DBRS Confirms NOVA Chemicals Corporation at BBB (low), Stable Trends

DBRS has today confirmed the Issuer Rating and Unsecured Notes & Debentures rating of NOVA Chemicals Corporation (NOVA or the Company) at BBB (low) with a Stable trend based on the implied support provided by its wholly owned parent, International Petroleum Investment Company (IPIC), which is wholly owned by the Government of the Emirate of Abu Dhabi (details below). DBRS notes that NOVA has performed in line with expectations and its credit metrics are above the current rating range. However, NOVA has a weak business profile because of its highly volatile commodity chemical business, and must demonstrate an ability to maintain a stronger financial profile through a cycle before achieving the current ratings on a stand-alone basis.

NOVA’s operating performance has been on an upward trend, albeit intermittently, since being acquired by IPIC in 2009. EBIT in 2013 (as defined by DBRS) has recovered from a dip in 2012 but is still below 2011, although net income did exceed the 2011 level. Performance in 2013 was mixed, with strong operating profit in the polyethylene (PE) business offsetting a modest decline in the olefins business at the Joffre and Corunna facilities. Profit in the PE business was helped by record volume and higher selling prices, while higher feedstock (natural gas) and operating costs weighed on the olefins business. NOVA has made solid progress in strengthening its financial profile, and a large debt repayment in 2012 was a key contributing factor. Stronger operating results and associated cash flow in 2013 have maintained the improving trend in all debt coverage ratios. The Company’s financial profile is above the current rating range.

Operating conditions are expected to be modestly positive for NOVA in 2014. The cracker revamp at Corunna was completed as scheduled in early 2014. The Corunna operations should benefit from the lower feedstock cost (ethane from the Marcellus shale gas). The improving North American economy, while improving at a modest pace, should support favourable demand and pricing for polyethylene. DBRS expects the Company’s performance to continue to improve in 2014. Longer term, the Company is well positioned to benefit from the availability of cost competitive shale gas and expected growth in the North American chemical industry. NOVA has secured an adequate feedstock supply to its Joffre facility, with the addition of ethane extracted from off-gas produced at oil sands upgrading facilities. In addition, the Company has also been able to source ethane from the Williston Shale oil basin in North Dakota. Concerns regarding the stability of the long-term supply of feedstock are much reduced. Nevertheless, the Company’s performance continues to be exposed to the volatility of the commodity chemical industry, in line with historical patterns.

Cash generation from operations is expected to improve in line with earnings in 2014. However, capital expenditures are expected to remain elevated because of heavy investments related to NOVA 2020, a long-term asset strategy to capitalize on emerging feedstock opportunities and growing North American demand. NOVA expects capital expenditures in 2014 to increase by at least 50% over 2013 levels ($470 million). Furthermore, ongoing spending on NOVA 2020 projects will likely keep capital expenditures at high levels in the next few years. DBRS expects internal cash generation to grow in line with earnings, to be sufficient to meet funding needs and to be neutral in free cash flow during this heavy investment period. However, there is a downside risk of incurring a deficit in free cash flow because of an unexpected deterioration in operating performance.

The Company has continued to make progress in executing its growth strategy as detailed in the NOVA 2020 plan. The plan aims for growth in NOVA’s proprietary polyethylene technology to support its leadership position in the North American markets. NOVA has completed the Corunna Revamp and will stand to benefit from cost competitive ethane from the Marcellus Shale basin. The Company has also started work on its PE1 Expansion as well as the E2 Furnace Revamp at Joffre. NOVA has also announced its decision to move forward with the second phase of NOVA 2020, which will concentrate on cost-effective expansions and upgrades to its facilities in Sarnia, Ontario. The expansion and upgrading activities should improve the return on the Company’s asset base. Successful implementation of NOVA 2020 should help sustain its leadership position, moderate earnings volatility and strengthen its business profile.

NOVA’s current ratings are still influenced by the implied support of IPIC. DBRS expects that IPIC would provide financial support to NOVA in the event of potential distress, even though a formal guarantee has not been provided to NOVA bondholders. DBRS notes that actions taken by IPIC since the acquisition support this view. Without this implied support, the Company would continue to be rated in the upper range of the BB category. DBRS notes that NOVA has strengthened its financial profile considerably, which is above the current rating range. However, NOVA has a weak business profile because of its highly volatile commodity chemical business, and must demonstrate an ability to maintain a stronger financial profile through a cycle before achieving the current ratings on a stand-alone basis. Solid progress in executing the NOVA 2020 strategy and the resultant stronger business profile and less volatile earnings would support the Company in achieving the current ratings on a stand-alone basis.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.