rate. In combination with similar tax rate reductions
enacted in 2006, NOVA Chemicals corporate tax rate is expected to drop from
33.1% in 2007 to 26% in 2012. Since the Olefins/Polyolefins business results
are predominantly taxed at the Canadian federal rate, lower tax rates will
translate Olefins/Polyolefins results into higher earnings for NOVA Chemicals.    Managements
Discussion & Analysis   35


Olefins/Polyolefins Financial Highlights (millions of U.S. dollars,
  except as noted)
  
  2007
  
  2006
  
  2005RevenueJoffre Olefins(1)
  
  $  1,803
  
  $  1,744
  
  $  1,704Corunna Olefins(1)
  
  2,075
  
  1,997
  
  1,430Polyethylene(1)
  
  2,022
  
  1,922
  
  1,628Eliminations
  
  (1,367
  )
  (1,382
  )
  (1,176
  )$  4,533
  
  $  4,281
  
  $  3,586Adjusted EBITDA(2)Joffre Olefins
  
  $588
  
  $     587
  
  $     340Corunna Olefins
  
  209
  
  93
  
  79Polyethylene
  
  196
  
  141
  
  234Eliminations(3)
  
  (18
  )
  (4
  )
  12$     975
  
  $     817
  
  $     665Operating income(2)Joffre Olefins
  
  $531
  
  $     537
  
  $     290Corunna Olefins
  
  144
  
  36
  
  30Polyethylene
  
  127
  
  75
  
  172Eliminations(3)
  
  (18
  )
  (4
  )
  12$     784
  
  $     644
  
  $     504Polyethylene Sales Volumes
  (millions of pounds)Advanced
  SCLAIRTECH resins(4)
  
  885
  
  854
  
  730All other
  polyethylene resins
  
  2,490
  
  2,385
  
  2,1113,375
  
  3,239
  
  2,841  (1)Before
inter-segment eliminations between the business units. (2)See
Supplemental Measures on page 54. (3)Represents
inter-segment profit eliminations. (4)PE
resins produced using Advanced SCLAIRTECH technology at the Joffre site,
including SCLAIR and SURPASS resins.  Olefins/Polyolefins Operating
Highlights  2007
  
  Annual(U.S. dollars per pound, except
  where noted)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2007
  
  2006
  
  2005Benchmark Principal Product
  Prices:(1)Ethylene(2)
  
  $  0.40
  
  $  0.45
  
  $  0.50
  
  $  0.60
  
  
  $  0.49
  
  $  0.48
  
  $  0.44PE  linear
  low-density butene liner(3)
  
  $  0.56
  
  $  0.62
  
  $  0.67
  
  $  0.75
  
  
  $  0.65
  
  $  0.65
  
  $  0.60PE 
  weighted-average benchmark(4)
  
  $  0.58
  
  $  0.64
  
  $  0.70
  
  $  0.77
  
  
  $  0.68
  
  $  0.67
  
  $  0.63Benchmark Raw Material Prices:(1)AECO natural gas
  (dollars per mmBTU)(5)
  
  $  6.32
  
  $  6.43
  
  $  4.96
  
  $  6.26
  
  
  $  5.99
  
  $  5.75
  
  $  7.25NYMEX natural Gas
  (dollars per mmBTU)(6)
  
  $  6.96
  
  $  7.56
  
  $  6.13
  
  $  7.03
  
  
  $  6.92
  
  $  7.26
  
  $  8.55WTI Crude Oil
  (dollars per barrel)(7)
  
  $58.27
  
  $65.03
  
  $75.38
  
  $90.68
  
  
  $72.34
  
  $66.21
  
  $56.56  (1)Average
benchmark prices do not necessarily reflect actual prices realized by NOVA
Chemicals or any other chemical company. (2)Source:
Chemical Market Associates, Inc. (CMAI) - USGC Net Transaction Price. (3)LLDPE
butene liner. Source: Townsend Polymer Services Information (TPSI). (4)Prices
weighted according to NOVA Chemicals sales volume mix in North America. Source
for benchmark prices: TPSI. (5)Source:
Canadian Gas Price Reporter, weighted-average daily spot gas prices, values in
millions of British Thermal Units (mmBTU). (6)Source:
NYMEX Henry Hub 3-Day Average Close, values in mmBTU. (7)Source:
NYMEX WTI daily spot-settled price average for calendar month.    36   Managements Discussion & Analysis


Discussion of Financial Results  In 2007, the Olefins/Polyolefins business unit
delivered record results due to a record Alberta Advantage, strong domestic PE
demand and record PE exports. The business delivered record results despite the
sharp increase in the Canadian dollar which increased 17% compared to the U.S.
dollar since the end of 2006.  JOFFRE OLEFINS, 2007 VERSUS 2006 Revenuewas
$1,803 million in 2007, up from $1,744 million in 2006. Total ethylene sales
were 2% higher in 2007 compared to 2006 due to stronger merchant ethylene
demand and higher internal consumption of ethylene for Joffre PE production. In
addition, average selling prices for ethylene and co-products, which were 2%
higher in 2007.  Feedstocks and Operating Costswere
$1,205 million in 2007, up from $1,143 million in 2006. Costs increased in 2007
due to higher Alberta natural gas prices, which were 3% higher in 2007, and
stronger consumption of feedstocks to support higher ethylene sales. In
addition, costs were negatively impacted by the appreciation of the Canadian
dollar in 2007.  In 2007, NOVA Chemicals realized an average
cash-cost advantage of 17¢ per pound of ethylene versus its USGC peers, the
highest in Company history. The Alberta Advantage increased from 11¢ per pound
in 2006, as strong demand for ethane on the USGC, coupled with high crude oil
prices, pushed USGC ethane prices to record levels. Alberta ethane costs, which
closely track natural gas prices, remained stable for most of the year.  Adjusted EBITDAwas
a record $588 million in 2007, up slightly from $587 million in 2006. Margins
in 2007 remained at a similar high level to 2006 as stronger revenue offset the
impact of higher feedstock costs and a stronger Canadian dollar. The expansion
of the Alberta Advantage, which was primarily due to higher USGC feedstock
costs, enabled NOVA Chemicals to maintain margins while industry margins
declined.  JOFFRE OLEFINS, 2006 VERSUS 2005 Revenuewas
$1,744 million in 2006, up from $1,704 million in 2005. Revenue increased as higher
ethylene and co-product selling prices in 2006, which were 6% higher in 2006,
more than offset lower sales volumes, which were 4% lower in 2006. Sales
volumes were lower due to slightly weaker demand from third-party ethylene
customers.  Feedstocks and Operating Costswere
$1,143 million in 2006, down from $1,353 million in 2005 due primarily to lower
Alberta natural gas prices, which were 21% lower in 2006 compared to 2005.  In 2006, NOVA Chemicals Alberta Advantage
averaged 11¢ per pound of ethylene, the highest in Company history at the time,
compared to 6¢ per pound in 2005. The Alberta Advantage increased from 2005 as
strong demand for ethane on the USGC, coupled with high energy prices, pushed
USGC ethane prices to near-record levels. Alberta ethane costs, which closely
track natural gas prices, remained stable for most of the year.  Adjusted EBITDAwas
$587 million in 2006, up significantly from $340 million in 2005. The
year-over-year improvement is due to lower feedstock costs and higher ethylene
selling prices.  CORUNNA OLEFINS, 2007 VERSUS 2006 Revenuewas
$2,075 million in 2007, up from $1,997 million in 2006. The year-over-year
improvement was due primarily to increased ethylene sales, which were 9% higher
in 2007 due to stronger internal demand for ethylene. Co-product revenue in
2007 was down slightly compared to 2006. Higher selling prices for energy and
chemical co-products, which rose in response to higher WTI crude oil prices,
mostly offset the impact of lower energy co-product sales.  Feedstocks and Operating Costswere
$1,856 million in 2007, down slightly from $1,885 million in 2006. Costs in
2007 were lower, despite higher feedstock prices, primarily due to reduced
feedstock purchases from lower energy co-products sales. The average WTI crude
oil price was 9% higher in 2007 compared to 2006; however, NOVA Chemicals
crude oil costs increased 4% due to the flow through of costs. In addition,
gains from the Companys feedstock purchasing program totaling $36 million in
2007 contributed to lower feedstock costs.   Managements
Discussion & Analysis 37


Adjusted EBITDAwas
$209 million in 2007, up from $93 million in 2006. The improvement was due
primarily to higher selling prices for co-products which were 15% higher than
2006. Despite the sharp rise in industry crude oil costs in the second half of
2007, Corunnas crude oil costs in 2007 were only 4% higher than 2006 due to
the flow through of costs. Gains from NOVA Chemicals feedstock purchasing
program minimized the year-over-year increase in feedstock costs and
contributed to the adjusted EBITDA improvement.  CORUNNA OLEFINS, 2006 VERSUS 2005 Revenuewas
$1,997 million in 2006, up from $1,430 million in 2005 due to higher selling
prices and sales volumes.  Compared to 2005, average ethylene selling
prices were 18% higher in 2006, while energy and chemical co-product prices
were 22% higher in 2006. Energy co-product prices were driven by higher crude
oil prices in 2006, while chemical co-product prices were driven by higher
propylene and butadiene prices.  Total sales volumes were approximately 16%
higher in 2006 due to improved operations at the Corunna ethylene
flexi-cracker. In 2005, the Corunna facility experienced an unplanned shutdown
in the second quarter due to a power outage and a delayed re-start in the
fourth quarter following the facilitys expansion and modernization project.  Feedstocks and Operating Costswere
$1,885 million in 2006, up from $1,334 million in 2005. Costs increased in 2006
due to higher feedstock prices and higher feedstock consumption driven by
increased production at the Corunna flexi-cracker.  Adjusted EBITDAwas
$93 million in 2006, up from $79 million in 2005. The year-over-year
improvement was due primarily to higher average selling prices and sales
volumes which more than offset higher feedstock and operating costs.  POLYETHYLENE, 2007 VERSUS 2006 Revenuewas
$2,022 million in 2007, up from $1,922 million in 2006. The year-over-year
improvement was primarily due to higher PE sales volume. PE sales volumes in
2007 were a record 3,375 million pounds, up 4% compared to 2006 due to record
PE exports and sales of PE manufactured using Advanced SCLAIRTECH technology
and solid domestic demand for standard resins.  International sales volumes rose 48% to 624
million pounds in 2007 compared to 423 million pounds in 2006. International
sales represented approximately 19% of total PE sales volume in 2007, up from
13% in 2006 as strong international PE pricing, driven by higher global
production costs and robust demand, supported profitable export opportunities.  Sales of PE manufactured using Advanced
SCLAIRTECH technology totaled a record 885 million pounds in 2007, up from 854
million pounds in 2006. Sales increased due to continued market penetration of
higher value products.  Feedstocks and Operating Costswere
$1,772 million in 2007, up slightly from $1,747 million in 2006. Feedstock and
operating costs were higher in 2007 as lower ethylene unit costs, which were 5%
lower than 2006, were offset by higher PE sales volume, which required 4% more
ethylene consumption. All of the ethylene feedstock consumed by the
Polyethylene reporting segment is supplied by the Companys Joffre, Alberta and
Corunna, Ontario, facilities.  Adjusted EBITDAin
2007 was $196 million, up from $141 million in 2006. The year-over-year
improvement was due to higher PE sales volumes and increased margins, despite
higher costs related to the stronger Canadian dollar.  POLYETHYLENE, 2006 VERSUS 2005 Revenuewas
$1,922 million in 2006 compared to $1,628 million in 2005. Revenue grew in 2006
due to increased sales volumes and higher average selling prices.  Sales volume was 14% higher in 2006 due to
improved ethylene availability from both the Joffre and Corunna ethylene
plants. In 2005, ethylene production at Joffre and Corunna was constrained due
to a tornado that damaged third-party NGL extraction facilities in Alberta, as
well as planned and unplanned outages at the Corunna flexi-cracker. In addition,
average PE prices were 4% higher in 2006.  International sales volumes rose 6% to 423
million pounds in 2006 compared to 398 million pounds in 2005. International
sales increased in 2006, representing 13% of total PE sales volume in 2006
versus 14% in 2005, as the Company pursued profitable export opportunities,
particularly in the fourth quarter.  In
2006, sales of total PE made with Advanced SCLAIRTECH technology increased 17%
to 854 million pounds which exceeded the plants nameplate capacity.   38 Managements Discussion & Analysis


Feedstocks and Operating Costswere
$1,747 million in 2006, up from $1,360 million in 2005. Feedstock and operating
costs rose in 2006 due to higher PE production and feedstock consumption and
higher average prices for ethylene.  Adjusted EBITDAwas
$141 million in 2006, down from $234 million in 2005. The year-over-year
decline was primarily due to higher feedstock costs, which more than offset
higher PE revenue.  Performance Styrenics Business Unit  Performance Styrenics is a growing business unit
that produces unique styrenic Performance Polymers and standard EPS, and has a
portfolio of EPS-based downstream ventures and businesses that aim to create
and capture value beyond the sale of EPS resin. Specifically, the Performance
Styrenics unit contains the following:  ·
  
  ARCEL and DYLARK Performance Polymers·
  
  North American EPS·
  
  EPS-based downstream ventures:ElemixTMconcrete
  additive, IMxTMtechnology, NOVA Chile EPS molding operations,
  and joint venture interests in Accelerated Building Technologies and
  NOVIDESA.  BUSINESS OVERVIEW Performance Styrenics portfolio of products and
ventures applies proprietary technology to the energy-efficiency benefits of
EPS to help customers reduce their costs and environmental impact (see Figure
7). For example, several of the ventures building and construction products
enable builders to create structures that have higher energy efficiency than
traditional homes, in less time and using fewer skilled workers. Performance
Polymers like ARCEL resins can reduce the amount of protective packaging used
which leads to lower packaging and logistics costs and reduced packaging waste.
These benefits are especially important in a high-energy cost and
sustainability driven environment. As a result, NOVA Chemicals premium-products
can earn higher margins over standard, non-differentiated products.  Styrenic Performance Polymers are used in
protective packaging, automotive interiors, food packaging and consumer goods.
The products created by the EPS-based downstream ventures are used in premium
beverage applications as well as in the building and construction industry.
Standard EPS resins are used in the production of packaging for food and
consumer products and in insulation for the building and construction industry.  Currently, sales of standard EPS resins account
for the majority of Performance Styrenics revenue. As a result, profitability
of the business unit is dependent on the cyclical supply/demand balance for
EPS. As sales from Styrenic Performance Polymers and the downstream business
ventures grow, Performance Styrenics offers the prospect of enhanced earnings
stability throughout the chemical cycle.  Figure 7. EPS Technology Value
Chain     Managements Discussion
& Analysis 39


STYRENE FEEDSTOCK Styrene is the primary feedstock for the
production of NOVA Chemicals EPS and styrenic Performance Polymers. NOVA
Chemicals minority interest in LyondellBasells Chemical Companys
Channelview, Texas, propylene oxide/styrene monomer (PO/SM) facility supplies
400 million pounds per year of cost-competitive styrene to the Performance
Styrenics business unit, meeting virtually all of its styrene requirements.  EXPANDABLE POLYSTYRENE NOVA Chemicals has the capacity to produce 370
million pounds per year of standard EPS at its production facilities in Monaca
(Beaver Valley), Pennsylvania, and Painesville, Ohio. NOVA Chemicals
downstream businesses and ventures build on the foundation of EPS resin
technology to create new consumer and industrial applications that deliver
enhanced value.  STYRENIC PERFORMANCE POLYMERS NOVA Chemicals has annual production capacity of
approximately 160 million pounds for styrenic Performance Polymers, which are
manufactured at its Beaver Valley facility and through tolling agreements with
outside manufacturing partners. Approximately 105 million pounds per year of
ZYLAR and NAS Performance Polymers capacity was transferred to the INEOS NOVA
joint venture that commenced operations on Oct.1, 2007.  ARCELresin
is a performance resin that is molded into foam for protective packaging and
used by producers of damage-sensitive goods such as electronics, appliances,
and furniture. Packaging made from ARCEL resin is resilient, tough and flexible
and can reduce product breakage and returns. In addition, packaging made from
ARCEL resin is compact, which reduces overall package size and packaging waste
and decreases transportation and fuel consumption costs for finished goods,
contributing to the sustainability goals of NOVA Chemicals customers.  NOVA Chemicals has annual ARCEL resin production
capacity of 70 million pounds between NOVA Chemicals Beaver Valley, PA,
facility and the ARCEL finishing plant in Ningbo, China. The finishing plant provides
a local source of ARCEL resin in Asia and is operated under a long-term
strategic partnership with Loyal Chemical Industrial Corporation.  DYLARKresins
are used in automotive applications, such as soft instrument panels, structural
consoles, roof-mounted LCD video supports and interior trim. DYLARK resins are
specified for their temperature resistance, stiffness and strength, lot-to-lot
consistency and exceptional foam adhesion.  DOWNSTREAM VENTURES USE EPS TECHNOLOGY TO CAPTURE VALUE NOVA Chemicals Performance Styrenics business
unit has a portfolio of downstream ventures that seek to capture value beyond
the manufacturing and sale of plastic resins. The ventures are based on the
attributes of EPS which offers energy-efficiency and insulating benefits to
customers looking for superior product performance and enhanced sustainability.  Through strategic relationships with downstream
partners, NOVA Chemicals plans to leverage its intellectual property and market
expertise to earn royalty revenue and create pull-through sales of the Companys
standard polymers and Performance Polymers. This combination of technology
licensing and sales of finished products is expected to generate and sustain
profits throughout the chemical industry cycle. Descriptions of the key
ventures and 2007 business activities follow:  ·
  
  Elemix Concrete Additivecontains proprietary
  polymeric spheres that have been specially formulated for use in concrete. By
  distributing uniformly in concrete, Elemix additive provides lighter weight
  concrete and enhanced durability in structural and non-structural concrete
  applications. Structures built with lightweight concrete made with Elemix
  additive require less supporting structural steel and offer superior
  insulating properties compared to traditional concrete. NOVA Chemicals
  recorded its first sale of Elemix additive in 2007.·
  
  Accelerated Building Technologiesis a 50:50 joint venture
  between NOVA Chemicals and Dietrich Metal Framing, a Worthington Industries
  company. This joint venture develops and manufactures durable, energy-saving,
  composite wall systems under the trademark accelETMfor
  residential, commercial and light industrial use. These systems combine the
  insulating and lightweight characteristics of EPS with the strength of
  light-gauge steel framing. The joint venture commercialized its first product
  in 2007. Its products have successfully passed key structural and
  environmental performance testing that have allowed it to make initial sales
  in each of its target segments: residential, commercial and light industrial.   40 Managements Discussion &
Analysis


·
  
  Insulating Concrete Forms (ICFs)are molded EPS forms that can
  be interlocked and filled with concrete to become the foundations and walls
  of structures such as residential homes. Structures built with ICFs are more
  energy-efficient and require less maintenance than traditional buildings. ICF
  structures can better withstand damage caused by hurricanes and earthquakes
  and are easy to assemble, potentially reducing both construction time and
  labor costs. Currently, ICFs are produced and marketed in North and South
  America through NOVIDESA, in the U.S. through toll manufacturers, and in
  Chile through NOVA Chile.·
  
  NOVIDESAis a 50:50 joint venture formed by NOVA
  Chemicals and Grupo IDESA, that produces and sells building systems such as
  ICFs and steel-reinforced EPS partition wall panels and decking that target
  the rapidly growing Mexican construction market. The joint venture also sells
  EPS in Mexico. During 2007 NOVIDESA doubled its sales of building and
  construction systems from 2006.·
  
  NOVA Chileis fully owned by NOVA Chemicals and
  operates two EPS molding plants in Quilicura and El Tepual, Chile, which mold
  products for local fish and produce packaging, housing and construction
  markets. NOVA Chile continues to grow and provide industry leading products
  to the Chilean construction market.·
  
  IMx technology for cups and containersenables NOVA Chemicals to
  produce labeled cups in a single-step process. These cups combine the superb
  insulation properties of EPS with the outstanding graphics quality
  traditionally offered only by paper. The Company is pursuing both direct
  sales of cups and containers, as well as technology licensing opportunities.
  During 2007, NOVA Chemicals signed a licensing agreement with the exclusive
  provider of hot beverage cups to a globally recognized quick-service
  restaurant chain in Singapore and also with a leading consumer products
  company in Europe for ice cream containers.·
  
  LRM Industriesis a 50:50 joint venture with
  Envirokare Composite Corp. that plans to commercialize TPF ThermoPlastic
  FlowformingTMtechnology, an emerging process technology for low pressure,
  fully automated molding of long-fiber reinforced thermoplastic and
  unreinforced thermoplastic large structural parts. During 2007, LRM
  commercialized its Sheetless ThermoFormingTMprocess
  technology, which is a proprietary, one-step, low-cost process for producing
  conventional single-sheet thermoformed parts.  Outlook for Performance Styrenics Business Unit  In 2007, NOVA Chemicals continued to make
progress growing its Performance Styrenics business unit. NOVA Chemicals
believes that its Performance Styrenics business unit now has the
infrastructure, intellectual property, and organization in place to deliver a
return on the investment made over the last few years. Each of the ventures
recorded revenue during the year while ARCEL resins continued to gain acceptance
as a superior packaging material for high-end consumer electronics. NOVA
Chemicals also took steps to reduce annual costs in its standard EPS business
by $8 million during the year. While Performance Styrenics business unit
results improved measurably in 2007, it did not meet the Companys aggressive
growth expectations.  In 2008, NOVA Chemicals plans to continue to
drive improvements in its standard EPS business and accelerate sales of ARCEL
resin. In addition, the Company will continue to develop its downstream
business ventures and expects that by the end of 2008, Performance Styrenics
will become a meaningful contributor to NOVA Chemicals revenue and earnings.  Performance Styrenics Financial Highlights(1) (millions of U.S. dollars,
  except where noted)
  
  2007
  
  2006
  
  2005Revenue
  
  $412
  
  $385
  
  $363Adjusted EBITDA(2)
  
  $(5
  )
  $ (17
  )
  $    7Operating loss(2)
  
  $(30
  )
  $ (29
  )
  $(5
  )Sales volumes(3) (millions
  of pounds)
  
  418
  
  415
  
  365  (1)
  
  ZYLAR and NAS resin assets that were formerly
  included in NOVA Chemicals Performance Styrenics segment were contributed to
  INEOS NOVA on Oct. 1, 2007. The results for these resins are now
  included in the INEOS NOVA joint ventures results. Prior period results have
  been revised to reflect this change.(2)
  
  See Supplemental
  Measures on page 54.(3)
  
  Third-party sales.   Managements
Discussion & Analysis 41


Performance Styrenics Operating Highlights 2007
  
  
  Annual(U.S. dollars per pound)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2007
  
  2006
  
  2005Benchmark Raw Material Prices:(1)Styrene(2)
  
  $0.65
  
  $0.71
  
  $0.68
  
  $0.69
  
  
  $0.68
  
  $0.65
  
  0.63  (1)
  
  Average benchmark prices do not necessarily reflect actual
  prices realized by NOVA Chemicals or any other petrochemical company.(2)
  
  Source: CMAI Contract Market.  Discussion of Financial Results  2007 VERSUS 2006 Revenuein
2007 was $412 million up from $385 million in 2006. The improvement was due to
higher sales volume of EPS and higher selling prices, particularly for EPS and
DYLARK resins. EPS sales volumes were 13% higher in 2007 due to stronger
domestic demand in the construction market.  Feedstocks and Operating Costsin
2007 were $380 million, up from $363 million in 2006. Costs were higher in 2007
primarily due to the 6% increase in styrene, which more than offset lower
operating costs as a result of NOVA Chemicals restructuring activities.  Adjusted EBITDAin
2007 was a $5 million loss, an improvement from the $17 million loss in 2006.
Margins expanded in 2007 as increased selling prices more than offset higher
styrene input costs. The impact of restructuring activities in 2007 also
contributed to the year-over-year improvement.  2006 VERSUS 2005 Revenuein
2006 was $385 million, up from $363 million in 2005. Stronger EPS sales and
continued acceptance of Styrenic Performance Polymers led to a 6% increase in
sales volume compared to 2005. This impact was partially offset by lower
average EPS prices.  Feedstocks
and Operating Costswere $363 million in
2006, up from $314 million in 2005. Higher feedstock consumption, due to higher
sales volume, and higher styrene costs contributed to the year-over-year
increase in costs.  Adjusted
EBITDAin 2006 was a $17 million
loss, compared to a $7 million profit in 2005. The year-over-year decline was
due to higher development costs, higher styrene feedstock costs, and lower EPS
selling prices which more than offset higher sales volumes.  INEOS NOVA Joint Venture  On Oct. 1, 2007, NOVA Chemicals and INEOS
expanded their 50:50 European joint venture to include the North American
styrene and SPS businesses of both companies. INEOS NOVA is headquartered in
Joliet, Illinois, and includes:  ·
  
  SPS and EPS assets in Europe (previously part of the NOVA
  Innovene joint venture).·
  
  NOVA Chemicals North American styrene and SPS assets
  (previously in its STYRENIX business unit) and NAS and ZYLAR performance
  resins (previously in its Performance Styrenics business unit).·
  
  INEOS North American styrene and SPS assets and its line
  of specialty polymers.  MARKET OVERVIEW Styrene is a globally-traded commodity and a key
feedstock in the production of styrenic polymers, such as SPS and EPS. Polystyrene
is used to make products such as electronics packaging, small appliances,
construction components and food packaging. While SPS and EPS resin production
accounts for approximately 60% of global styrene demand, styrene is also used
in other styrenic polymers such as ABS, synthetic rubber and unsaturated
polyesters.  Margins
in the styrene and SPS industries are primarily driven by supply/demand
dynamics. Styrene is the supply bottleneck in the styrenics chain and therefore
the key indicator of supply/demand tightness for both styrene and SPS.
Operating rates in excess of 92% for styrene generally lead to margin
expansion.   42 Managements Discussion & Analysis


BUSINESS
OVERVIEW INEOS NOVA is the largest combined styrene/SPS
producer in North America and SPS/EPS producer in Europe.  Figure 8. INEOS NOVA
production profile  Capacity (billions of pounds)
  
  
  Capacity RankNorth
  
  
  
  
  
  
  NorthAmerica
  
  Europe
  
  Global
  
  
  America
  
  Europe
  
  GlobalStyrene
  
  3.7
  
  
  
  3.7
  
  
  1
  
  
  
  5SPS
  
  1.6
  
  1.2
  
  2.8
  
  
  3
  
  2
  
  2EPS
  
  
  
  0.9
  
  0.9
  
  
  
  
  1
  
  4  Styrene.INEOS
NOVA can produce approximately 3.7 billion pounds of styrene from its three
production sites in Bayport and Texas City, Texas, and Sarnia, Ontario. The
majority of styrene production is consumed internally to manufacture styrenic
polymers, with the balance sold to third parties.  The primary raw materials for the production of
styrene are benzene and ethylene. INEOS NOVA has entered into long-term supply
agreements with NOVA Chemicals and INEOS to supply virtually all of its
ethylene and a portion of its benzene feedstock requirements. The balance of
feedstocks is obtained through purchases in the open market.  While INEOS NOVA has roughly the same capacity
to consume styrene as it does to produce it, the joint venture has a long
styrene position in North America and a short position in Europe. To achieve a
more balanced global styrene position, the joint venture engages in
transatlantic swap arrangements with other producers and merchant sales.  SPS/EPS.INEOS
NOVA has the capacity to produce approximately 1.6 billion pounds per year of
SPS from its three production sites in North America and 2.1 billion pounds per
year of SPS and EPS from its five sites in Europe. Styrene feedstock is
supplied from INEOS NOVAs production facilities, swap agreements and
third-party merchant contracts.  Profitability Improvement Potential  Profitability in the global styrenics industry
has been poor in the last several years, primarily due to the over supply of
styrene and relatively high cost of benzene feedstock. However, the Company
believes that the efficiency enhancing actions taken by INEOS NOVA and others
in the industry, coupled with steady demand growth will raise operating rates
and restore industry profitability.  RAPID COST REDUCTION Since its inception in October 2005, the
INEOS NOVA European joint venture has aggressively reduced costs through asset
rationalizations, reductions in corporate overhead expenses and operating
synergies. In 2007, the joint venture achieved annual cost-savings of $82
million in Europe, double the original target. The newly expanded joint venture
is expected to build upon the success of the European joint venture and is
initially targeting $80 million per year of additional cost reductions and
EBITDA improvement. The benefit of these cost reductions is shared equally
between NOVA Chemicals and INEOS.  Within the first 60 days of expanded operation
in North America, INEOS NOVA announced its plan to close the Montreal, Quebec,
and Belpre, Ohio, SPS facilities and shift production to its more efficient
sites. The combined annual capacity of these facilities is 340 million pounds
which represents 5% of North American capacity. Both of these sites have
stopped production as of Jan. 17, 2008. INEOS NOVA expects that these
actions will yield $14 million per year in synergies.  In November 2007, INEOS NOVA acquired the
exclusive production rights to Sterling Chemicals styrene facility in Texas
City, Texas. The $60 million cost of the transaction was fully funded by INEOS
NOVA from cash on-hand. Sterlings styrene facility has 1.7 billion pounds of
annual production capacity, which represents approximately 11% of North
American capacity and 3% of global capacity.   Managements
Discussion & Analysis 43


INEOS NOVA nominated zero production from the
Sterling asset for December 2007 which prompted Sterling Chemicals to
announce its intention to exit the styrenics business and exercise its right to
permanently shut down and decommission the Texas City styrene facility. NOVA
Chemicals expects the impact from the Sterling deal will contribute to INEOS
NOVAs stated $80 million annual synergy target.  IMPROVING STYRENICS MARKET FUNDAMENTALS In addition to benefiting from its own cost
reduction and consolidation activities, NOVA Chemicals believes that INEOS NOVA
is well positioned to benefit from an improvement in industry fundamentals. The
activity of other global styrenics producers, further industry consolidation
and relatively few global capacity additions between 2008 and 2011 could
improve the health of the traditionally oversupplied industry by raising
operating rates, reducing costs and restoring margins.  In addition, moderating relative costs of
benzene, the key feedstock required in the SPS value chain, could allow
producers to recapture demand that had been lost to competing polymers and
materials, such as polypropylene (PP) for some applications.  Figure 9 shows that the price of benzene
relative to the price of WTI crude oil. Since the feedstocks of competing
polymers such as PP tend to be derived from crude oil, this ratio generally
provides a good indication of the feedstock cost pressures facing each polymer.
At the end of 2007, benzene prices relative to crude oil were below the
historical range and significantly below the record highs in 2004.  As a result, SPS pricing has become more
competitive relative to PP, and as of the end of 2007, was at its lowest level
in the last ten years, as shown in Figure 10. Continued competitive pricing of
SPS could lead to demand substitution and improved SPS demand growth. Since the
PP market is four times the size of the SPS market, even a small shift in
applications from PP could have a significant positive impact to SPS demand
growth.  Figure 9.
  Figure 10.
    44Managements
Discussion & Analysis


Significant Leverage to Market Improvements  In addition to INEOS NOVA, several global
  producers announced plans in 2007 for consolidation and efficiency generating
  asset rationalization. For example, Dow Chemical Company and Chevron Phillips
  Chemical Company announced a styrenics joint venture for North and South
  America. The BASF Chemical Company announced its intention to pursue
  strategic options for its styrenics business. Total Chemicals announced plans
  to consolidate its styrene capacity in Europe and Sterling Chemicals
  announced its exit from the styrene business.
  
  NOVA Chemicals expects that the actions of
  INEOS NOVA and other global styrenics players will have a meaningful impact
  on operating rates and industry profitability. Due to INEOS NOVAs size and
  scale in the global styrenics market, it has significant leverage to
  improvements in industry profitability. For each one cent improvement in
  industry margins, NOVA Chemicals share of the improvement is $19 million per
  year EBITDA which translates to $0.23 per share as shown in Figure 11. This
  assumes production capacity is sold-out and no taxes are incurred due to the
  use of tax loss carry forwards.
  
  Figure 11.
  INEOS NOVA Joint Venture Financial Highlights(1) (millions of U.S. dollars,
  except where noted)
  
  2007
  
  2006
  
  2005Revenue
  
  $2,092
  
  $2,186
  
  $1,937Adjusted EBITDA(2)
  
  $     17
  
  $   (43
  )
  $ (102
  )Operating loss(2)
  
  $      (4
  )
  $ (149
  )
  $ (211
  )Sales Volumes (millions
  of pounds)
  
  2,929
  
  3,351
  
  3,444 (1)Results
represent NOVA Chemicals 50% share of INEOS NOVA. The 2007 annual INEOS NOVA
joint ventures results are comprised of: (a) results from the first nine
months of NOVA Chemicals former STYRENIX business unit, (b) NAS and ZYLAR
resins (formerly included in Performance Styrenics) and (c) NOVA Chemicals
50% share of INEOS NOVAs results for the last three months of 2007. (2)See
Supplemental Measures on page 54.  INEOS NOVA Joint Venture Operating Highlights 2007
  
  Annual(U.S. dollars per pound, except
  where noted)
  
  Q1
  
  Q2
  
  Q3
  
  Q4
  
  
  2007
  
  2006
  
  2005Benchmark principal product
  prices:(1)Styrene(2)
  
  $0.65
  
  $0.71
  
  $0.68
  
  $0.69
  
  
  $0.68
  
  $0.65
  
  $0.63SPS(3)North America
  
  $0.94
  
  $0.99
  
  $0.98
  
  $1.00
  
  
  $0.98
  
  $0.89
  
  $0.86Europe
  
  $0.76
  
  $0.83
  
  $0.82
  
  $0.83
  
  
  $0.81
  
  $0.68
  
  $0.65Benchmark raw material prices:(1)Benzene (dollars
  per gallon)(2)
  
  $3.53
  
  $3.95
  
  $3.55
  
  $3.44
  
  
  $3.62
  
  $3.26
  
  $2.90 (1)Average
benchmark prices do not necessarily reflect actual prices realized by NOVA
Chemicals or any other petrochemical company. (2)Source:
CMAI Contract Market. (3)Source
for benchmark prices: CMAI.  Managements Discussion & Analysis45


Discussion of Financial Results  2007 VERSUS 2006 Revenuewas
$2,092 in 2007, down from $2,186 in 2006. The year-over-year decrease was due
to higher selling prices for styrene and SPS, which were more than offset by
the impact of lower sales volumes. North American average styrene and SPS
prices increased by 5% to 10%; respectively, due primarily to higher benzene
feedstock costs. In addition, European SPS prices increased by 19% in 2007, in
part due to higher feedstock costs.  Total sales volumes were
13% lower in 2007 than in 2006, due in part to a lack of styrene export
opportunities in the fourth quarter of 2007. The combination of higher styrene
prices in North America in the fourth quarter, due to sharply higher ethylene
feedstock costs, and lower styrene prices in Asia resulted in few profitable
export opportunities. In contrast, North American styrene producers exported
significant volumes to Asia in the fourth quarter of 2006 due to attractive
economics.  Feedstock
and Operating Costswere $2,031 million, down
from $2,183 million in 2006. The year-over-year decrease in feedstock costs was
due to lower feedstock purchases from lower sales volume.  Adjusted
EBITDAwas $17 million in 2007,
compared to a loss of $43 million in 2006. The year-over-year improvement was
primarily due to restructuring activities taken in North America and Europe.
Since the middle of 2006 the following cost-reduction actions were taken: closure
of the Chesapeake, Virginia, Carrington, UK, and Berre, France, polystyrene
sites, expiration of a long styrene supply contract, and continued cost
reductions in Europe.  INEOS NOVA is initially
targeting $80 million per year of additional cost reductions and EBITDA
improvements. The joint venture has announced a series of actions that will
contribute to this synergy target. The impact of these synergies will be
realized starting in 2008.  2006 VERSUS 2005 Revenuewas
$2,186 in 2006, up from $1,937 in 2005. The year-over-year improvement was due
primarily to higher selling prices which more than offset the impact of lower
sales volumes. North American styrene and PS prices were each higher by 3% and
European SPS and EPS selling prices were 5% and 17% higher, respectively.
Producers were able to increase selling prices due to higher benzene and
ethylene feedstock costs. In addition, tighter European EPS market conditions
lead to price increases which expanded margins.  Feedstock
and Operating Costswere $2,183 in 2006, up
from $1,994 million in 2005. The year-over-year increase was due primarily to
increased feedstock costs. Industry benzene prices were 12% higher in 2006,
while ethylene prices were 9% higher.  Adjusted EBITDAwas
a loss of $43 million in 2006, an improvement from the loss of $102 million in
2005. The improvement was due to restructuring activities taken in North
America and Europe. In the second half of 2006, the Chesapeake, Virginia,
Carrington, UK, and Berre, France, polystyrene sites were closed. Fixed costs
were also removed as a result of other restructuring activities. In addition,
stronger marketconditions in Europe lead to increased margins, particularly for
EPS.   46   Managements
Discussion & Analysis


Corporate Adjusted EBITDA and Other Items  A listing of before-tax corporate and other items for
the periods presented is as follows:  (millions of U.S. dollars)
  
  2007
  
  2006
  
  2005Corporate operating
  costs
  
  $(100
  )
  $   (108
  )
  $(139
  )Stock-based compensation
  and profit sharing
  
  (52
  )
  6
  
  38Forward transactions on
  stock-based compensation
  
  16
  
  (20
  )
  (15
  )Mark-to-market feedstock
  derivatives
  
  21
  
  (20
  )
  12Restructuring charges
  
  (86
  )
  (985
  )
  (168
  )Insurance credit
  (charge)
  
  4
  
  (19
  )
  (22
  )Tax settlement
  
  
  
  
  
  8$(197
  )
  $(1,146
  )
  $(286
  )Add back:Corporate
  depreciation
  
  9
  
  8
  
  8Restructuring
  charges
  
  86
  
  985
  
  168Adjusted EBITDA(1)
  
  $(102
  )
  $   (153
  )
  $(110
  ) (1)See
Supplemental Measures on page 54.  Corporate Operating Costs Beginning with the first quarter of 2007, NOVA
Chemicals ceased allocating interest, income taxes and corporate operating
costs to the business segments. Prior period results have been revised to
reflect this change. Corporate operating costs include corporate depreciation.  2007 VERSUS 2006 Corporate operating costs were $100 million in
2007 compared to $108 million in 2006, a decrease of $8 million primarily due
to one-time lower employee retirement accruals.  2006 VERSUS 2005 Corporate operating costs were $108 million in
2006 compared to $139 million in 2005, a decrease of $31 million due to a
significant decrease in Selling, general and administrative expense in
conjunction with restructuring activities in 2006.  Stock-Based Compensation, Forward
Transactions and Profit Sharing  NOVA Chemicals has two cash-settled, stock-based
incentive compensation plans that are marked to market with changes in the
value of its common stock price. In November 2005, NOVA Chemicals entered
into forward transactions in order to hedge the portion of its stock-based
compensation, which is subject to quarterly mark-to-market accounting
adjustments. The forward transactions are cash-settled at the end of a
three-year term (November 2008), or at any time prior to that at the
option of NOVA Chemicals, based on the difference between NOVA Chemicals
common stock price and the execution price plus accrued interest.  The transactions effectively give NOVA Chemicals
the same economic effect as if it had borrowed money, purchased NOVA Chemicals
common shares and held them as assets. The average execution price was $37.56
on approximately 3.6 million shares, which approximates the number of
outstanding shares related to the stock-based compensation units as of November 2005.
As NOVA Chemicals stock price changes, the mark-to-market impact related to
the stock-based compensation liability is largely neutralized by the
mark-to-market impact related to the forward contracts.  Stock based compensation also includes the
amount expensed related to the fair value of stock options earned by employees.
Additionally, NOVA Chemicals has a profit sharing program that is available to
most employees and is based on the achievement of shareholder return on equity
targets.  Stock based compensation and profit sharing
expenses net of forward transactions were $36 million in 2007, $22 million
higher than 2006. The year-over-year increase was due to increased profit
sharing of $12 million, due to record profitability and $10 million due to the
impact of adopting EIC 162, Stock Based
Compensation for Employees Eligible to Retire Before Vesting Date,which
accelerated recognition of compensation costs for stock options granted to
employees eligible for retirement. Under former standards this charge would
have been expensed evenly over a three-year period.  Managements
Discussion & Analysis   47


Mark-to-Market Feedstock
Derivatives  NOVA
Chemicals maintains a derivative program to manage risk associated with
feedstock purchases. The gain or loss resulting from changes in the market
value of these derivatives is recorded through earnings each period. Beginning
in the first quarter of 2006, NOVA Chemicals began classifying mark-to-market
adjustments on feedstock derivative positions as corporate items, as they are
non-cash items and are not relevant in measuring business performance.
Previously, these amounts were allocated to the business units. Prior periods
have been restated. Once positions are realized, any income effects are
recorded in business results.  The
mark-to-market impact to earnings was $21 million in 2007 versus a $20 million
loss in 2006. The $41 million improvement was a result of increases in forward
propane and butane prices relative to crude oil and the number of feedstock
positions put in place.  The
mark-to-market impact to earnings was a $20 million loss in 2006 versus a $12
million gain in 2005. The $32 million decline was a result of the unfavorable
difference between the forecasted and actual relationship of liquefied
petroleum gas (LPG) markers to WTI crude oil prices for the period hedged.  Restructuring Charges  2007 In 2007, NOVA Chemicals recorded total
restructuring charges of $86 million ($55 million after-tax) related to actions
taken by INEOS NOVA, as well as NOVA Chemicals to reduce costs. During the
fourth quarter of 2007, INEOS NOVA announced the planned closure of the Belpre,
OH, and Montreal, Quebec, sites, resulting in restructuring charges of $38
million (NOVA Chemicals share) comprised of before-tax non-cash asset
write-downs of $32 million and severance costs of $6 million.  During
the fourth quarter of 2007, INEOS NOVA acquired the exclusive production rights
from Sterling Chemicals Texas City, Texas, styrene plant and nominated zero
production volume from that facility. Sterling Chemicals subsequently announced
plans to permanently shut down the facility. As a result, NOVA Chemicals
recorded a charge of $29 million, the Companys 50% share of the charge.  During 2007, NOVA Chemicals recorded a $7
million before-tax restructuring charge related to the elimination of
approximately 90 positions in the United States and Europe. NOVA Chemicals also
recorded $6 million before-tax charges for other restructuring actions to
reduce costs.  INEOS
NOVA had severance costs related to North American employees resulting in a $3
million before-tax charge for NOVA Chemicals share of those costs.  NOVA
Chemicals also accrued restructuring charges of $3 million before-tax related
to additional actions taken in Europe by the INEOS NOVA joint venture.  2006 In 2006, NOVA Chemicals recorded total
restructuring charges of $985 million ($861 million after-tax) related to the
following: the write-down of the STYRENIX assets, the write-down of the
Carrington, UK, SPS facility, severance costs for the North American
restructuring, severance costs for the Chesapeake, Virginia, SPS plant closure
and NOVA Innovene restructuring costs.  NOVA Chemicals recorded a non-cash write-down of
$860 million in 2006 ($772 million after-tax) related to STYRENIX assets (see
discussion on page 55 related to Property, Plant and Equipment).  The
Company accrued $56 million ($46 million after-tax) of restructuring costs
related primarily to non-cash asset write-downs for the Carrington, UK, SPS
facility closure following the announcement to permanently close that site. The
charge included $8 million related to total expected severance and other
departure costs, all of which have been paid to date.  48   Managements
Discussion & Analysis


The Company also accrued $53 million ($33
million after-tax) of restructuring costs related to severance, pension and
other employee-related costs associated with the North American restructuring
announced on June 26, 2006. To date, $33 million has been paid related to
severance costs for employees.  NOVA Chemicals accrued $15 million ($10 million
after-tax) related to severance costs for the Chesapeake, Virginia, polystyrene
plant closure. As of Dec. 31, 2007, $9 million has been paid to employees.  Lastly, $1 million (less than $1 million
after-tax) of restructuring costs related to actions taken by NOVA Innovene
were accrued.  2005 In 2005, NOVA Chemicals recorded total restructuring
charges of $168 million ($125 million after-tax) related to the following:
write-down of the Berre, France, and the Carrington, UK, EPS facilities and
associated severance costs; write-down of the Chesapeake, Virginia, polystyrene
plant; and the write-off of certain other non-productive assets.  On Oct. 1, 2005, NOVA Chemicals and
Innovene combined their European polystyrene businesses into a 50:50 joint
venture known as NOVA Innovene. Shortly thereafter, NOVA Innovene announced it
would cease EPS production at Berre, France, and permanently shut down the
previously idled EPS plant at its Carrington, UK, facility. Accordingly, NOVA
Chemicals took a write-down on the value of its 50% interest in the value of
the plants in the amount of $76 million ($60 million after-tax). NOVA Chemicals
also reduced the recorded benefit of certain tax loss carry forwards by $9
million, as the utilization likelihood was reduced due to the formation of the
joint venture and closure of the plants. NOVA Chemicals incurred additional
restructuring charges of $7 million ($4 million after-tax) for severance costs
related to these plant closures all of which have been paid to date.  NOVA Chemicals recorded a non-cash $76 million
($46 million after-tax) write-down related to the permanent closure of the
Chesapeake, Virginia, plant. Certain other non-productive assets were written
off, amounting to $9 million ($6 million after-tax).  Insurance Charge  NOVA Chemicals is one of many participants in
OIL and sEnergy  two mutual insurance companies formed to insure against
catastrophic risks. The Company continues to participate in OIL, an insurance
pool for property and liability; however, sEnergy, an insurance pool for
business interruption, is in the process of winding-up its operations. NOVA
Chemicals believes the Companys reserves are adequate to cover any outstanding
claims.  2007 NOVA Chemicals recorded a $4 million ($3 million
after-tax) credit due to the reduction of estimated future claims payments.  2006 and 2005 NOVA Chemicals recorded a $19 million ($13
million after-tax) charge in 2006 and a $22 million ($15 million after-tax)
charge in 2005 related to its share of potential incremental future payments
required to meet losses in OIL and sEnergy.  Tax Settlement  2005 An amount of $8 million ($5 million after-tax)
was recorded in 2005 related to the 2004 tax settlement that resulted from a
tax dispute regarding the deductibility of foreign taxes in certain returns
filed with the U.S. Internal Revenue Service prior to 1982.  Other Gains  2007 In
2007, NOVA Chemicals recognized other gains of $20 million ($14 million
after-tax) related to the sale of the previously shut-down Chesapeake,
Virginia, facility and other incidental land. NOVA Chemicals received cash
proceeds of $6 million for these transactions and entered into a $14 million
note receivable, bearing interest of 8.75% per annum and due in full in 2012,
in connection with the sale of the Chesapeake, Virginia, facility.  Managements
Discussion & Analysis   49


Liquidity and Capital Resources  NOVA Chemicals principal sources of liquidity
are cash flows from operations, cash on-hand, accounts receivable
securitization programs and borrowings under its revolving credit facilities.
NOVA Chemicals principal uses of cash are operating expenditures, capital
expenditures and debt service.  CASH FLOW The following is a summary of the cash inflows
and outflows, which contributed to the changes in NOVA Chemicals cash and
debt:  (millions of U.S. dollars)
  
  2007
  
  2006
  (1)
  2005
  (1)InflowsFunds from operations(2)
  
  $  557
  
  $ 311
  
  $  153Changes in non-cash
  working capital
  
  (228
  )
  39
  
  69Cash provided by
  operating activities
  
  329
  
  350
  
  222Proceeds from sale of
  assets, investments and other capital transactions
  
  6
  
  3
  
  11Common shares issued
  
  8
  
  3
  
  13Affiliate long-term
  notes
  
  
  
  3
  
  Tax-related settlement
  
  
  
  
  
  116Total inflows
  
  343
  
  359
  
  362OutflowsProperty, plant and
  equipment additions
  
  (156
  )
  (198
  )
  (419
  )Turnaround costs,
  long-term investments and other assets
  
  (42
  )
  (48
  )
  (176
  )Common share dividends
  
  (31
  )
  (29
  )
  (27
  )Stock options retired
  for cash
  
  (6
  )
  (2
  )
  (11
  )Common shares
  repurchased
  
  
  
  
  
  (125
  )Cash paid for business
  acquisitions
  
  (30
  )
  
  
  Foreign exchange on
  long-term debt and other
  
  (30
  )
  (1
  )
  (8
  )Total outflows
  
  (295
  )
  (278
  )
  (766
  )Net debt reduction
  (addition)(3)
  
  $   48
  
  $  81
  
  $(404
  )  (1)Certain
comparative figures have been restated to conform with adoption of new
accounting standards and to conform with the current periods presentation (see
page 81). (2)See
Supplemental Measures on page 54. (3)Includes
foreign exchange changes.  INFLOWS OF CASH Funds from operations increased to $557 million
in 2007 from $311 million in 2006 primarily due to an improvement in business
unit results due to record PE sales volume and margin improvements. Funds from
operations increased to $311 million in 2006 from $153 million in 2005 due to
improving business conditions despite the large non-cash asset write-downs that
occurred in 2006.  Operating working capital increased by $228
million in 2007 due to rapidly rising feedstock costs which increased the value
of inventory, as well as product price increases which increased receivables.
Operating working capital decreased by $39 million in 2006 primarily due to a
decrease in receivables and inventory. Operating working capital decreased by
$69 million in 2005 primarily due to lower-priced feedstock inventories.  In 2007, NOVA Chemicals sold the previously
closed Chesapeake, Virginia, site and other incidental land for $20 million, of
which $6 million was received in cash and $14 million in the form of a note
receivable due in 2012 and bearing interest of 8.75%.  Cash
collections of $116 million in 2005 were received from the settlement of a tax
dispute related to the deductibility of foreign taxes in certain returns filed
in the U.S. Internal Revenue Service prior to 1982.  50Managements
Discussion & Analysis


In
total, NOVA Chemicals generated $329 million in cash from operations in 2007
versus $350 million in 2006 and $222 million in 2005 (excluding the tax-related
settlement). Cash generation in 2007 and 2006 was primarily due to improved
business unit earnings.  OUTFLOWS OF CASH NOVA Chemicals capital expenditures were $156
million in 2007, compared to $198 million in 2006 and $419 million in 2005. The
reduction in capital expenditures reflects the significant investments made in
prior years to modernize and expand the Companys assets. In 2005, capital
expenditures reflect the spending on the Corunna ethylene flexi-cracker
expansion and modernization project, which increased the sites production
capacity and energy efficiency. During 2007, NOVA Chemicals spent $42 million
for turnaround costs, long-term investments and other assets compared to $48
million and $176 million in 2006 and 2005, respectively. The Company incurred
significant turnaround costs in 2005 to ensure its plants were at peak
operating performance. Capital expenditures in 2008 are expected to be
approximately $220 million.  No share repurchase programs were initiated in
2007 or 2006. In July 2005, a share repurchase program for up to
approximately 7.2 million shares was announced. The repurchase program was
terminated on July 26, 2006. The Company did not repurchase any shares
under this program. In July 2004, a share repurchase program for up to
approximately 7.5 million shares was initiated. NOVA Chemicals purchased the
entire number of shares available under that program for an aggregate cost of
$313 million of which $125 million was paid in 2005. The Company also paid
stock option exercise values in cash of $6 million in 2007, $2 million in 2006
and $11 million in 2005 in lieu of issuing stock.  In
2007, INEOS NOVA acquired the exclusive rights to production from the Sterling
Chemicals Texas City, Texas, styrene plant for $60 million, of which NOVA
Chemicals 50% share was $30 million. INEOS NOVA nominated zero production from
Sterling in December 2007, which prompted Sterling to permanently shut
down the Texas City plant.  In
2007, NOVA Chemicals was able to reduce debt despite the significant investment
in working capital from rapidly escalating feedstock and product prices. In May 2006,
the Company repaid $300 million of medium-term notes upon maturity. This debt
repayment was funded by an issuance in October 2005 of $400 million of
senior floating rate notes due 2013. In September 2005, the Company repaid
$100 million of 7% notes upon maturity. This debt repayment was funded by cash
on hand.  Commitments  NOVA Chemicals has various commercial
commitments, including operating leases for office space and railcars and
unconditional purchase obligations related to minimum amounts of feedstock and
other raw material purchases pursuant to agreements entered into to secure
short- and long-term supply. NOVA Chemicals has raw materials agreements that
are typically market-based. Obligations have been calculated using current
pricing for purposes of the chart below.  Contractual Cash ObligationsPayments
  due by periodas of Dec. 31, 2007
  (millions of U.S. dollars)
  
  Total
  
  2008
  
  2009 to
  2010
  
  2011 to
  2012
  
  After
  2012Long-term debt(1)
  
  $  1,803
  
  $   257
  
  $   570
  
  $   456
  
  $   520Operating leases(2)
  
  490
  
  51
  
  93
  
  76
  
  270Unconditional purchase
  obligations
  
  8,990
  
  2,811
  
  2,068
  
  945
  
  3,166Total contractual cash
  obligations
  
  $11,283
  
  $3,119
  
  $2,731
  
  $1,477
  
  $3,956 (1)Includes
current portion and bank loans. (2)Includes
property, railcar and other equipment leasing commitments   Managements Discussion &
Analysis  51


LIQUIDITY In 2007, the Company reduced net debt by $48
million. In 2006, the Company repaid $300 million of medium-term notes upon
maturity. This debt repayment was funded by an issuance, in October 2005,
of $400 million of senior floating rate notes due 2013. In September 2005,
the Company repaid $100 million of 7% notes upon maturity. The debt repayment
was funded by cash on hand.  NOVA
Chemicals is able to meet short-term liquidity needs through the generation of
funds from operations, cash on-hand, accounts receivable securitization
programs and borrowing capacity under revolving credit facilities. At Dec. 31,
2007, the Company had total liquidity of $552 million, comprised of $118
million cash on-hand and $434 million (net of letters of credit) of available
borrowing capacity under its revolving credit facilities.  CREDIT FACILITIES During
2007, NOVA Chemicals added a new $65 million revolving credit facility expiring
on Mar. 20, 2010. This facility is in addition to the two existing $100
million revolving credit facilities expiring Mar. 31, 2008 and Mar. 20,
2011, and the $325 million facility that expires June 30, 2010. As of Dec. 31,
2007, NOVA Chemicals had utilized $156 million of these facilities, of which
$50 million was in the form of letters of credit.  The
$100 million facility expiring on Mar. 31, 2008 and the $325 million
facility are governed by financial covenants. Using the covenant methodology in
the relevant revolving credit facilities, the debt-to-capitalization ratio was
48% at Dec. 31, 2007. NOVA Chemicals continues to comply with all
financial covenants under the applicable facilities. The $100 million facility
expiring on Mar. 20, 2011 and the $65 million facility have no financial
covenants associated with them.  Financial ConvenantsCovenant
  
  Requirement
  
  Dec. 31, 2007 ActualInterest Coverage(1)
  
  2.0x when net
  debt to total capitalization ratio > 40%
  
  4.7Debt to Total
  Capitalization(2)
  
  60 %
  
  48%Consolidated
  Shareholders Equity(3)
  
  $1.25 billion
  plus 50% of positive earnings
  
  $2.0 billion (1)     As defined in
NOVA Chemicals revolving credit facility, interest coverage is the ratio of
cash flow to interest expense for the preceding twelve-month period. (2)     As defined in
NOVA Chemicals revolving credit facility, debt includes items not in
accordance with Canadian GAAP, such as obligations under operating leases (if
in excess of a specified percentage of consolidated assets) and amounts
outstanding under the Companys accounts receivable securitization programs.
The amended definition also provides for debt to be offset by cash, other than
restricted cash and the amount of NOVA Chemicals wholly-owned subsidiarys
(NOVA Chemicals Inc.) preferred shares to be excluded in arriving at debt for
purposes of this covenant. As a result of NOVA Chemicals amendment to its
financial covenants governing these credit facilities, the
debt-to-capitalization ratio financial covenant was raised from 55% to 60%.
This amendments is in effect for the period Dec. 31, 2006 to Mar. 30,
2008. (3)     Consolidated shareholders equity is defined in accordance with
Canadian GAAP plus the amount of NOVA Chemicals wholly-owned subsidiarys
(NOVA Chemicals Inc.) preferred shares and excludes any write-down up to $950
million of NOVA Chemicals former STYRENIX business that occurred during the
fiscal year ended Dec. 31, 2006.  CURRENT DEBT MATURITIES OR REDEMPTIONS NOVA
Chemicals has $254 million of debt that is maturing or may be redeemed in the
coming year from principally two financings: (i) $126 million relates to
the Series A preferred shares discussed below under the heading Total Return Swapand (ii) $125
million relates to notes due August 2028, which are redeemable at the
option of the holders on Aug. 15, 2008 and are therefore classified as
current maturities. NOVA Chemicals plans to finance the maturities or
redemptions through cash flows from operations.  NOVA CHEMICALS OFF-BALANCE SHEET ACCOUNTS RECEIVABLE
SECURITIZATION PROGRAMS NOVA Chemicals off-balance sheet financing
activities are limited to participation in accounts receivable securitization
programs. NOVA Chemicals has engaged in the current programs since 1999 to
obtain lower financing rates than those available from other sources. The
capacity of trade accounts receivable sold to a third party on a revolving
basis is a maximum of $350 million. At Dec. 31, 2007, $264 million in
receivables were sold under the programs. Of the total amount, $128 million was
sold via a special purpose entity (SPE) that is 100% owned by NOVA Chemicals.
The SPE isolates the sold receivables and the related cash collections for the
exclusive benefit of the purchasers. The Company has no right to any cash
collected from these receivables; therefore, neither the receivables nor any
obligation to the purchasers is reflected in NOVA Chemicals Consolidated
Financial Statements. No other business is conducted through SPEs.  As
a result of the INEOS NOVA joint venture, the Company was required to pay down
$52 million at Oct. 1, 2007 related to receivables generated by the
business units and contributed by NOVA Chemicals to the INEOS NOVA joint
venture.    52  Managements Discussion & Analysis


INEOS NOVA OFF-BALANCE SHEET ACCOUNTS RECEIVABLE
SECURITIZATION PROGRAM In November 2006, the INEOS NOVA joint
venture (formerly NOVA Innovene European joint venture) entered into a
five-year,120 million accounts receivable securitization program. In 2007,
NOVA Chemicals changed its accounting for its interest in the European accounts
receivable securitization program to reflect that the accounts receivable
securitization transactions are recorded as sales of receivables and not a
financing arrangement. To properly reflect this change, NOVA Chemicals restated
the 2006 Balance Sheet by decreasing Cash and cash equivalents by $22 million
and Accounts receivable by $11 million and decreasing Long-term debt by $33
million. NOVA Chemicals 50% share of the outstanding balance was 37 million
and 9 million at Dec. 31, 2007 and Dec. 31, 2006, respectively. The
program expires in November 2011.  TOTAL RETURN SWAP In connection with the acquisition of styrenics
assets from Huntsman Corporation in 1998, the Companys subsidiary, NOVA
Chemicals Inc., issued retractable preferred shares with a liquidation
preference of $198 million as partial consideration. Holders of the retractable
preferred shares originally had the right to exchange the shares (a retraction)
for NOVA Chemicals common shares (plus NOVA Chemicals preferred shares if the
market value of such common shares was less than $198 million) on or after
Apr. 1, 2001. In September 2005, the terms of the retractable
preferred shares were amended to eliminate this right. In connection with this
amendment, the retractable preferred shares were re-designated as Series A
preferred shares. Additionally, the dividend rate on the Series A
preferred shares was reduced from 2% to 0.5% in December 2005.  NOVA
Chemicals has the right to repurchase the Series A preferred shares at any
time. However, any such repurchase may obligate NOVA Chemicals to pay an early
termination fee under the terms of the total return swap described below.  NOVA Chemicals also entered into a total return
swap with respect to the Series A preferred shares. On the initial closing
date of the total return swap in 2001, the counterparty through its hedge
providers purchased the Series A preferred shares from Huntsman
Corporation for $191 million plus accrued unpaid dividends. NOVA Chemicals
subsequently posted $65 million of cash collateral with the counterparty that
is held by the counterparty as a prepayment against settlement. Accordingly,
the equity notional amount of the Series A preferred shares is now set at
$126 million and on settlement of the total return swap at the end of the term,
NOVA Chemicals will owe the counterparty $126 million.  Under the terms of the total return swap: (i) the
counterparty pays NOVA Chemicals the total return on the Series A
preferred shares (periodic dividends plus positive changes in the equity value
of the Series A preferred shares upon termination of the swap); and (ii) NOVA
Chemicals pays the counterparty a spread to London Inter-Bank Offered Rate
(LIBOR), as well as any negative changes in the equity value of the Series A
preferred shares upon termination of the swap. Because of its short term nature
and immaterial balance sheet effect, the derivative feature of the total return
swap is reported as part of the Series A preferred shares and is not
accounted for separately. All periodic dividends, changes in equity value of
the Series A preferred shares and interest payments are charged to
earnings as incurred.  If
the equity value of the Series A preferred shares decreases by a certain
amount, NOVA Chemicals is required to post maintenance collateral. Once the
margin-posting requirement is triggered, if the equity value of the Series A
preferred shares increases by 5% or more, any excess margin may be returned to
NOVA Chemicals. Changes in equity value of the Series A preferred shares
during the term of the swap will be determined based on changes in the average
price of the outstanding 6.5% medium-term notes due 2012, issued by NOVA
Chemicals.  If NOVA Chemicals defaults on other debt of at
least $25 million or the closing price of its common shares is $12.00 or less
and upon certain other events, the counterparty would have the right to sell
the Series A preferred shares to a third party and terminate the swap.
NOVA Chemicals would then owe the counterparty the difference between the
actual sale price received by the counterparty and $126 million. Subsequent to
such termination of the swap, NOVA Chemicals may, at its option, repurchase the
preferred shares for $198 million plus accrued and unpaid dividends.  The
total return swap was scheduled to terminate on Oct. 31, 2007. However, in
October 2007, NOVA Chemicals and the counterparty agreed to extend the
term until Oct. 31, 2008. Because the term expires within the next 12
months, these Series A preferred shares have been reclassified under
Long-term debt due within one year on the Consolidated Balance Sheets presented
on page 72 of this Annual Report.   Managements Discussion
& Analysis  53


Capitalization  NOVA Chemicals net debt-to-total capitalization
ratio was 60.3% at Dec. 31, 2007, 75.9% at Dec. 31, 2006, and 59.8%
at Dec. 31, 2005. The ratio declined in 2007 compared to 2006 as cash
on-hand increased as well as shareholders equity improved with positive
earnings.  The
increase in the ratio from 2005 to 2006 was mainly a result of a decline in
shareholders equity. In December 2006, NOVA Chemicals wrote down the
STYRENIX assets by $860 million ($772 million after-tax), which negatively
impacted shareholders equity.  Financial Ratios  Dec. 31 (millions of U.S. dollars, except as
  noted)
  
  2007
  
  2006
  
  2005Long-term debt(1)
  
  $1,797
  
  $1,780
  
  $1,974Less: cash and cash
  equivalents,
  
  (118
  )
  (53
  )
  (166
  )restricted cash
  and other assets
  
  (4
  )
  (7
  )
  Total debt, net of cash,
  cash equivalents, restricted cash and other assets
  
  1,675
  
  1,720
  
  1,808Shareholders equity
  
  1,101
  
  546
  
  1,215Total capitalization(2)
  
  $2,776
  
  $2,266
  
  $3,023Net debt to total
  capitalization(3)
  
  60.3
  %
  75.9
  %
  59.8
  % (1)     On Jan. 1, 2005, NOVA Chemicals adopted new Canadian
accounting standards, which require the Series A preferred shares of NOVA
Chemicals subsidiary, NOVA Chemicals Inc., to be classified as debt. Maturity
dates for NOVA Chemicals current and long-term debt range from October 2008
to August 2028. Long-term debt includes current portion of long-term debt,
the secured revolver and bank loans. (2)     Total capitalization reflects shareholders equity and total
debt, net of cash, cash equivalents, restricted cash and other assets. (3)     Computed after taking into account the reclassification of the Series A
preferred shares to long-term debt due within one year (see Supplemental
Measures below).   Senior Debt Ratings(1)Senior
  Unsecured DebtDominion Bond Rating
  Service Limited
  
  BB (negative)Fitch Ratings Ltd.
  
  BB- (stable)Moodys Investor Service
  
  Ba3 (negative)Standard &
  Poors
  
  B+ (stable) (1)     Credit ratings are not recommendations to
purchase, hold or sell securities and do not comment on market price or
suitability for a particular investor. There is no assurance that any rating
will remain in effect for any given period of time or that any rating will not
be revised or withdrawn entirely by a rating agency in the future.  SUPPLEMENTAL MEASURES In
addition to proiding measures in accordance with Canadian GAAP, NOVA Chemicals
presents certain supplemental measures as follows. The following supplemental
measures do not have any standardized meaning prescribed by Canadian GAAP and
are therefore unlikely to be comparable to similar measures presented by other
companies.  Adjusted EBITDAequals
net income (loss) before interest expense, income taxes, depreciation and
amortization, other gains and losses, and restructuring charges. This measure
is provided to assist investors in determining NOVA Chemicals ability to
generate cash.  Funds from operationsassists
investors in determining NOVA Chemicals cash flow, before changes in working
capital and other items. Refer to page 50 for reconciliation.  Net debtequals
long-term debt, net of cash, cash equivalents, restricted cash and other
assets.  Net debt to total capitalizationequals
net debt, as defined above, divided by the sum of net debt and shareholders
equity. This measure can be used to analyze the leverage of the Company.  Operating income (loss)equals
net income (loss) before income taxes, interest expense and other gains and
losses. This measure is provided to assist investors in analyzing NOVA
Chemicals income from operations.  54  Managements Discussion & Analysis


Common shareholders equity at
year-endis equal to common
shareholders equity divided by outstanding common shares.  Return (loss) on average common
equityis equal to net income
(loss) divided by average common equity.  Reconciliation of Net Income to
  Adjusted EBITDA(millions of U.S. dollars)
  
  2007
  
  2006
  
  2005Net income (loss)
  
  $347
  
  $(703
  )
  $(101
  )Income tax expense
  (recovery)
  
  51
  
  (144
  )
  (1
  )Other gains
  
  (20
  )
  (1
  )
  (8
  )Restructuring charges
  
  86
  
  985
  
  168Interest expense (net)
  
  175
  
  168
  
  113Depreciation and
  amortization
  
  246
  
  299
  
  290Adjusted EBITDA
  
  $885
  
  $  604
  
  $  461  Dividends and Distributions  COMMON SHARE DIVIDENDS Historically, NOVA Chemicals has paid quarterly
dividends on its common shares at the rate of $0.10 Canadian per share,
representing an aggregate of $0.40 Canadian per share annually. In 2007, a
total of $31 million in dividends was paid on the Companys common shares.
There are currently no material contractual restrictions on NOVA Chemicals
ability to declare and pay dividends on its common shares. The declaration and
payment of dividends is at the discretion of NOVA Chemicals Board of
Directors, which will consider earnings, capital requirements, financial
condition and other relevant factors. It is, however, the Companys current
intention to retain most of its earnings to support current operations, reduce
debt and continue to pay dividends at historic levels.  SERIES A PREFERRED SHARE DIVIDENDS NOVA
Chemicals pays 0.5% annual dividends on the $198 million Series Apreferred
shares of its subsidiary. On Jan. 1, 2005, NOVA Chemicals adopted new
Canadian accounting standards that require these instruments to be classified,
on a retroactive basis, as liabilities rather than equity. In addition, any
dividends associated with these preferred shares have been reclassified to
interest expense. All prior periods have been restated.  Application of Critical Accounting Estimates  The
following represents the estimates most critical to the application of NOVA
Chemicals accounting policies. For a summary of the Companys significant
accounting policies, please see Note 2 to the annual Consolidated Financial
Statements. Management has discussed the development and selection of these
critical accounting estimates with the Audit, Finance and Risk Committee of
NOVA Chemicals Board of Directors, and the Audit, Finance and Risk Committee
has reviewed the disclosure relating to such estimates in this Managements
Discussion & Analysis.  Inventories.NOVA
Chemicals carries inventories at the lower of cost or net realizable value.
Cost is determined on a first-in, first-out (FIFO) basis with no allocation of
fixed production overhead. NOVA Chemicals uses the FIFO method because it
believes the FIFO basis is a better method to match actual costs incurred with
the related revenue.  Property, Plant and Equipment (PP&E).NOVA
Chemicals PP&E consists primarily of land, buildings for producing
petrochemicals and manufacturing equipment. NOVA Chemicals values PP&E at
historical cost. Financing costs incurred during major construction projects
are capitalized as part of the cost of the asset until the asset is available
for use. Costs related to turnaround activities are capitalized and amortized
over the period remaining until the next turnaround activity, while maintenance
and repair costs are expensed as incurred.  Judgmental
aspects of accounting for PP&E involve estimates of the life of the assets,
the selection of an appropriate method of depreciation and determining whether
an impairment of NOVA Chemicals assets exists and measuring such an
impairment. These assessments are critical due to their potential impact on
earnings and equity.   Managements Discussion
& Analysis  55


NOVA Chemicals is able to choose from
alternative methods of depreciation. The straight-line method was chosen rather
than other methods, such as units of production, because the straight-line
method is more conservative, requires less estimation and judgment and is a
systematic and rational basis reflecting the period over which the assets
benefit is realized.  Net PP&E at Dec. 31, 2007, totaled
approximately $3 billion. PP&E is tested for impairment at the lowest level
for which identifiable cash flows exist, which in NOVA Chemicals case is the
plant asset level. Impairment testing of the plant assets occurs whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. The Company assesses recoverability by comparing
the carrying amount of the asset group to the estimated future cash flows
expected to be generated by the assets, undiscounted and without interest
charges. If an asset is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the assets carrying amount
exceeds its fair value.  The
estimate of PP&E fair value is based on estimated discounted future cash
flows expected to be generated by the asset. The assumptions underlying cash
flow projections represent managements best estimates at the time of the
impairment review. Factors that management must estimate include: industry and
market conditions, sales volume and prices, costs to produce, inflation, etc.
Changes in key assumptions or actual conditions, which differ from estimates,
could result in an impairment charge. The Company uses reasonable, supportable
and, where available, third-party, industry expert assumptions when performing
impairment reviews.  NOVA
Chemicals Olefins/Polyolefins business has an established, long-term record of
profitability and, based on current asset carrying values and expected future
cash flows, NOVA Chemicals has concluded the carrying value of the assets of
the Olefins/Polyolefins business unit is appropriate.  During 2006, NOVA Chemicals restructured its
traditional Styrenics business into two business units, Performance Styrenics
(which included North American EPS and Styrenic Performance Products) and
STYRENIX (which included the reportable segments of Styrene Monomer, North
American SPS and NOVA Chemicals interest in NOVA Innovene, the  50:50
European joint venture with INEOS). In 2006, the Company recorded an after-tax
charge of $46 million to write-off the asset value of its Chesapeake, Virginia,
SPS plant and another $46 million to write-off the asset value of NOVA
Innovenes Carrington, UK, SPS facility as a result of the closure of these
STYRENIX plants. As of Dec. 31, 2006, NOVA Chemicals used third-party
forecasts of market conditions and product margins to assess the recoverability
through projected future cash flows of the STYRENIX plant carrying values. The
assets carrying value at Dec. 31, 2006, prior to write-down, was $1.1
billion. Fair value was estimated to be $242 million. Thus, the assets were
written down to the estimated fair value, resulting in a non-cash charge of
$860 million ($772 million after-tax).  On Oct. 1, 2007, NOVA Chemicals and INEOS
expanded their European joint venture to include the North American Styrene and
SPS businesses of both companies. The expanded joint venture is called INEOS
NOVA. The contribution of assets was completed on a book value basis. Based on
current asset carrying values and expected future cash flows of the expanded
INEOS NOVA joint venture, NOVA Chemicals concluded that the carrying value of
the assets as of Dec. 31, 2007 was appropriate.  NOVA Chemicals also conducted a review of its
Performance Styrenics assets. Based on current asset carrying values and
expected future cash flows of the Performance Styrenics assets, NOVA Chemicals
concluded that the carrying value of the business unit as of Dec. 31, 2007
and 2006 was appropriate.  Asset Retirement Obligations.United
States and Canadian GAAP require companies to record liabilities associated
with future plant decommissioning and site restoration costs on both active and
inactive plants at their fair value, based on a discounted value of the
expected costs to be paid when the assets are retired. At Dec. 31, 2007,
NOVA Chemicals had $23 million of accumulated reserve for these activities.  As a result of the commencement of the INEOS
NOVA joint venture on Oct. 1, 2007, the asset retirement obligations
associated with the plants that were contributed to the joint venture were
removed from NOVA Chemicals liabilities. However, the joint venture was
required to establish asset retirement obligations associated with the assets
contributed by NOVA Chemicals and INEOS, and NOVA Chemicals included 50% of
this obligation through proportionate consolidation in its results.  During
2006 and 2005, there were no business conditions or decisions that resulted in
a requirement to increase or decrease the asset retirement obligations
associated with active or divested sites. The obligations were increased as  56  Managements Discussion & Analysis


a
result of the accretion of the liabilities. For inactive sites or sites that
became inactive in 2007, 2006 and 2005, the reserves were generally considered
adequate for the environmental remediation work required.  In 2003, the Company undertook an evaluation of
the costs to conduct decommissioning and site restoration to satisfy the
projected obligations under applicable environmental requirements upon
termination of operations at currently operating plant sites. Canadian GAAP
required that the present value of inflation-adjusted decommissioning and site
restoration costs be recorded as increases to the carrying values of the assets
at that time and that this amount be depreciated over the estimated remaining
lives of the assets. NOVA Chemicals determined that $131 million, at that time,
might be required to decommission and restore operating plant sites. This
amount does not include any deduction for salvage or land value that may be
realized; however, these will be taken into consideration as the assets are
depreciated. Because these plants may be in operation in excess of 40 years,
significant uncertainty exists concerning the nature of the decommissioning and
site restoration activities that may be required. Furthermore, significant
judgment is involved in the estimation process, because the degree of natural
attenuation, evolution of new technologies and potential land uses may mitigate
future environmental liabilities and potential costs. There have been no
changes in assumptions since the initial evaluation.  The
present value of this future amount (using a credit-adjusted risk-free rate of
10.5% to discount the estimated future cash flows) was approximately $19
million and was accrued in 2003 in anticipation of these activities. This
estimated liability will increase, or accrete, each year over the lives of the
active plants until it reaches the $225 million to $250 million expected to be
incurred on closure of the plants. The resulting expense is referred to as
accretion expense and is included in operating expenses. In each of 2007, 2006
and 2005, this expense was $2 million.  Pension Plans.NOVA
Chemicals sponsors both defined benefit and defined contribution pension
arrangements covering substantially all of its employees. For the defined
contribution plans, the cost is expensed as earned by employees. For the
defined benefit plans, obligations and expense are determined using actual
discount rates and assumptions for mortality, termination, retirement and other
rates, as well as the expected return on plan assets and the rate of increase
for future compensation. The Company uses current mortality rate tables
commonly used for actuarial calculations and selects other assumptions in line
with past experience and current economic conditions. The return on plan assets
is not the actual return, but an expected rate based on estimates of long-term
rates of return for various asset classes and the investment strategy of the
plans. The discount rate is based on actual market interest rates at the
measurement date on high quality debt instruments with cash flows that match
the timing and amount of expected benefit payments of NOVA Chemicals plans.  Canadian GAAP requires that actuarial gains and
losses be recognized in NOVA Chemicals income using a systematic and
consistent methodology. For defined benefit pensions, the Company amortizes
such gains and losses over the estimated remaining service lifetime of the
employee group to the extent these gains or losses exceed 10% of the greater of
the accrued benefit obligation or market value of assets. This alternative
avoids recognizing into income large unrealized gains or losses in individual
years. Immediate recognition of such gains and losses would introduce
significant volatility into NOVA Chemicals earnings. Cumulative unrealized
actuarial gains and losses have ranged from a $61 million gain at Dec. 31,
1999, to a $229 million loss at Dec. 31, 2007. On Dec. 31, 2007,
unrealized actuarial losses were $229 million.  On
Sep. 28, 2007, NOVA Chemicals amended certain defined benefit pension
plans in the United States. The amendments provided for benefits to be frozen
as of Jan. 1, 2008 and transition relief to be provided to plan
participants meeting certain age and service requirements. At the same time,
NOVA Chemicals also enhanced benefits under one of its defined contribution
plans. These actions serve to ascertain more certainty with regards to pension
cost.  A total of $52 million, $65 million and $49
million was contributed in 2007, 2006 and 2005, respectively, to all of NOVA
Chemicals defined benefit pension plans. The contributions were based on the
most recently filed valuations with pension regulators in various countries.
NOVA Chemicals contributed $8 million, $8 million and $7 million in 2007, 2006
and 2005, respectively, to the defined contribution plans.  Funding
for NOVA Chemicals defined benefit pension plans is largely driven by the
North American pension plans, as they constitute a significant portion of the
Companys pension plan assets and obligations. For 2008, NOVA Chemicals
funding is expected to be approximately $40 million as employees accrue
additional pension benefits and special payments are made to cover the
shortfall between assets and liabilities. Contributions to defined contribution
plans for 2008 are expected to be $14 million. The increase in funding to
defined contribution plans in 2008 reflects changes made to the Companys U.S.
pension plans discussed above.   Managements Discussion
& Analysis  57


Income Taxes.The
objective of accounting for income taxes is to recognize the amount of taxes
payable or refundable for the current and future years for events that have
been recognized in NOVA Chemicals financial statements or tax returns.
Judgment is required in assessing future tax consequences. Variations in the
actual outcome of these future tax consequences could materially impact NOVA
Chemicals financial position or results of operations.  NOVA Chemicals has a valuation allowance and a
tax reserve to provide for uncertain tax positions. The valuation allowance is
used in situations where it is uncertain that the recorded tax benefit can be
utilized in the future. This allowance primarily relates to the uncertain
utilization of tax loss carryforwards. The allowance was increased by $14
million in 2007, $226 million in 2006 and $16 million in 2005. The tax reserve
is used to provide for potential disputes with tax authorities. During 2007,
the reserve was reduced by $13 million due to the successful resolution of a
dispute with the Belgian tax authorities. There were no changes to the tax
reserve in 2006 and 2005  Accounting Standards  CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS (CICA) 1506,
CHANGES IN ACCOUNTING POLICIES AND ESTIMATES AND ERRORS This
new standard applies to fiscal years beginning on or after Jan. 1, 2007.
It provides that an entity is permitted to change accounting policies only when
it is required by a primary source of GAAP, or when the change results in a
reliable and more relevant presentation in the financial statements.  CICA 1530, COMPREHENSIVE INCOME Adopted
by NOVA Chemicals on Jan. 1, 2007, this standard establishes standards for
reporting and presentation of comprehensive income (loss), which is defined as
the change in equity from transactions and other events and circumstances from
non-owner sources. As a result of adopting CICA Section 1530, two new
statements, Consolidated Statements of Changes in Shareholders Equity and
Consolidated Statements of Comprehensive Income (Loss), have been presented.
Comprehensive income (loss) is composed of NOVA Chemicals net income (loss)
and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains (losses) on available for sale financial assets, foreign
currency translation gains (losses) on the net investment in self-sustaining
foreign operations and changes in the fair market value of derivative
instruments designated as cash flow hedges (not including the amount of
ineffectiveness, if any), all net of income taxes. The components of
comprehensive income (loss) are disclosed in the Consolidated Statements of
Changes in Shareholders Equity and Consolidated Statements of Comprehensive
Income (Loss).  CICA 3251, EQUITY This
standard establishes rules for the presentation of equity and changes in
equity during the reporting periods. The requirements of this Section have
been effected in the presentation of the Consolidated Statements of Changes in
Shareholders Equity. This standard was adopted by NOVA Chemicals on Jan. 1,
2007.  CICA 3862, FINANCIAL INSTRUMENTS  DISCLOSURE AND CICA 3863,
FINANCIAL INSTRUMENTS These two standards replace CICA Section 3861,
Financial Instruments  Disclosure and Presentation. The new standards revise
and enhance the disclosure requirements and carry forward, substantially
unchanged, the presentation requirements. These new standards emphasize the
significance of financial instruments for the entitys financial position and
performance, the nature and extent of risks arising from financial instruments
and how these risks are managed. These new standards are applicable to interim
and annual periods relating to fiscal years beginning on or after Oct. 1,
2007. NOVA Chemicals has chosen to early adopt these new standards as of Dec. 31,
2007.  CICA 3855, FINANCIAL INSTRUMENTS  RECOGNITION AND
MEASUREMENT AND CICA 3865, HEDGES These standards are effective for interim and
annual periods relating to fiscal years beginning on or after Oct. 1,
2006. The required effective date for NOVA Chemicals was Jan. 1, 2007.
CICA 3855 is intended to harmonize Canadian, U.S. and International Financial
Reporting Standards (IFRS) and establishes standards for recognition and
measurement of financial assets, liabilities and non-financial derivatives.
Previous standards addressed disclosure and presentation matters only. All
financial instruments, including derivatives, are included on the Consolidated
Balance Sheets and are measured at fair value, except for held to maturity
investments, loans and receivables and other financial liabilities, which are
measured at amortized cost. CICA 3855 also requires financial and non-financial
derivative instruments to be measured at fair value and recorded as either
assets or liabilities, with the exception of non-financial derivative contracts
that were entered into and continue to be held for the purpose of receipt or
delivery of a non-financial item in accordance with NOVA Chemicals    58   Managements Discussion & Analysis


expected purchase, sale or usage requirements.
Certain derivatives embedded in non-derivative contracts must also be measured
at fair value. Any changes in fair value of recognized derivatives are included
in net income in the period in which they arise unless specific hedge
accounting criteria are met. Also, it is NOVA Chemicals policy that
transaction costs related to all financial assets and liabilities be added to
the acquisition or issue cost, unless the financial instrument is classified as
held-for-trading, in which case the transaction costs are recognized
immediately in net income. Because the standard requires long-term debt to be
measured at amortized cost, certain deferred debt discount and issuance costs
that were previously reported as long-term assets on the Consolidated Balance
Sheets were reclassified on a prospective basis and are now being reported as a
reduction of the respective debt obligations ($17 million was reclassified as
of Jan. 1, 2007). CICA 3865, which replaces and expands AcG-13, Hedging Relationshipsand
the hedging guidance in CICA 1650, Foreign Currency
Translationsets the
standards for when and how hedge accounting may be applied, further restricting
which hedging relationships qualify for hedge accounting. Also included in the
standard is the concept that the ineffective portion of an otherwise qualifying
hedging relationship would be included in earnings of the period. Hedge
accounting ensures the recording, in the same period, of counterbalancing
gains, losses, revenues and expenses from designated derivative financial
instruments as those related to the hedged item. As a result of adopting CICA
3865, NOVA Chemicals has reclassified, on a prospective basis from various
current and long-term liability accounts to Long-term debt on the Consolidated
Balance Sheets, a deferred gain of $4 million which represented the remaining
gain on settlement of a derivative instrument previously (under AcG-13)
designated as a hedge.  CICA 3251, EQUITY AND CICA 3861, FINANCIAL INSTRUMENTS -
DISCLOSURE & PRESENTATION The
standards were updated in October 2006 for additional disclosure and
presentation requirements to comply with CICA 3855, CICA 3865 and CICA 1530.
NOVA Chemicals adopted the disclosure and presentation changes, as required,
effective Jan. 1, 2007.  EIC 166, ACCOUNTING POLICY FOR TRANSACTION COSTS This standard, issued by the Emerging Issues
Committee (EIC) requires an entity to disclose the accounting policy for
transaction costs for all financial assets/liabilities other than those
classified as held for trading. Transaction costs can either be recognized in
net income or added to the initial carrying amount of the asset/liability it is
directly attributable to. The same accounting policy must be chosen for all similar
financial instruments, but a different accounting policy may be chosen for
financial instruments that are not similar. EIC 166 should be applied
retrospectively to transaction costs accounted for in accordance with CICA Section 3855
in financial statements issued for interim and annual periods ending on or
after Sept. 30, 2007. NOVA Chemicals accounting policy with respect to
transaction costs has been to capitalize all transaction costs for all
financial instruments (except for those classified as held for trading). This
policy did not change as a result of adopting EIC 166.  EIC 162, STOCK-BASED COMPENSATION FOR EMPLOYEES ELIGIBLE TO
RETIRE BEFORE THE VESTING DATE This standard, issued by the EIC, clarifies
inconsistencies regarding accounting for stock-based awards granted to
employees who are either eligible for retirement at the grant date or will be
eligible before the end of the vesting period. Compensation costs for
stock-based awards for employees eligible to retire at the grant date must be
recognized at the grant date. Compensation costs for stock-based awards for
employees who will become eligible to retire during the vesting period should
be recognized over the period from the grant date to the date on which the
employee becomes eligible to retire. Application of this standard has resulted
in acceleration of the recognition of stock-based compensation expenses. EIC
162 is to be applied retroactively, with restatement of prior periods and is
effective for interim and annual periods ending on or after Dec. 31, 2006.
Accordingly, NOVA Chemicals adopted EIC 162 in the fourth quarter of 2006.
Prior periods presented have been retroactively adjusted, reducing net loss in
2005 by $3 million ($0.04 per share diluted).  MEASUREMENT DATE Effective
Jan. 1, 2006, NOVA Chemicals changed the measurement date for reporting
related to its defined benefit plans from Nov. 30 to Dec. 31. This
change in measurement date has been used consistently in 2007 and will be for
future periods. The change in measurement date had no significant impact on the
2006 Consolidated Financial Statements.  Market and Regulatory Risk  The Audit, Finance and Risk Committee of NOVA
Chemicals Board of Directors regularly reviews foreign exchange, interest rate
and commodity hedging activity and monitors compliance with the Companys
hedging policy. NOVA Chemicals policy prohibits the use of financial
instruments for speculative purposes and limits hedging activity to the    Managements
Discussion & Analysis   59


underlying net economic exposure. See additional
information in Note 20 on page 107. Additional risks inherent in the
Companys business and operations are discussed in the Companys Annual
Information Form among other publicly filed disclosures.  FOREIGN EXCHANGE HEDGING NOVA Chemicals has U.S., Canadian and
European-based petrochemical operations. As a result, the Company is exposed to
currency risks from its investing, financing and operating activities. Risks
from foreign currencies may be hedged using cash contracts, spot contracts,
forward contracts and swap transactions to minimize the gains and losses due to
short-term foreign currency exchange rate fluctuations. The exposure that may
be hedged in accordance with the Companys foreign exchange policy is limited
to operational transaction exposure and is generally used only to balance out
NOVA Chemicals cash positions. Foreign currency risks resulting from the
translation of assets and liabilities of foreign operations into NOVA Chemicals
functional currency are generally not hedged; however, NOVA Chemicals may
decide to hedge this risk under certain circumstances.  COMMODITY PRICE RISK MANAGEMENT AND HEDGING NOVA Chemicals sells petrochemical products at
prices denominated in various currencies, purchases energy commodities, invests
in foreign operations, issues short- and long-term debt, including amounts in
foreign currencies; and utilizes a number of stock-based compensation plans.
These activities result in exposures to fluctuations in foreign currency
exchange rates, commodity prices, interest rates and common stock prices. NOVA
Chemicals may choose 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
exchange rate, commodity price, interest rate and stock price volatility risks.
NOVA Chemicals enters into derivative financial instruments with high credit
quality counterparties and diversifies its positions among such counterparties
in order to reduce its exposure to credit losses. In addition, the credit risk
of financial instruments with a positive fair value is minimized by way of
limit management, which sets individual relative and absolute figures for risk
exposure depending on the counterpartys credit rating. The Company has not
experienced any credit losses on derivatives during the three-year period ended
Dec. 31, 2007. Negative fair value is also minimized by way of limit
management. If the aggregate negative fair value is at or above the corporate
market risk limit, the appropriate level of management must be immediately
notified and an appropriate course of action will be determined. These
derivative instruments are not utilized for trading or speculative purposes.  NOVA
Chemicals uses commodity-based derivatives to manage its exposure to price
fluctuations on crude oil, refined products and natural gas transactions. The
instruments are used to moderate the risk of adverse short-term price
movements. Occasionally, longer-term positions will be taken to manage price
risk for anticipated supply requirements. The extent to which commodity-based
derivatives are used depends on market conditions and requires adherence to the
Companys hedging policy. NOVA Chemicals limits its positions in futures
markets to proprietary feedstock requirements and does not use derivative
instruments for speculative purposes.  NOVA
Chemicals may choose to use commodity-based derivatives to manage its exposure
to price fluctuations on crude oil, refined products and natural gas
transactions. The instruments are used to moderate against adverse short-term
price movements. Occasionally, longer-term positions will be taken to manage price
risk for anticipated supply requirements.  When
considered appropriate, NOVA Chemicals enters into interest rate swaps in order
to manage the fixed and floating interest rate mix on its long-term debt
portfolio. The interest rate swap agreements generally involve the periodic
exchange of payments without the exchange of the notional principal amounts
upon which the payments are based.  Changes
in the fair value of derivative instruments are reported in income or
Accumulated Other Comprehensive Income (AOCI), depending on the use of the
derivative and whether it qualifies for hedge accounting treatment under the
provisions of CICA 3865, Hedges.
Unrealized gains and losses on derivative instruments qualifying as cash flow
hedges are recorded in AOCI to the extent the hedges are effective, until the
underlying transactions are recognized in Feedstock and operating costs on the
Consolidated Statements of Income (Loss). To the extent effective, unrealized
gains and losses on derivative and non-derivative instruments used as hedges of
the Companys net investment in foreign operations are recorded in AOCI. The
ineffective portions of cash flow hedges and hedges of net investment in
foreign operations, if any, are recognized in income immediately.    60   Managements Discussion & Analysis


Unrealized
gains and losses on derivative instruments designated and qualifying as fair
value hedging instruments, as well as the offsetting unrealized gains and
losses on the hedged items, are recognized in Feedstock and operating costs on
the Consolidated Statements of Income (Loss) in the same accounting period.
Unrealized gains and losses on derivative instruments that do not qualify or
are not designated as hedges are marked-to-market at the end of each accounting
period with the results included in feedstock and operating costs on the
Consolidated Statements of Income (Loss).  EQUITY FORWARD CONTRACTS Equity
forward contracts are used to manage exposures to fluctuations in NOVA
Chemicals stock-based compensation costs, as the costs of the plans vary as
the market price of the underlying common shares changes. For further details
on NOVA Chemicals equity forward contracts, see Stock-Based Compensation,
Forward Transactions and Profit Sharing on page 47.  CREDIT RISK MANAGEMENT NOVA
Chemicals is exposed to credit risk on financial instruments in cases where a
counterparty to an instrument fails to make payment of unrealized gains. The
Company has established a limit on contingent exposure for each counterparty,
based on the counterpartys credit rating. Credit exposure is managed through
credit approval and monitoring procedures. Concentration of credit risk can
result primarily from receivables, as certain customer groups are located in
the same geographic area and operate in the same industry. NOVA Chemicals
manages its credit risk relating to these receivables through credit approval
and monitoring procedures.  GOVERNMENT REGULATION AND ENVIRONMENTAL PROTECTION Like
other companies in the plastics and chemical industries, NOVA Chemicals is
subject to extensive environmental laws and regulations at all levels of
government. These laws and regulations concern the manufacturing,processing and
importation of certain petrochemical substances; discharges or releases (air,
land or water); and the generation, handling, storage, transportation,
treatment, disposal and clean-up of regulated materials. Although NOVA
Chemicals believes that its businesses, operations and facilities are being
operated in material compliance with applicable environmental laws and
regulations, the operation of any petrochemical facility and the distribution
of petrochemical products involve the risk of accidental discharges of toxic or
hazardous materials, personal injury and property and environmental damage.  Furthermore,
applicable environmental laws and regulations are complex, change frequently
and provide for substantial fines, regulatory penalties and criminal sanctions
in the event of non-compliance. In addition, substantial costs can sometimes
result from orders that require rectification of environmental conditions. NOVA
Chemicals cannot provide assurance that it will not incur substantial costs or
liabilities as a result of such occurrences or the enforcement of environmental
laws.  From
time-to-time, NOVA Chemicals has entered into various consent agreements or
been subject to administrative orders for pollution abatement or remedial
action. Under some environmental laws, NOVA Chemicals may be subject to strict
and, under certain circumstances, joint and several liability for the costs of
environmental contamination on or from its properties and at off-site locations
where NOVA Chemicals disposed of or arranged for disposal or treatment of
hazardous substances and may also incur liability for related damages to
natural resources. NOVA Chemicals has been named as a potentially responsible
party under the U.S. Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or its state equivalents, at several third-party sites.
NOVA Chemicals cannot provide assurance that significant costs will not be
incurred.  In
1985, NOVA Chemicals adopted the Responsible Care initiative as the basis for
its overall safety, health, environment, security and risk program. Responsible
Care is a global chemical industry performance initiative created by the
Canadian Chemical Producers Association (CCPA) in 1985 and adopted by the
American Chemistry Council (ACC) in the United States in 1988. Responsible Care
is currently practiced by chemical industry associations in more than 53
countries worldwide. Responsible Care requires participants to commit to the
responsible management of the total life cycle of their products. In 2006, the
ACC honored NOVA Chemicals as co-winner of their Responsible Care Leadership
award in the medium-sized company category. The award recognizes outstanding
leadership and performance under the Responsible Care initiative.    Managements
Discussion & Analysis   61


NOVA Chemicals is active in a number of
voluntary environmental initiatives to reduce emissions and wastes from its
facilities. NOVA Chemicals participates in the CCPAs National Emissions
Reduction Master plan and is also directly involved in the Canadian Chemical
Industrys Environmental Performance Memoranda of Understanding with the
Federal, Ontario and Alberta governments, which is a voluntary program designed
to achieve reductions in air emissions from the chemical industry. Through a
greenhouse gas emissions management program, NOVA Chemicals is committed to
economically viable solutions to climate change concerns. This includes NOVA
Chemicals participation in the joint venture with ATCO Power Canada Ltd. and
EPCOR Power Development Corporation to operate a natural gas-fired cogeneration
power plant at its production site at Joffre, Alberta. This joint venture has
substantially reduced greenhouse gas emissions when compared with supplying the
electrical needs of the Joffre site from Albertas primarily coal-fired
electrical generation facilities.  In 2002, Canada ratified the Kyoto Protocol
thereby committing it to legislating reductions in air emissions that
contribute to climate change.  On
Apr. 27, 2007, the Canadian federal government released its plan for
industrial air emission reductions with its Turning the Corner plan including
an ultimate goal of reducing greenhouse gas emissions by 20% from 2006 levels
by the year 2020 and by 60 to 70% by 2050. Existing facilities will be required
to reduce greenhouse gas emissions intensity by 18% from 2006 levels beginning
in the year 2010. The federal plan will be implemented through a series of
amendments to existing regulations, which are expected to begin in the spring
of 2008. As a result, legally binding greenhouse gas emission reduction targets
will be imposed on NOVA Chemicals operations in Canada.  In addition to the anticipated federal
regulations, most of the Canadian provinces are also contemplating some form of
greenhouse gas emissions reduction legislation. In Alberta, the Specified Gas Emitters Regulationunder
the Climate Change and Emissions Management
Actcame into force on July 1, 2007, imposing annual reductions
targets on facilities that emit greenhouse gases. Established facilities are
required to reduce carbon dioxide equivalent gases by 12% from a 2003-2006
average emissions intensity (baseline). Baseline emissions data were required
to be submitted by each facility by Dec. 31, 2007. Albertas ultimate goal
is to reduce greenhouse gas emission relative to gross domestic product by 50%
from 1990 levels by 2020.  There is no national greenhouse gas emissions
reduction program that imposes reduction targets in the United States, but some
states have announced an intention to implement such programs and NOVA
Chemicals operations in the United States could have targets imposed. INEOS
NOVAs European operations are also located in countries where greenhouse gas
emission targets are currently being imposed.  NOVA
Chemicals is developing and implementing a variety of initiatives to reduce
greenhouse gas emissions and improve energy efficiency across its operations.
Due to the uncertainty of long-term regulatory requirements, NOVA Chemicals
cannot provide assurance that it will not incur substantial costs to meet
greenhouse gas emission reduction requirements or whether they will be
material.    Managements Discussion
& Analysis   62


Summarized Quarterly Financial
Information  three months ended(millions of U.S. dollars, except
  where noted)
  
  2007
  
  2006Dec. 31
  
  Sept. 30
  
  Jun. 30
  
  Mar. 31
  
  Dec. 31
  
  Sept. 30
  
  Jun. 30
  
  Mar. 31Revenue
  
  $1,795
  
  $1,755
  
  $1,676
  
  $1,506
  
  $1,635
  
  $1,712
  
  $1,619
  
  $1,553Operating income (loss)
  
  $   114
  
  $   188
  
  $   150
  
  $   101
  
  $  (837
  )
  $     13
  
  $   107
  
  $     37Net income (loss)
  
  $   126
  
  $     97
  
  $     80
  
  $     44
  
  $  (781
  )
  $    (24
  )
  $   106
  
  $      (4
  )Net income (loss) per
  common share Basic
  
  $  1.52
  
  $  1.17
  
  $  0.97
  
  $  0.53
  
  $ (9.46
  )
  $ (0.29
  )
  $  1.28
  
  $ (0.05
  ) Diluted
  
  $  1.51
  
  $  1.16
  
  $  0.96
  
  $  0.53
  
  $ (9.46
  )
  $ (0.29
  )
  $  1.27
  
  $ (0.05
  )Weighted-average
  common shares outstanding (millions) Basic
  
  83.0
  
  83.0
  
  82.9
  
  82.7
  
  82.6
  
  82.6
  
  82.5
  
  82.5 Diluted
  
  83.4
  
  83.8
  
  83.7
  
  83.5
  
  82.6
  
  82.6
  
  83.2
  
  82.5  QUARTERLY EARNINGS TRENDS The improvement in net income in the first
quarter of 2007 was due to strengthening margins, cost reductions and
mark-to-market unrealized gains on feedstock derivatives ($17 million
after-tax) offset somewhat by the negative impact of the Canadian rail strike
($8 million after-tax). Net income increased in the second quarter due to
significant margin improvement in the Olefins/Polyolefins business unit. While
market ethylene and polyethylene price increases were offset by higher
feedstock costs on the U.S. Gulf Coast, NOVA Chemicals feedstock costs
increased only slightly resulting in improved margins. The Alberta Advantage
was significant in the second quarter at approximately 13 cents per pound. In
the third and fourth quarters, the Olefins/Polyolefins business unit reported
record EBITDA due to strong domestic and export demand and improving margins as
price increases exceeded feedstock cost changes. Margins improved as industry
price increases, driven by rising market feedstock costs outpaced the Companys
Alberta based feedstock costs. The Alberta Advantage averaged a record 27 cents
per pound by year-end; 17 cents per pound on average for the full year. As
previously mentioned, several non-recurring items also impacted NOVA Chemicals
earnings in 2007 including restructuring charges of $55 million after-tax, $25
million impact of a stronger Canadian Dollar, Canadian federal tax-rate
reduction benefit of $65 million, $13 million non-cash tax benefit associated
with a Belgium tax case, the Canadian rail strike negative impact of $8 million
after-tax and the sale of the previously shutdown Chesapeake, Virginia, facility
and other incidental land of $14 million after-tax.  The
net loss in the first quarter of 2006 was primarily the result of the extended
Corunna facility shutdown for maintenance and modernization work, and the
accrued severance costs associated with the closure of the Chesapeake, Virginia
facility. In addition, margins eroded due to selling prices falling at a faster
rate than feedstock costs. Net income in the second quarter was favorably
impacted by Canadian tax rate reductions of $60 million, the Corunna site
beginning expanded operations and improved ethylene and PE margins. The
third-quarter loss was primarily related to North American restructuring costs
and the costs associated with the closure of the Carrington, UK site. The third
quarter also saw the highest quarterly EBITDA for the Companys
Olefins/Polyolefins business unit to such date as polyethylene and ethylene
price increases outpaced higher feedstock costs. The fourth quarter net loss
was largely due to the one-time, non-cash write-down of the STYRENIX business
unit assets, however business operating performance also suffered. Despite
unusually high sales volumes in the Olefins/Polyolefins business unit, PE and
ethylene pricing declined from the third quarter by 16% and 12%, respectively.
This was due in large part to de-stocking as converters worked off excess
inventories in anticipation of the 2006 hurricane season, which did not result
in disruptions as in 2005. Similarly, styrene and the Performance Styrenics
units products such as EPS also saw price declines, although not as dramatic
as in the Olefins/Polyolefins business.  FOURTH QUARTER 2007 OVERVIEW The
Company filed its Managements Discussion & Analysis for the fourth
quarter of 2007 (the Fourth Quarter MD&A) with the Canadian securities
administrators and the U.S. Securities and Exchange Commission on Jan. 31,
2008. The Fourth Quarter MD&A is hereby incorporated by reference into this
MD&A for the year ended Dec. 31, 2007.    Managements
Discussion & Analysis   63


Share Data  Common Shares Issued and
Outstanding For the
  period ended(number of shares)
  
  February 7,
  2008
  
  2007
  
  2006
  
  2005Beginning of period
  
  83,054,528
  
  82,561,272
  
  82,364,899
  
  84,268,293Issued upon exercise of
  options
  
  43,445
  
  493,256
  
  196,373
  
  695,157Repurchased
  
  
  
  
  
  
  
  (2,598,551
  )End of period
  
  83,097,973
  
  83,054,528
  
  82,561,272
  
  82,364,899  Employee Incentive Stock
Options For the
  period ended(number of shares)
  
  February 7,
  2008
  
  2007
  
  2006
  
  2005Beginning of period
  
  4,054,567
  
  5,478,697
  
  5,107,611
  
  5,849,131Granted
  
  223,550
  
  174,100
  
  1,007,259
  
  532,750Exercised
  
  (56,502
  )
  (1,547,696
  )
  (567,795
  )
  (1,257,857
  )Cancelled
  
  (4,138
  )
  (50,534
  )
  (68,378
  )
  (16,413
  )End of period
  
  4,217,477
  
  4,054,567
  
  5,478,697
  
  5,107,611  DISCLOSURE CONTROLS AND PROCEDURES NOVA
Chemicals management, with the participation of the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness, as at
Dec. 31, 2007, of NOVA Chemicals disclosure controls and procedures (as
defined in Rules 13a-15e and 15d-15e under the United States Securities
Exchange Act of 1934) and has concluded that such disclosure controls and
procedures are effective.  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in NOVA Chemicals
internal control over financial reporting during the year ended Dec. 31,
2007, that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting. Management has
determined that no material change in internal control over financial reporting
has occurred as a result of the implementation of the INEOS NOVA joint venture.  ADDITIONAL INFORMATION Additional
information relating to NOVA Chemicals, including the Annual Information Form,
is filed with Canadian securities administrators and can be accessed through
the System for Electronic Document Analysis and Retrieval (SEDAR) at
www.sedar.com. This same information is filed with the U.S. Securities and
Exchange Commission and can be accessed via its Electronic Data Gathering,
Analysis and Retrieval System (EDGAR) at www.sec.gov/edgar.shtml.    64   Managements Discussion & Analysis


Trademark Information  is a registered trademark of NOVA Brands Ltd.;
authorized use/utilization autorisée.  Advanced SCLAIRTECHTM and SCLAIRTECHTM
are trademarks of NOVA Chemicals.  SURPASS®is a registered trademark of NOVA Chemicals
Corporation in Canada and of NOVA Chemicals (International) S.A. elsewhere.  SCLAIR®is a registered
trademark of NOVA Chemicals Corporation in Canada and of NOVA Chemicals
(International) S.A. elsewhere; authorized use/utilisation autorissée.  ARCEL®and DYLARK®are
registered trademarks of NOVA Chemicals Inc.  NAS®and ZYLAR®are
registered trademarks of INEOS NOVA.  Elemix, IMxTMand NOVACATTMare trademarks of NOVA
Chemicals Inc.  accel-ETM is a trademark of Accelerated Building
Technologies, LLC.  TPF Thermo Plastic FlowformingTM and Sheetless ThermoFormingTM
are trademarks of LRM Industries, LLC.  LEED®is a registered
trademark of the U.S. Green Building Council Non Profit Corporation.  Responsible Care®is a registered
trademark of the Canadian Chemical Producers Association (CCPA) in Canada and
is a registered service mark of the American Chemistry Council, Inc. (ACC)
in the United States.    Trademark
Information   65