October 29, 1998
FOR IMMEDIATE RELEASE
For further information contact:
Helen Wesley - Investor Relations (403) 750-4390
Rocco Ciancio - Public Affairs (403) 750-3290
CALGARY, Alberta -- NOVA Corporation (NOVA) today announced third quarter earnings
of U.S. $13 million (14 cents per share, fully diluted) for the three month period ended
September 30, 1998, compared to a second quarter loss of U.S. $14 million (15 cents per share,
fully diluted) and earnings of U.S. $39 million (42 cents per share, fully diluted) during the third
quarter of 1997. NOVA reported U.S. $8 million of earnings from its operated businesses, a
U.S. $11 million contribution from its investment in Dynegy Inc. (Dynegy) and a U.S. $6 million loss
related to its investment in Methanex Corporation (Methanex).
Earnings from operated businesses were up U.S. $6 million from the second quarter, despite a U.S. 3 cent per pound decrease in benchmark polyethylene prices and a U.S. 2 cent per pound decrease in benchmark polystyrene prices. On an after-tax basis, the U.S. $13 million negative impact of these price declines was more than offset by a U.S. $12 million reduction in feedstock costs and a U.S. $7 million reduction in fixed costs.
"While prices declined steadily throughout the quarter, we were able to benefit from lower feedstock costs as well as reduced operating expenses. I am very pleased that we are seeing the benefit of our cost reduction efforts," said NOVA president and chief executive officer Jeff Lipton. "Our styrenics business contributed the bulk of these cost reductions and improved its performance significantly."
Demand for the commodity chemicals NOVA produces is typically weaker during the fourth quarter. In addition, new North American polyethylene supply is scheduled to enter the market. As a result, fourth quarter earnings from NOVA's operated chemicals businesses are expected to be below third quarter levels. "We are working quickly to further improve our business so that we can sustain a higher level of earnings during this weak price environment," said Jeff Lipton. "We expect to be well-positioned to capture the benefits of our operating income improvements as we enter 1999."
Since entering the market as a publicly traded commodity chemicals company on July 3, 1998, NOVA has actively pursued its strategy of focusing on commodity chemicals, announcing:
- its intent to acquire most of Huntsman Corporation's styrenics business;
- its intent to divest its 38.8 million share interest in Dynegy, as well as its specialty automotive resin business, DYLARK®; and
- a significant breakthrough in single site catalyst technology.
Note: On July 2, 1998 NOVA Corporation was split off as an independent, publicly traded commodity chemicals company following the merger of the former NOVA Corporation and TransCanada PipeLines Limited (TransCanada). All prior periods presented for comparative purposes represent the results from NOVA Chemicals Ltd., which account for approximately 99 percent of the ongoing assets and revenues of the current NOVA Corporation. Beginning with the third quarter of 1998, NOVA is reporting its financial results in U.S. dollars while continuing to follow Canadian Generally Accepted Accounting Principles. All prior periods have been restated in U.S. dollars using an exchange rate of $1.00 Canadian = $0.68 U.S.
NOVA Highlights
| (unaudited; millions of U.S. dollars except as noted) | Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) | Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
|||||||||||
| Olefins/polyolefins | $ | 13 | $ | 10 | $ | 35 | $ | 55 | $ | 122 | ||||||
| Styrenics | (6) | (11) | (11) | (31) | (29) | |||||||||||
| Corporate and other | 1 | 3 | (3) | 3 | (9) | |||||||||||
| NOVA operated | 8 | 2 | 21 | 27 | 84 | |||||||||||
| Methanex | (6) | (10) | 10 | (17) | 33 | |||||||||||
| Dynegy | 11 | 6 | 8 | 18 | 13 | |||||||||||
| Styrenics restructuring charge | - | (12) | - | (12) | - | |||||||||||
| Net income (loss) | $ | 13 | $ | (14) | $ | 39 | $ | 16 | $ | 130 | ||||||
| ===== | ===== | ===== | ===== | ===== | ||||||||||||
| Net income (loss) per share (fully diluted)(1) | ||||||||||||||||
| - before styrenics restructuring charge | $ | 0.14 | $ | (0.02) | $ | 0.42 | $ | 0.30 | $ | 1.41 | ||||||
| - after styrenics restructuring charge | $ | 0.14 | $ | (0.15) | $ | 0.42 | $ | 0.17 | $ | 1.41 | ||||||
| Common shares outstanding (millions) | 92 | 92 | 92 | 92 | 92 | |||||||||||
| Revenue | $ | 486 | $ | 531 | $ | 554 | $ | 1,573 | $ | 1,725 | ||||||
| EBITDA(2) | $ | 66 | $ | 45 | $ | 93 | $ | 201 | $ | 315 | ||||||
| Depreciation | $ | 37 | $ | 35 | $ | 39 | $ | 114 | $ | 118 | ||||||
| Funds from operations | $ | 52 | $ | 22 | $ | 58 | $ | 132 | $ | 196 | ||||||
| Capital expenditures | $ | 82 | $ | 132 | $ | 54 | $ | 287 | $ | 129 | ||||||
| Capital employed(3) | $ | 1,857 | $ | 2,003 | $ | 2,050 | $ | 1,857 | $ | 2,050 | ||||||
| After-tax return on capital employed(4) | 4.1% | (0.7)% | 9.1% | 3.0% | 10.0% | |||||||||||
| Return on average equity | 1.0% | (1.0)% | 2.9% | 1.2% | 9.6% | |||||||||||
(1) Earnings per share calculation for comparative purposes assumes 92 million common shares outstanding. (2) Earnings before interest, taxes, depreciation and amortization. (3) Capital employed equals plant, property and equipment, working capital and investments, and excludes capital under construction. (4) Equals net income plus after-tax interest expense divided by capital employed.
OLEFINS/POLYOLEFINS BUSINESS
Financial Highlights - Olefins/Polyolefins
| (unaudited; millions of U.S. dollars except as noted) | Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
||||||||||||
| Revenue | $ | 376 | $ | 414 | $ | 439 | $ | 1,241 | $ | 1,368 | ||||||
| EBITDA(1) | $ | 64 | $ | 66 | $ | 100 | $ | 226 | $ | 333 | ||||||
| Depreciation | $ | 30 | $ | 26 | $ | 29 | $ | 88 | $ | 94 | ||||||
| Operating income | $ | 34 | $ | 40 | $ | 71 | $ | 138 | $ | 239 | ||||||
| Net income | $ | 13 | $ | 10 | $ | 35 | $ | 55 | $ | 122 | ||||||
| Capital expenditures | ||||||||||||||||
| - strategic | $ | 54 | $ | 71 | $ | 4 | $ | 179 | $ | 18 | ||||||
| - maintenance | 5 | 35 | 37 | 50 | 77 | |||||||||||
| Total capital expenditures | $ | 59 | $ | 106 | $ | 41 | $ | 229 | $ | 95 | ||||||
| Capital employed(2) | $ | 823 | $ | 912 | $ | 943 | $ | 823 | $ | 943 | ||||||
| After-tax return on capital employed(3) | 8.1% | 7.9% | 17.2% | 11.6% | 19.7% | |||||||||||
(1) Earnings before interest, taxes, depreciation and amortization (2) Capital employed equals plant, property and equipment, working capital and investments, and excludes capital under construction. (3) Equals net income plus after-tax interest expense divided by capital employed.
Operating Highlights - Olefins/Polyolefins
| Average Benchmark Prices on the U.S. Gulf Coast(1) | |||||||||||
| (U.S. dollars per pound) | Q3 1998 |
Q2 1998 |
Q1 1998 |
Q4 1997 |
Q3 1997 |
Q2 1997 |
|||||
| Ethylene | $ 0.17 | $ 0.19 | $ 0.21 | $ 0.24 | $ 0.25 | $ 0.25 | |||||
| Polyethylene - linear low-density butene liner | $ 0.28 | $ 0.32 | $ 0.34 | $ 0.36 | $ 0.39 | $ 0.42 | |||||
| Weighted average polyethylene(2) | $ 0.31 | $ 0.34 | $ 0.38 | $ 0.39 | $ 0.42 | $ 0.44 | |||||
(1) Average benchmark prices are not intended to be actual prices realized by NOVA or any other petrochemical company. (2) Benchmark prices weighted according to NOVA's product mix. Source: Phillip Townsend and Associates.
| Sales Volumes (millions of pounds) |
Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Polyethylene | Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
|||||||||||
| Linear low-density polyethylene | 242 | 291 | 327 | 849 | 879 | |||||||||||
| Low-density polyethylene | 72 | 75 | 61 | 217 | 195 | |||||||||||
| High-density polyethylene | 113 | 103 | 115 | 329 | 341 | |||||||||||
| SCLAIR® | 154 | 146 | 148 | 430 | 435 | |||||||||||
| Total | 581 | 615 | 651 | 1,825 | 1,850 | |||||||||||
Review of Operations - Olefins/Polyolefins
NOVA's olefins/polyolefins business contributed U.S. $13 million of net income during the quarter, compared to the U.S. $10 million contributed during the second quarter of 1998. The negative impact of lower polyethylene prices was offset by lower feedstock costs.
Benchmark prices for polyethylene, weighted according to NOVA's product mix, were U.S. 31 cents per pound, down U.S. 3 cents per pound from second quarter levels as market supply continued to exceed demand. Benchmark prices for linear low-density butene liner polyethylene were U.S. 28 cents per pound, down U.S. 4 cents per pound from the prior quarter. Prices remained severely depressed in Asia for most of the quarter, but have strengthened recently. Approximately 3 percent of NOVA's total polyethylene sales volumes were directed at Asian markets, significantly less than during the second quarter.
NOVA sold 581 million pounds of polyethylene, down 6 percent from the prior quarter due to the effects of minor unplanned production outages.
On average, pricing for feedstocks used in NOVA's olefins/polyolefins business weakened during the quarter. NYMEX natural gas prices averaged U.S. $2.02 per thousand cubic feet, down 10 percent from the second quarter. West Texas Intermediate crude oil averaged U.S. $14.15 per barrel, down 4 percent from the prior quarter.
Benchmark ethylene prices averaged U.S. 17 cents per pound, down U.S. 2 cents per pound from the second quarter. Changes in ethylene prices do not directly affect NOVA's earnings because substantially all of the ethylene NOVA produces is consumed internally or sold under cost of service agreements.
Over 1 billion pounds of new polyethylene capacity is expected to enter the North American market in the fourth quarter of 1998. NOVA believes polyethylene prices will continue to soften in the near term, even though third quarter benchmark linear low butene liner grade polyethylene prices were near previous trough levels.
Strategic Initiatives - Olefins/Polyolefins
On September 23, 1998, NOVA announced the discovery of new single site catalysts which are expected to enhance NOVA's polyethylene technology position. These catalysts can be used with NOVA's Advanced SCLAIRTECH™ technology to produce high-performance resins at highly competitive costs. The new catalysts can also be effectively used in gas phase processes.
NOVA has upgraded approximately 200 million pounds of capacity at its St. Clair, Ontario facility using components of the Advanced SCLAIRTECH technology. During the fourth quarter, NOVA expects to begin producing new polyethylene resins with many performance characteristics of resins made with the Advanced SCLAIRTECH process. These resins will be available to customers beginning in early 1999.
NOVA currently owns 50 percent of the Joffre co-generation project now under construction. Assuming completion of current negotiations with EPCOR, NOVA's ownership will be reduced to 20 percent. NOVA will benefit from lower cost steam and electricity as a result of its interest in this project.
| Strategic capital spending | ||||||||
| Capacity | Total Budgeted Capital | Capital Expenditures To-date | Expected Start-up | |||||
|---|---|---|---|---|---|---|---|---|
| (millions of pounds) | (U.S. $millions) | (U.S. $millions) | ||||||
| EIII | 2,800(1) | $ 330(2) | $ 91 | mid-2000 | ||||
| PEII | 850 | 260 | 69 | mid-2000 | ||||
| Joffre co-generation (Megawatts)(3) | 420 | 45 | 50 | early 2000 | ||||
(1) To be shared between NOVA and its EIII joint venture partner, Union Carbide Canada Inc. (2) NOVA's portion (3) Budgeted capital reflects NOVA's expected 20 percent interest in this project and capital expenditures to-date reflect our current 50 percent position.
STYRENICS BUSINESS
Financial Highlights - Styrenics
| (unaudited; millions of U.S. dollars except as noted) | Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
||||||||||||
| Revenue | $ | 139 | $ | 137 | $ | 135 | $ | 405 | $ | 423 | ||||||
| EBITDA(1) | $ | 1 | $ | (5) | $ | (7) | $ | (11) | $ | (13) | ||||||
| Depreciation | $ | 6 | $ | 8 | $ | 7 | $ | 22 | $ | 22 | ||||||
| Operating loss | $ | (5) | $ | (13) | $ | (14) | $ | (33) | $ | (33) | ||||||
| Net loss | $ | (6) | $ | (11) | $ | (11) | $ | (31) | $ | (29) | ||||||
| Capital expenditures | ||||||||||||||||
| - strategic | $ | 22 | $ | 21 | $ | 11 | $ | 51 | $ | 14 | ||||||
| - maintenance | $ | 1 | $ | 5 | $ | 2 | $ | 7 | $ | 20 | ||||||
| Total capital expenditures | $ | 23 | $ | 26 | $ | 13 | $ | 58 | $ | 34 | ||||||
| Capital employed(2) | $ | 476 | $ | 445 | $ | 453 | $ | 476 | $ | 453 | ||||||
| After-tax return on capital employed(3) | (3.0)% | (7.1)% | (7.6)% | (6.1)% | (6.2)% | |||||||||||
(1) Earnings before interest, taxes, depreciation and amortization. (2) Capital employed equals plant, property and equipment, working capital and investments and excludes capital under construction. (3) Equals net income plus after-tax interest expense divided by capital employed.
Operating Highlights - Styrenics
| Average Benchmark Prices on the U.S. Gulf Coast(1) | |||||||||||
| (U.S. dollars per pound) | Q3 1998 |
Q2 1998 |
Q1 1998 |
Q4 1997 |
Q3 1997 |
Q2 1997 |
|||||
| Styrene | $ 0.25 | $ 0.26 | $ 0.27 | $ 0.28 | $ 0.28 | $ 0.28 | |||||
| Weighted average polystyrene(2) | $ 0.40 | $ 0.42 | $ 0.40 | $ 0.42 | $ 0.44 | $ 0.45 | |||||
(1) Average benchmark prices are not intended to be actual prices realized by NOVA or any other petrochemical company. (2) Average benchmark prices and NOVA's actual realized prices, weighted according to NOVA's polystyrene product mix, including EPS. Excludes specialty, DYLARK® and other. Source for benchmark prices is Phillip Townsend and Associates
| Sales Volumes (millions of pounds) |
Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
||||||||||||
| Merchant styrene(1) | 44 | 53 | 45 | 140 | 164 | |||||||||||
| Polystyrene | ||||||||||||||||
| Solid and expandable | 272 | 260 | 265 | 781 | 791 | |||||||||||
| Specialty, DYLARK and other | 36 | 37 | 39 | 114 | 120 | |||||||||||
| Total | 308 | 297 | 304 | 895 | 911 | |||||||||||
(1) Reflects sales of styrene made to third parties
Review of Operations - Styrenics
NOVA's styrenics business yielded a net loss of U.S. $6 million during the quarter, an improvement of U.S. $5 million from the net loss of U.S. $11 million reported in the second quarter. Despite continued weakness in polystyrene prices, NOVA improved earnings through aggressive cost cutting, process improvement, stronger sales and lower feedstock costs. The styrenics business achieved a 15 percent reduction in fixed costs during the quarter.
Benchmark prices for polystyrene, weighted according to NOVA's product mix, were U.S. 40 cents per pound, down U.S. 2 cents per pound from second quarter levels. Sales volumes totalled 308 million pounds of polystyrene, up slightly from the 297 million pounds sold during the prior quarter.
Expandable polystyrene accounts for approximately one third of NOVA's overall polystyrene capacity. During the third quarter, competitive pricing for these products was particularly aggressive as Asian producers exported product to the U.S. at low prices.
On average, pricing for ethylene and benzene -- the main feedstocks used in NOVA's styrenics business -- weakened during the third quarter. U.S. Gulf Coast ethylene prices declined by U.S. 2 cents per pound to an average of U.S. 17 cents per pound, while benzene prices averaged U.S. 74 cents per gallon, down from U.S. 76 cents per gallon in the second quarter.
Strategic Initiatives - Styrenics
On July 21, NOVA and Huntsman announced they had signed a letter of intent for NOVA to acquire a significant portion of Huntsman's styrenics business for U.S. $744 million plus working capital. This acquisition is expected to make NOVA a leading participant in the global styrenics business, and is expected to deliver significant cost savings and revenue generating opportunities.
To facilitate U.S. Federal Trade Commission (FTC) review of the Huntsman transaction, NOVA and Huntsman recently decided to remove the North American expandable polystyrene (EPS) assets from the proposed transaction. These assets represent approximately 10 percent of the total Huntsman polystyrene capacities included in the original transaction. NOVA and Huntsman are negotiating a purchase price reduction to reflect the removal of these assets, as well as certain other matters.
NOVA continues to target completion of the transaction by year-end; however, timing is subject to satisfactory FTC review, other regulatory approvals, and the negotiation and execution of definitive agreements.
At the end of November, the 350 million pound expansion of NOVA's existing 600 million pound styrene plant at Sarnia, Ontario is expected to start-up. This expansion will increase NOVA's styrene capacity to 1.75 billion pounds, including the styrene NOVA receives through its arrangements with Lyondell (formerly ARCO Chemicals). NOVA expects this expansion to result in significantly lower styrene costs at Sarnia.
| Strategic capital spending | ||||||||
| Capacity | Total Budgeted Capital | Capital Expenditures To-date | Expected Start-up | |||||
|---|---|---|---|---|---|---|---|---|
| (millions of pounds) | (U.S. $millions) | (U.S. $millions) | ||||||
| Sarnia styrene expansion | 350 | $ 88 | $ 75 | Q4 1998 | ||||
Equity Investments
Methanex
| (unaudited; millions of U.S. dollars) | Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
||||||||||||
| Equity earnings | $ | (4) | $ | (8) | $ | 12 | $ | (12) | $ | 38 | ||||||
| Amortization of goodwill | (2) | (2) | (2) | (5) | (5) | |||||||||||
| Net equity earnings contribution (loss) | $ | (6) | $ | (10) | $ | 10 | $ | (17) | $ | 33 | ||||||
| Investment in Methanex | $ | 408 | ||||||||||||||
| Market value of investment(1) | $ | 267 | ||||||||||||||
| Number of shares held by NOVA (millions) | 46.9 | |||||||||||||||
(1) Based on October 28, 1998 closing price of Methanex shares on NASDAQ
Dynegy
| (unaudited; millions of U.S. dollars) | Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Sept. 30 1997 |
Sept. 30 1998 |
Sept. 30 1997 |
||||||||||||
| Equity earnings | $ | 12 | $ | 7 | $ | 9 | $ | 20 | $ | 15 | ||||||
| Amortization of goodwill | (1) | (1) | (1) | (2) | (2) | |||||||||||
| Net equity earnings contribution (loss) | $ | 11 | $ | 6 | $ | 8 | $ | 18 | $ | 13 | ||||||
| Investment in Dynegy | $ | 301 | ||||||||||||||
| Market value of investment(1) | $ | 575 | ||||||||||||||
| Number of shares held by NOVA (millions) | 38.8 | |||||||||||||||
(1) Based on October 28, 1998 closing price of Dynegy shares on NYSE
Methanex and Dynegy Review
NOVA's investment in Methanex yielded a loss of U.S. $6 million, compared with a loss of U.S. $10 million during the prior quarter. Methanex increased its operating rates during the quarter and achieved higher sales volumes. This resulted in reduced unit costs. The operating improvement was partially offset by a continued decline in methanol prices. Methanex's realized price for methanol was U.S. 32 cents per gallon in the third quarter, down U.S. 2 cents per gallon from the prior quarter. Methanol prices have declined U.S. 23 cents per gallon from the third quarter of 1997.
NOVA's investment in Dynegy contributed earnings of U.S. $11 million, up U.S. $5 million from the prior quarter. Dynegy continued to strengthen its operations and margins, particularly in the areas of power generation and marketing, and benefited from a non-recurring gain related to the sale of Ozark Gas Transmission.
Consistent with its strategy to focus on commodity chemicals, on August 24, NOVA announced its intent to divest its 38.8 million shares of Dynegy.
Balance Sheet Strength
At September 30, 1998, NOVA's debt to total capitalization ratio was 42.7 percent, with total outstanding debt of U.S. $857 million.
On July 21, NOVA announced that financing arrangements were in place for the Huntsman transaction, consisting of a committed credit facility, exchangeable preferred shares and the assumption of a small amount of Huntsman debt. Financing arrangements will be modified as the announced transaction changes are completed. In the past week, NOVA issued U.S. $210 million of preferred securities, the proceeds of which will be used to pay down short-term bank loans and to fund ongoing capital requirements.
Long term debt (millions of U.S. dollars)
| Amount | Interest rate | Maturity | |||
|---|---|---|---|---|---|
| $ | 150 | 6% unsecured debenture | September 22, 2000 | ||
| 100 | 7% unsecured debenture | September 15, 2005 | |||
| 100 | 7.87% unsecured debenture | September 15, 2025 | |||
| 150 | 7% unsecured debenture | August 15, 2026 | |||
| 125 | 7.25% unsecured debenture | August 15, 2028 | |||
| 71 | 6.4% (average) ethylene plants financing | 1998-2004 | |||
| $ | 696 | ||||
Balance Sheet Ratios
| Twelve Months Ending | ||||||
|---|---|---|---|---|---|---|
| Sept. 30 1998 |
June 30 1998 |
Dec. 31 1997 |
||||
| Debt to total capitalization | 42.7% | 43.1% | 40.0% | |||
| Interest coverage on long-term debt | 1.9x | 2.5x | 4.6x | |||
At September 30, 1998, NOVA had revolving credit facilities totalling U.S. $490 million, of which U.S. $144 million was outstanding.
Hedging Activities
(For further information on NOVA's currency hedging program, please refer to pages 42,43,51,63 and 64 of NOVA's 1997 annual report.)
At September 30, 1998, NOVA had hedged approximately U.S. $2.6 billion of anticipated U.S. dollar revenue at an average exchange rate of one Canadian dollar equals U.S. 74.14 cents. Hedges were put in place at the rate of approximately U.S. $50 million per month, extending to March 2003. These hedges represent substantially all of NOVA's anticipated net U.S. dollar cash flow exposure over this time period. At the noon rate as of October 28, 1998, the mark to market value of these hedges was U.S. ($297) million.
NOVA's foreign exchange exposure results from virtually all of its revenues being denominated in U.S. dollars, while a large portion of its costs are denominated in Canadian dollars. In the 1989 to 1992 time frame, the Canadian dollar was strong relative to the U.S. dollar. To protect itself from the negative effects of a strong Canadian dollar on NOVA's Canadian dollar-denominated cost structure, NOVA began to hedge a significant portion of its net U.S. dollar cash flow beginning in 1993.
Through the 1994 to 1996 time frame, the Canadian dollar traded within a narrow range around the average exchange rate at which NOVA's hedges were put in place. At December 31, 1997, the fair market value of NOVA's then U.S. $2.8 billion of hedges was U.S. $(124) million.
If NOVA had not entered into this hedging program, after-tax earnings during the quarter would have been U.S. $11 million higher, and U.S. $23 million higher for the first nine months of 1998.
The Audit, Finance and Risk Committee of NOVA's board of directors regularly reviews foreign exchange and feedstock commodity hedging activity, ensuring it complies with NOVA's hedging policy. Financial instruments are not used for speculative purposes.
Year 2000 Update
NOVA has a working group, led by NOVA's chief information officer, dedicated to the Year 2000 issue. This group reports to the CEO and a committee of the board of directors on a regular basis. NOVA's Year 2000 project is on schedule. The expenditures related to NOVA's Year 2000 compliance program are not expected to be material.
Shareholder Information
Odd-Lot Program
On October 19, 1998, NOVA announced that it would be implementing an "odd-lot" program to enable shareholders with 99 or fewer shares to sell their shares without incurring brokerage fees. This program will be available to all NOVA shareholders of record with 99 or fewer shares as of October 16, 1998, and will be in effect until January 15, 1999 unless NOVA extends the program. NOVA will not be repurchasing any shares as a result of this odd-lot program. For further information, please contact the manager of the program, Shareholder Communications Canada, at 1-800-890-1037.
Tax Information Related to the NOVA/TransCanada merger
As a consequence of the NOVA/TransCanada merger on July 2, 1998, all NOVA shareholders were deemed to have disposed of their shares. This transaction resulted in a capital gain for tax purposes, calculated as the difference between the shareholders' cost base in NOVA shares and the deemed disposition price.
For a Canadian taxpayer, while Revenue Canada may accept a number of different approaches in valuing shares of a public company at a particular time, NOVA believes a value of Canadian $16.90 per share is appropriate as a deemed disposition price. This value is derived from the use of ten-day weighted average prices.
For an American taxpayer, the United States' rules are different. The Internal Revenue Service also accepts different approaches in valuing shares of public companies. Based on discussions with NOVA's U.S. tax counsel, we believe it is reasonable to use a value of U.S. $11.56 per NOVA share. This value is derived from the simple average of the high and low trading prices on the Toronto Stock Exchange on July 2, 1998, converted to U.S. dollars.
For a Canadian taxpayer who held shares in the former NOVA Corporation, the adjusted cost base for each new NOVA Corporation (NCX) share was Canadian $27.85. This was calculated as the weighted average trading price of NOVA shares during the first ten days of trading. The adjusted cost base for each new TransCanada (TRP) share was Canadian $26.93. This was calculated as the weighted average trading price of TransCanada shares during the last ten days of trading prior to the merger, less one-fifth of the value of each new NOVA Corporation (NCX) share.
For an American taxpayer, the adjusted cost base for each new NOVA Corporation (NCX) share (derived from the simple average of the high and low trading prices on the Toronto Stock Exchange on July 2, 1998) is U.S. $20.89. The comparable value of a TransCanada share cannot be determined until after December 31, 1998. It is expected shareholders of TransCanada will be advised by TransCanada in 1999.
Additional detail related to this tax information is available on NOVA's internet site at www.novachem.com.
Please contact your tax advisor for further information.
NOVA's share price decreased to U.S. $13.00 at September 30, 1998 from U.S. $21.38 at July 3, 1998.
NOVA's total return to shareholders was (39) percent for the quarter ending September 30, 1998, compared to a total return of (23) percent for the TSE 300 and (10) percent for the S & P 500.
NOVA's commodity chemicals peers have experienced an average decline of 31 percent from their 52 week high.
NOVA has experienced a 39 percent decline from its trading high of U.S. $21.45.
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| Forward-looking Information |
| The information in this news release contains forward-looking statements with respect to NOVA Corporation, its subsidiaries or affiliated companies. By their nature, these forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. These risks and uncertainties include commodity chemicals and feedstock prices, cost levels in the chemicals operations, Canadian/U.S. exchange rates, assumptions related to growth in capital investment and other risks detailed from time to time in the publicly filed disclosure documents and securities commission reports of NOVA Corporation and its subsidiaries or affiliated companies. |
FINANCIAL SCHEDULES AND STATEMENTS
| Changes in Net Income | |||||||||
| (unaudited; millions of U.S. dollars) | Q3 1998 Compared With |
First Nine Months 1998 Compared With First Nine Months 1997 |
|||||||
| Q2 1998 | Q3 1997 | ||||||||
| Lower product margins | $ | (1) | $ | (33) | $ | (81) | |||
| Higher (lower) sales volumes | (3) | 5 | 16 | ||||||
| Lower fixed costs | 7 | 8 | 8 | ||||||
| Higher licensing revenue | 2 | 3 | 3 | ||||||
| Styrenics restructuring charge | 12 | - | (12) | ||||||
| Higher (lower) equity earnings in Methanex | 4 | (16) | (51) | ||||||
| Higher equity earnings in Dynegy | 5 | 3 | 5 | ||||||
| Lower interest expense | 4 | 2 | - | ||||||
| Other | (3) | 2 | (2) | ||||||
| Increase (decrease) | |||||||||