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The following discussion
and analysis should be read in conjunction with information contained
in the Consolidated Financial Statements and the notes thereto starting
on page 63. This discussion and analysis has been based upon financial
statements prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP). These accounting principles are different
in some respects from those generally accepted in the United States,
and the significant differences are described in Note 23 to the
Consolidated Financial Statements. References to average capital
employed, after-tax return on capital employed, cash flow cycle
time, net debt to total capitalization, earnings before interest,
taxes, depreciation and amortization, and net income (loss) from
the businesses should be read in conjunction with the discussion
of Supplemental Measures on page 55. This discussion and analysis
is the responsibility of management. The Board of Directors carries
out its responsibility for review of this disclosure principally
through its Audit, Finance and Risk Committee comprised exclusively
of independent directors. The Audit, Finance and Risk Committee
reviews this disclosure and recommends its approval by the Board
of Directors. This discussion and analysis was prepared as of February
15, 2006.
All amounts are presented in U.S. dollars unless otherwise noted.
Plastics and Chemicals
NOVA Chemicals is a focused plastics and chemicals company that
operates two primary businesses:
• The Olefins/Polyolefins business manufactures and sells ethylene,
ethylene co-products and polyethylene resins.
• The Styrenics business manufactures and sells styrene monomer,
polystyrene and expandable polystyrene.
Polyethylene and styrenic polymer products are used in a wide variety
of applications, including rigid and flexible packaging, food packaging,
construction materials, electronics, appliances, automotive components,
and other industrial and consumer goods.
NOVA Chemicals’ assets consist of NOVA Chemicals constructed world
scale plants; acquisitions from companies such as Polysar Energy
and Chemical Corporation, Union Carbide Canada Ltd., DuPont Canada
Inc., ARCO Chemical Company, Huntsman Corporation and the Shell
Petroleum Company Limited; and joint ventures with Dow Chemical
Canada Inc., INEOS, and GRUPO IDESA.
By its nature, profitability in the commodity plastics and chemicals
industry is highly cyclical. In addition to manufacturing standard
commodity products (standard products), NOVA Chemicals’ Olefins/Polyolefins
and Styrenics businesses developed a range of Performance Products.
Performance Products have unique attributes that deliver enhanced
value to customers and, therefore, earn a margin premium to standard
products.
Key Drivers of Financial Performance
NOVA Chemicals’ earnings and cash flow are primarily influenced
by the margins we earn on the products we manufacture. Margin, on
a unit basis, is defined as the difference between the selling price
of products and the direct cost to produce and distribute them.
Margins are directly impacted by changes in supply/demand balance,
which drive the relationship of cost, seller’s price and sales volumes.
Supply/Demand Balance
The supply/demand balance of NOVA Chemicals’ products can best be
measured by industry operating rates. Peak conditions occur when
operating rates are high. During peak conditions, prices and margins
tend to increase rapidly as customers attempt to secure scarce supply
to meet their production needs. Conversely, trough conditions exist
when there is ample supply, operating rates are low and producers
tend to compete for market share by reducing prices, which in turn
decreases margins.
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