The past year was a very important one for our company. We clearly demonstrated the exceptional quality and profit-growth potential of our Olefins/Polyolefins business and completed the largest phase of capital and market development investment for our Performance Products and new downstream businesses. We also restructured our company in an effort to maximize value for shareholders.

Restructuring
Early in 2006, it became clear that the styrene monomer and solid polystyrene portions of our portfolio were not likely to strengthen soon enough to keep them from offsetting the results of our truly superior olefins and polyolefins product chain. As a result, we restructured the company to unlock the value of our core business.

In the second quarter, we created a STYRENIX unit that could operate independently and rapidly reduce costs by streamlining business processes and closing higher-cost facilities. The new unit is able to stand on its own and is well-positioned to play an important role in the necessary consolidation of our industry through a joint venture, sale or spin-off.

STYRENIX includes our North American styrene and solid polystyrene assets and our share of the European styrenic polymers joint venture with INEOS. These businesses lost an average of $60 million in EBITDA per year during the past six years. Our actions were designed to reach EBITDA break-even by the start of 2007. So far, we have exceeded our expectations.

As we start the new year, company costs are down $127 million per year, and STYRENIX asset values have been written down by $772 million after-tax. We expect our STYRENIX unit to generate positive EBITDA and operating income beginning in the first quarter of 2007 – without market improvement. For 2008, annual operating costs and depreciation will be down approximately $220 million.

We have cleared the decks for value-adding action. We have done all of the difficult things necessary to make STYRENIX an excellent vehicle for the consolidation needed to help bring supply and demand in the styrenics industry into balance.

NOVA Chemicals’ 2006 Results
Olefins and polyolefins markets worldwide were solid during the year and the consensus of most observers is that this business has a long, strong earnings period ahead. Looking back on 2006, NOVA Chemicals began the year recovering from the pain of the long and expensive period of Corunna project start-up problems following the modernization and expansion of the facility. After a better second quarter, we delivered a record third quarter for our Olefins/Polyolefins business unit. However, in the fourth quarter, North American polyethylene customers worked off excess inventories, and the result was a sudden and sharp downdraft in margins. Operating income for the year in the Olefins/Polyolefins business unit was $577 million, up from $430 million in 2005. In a highly volatile year, this unit generated an 18.6% after-tax return on capital employed.

Performance Styrenics is a small, newly created, entrepreneurial business unit, and its results today are heavily influenced by our commodity expandable polystyrene (EPS) business, which provides the base technology for most of the unit’s Performance Products and ventures. Future growth in this unit will be led by ARCEL^®, ZYLAR^® and DYLARK^® Performance Products and new downstream ventures. The operating loss for Performance Styrenics, including all research and market development activity, was $36 million in 2006 versus $18 million in 2005.

In the STYRENIX unit, cost-cutting had a significant positive impact this year. The operating loss in 2006 was $182 million, a $72 million improvement over 2005.

In the fourth quarter, our European joint venture with INEOS reported its first positive EBITDA results. Europe had been responsible for about half of the historical losses of NOVA Chemicals’ styrene and polystyrene businesses. The joint venture was launched just over a year ago, in the fourth quarter of 2005. It has benefited from rapid cost reduction and the consolidation of facilities to bring better supply/demand balance to the European region.

Performance Products and New Ventures
We introduced new products, added capacity and began to penetrate new markets with our Performance Products during 2006. Our efforts during the past year involved a lot of creativity and hard work, but we fell short of our financial objectives, due mainly to a quality issue in polyethylene and an over-reliance on ARCEL sales to one customer that converted to our material more slowly than expected. Both issues have been fully resolved, and I’m confident that we will be back on course in 2007 and will hit our 2008 target of $240 to $300 million in total EBITDA contributed by Performance Products.

Sales of Polyethylene Performance Products were up 17% year-over-year and totaled 88% of capacity at Joffre’s Advanced SCLAIRTECH™ plant in December. We sold 854 million pounds of resin from this facility in 2006, matching the plant’s capacity rating. Our work is now focused on improving the mix of polyethylene Performance Products in order to get the most value from our technology. Given the strong and speedy market acceptance for our unique resins, we plan to debottleneck the plant to around one billion pounds of annual capacity in 2008, with very little capital.

In our Performance Styrenics unit, sales of ARCEL resins, an exceptionally durable packaging foam, continue to grow. Including new finishing operations added with a strategic partner in China, we have manufacturing capacity for 70 million pounds of ARCEL resins – and another simple finishing addition will take that capacity to 100 million pounds. Our global market focus on electronics packaging resulted in new ARCEL business for protective packaging of LCD and plasma screen televisions made in Mexico, printers made in China and the U.S., and data servers made in Hungary. The list of active development partners is long and exciting, and we feel we’re just scratching the surface of the potential that exists for our highly profitable ARCEL resins.

Many of our new business development ventures are starting to make the transition from innovative concepts to real profitability. For example, late in 2006 we received our first commercial order from a restaurant chain in the U.S. for our IMx™ technology cups that feature outstanding graphics and insulation performance for both hot and cold drinks. In addition to the sales of expandable polystyrene for the application, NOVA Chemicals receives a royalty for every cup sold. These cups are also being trialed in Europe and Asia for both hot and cold drinks.

I’m particularly excited by the potential to leverage our polymer technology and related applications in the building and construction industry, a rapidly growing market that is hungry for innovation. With our strategic partners, we have developed an array of value-adding, EPS-based products including lightweight concrete, insulating concrete forms, and steel-and-polymer composite wall systems. All of these ventures are based on proprietary technology and can grow rapidly with small amounts of capital.

Long-Term Competitive Advantage
The foundation of our company is the advantaged cash-cost position of our ethylene and polyethylene assets in Western Canada, known as the Alberta Advantage. A full description of the components of the Advantage can be found on page 37 of this report. In 2006, we enjoyed a record Advantage of 17˘ per pound in the third quarter and an average for the year of 11˘ per pound. For the past three years, the average Alberta Advantage was 8¢ per pound.

The prospect of future gas flows from the Canadian Arctic and Alaska through the Alberta Hub, along with recent policy actions of the Alberta government, support expansion of ethane feedstock availability and buttress the long-term Advantage. We strongly believe that we’ll see a powerful Advantage for years to come, which will help fuel growth in the chemical industry in Alberta and deliver both outstanding operating returns and profitable growth through the coming decades.

Ethylene/Polyethylene Market Dynamics
Given our tight focus on ethylene and polyethylene, it is critically important that we, and our investors, fully comprehend the market fundamentals for this chain. It is important to understand both the short-term dynamics for our products and the prospects for the next four to five years and beyond.

The balance of supply and demand is the key to profitability in our industry; however, the supply/demand balance for ethylene is not as important for NOVA Chemicals as the balance for polyethylene. Tight ethylene markets are always positive for polyethylene, but long ethylene markets do not always lead to weaker polyethylene chain margins, in part because ethylene is expensive and difficult to transport beyond local markets.

For investors, short-term volatility in polyethylene markets creates uncertainty about the prospects for our industry and 2006 was a prime example of that volatility. The North American polyethylene price fell by about 17¢ per pound from a high in August to the low in December. Customers clearly stocked up in anticipation of U.S. Gulf Coast hurricanes that did not occur. Demand softened as they consumed inventory, causing prices to fall.

The “Perils” of Polyethylene
In my youth, I saw some episodes of what is considered to be the most famous serial in cinema history – “The Perils of Pauline.” In each episode, the heroine, Pauline, successfully faced one life-threatening “peril” after another. She was always in trouble, and somehow always escaped.

The last few years in the North American markets have seemed like “The Perils of Polyethylene,” but I’m convinced we’ll wind up the same way Pauline did in each episode – safe and strong.

Let me start with the fundamental, long-term story – Figure 1 shows the North American supply/demand balance for the next four years. It assumes 3% Gross Domestic Product (GDP) growth as forecast by Global Insight and we assume that polyethylene demand growth will be at only GDP growth rates. Very little new capacity has been announced for North America. The net result will be a very strong supply/demand balance.

The global picture as shown in Figure 2 is also very strong, based on similar assumptions. The global polyethylene industry has never been able to operate at a rate approaching 90% of utilization for any sustained period. As a consequence, we are very confident about the basic health of the polyethylene market for the next four years, and perhaps even longer.

Figure 1: NORTH AMERICAN PE OPERATING RATES

Managing Inventory
Why, then, are we experiencing so much volatility in North American polyethylene markets? In my view, it’s all about polyethylene producers’ operating philosophies and our customers’ approach to using inventory to fight off price increases.

Our customers and their customers have driven polyethylene and related product inventories down to protect themselves from risks associated with energy price swings and the related volatility of polyethylene prices. In general, our customers have sharply reduced overall chain inventory levels. This has left room for them to aggressively build inventory when prices are relatively low, energy prices are expected to rise, or supply disruptions become a threat. Once they have built an inventory buffer, and expect energy prices to fall, they stop buying and consume inventory.

Our industry enables customers to do that, since many producers ignore available inventory data and continue to produce at maximum rates under all conditions – assuming that high production rates are necessary to maximize profit margins. NOVA Chemicals’ operating approach is very different. We study real-time inventory data and reduce production whenever it is necessary to control inventories. This reduces the pressure on our company to sell heavy volumes into low-margin markets. For the last five years, the North American polyethylene industry has averaged 43 days sales of polymer inventory; NOVA Chemicals has averaged 24 days during the same period.

Figure 2: GLOBAL PE OPERATING RATES

I believe investors who study longer-term supply/demand fundamentals should have great confidence in our industry. They can expect that the polyethylene market will face – and overcome – frequent, short-term challenges. There simply will not be enough capacity to match demand growth and, unless we are hit with a global recession, short-term downturns will not last long. Further, the continued tightening of North American and global supply/demand balances will make it harder and harder for our customers to build inventories, even if polyethylene producers don’t change their operating tactics. When customers can’t build excess inventory, they can’t use inventory to push down prices.

I think the indicators of this underlying market strength are there to see. In the fourth quarter of 2006, although there was a rapid price fall in North America, the European and Asian polyethylene markets remained stable and strong. That enabled North American producers to export profitably, which in turn made the downturn relatively brief.

I also think many observers are overestimating the impact and timing of capacity additions planned for the Middle East. Construction delays appear to be getting worse, not better, and the impact of planned new capacity continues to slide into the future. We have done some interesting work on start-up timing and our supply/demand balance projections are, we believe, the most accurate available.

Investors who understand that volatility is not necessarily an indicator of a weak industry will be able to take advantage of the short-term “perils” of product and share price volatility. They can be part of an industry that can look forward to years of continued supply/demand balance improvement and strong cash-flow generation.

Safe Operations
The part of NOVA Chemicals’ 2006 performance that I am most proud of is our Responsible Care^® record. Responsible Care is the chemical industry’s management system for health, safety, security and the environment. This initiative has historically delivered results far better than any other manufacturing industry.

When you think about all of the change our people initiated and executed in 2006, it’s gratifying to know that we worked responsibly and carefully, and delivered a spectacular employee safety record that is the best I’ve ever seen in our industry. NOVA Chemicals won the prestigious American Chemistry Council Responsible Care Leadership Award for medium-sized companies as a result of our 2005 record for safety, security and environmental performance, as well as our innovations, particularly around fire prevention. And our record for 2006 was far better than in 2005.

More information about our safety performance can be found on page 20 of this report. I hope you see this performance, as I do, as an indicator of the culture, operating strength and professionalism of our organization.

Moving Forward
We remain committed to our focus on our powerful Olefins/Polyolefins business and very promising Performance Products. We are also optimistic about a STYRENIX pathway that will add value for shareholders since there is strong interest in consolidation across the industry.

We’re making significant strides in our efforts to maximize value for shareholders. As I say to our employees, we must be focused – not on selling more and more little plastic pellets, but on delivering real value to our shareholders, despite the volatility of our marketplace and quarter-to-quarter results.

To close, I would like to offer my very sincere thanks and appreciation to all of the people who worked with and for NOVA Chemicals in 2006. We felt it was important to treat the employees who left us fairly and with respect. I am grateful to those who remain for their hard work, dedication and focus on things we can control like our costs, new product and business development, and Responsible Care.

I would like to offer a special note of appreciation to the members of our Board of Directors, who have been able to see through the volatile nature of commodity product markets and support our need for rapid action and creativity.

In particular, I want to thank Ted Newall who has been the non-executive Chairman of our Board since NOVA Chemicals started up in July 1998. Ted has utilized his long experience in the chemical industry and combined it with practical, supportive thought and action to help us deal with the many challenges a new, tightly focused and entrepreneurial company has faced.

Ted will not be standing for election to our Board at the next Annual General Meeting. While we will miss his leadership, we firmly believe he has helped position us for long-term success at the Board, management and operating levels of the company. We look forward to delivering on Ted’s expectations and those of all of our other shareholders in the coming year.

JEFFREY M. LIPTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FEBRUARY 8, 2007