Engineering News

NOVA Chemicals: Solid Performance
Wednesday January 26, 7:30 am ET

Stronger Balance Sheet

PITTSBURGH--(BUSINESS WIRE)--Jan. 26, 2005--
NOVA Chemicals Corporation

All financial information is in U.S. dollars unless otherwise indicated.

NOVA Chemicals will host a conference call today, Wednesday, Jan. 26, 2005, for investors and analysts at 1 p.m. EDT (11 a.m. MDT; 10 a.m. PDT). Media are welcome to join this call in a "listen only" mode. The dial in number for this call is (416) 405-9328. The replay number is (416) 695-5800 (Reservation No. 3099729). The live call is also available on the Internet at.

NOVA Chemicals Corporation (NOVA Chemicals) reported net income to common shareholders of $162 million ($1.78 per share diluted) for the fourth quarter of 2004. This compares to net income to common shareholders of $56 million ($0.60 per share diluted) in the third quarter of 2004.

In the fourth quarter of 2003, NOVA Chemicals reported a net loss to common shareholders of $15 million ($0.18 per share loss diluted).

For the full year 2004, net income to common shareholders was $252 million ($2.71 per share diluted) compared with a net loss of $1 million ($0.02 per share loss diluted) for 2003.

"I am very pleased with our operating results in a quarter that was impacted by a normal seasonal downturn in demand and highly volatile feedstock costs. In addition, our balance sheet strengthened considerably from an asset sale and a tax-related settlement," said Jeff Lipton, NOVA Chemicals' President and Chief Executive Officer.

The Olefins/Polyolefins business reported net income of $83 million in the fourth quarter, $5 million higher than the third quarter. Prices increased and contributions from ethylene co-products remained strong. Polyethylene sales volumes were down 2% versus the third quarter but were the second highest in our history.

The Styrenics business reported a net loss of $16 million in the fourth quarter, versus a third quarter net loss of $10 million. Overall, polymer prices were able to keep pace with increased feedstock costs. Styrene monomer margins fell as spot prices followed a rapid decline in spot benzene prices. Polymer volumes decreased 12% versus the third quarter on seasonally lower demand.

Corporate items increased net income by $97 million in the fourth quarter. These items included a $91 million (after-tax) gain from a tax-related settlement, and a $40 million (after-tax) gain on the sale of our interest in the Alberta Ethane Gathering System. These were offset by $29 million (after-tax) in mark-to-market charges related to our stock-based compensation and profit sharing programs and a $5 million (after-tax) restructuring charge related to the SCLAIR(TM) A-Line closure in the second quarter of 2004. Fourth Quarter 2004

The Olefins/Polyolefins business reported net income of $83 million in the fourth quarter of 2004, compared to net income of $78 million in the third quarter of 2004. Ethylene and polyethylene price increases offset the adverse effect of a strengthening Canadian dollar, an unplanned outage at our Corunna, Ontario flexi cracker and higher feedstock costs.

Feedstocks and Ethylene

Earnings from Ethylene operations were flat with the third quarter due to higher ethylene prices being completely offset with higher crude and condensate feedstock costs, slightly declining co-product pricing and a Corunna cracker outage that cost $4 million after-tax. USGC ethylene prices increased 18% from the third quarter while average WTI crude oil and NYMEX natural gas prices were up 10% and 18% respectively from the third quarter.

Our Joffre, Alberta ethane-based crackers' cash-cost advantage averaged approximately 10 cents per pound for the quarter over typical ethane-based U.S. Gulf Coast (USGC) ethylene plants, about the same as the third quarter.

Polyethylene

Fourth quarter weighted-average benchmark polyethylene prices were up about 8 cents per pound from the third quarter of 2004. NOVA Chemicals announced a 5 cents per pound polyethylene price increase effective December 1, 2004. An additional price increase of 4 cents per pound was announced at the end of December 2004 for implementation Feb. 1, 2005.

Total polyethylene sales volumes for the fourth quarter were down 2% from a record high third quarter sales volume of 842 million pounds, and were slightly higher than the fourth quarter of 2003. During the fourth quarter the polyethylene industry experienced a normal seasonal reduction in demand. For NOVA Chemicals, North American volumes were flat with the third quarter, and international volumes were down 12%. International sales represented 14% of NOVA Chemicals' total polyethylene sales volume this quarter.

Advanced SCLAIRTECH(TM) Polyethylene

NOVA Chemicals sold 186 million pounds of Advanced SCLAIRTECH polyethylene in the fourth quarter of 2004. Sales of higher-margin performance grades, including new rotational molding and thin-wall injection molding products, represented approximately 48% of plant capacity. This is up slightly from previous quarters. Sales of AST products were up 27% for the year.

Fourth Quarter 2004 versus Fourth Quarter 2003

Net income of $83 million in the fourth quarter of 2004 was up from net income of $27 million in the fourth quarter of 2003, primarily due to strong industry operating rates that are driving up polyethylene margins. As reported by the American Plastics Council (APC), industry operating rates for polyethylene in North America were 96% in the fourth quarter of 2004 versus 88% in the fourth quarter of 2003. Effective industry operating rates for ethylene in the United States, as reported by CMAI for the fourth quarter of 2004, were 95%, up from 94% in the fourth quarter of 2003.

Fiscal Year 2004 versus Fiscal Year 2003

Net income of $255 million for fiscal year 2004 was up from net income of $18 million for fiscal year 2003. EBITDA was $626 million in 2004, $341 million higher than 2003, due to higher industry operating rates, improvement in polyethylene margins, and stronger ethylene co-product contributions. During fiscal year 2004, APC reported North American industry operating rates for polyethylene of 94%, up from 85% for fiscal 2003. CMAI reported effective industry operating rates for ethylene in the United States for the fiscal year 2004 of 95% versus 89% for fiscal 2003.

Our ability to implement announced price increases depends on many factors that may be beyond our control, including market conditions, the supply/demand balance for each particular product and feedstock costs. Successful price increases, when realized, are typically phased in over several months, vary by product or market, and can be reduced in magnitude during the anticipated implementation period. See Forward-Looking Information.

STYRENICS BUSINESS

Review of Operations

Styrenics

Fourth Quarter 2004

The Styrenics business reported a net loss of $16 million in the fourth quarter, compared to a net loss of $10 million in the third quarter of 2004.

Styrene monomer margins declined in the fourth quarter. High benzene costs in inventory at Sept. 30, 2004 impacted our cost of sales in the fourth quarter and spot styrene prices declined rapidly in December following a sharp decline in spot benzene prices.

Third-party styrene monomer sales volume was up 16% from the third quarter. However, North American and European polymer volumes were down from the third quarter, as a result of the typical seasonal decline in demand and reductions in customer inventories. Polymer prices overall were able to keep pace with rising flow through feedstock costs, however prices in Europe were weaker than North America, particularly in December.

Styrene Monomer

The USGC fourth quarter average spot price for styrene was 56 cents per pound, essentially flat with the third quarter average price of 57 cents per pound. Average fourth quarter benchmark contract pricing was 68 cents per pound, up from the third quarter price of 66 cents per pound. Fourth quarter average benzene benchmark prices declined 3 cents per gallon to $3.59 per gallon but there was a 14% drop for the month of December.

NOVA Chemicals announced contract price increases for North American styrene monomer of 2 cents per pound effective Oct. 1, 2004, and 4 cents per pound effective Nov. 1, 2004. In Europe, the fourth quarter average price for styrene monomer was 65 cents per pound, up from the third quarter price of 59 cents per pound.

Solid Polystyrene (SPS)

North American and European SPS price increases kept pace with flow through feedstock costs. The weighted-average North American SPS benchmark price increased from the third quarter by 10 cents per pound. North American SPS volumes declined 9% and European volumes declined 8% over the third quarter as a result of the seasonal demand decline and customers depleting inventories.

NOVA Chemicals announced a European SPS price increase of 5.5 cents per pound effective Oct. 1, 2004.

Expandable Polystyrene (EPS)

North American EPS price increases kept pace with flow through feedstock costs despite seasonal volume declines. European EPS volumes declined, price increases did not keep pace with feedstock flow through costs and margins declined.

NOVA Chemicals announced a North American EPS price increase of 5 cents per pound effective Nov. 1, 2004; and European EPS price increases of 3 cents per pound effective Oct. 1, 2004 and 2.5 cents per pound effective Nov. 1, 2004.

Fourth Quarter 2004 versus Fourth Quarter 2003

The Styrenics business had a net loss of $16 million in the fourth quarter of 2004, compared to a net loss of $29 million in the fourth quarter of 2003, primarily due to increased styrene monomer sales. Volume increased 13% over the fourth quarter of 2003 due to increased styrene production at Bayport, Texas, where capacity was constrained from a fire in 2003.

Fiscal Year 2004 versus Fiscal Year 2003

The net loss of $69 million for fiscal year 2004 improved from a net loss of $127 million for fiscal 2003. Volumes increased by 509 million pounds in 2004, primarily in global styrene spot sales and North American polymers. Margins strengthened on stronger demand.

Joint Venture with BP

In November, NOVA Chemicals and BP plc (BP) announced a non-binding agreement in principle to merge their European styrenic polymers businesses into a new 50:50 Joint Venture. The Joint Venture is expected to be a leading manufacturer and marketer of styrenic polymers in Europe. The Joint Venture will be headquartered in Fribourg, Switzerland and is expected to generate approximately $1 billion U.S. in annual revenue from seven manufacturing sites in France, Germany, the Netherlands, Sweden and the United Kingdom. The Joint Venture will leverage the existing assets and capabilities of both participants and has the potential to deliver meaningful cost reductions and a stronger, broader product line to its customers. Pending final agreements and regulatory and other approvals, we anticipate the Joint Venture to be operational by mid-2005.

Our ability to implement announced price increases depends on many factors that may be beyond our control, including market conditions, the supply/demand balance for each particular product and feedstock costs. Successful price increases, when realized, are typically phased in over several months, vary by product or market, and can be reduced in magnitude during the anticipated implementation period. See Forward-Looking Information.

NOVA Chemicals' net debt to total capitalization ratio was 42.9% at Dec. 31, 2004. Cash on hand at the end of the fourth quarter was $245 million, up from $233 million at the end of the third quarter of 2004. During the fourth quarter, $116 million of cash was used to repurchase 2.7 million common shares.

NOVA Chemicals' funds from operations were $78 million for the fourth quarter of 2004, down from $129 million in the third quarter of 2004 due to higher operating losses in the Styrenics business, higher current tax expense, as well as higher accruals for corporate expenses and restructuring charges.

Operating working capital decreased by $81 million in the fourth quarter of 2004, related primarily to reductions in accounts receivable and increases in payables. Accounts receivable on December 31, 2004, net of the $110 million tax receivable, decreased due to lower sales in December versus September 2004. Receivables were further reduced by the $24 million increase in the usage of our securitization program at the end of Q4 versus the end of Q3. Quarter over quarter inventory increases were more than offset by increases in accounts payable over the same timeframe.

NOVA Chemicals assesses its working capital management effectiveness through a Cash Flow Cycle Time (CFCT) measure. CFCT measures working capital from operations in terms of the number of days sales (calculated as working capital from operations divided by average daily sales). This metric helps to determine which portion of changes in working capital results from factors other than price movements. CFCT was 35 days as of Dec. 31, 2004, versus our target range of 25 to 30 days, and up from 33 days as of Sept. 30, 2004, due to building of inventories for maintenance turnarounds and a temporary fall off of sales in December. (The receivable related to the $110 million tax-related settlement is eliminated from the CFCT calculation.)

During the fourth quarter, NOVA Chemicals sold its interest in the Alberta Ethane Gathering System (AEGS) for proceeds of $78 million and an after-tax gain of approximately $40 million. Capital expenditures were $94 million (after third-party project advances) in the fourth quarter of 2004, compared to $57 million in the third quarter of 2004 and $49 million in the fourth quarter of 2003.

NOVA Chemicals continued its share repurchase program during the fourth quarter. (See Normal Course Issuer Bid below.) In addition, the Company paid stock option exercise values of $17 million in cash in lieu of issuing stock in the fourth quarter.

Selling, general and administrative expenses (SG&A) increased by $2 million from the third quarter of 2004. SG&A was also up $23 million from the fourth quarter of 2003, and $83 million for fiscal 2004 versus fiscal 2003. The increase for the year was primarily due to the $76 million pre-tax impact of NOVA Chemicals' stock appreciation on the mark-to-market liability of our stock-based compensation plans, as well as a $9 million impact from a higher Canadian dollar and a higher euro.

A restructuring charge of $8 million ($5 million after-tax) was recorded in the fourth quarter of 2004 due to additional environmental and severance obligations related to the permanent 2004 shutdown of one of our linear low density polyethylene production lines at our St. Clair River polyethylene plant site.

Financing

NOVA Chemicals has a $300 million revolving credit facility, expiring April 1, 2007. NOVA Chemicals continues to comply with all financial covenants under the facility. As of Jan. 25, 2005, NOVA Chemicals has utilized $55 million of the revolving credit facility in the form of operating letters of credit.

In Sept. 2005, $100 million of debt will mature.

As of Dec. 31, 2004, the amount of receivables sold under the accounts receivable securitization program was $250 million, compared to $226 million as of Sept. 30, 2004.

Normal Course Issuer Bid

On July 21, 2004, NOVA Chemicals announced a share repurchase program for up to approximately 7.5 million common shares. As of Jan. 21, 2005, 5.1 million common shares have been repurchased at an average price of $48.02 Cdn.

FIFO Impact

NOVA Chemicals uses the first-in, first-out (FIFO) method of valuing inventory. Most of NOVA Chemicals' competitors use the last-in, first-out (LIFO) method. Because we use FIFO, a portion of the third quarter feedstock purchases flowed through the income statement in the fourth quarter. Fourth quarter average NYMEX natural gas pricing was higher than the third quarter average price by $1.03 per mmBTU and WTI crude was higher by $4.40 per bbl. Benchmark benzene prices fell during the quarter, starting the quarter at $3.95 per gallon and ending the quarter at $3.25 per gallon. We estimate that net income would have been about $14 million higher in the fourth quarter had NOVA Chemicals used the LIFO method of accounting.

Feedstock Derivative Positions

NOVA Chemicals maintains a derivatives program to manage its feedstock costs. The gain from natural gas and crude oil positions realized in the fourth quarter of 2004 was $6 million after-tax ($5 million gain after-tax for fiscal year 2004).

In addition, NOVA Chemicals is required to record on its balance sheet the market value of any outstanding feedstock positions that do not qualify for hedge accounting treatment. The gain or loss resulting from changes in the market value of positions is recorded through earnings each period. NOVA Chemicals has recorded $6 million of after-tax mark-to-market losses on outstanding feedstock derivative positions in the fourth quarter ($5 million gain after-tax for fiscal year 2004.) This is in addition to the realized gain reported above, bringing the total fiscal year gain to $10 million after-tax. There was no impact to NOVA Chemicals' income statement as the gain from the derivatives program in the fourth quarter of 2004 was entirely offset by the mark-to-market loss during the same time period.

Supplemental Measures

In addition to providing measures in accordance with Canadian GAAP, NOVA Chemicals presents certain supplemental measures. These are EBITDA (defined below), average capital employed (defined above), after-tax return on capital employed (defined above) and operated business income (loss) (defined above). It also includes net debt to total capitalization (see "Capitalization" table above), with net debt and total capitalization defined to be net of cash and cash equivalents in accordance with the debt covenants for its $300 million revolving credit facility. These measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.

EBITDA

This measure is provided to assist investors in determining the ability of NOVA Chemicals to generate cash from operations. EBITDA can be determined from the Consolidated Statement of Income (Loss) by adding back income taxes, interest expense, other gains and losses, earnings from equity investment in affiliates and depreciation and amortization. Segment EBITDA is determined as segment operating income or loss before depreciation and amortization.

NOVA Chemicals' share price on the New York Stock Exchange (NYSE) increased to U.S. $47.30 at Dec. 31, 2004 from U.S. $38.70 at Sept. 30, 2004. NOVA Chemicals' share value increased 22% for the quarter ending Dec. 31, 2004 on the NYSE and 16% on the Toronto Stock Exchange (TSX), while peer chemical companies' share values increased 18% on average and the S&P Chemicals Index increased 13%. The S&P/TSX Composite Index was up 7% and the S&P 500 was up 9% in the fourth quarter. As of Jan. 25, 2005, NOVA Chemicals' share price was U.S. $46.90, down 0.8% from Dec. 31, 2004. The S&P Chemicals Index was down 3.8% in the same period.

In the fourth quarter, approximately 59% of trading in NOVA Chemicals' shares took place on the TSX and 41% of trading took place in the U.S. For 2004, approximately 65% of trading in NOVA Chemicals' shares took place on the TSX and 35% of trading took place in the U.S.

Forward-Looking Information

The information in this news release contains forward-looking statements with respect to NOVA Chemicals, its subsidiaries and 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 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; 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; changes in, or the introduction of new laws and regulations relating to NOVA Chemicals' business, including environmental, competition and employment laws; loss of the services of any of NOVA Chemicals' executive officers; uncertainties associated with the North American, European and Asian economies; and other risks detailed from time to time in the publicly filed disclosure documents and securities commissions reports of NOVA Chemicals and its subsidiaries or affiliated companies.

Implementation of announced price increases depends on many factors, including market conditions, the supply/demand balance for each particular product and feedstock costs. Price increases have varying degrees of success. They are typically phased in and can differ by product or market. There can be no assurances that any announced price increases will be successful or will be realized within the anticipated time frame. In addition, benchmark price indices sometimes lag price increase announcements due to the timing of publication.

Source: NOVA Chemicals Corporation.

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