Court of Queen’s Bench of Alberta

Citation: Dow Chemical Canada ULC v NOVA Chemicals Corporation, 2018 ABQB 482

Date: 20180620

Docket: 0601 07921

Registry: Calgary

Between:

Dow Chemical Canada ULC and Dow Europe GmbH

Plaintiffs/Defendants by Counterclaim

- and -

NOVA Chemicals Corporation

Defendant/Plaintiff by Counterclaim

Restriction on Publication

This decision has been redacted so that it may be published.

The unredacted decision may not be published to protect confidential proprietary information in accordance with orders made at trial, and shall be sealed in the court file in accordance with paragraph 1468.

Corrected judgment: A corrigendum was issued on October 11, 2018; the corrections have been made to the text and the corrigendum is appended to this judgment.

_______________________________________________________

Reasons for Judgment

of the

Honourable Madam Justice B.E. Romaine

______________________________________________________

2018 ABQB 482 (*)

Page 2

 

Table of Contents

 

DOW CLAIM

8

I.

Overview

8

II.

Introduction

9

III.

Detailed Submissions of the Parties with respect to the Dow Claim

10

IV.

Facts

12

V.

Principles of Contractual Interpretation

12

VI.

Allocation Claim

15

A.

Factual Context

15

B.

Parties and Agreements – Summary of Key Provisions

21

C.

Concept

26

D.

Analysis

27

E.

Nova Defences to Allocation Claim

37

1.

Ethane Shortage

37

2.

Disclosure

39

3.

Misrepresentations

43

F.

Analysis of Ethane Allocation as a Breach of Contract

44

G.

Analysis of Ethane Allocation as Conversion

45

VII.

Optimization Claim

46

A.

Introduction

46

B.

Evidence of Productive Capacity

47

1.

Sanjeev Kapur

47

2.

Chris Wallsgrove

54

C.

Nova Defence of Mechanical Constraints

55

1.

Introduction

55

2.

John T. Holloway

55

3.

Scott Ferrigno

64

4.

Nova Lay Witnesses

72

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a)

Admissibility of Evidence of Lay Witnesses

72

 

b)

David Gent

74

 

c)

Ron Just

80

 

d)

Jeffrey Kluthe

83

 

e)

Kevin Wilke

84

 

f)

Randy Saunders

89

 

g)

David Craig

91

 

h)

Yost Kieboom

92

 

i)

William Wade

96

 

j)

John Dennehy

102

5. Conclusions on Mechanical Constraints

104

 

a)

Furnace Burners and Coils

104

 

b)

Venturis

106

 

c)

E-502 Exchanger

107

 

d)

C2 Splitter – Hydrate Formation

107

 

e)

E-568 Exchanger

107

 

f)

E-565 Reboiler

108

 

g)

E-650

108

 

h)

TD-405 Steam Rack

109

 

i)

Crossover Piping

109

 

j)

Furnace Availability Issues – Miscellaneous

109

 

k)

Cooling Water System Debris

110

 

l)

T-301 Pressure Relief Devices

110

 

m)

K-570 Pressure Safety Valves

110

 

n)

K-400 Compressor

111

D.

Breach of the Joint Venture Agreements

112

1. Breach of Section 4.3(b) of the OSA

112

2. Breach of Section 4.4(a) of the OSA

114

 

a)

Constraints were reported to Dow

114

 

b)

Budgets as Approval of Operations

114

3. Breach of Section 7.3 of the OSA

115

4. Breach of Section 3.2(c) of OSA and Section 3.11 of the COA

117

E.

Conclusion on Optimization Claim

117

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VIII.

Damages

120

A.

Introduction

120

B.

Dow Lay Witnesses

120

1.

 

David Kyle

120

2.

 

Mariano Gutierrez

123

C.

Expert Witnesses

124

1.

 

Charles Mikulka

124

 

a)

Entitlement to damages

128

 

b)

Unlimited demand

128

 

c)

Reliance on the AUDB

129

 

d)

Lack of experience

132

 

e)

The Empress force majeure period

132

 

f)

Liquid Co-Products

132

 

g)

Ethane Purity Claim

134

 

h)

Adjustment Claims

137

 

 

i)

Life-to-date accounting reconciliation

137

 

 

ii) Ethane Fixed Cost Adjustment

138

 

 

iii)

Plant cost recovery

139

2.

 

John Williams

139

 

a)

Both Dow plaintiffs are entitled to damages

145

 

b)

Allocation and optimization claims are calculated on a combined basis

145

 

c)

E3 should have produced up to its productive capacity

146

 

d)

Unlimited demand for E3 ethylene

146

 

e)

The Dow plaintiffs were unable to further mitigate damages

149

 

f)

AUDB is an accurate measure of lost polyethylene sales

153

 

g)

Ordering of damages

154

 

 

i)

Average selling price

154

 

 

ii)

Under-nomination by Nova

155

 

 

iii)

Merchant market in Alberta

155

3.

 

ESI

..............................................................................................................................

157

 

a)

Mark Woods

158

 

b)

Scott Ferrigno

159

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c)

Mitigation

161

D.

Conclusion on Expert Opinions

162

E.

Nova Defences to Damages Claims

162

1. Exclusion of Liability under Contract

162

 

a)

Direct or Consequential

164

 

b)

Loss or Damage to E3

171

 

c)

Nova as Operator

172

 

d)

Gross Negligence or Wilful Misconduct

175

 

e)

Loss arising as a result of joint ownership on use of E3

180

 

f)

Declaratory Relief

180

2. Concurrent Claims in Tort and Contract

181

3. The Test for Unjust Enrichment

182

4.

 

Limitations of Actions

183

5.

 

Corporate Group Issue

185

F.

Infrastructure Revenues Claim

187

IX.

Additional Relief

191

A.

Currency Conversion

191

B.

Interest

191

C.

Other Relief

192

X.

Conclusion on the Dow Claim

192

NOVA COUNTERCLAIM

193

XI.

Introduction to the Counterclaim

193

XII.

Amendment of Pleadings

193

XIII.

Facts

194

XIV.

Positions of the Parties on the Counterclaim

199

A.

Nova’s Position

199

B.

Dow’s Position

200

XV.

Relevant Contractual Provisions

201

XVI.

Issues

204

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XVII. Analysis

205

A. What do Sections 5.1(a) and 5.15 of the OSA mean?

205

B.Do Sections 5.1(a) and 5.15 of the OSA place restrictions on Dow’s ability to acquire

ethane for LHC-1?

209

C.Has Dow breached its duty to act honestly and in good faith pursuant to section 3.11 of

the COA?

210

D.

Did the Dow Plaintiffs breach the OSA by effecting the Dow/UCC merger?

212

E.

Are the Notices issued by Nova valid?

212

F.

What are Nova’s remedies for Dow contractual breaches, if any?

215

G.Are sections 5.1(a) and 5.15 of the OSA unenforceable as a common law restraint of

trade?

217

H.Are Sections 5.1(a) and 5.15 of the OSA illegal and unenforceable under the Competition Act? 220

1. Overview of Relevant Provisions of the Competition Act

220

2. Application to the Joint Venture Restrictions Pre-March 2010

222

3.

Ancillary Restraint

231

4. Contravention of Section 90.1

231

5.

Expert Opinions

231

 

a) What are the consequences of the illegality of Sections 5.1(a) and 5.15?

232

XVIII. Other Claims

235

A.

The Low Conversion Claim

235

B.

The LCP Services Claim

235

C.

The Water Usage and Power Billing Adjustment Claim

236

XIX.

Conclusion on the Counterclaim

238

XX.

Final Comments

238

APPENDIX A – FACTUAL OVERVIEW AND CHRONOLOGY

240

A.

Description of Joffre Site and Products

240

1.

Ethylene

240

2.

The Joffre Site

240

3.

E3

240

B.

Ethane processing at E3

241

C.

Summary of pre-E3 site agreements

241

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1.

Ethylene Sales Agreement

241

2. Post 1998 Ethylene 2 Customers Agreement

242

3. Ethane to Ethylene Tolling Agreement

242

D.

History of E3 Development

243

E.

E3 Agreements

245

F.

The Dow/UCC Merger

249

G.

Development of the Concept of Ethane Allocation

250

H.

First Involvement of Dow

253

I.

Nomination Process

257

J.

Extension of Ethane Allocation

257

K.

The Ramachandran Years

276

APPENDIX B – ACRONYM GLOSSARY

301

APPENDIX C – COMPETITION ECONOMICS EXPERT OPINIONS

308

I.

Dr. Leonard Waverman

308

II.

Dr. Ramsay Shehadeh

314

III.

Dr. Nicola Mazzarotto

323

IV.

Conclusion

333

2018 ABQB 482 (*)

Page 8

DOW CLAIM

I.Overview

[1]Dow Chemical Canada ULC (Dow Canada) and NOVA Chemicals Corporation (Nova) jointly own one of the largest ethylene production facilities of its kind at Joffre, Alberta. This facility commenced operations in 2000, with Nova as both a joint venture partner and the operator of the facility. The dispute arises out of the operation of the facility. The parties have claimed and counterclaimed against each other for damages in the hundreds of millions of dollars. The matter was tried over a period of a year, with involvement of numerous counsel, voluminous documents and a large number of expert and lay witnesses.

[2]Dow alleges that Nova breached the joint venture agreements in six key ways:

1.Nova had a duty to run the facility at full rates when the Co-owners so nominated and it did not do so.

2.Nova had a duty to deliver to Dow a certain proportion of the facility’s production; it did not do that and instead converted to itself some of Dow’s share of the production through a scheme called “ethane allocation”.

3.Nova failed in its duty to pay to Dow its share of infrastructure capital fees.

4.Nova took cleaner fuel for the production of ethylene for its own uses and charged Dow an average fuel price.

5.Nova had a duty to account to Dow for each individual co-product produced at the facility; it did not do so.

6.Although some of these obligations are characterized in the joint venture agreements as operator obligations, Nova was not acting as operator when it took steps that put it in breach. Nova as Co-owner of the facility caused Nova as operator to be in breach of the joint venture agreements.

[3]Nova submits that this is mainly a dispute over contractual interpretation, and that Dow’s interpretation of the agreement is incorrect. Nova alleges that Dow is attempting to rewrite the agreements in a manner that would result in both a supply and a production guarantee that were not intended by the parties. Nova also submits that it had no choice but to respond to an unforeseen shortage of feedstock in operating the joint venture, and that it operated the facility in a safe and reasonable manner.

[4]The Dow plaintiffs seek damages in the Canadian dollar equivalent of $822,671,670 USD, plus interest and certain declaratory relief. They also ask for provision to be made for the top-up of damages beyond December 31, 2012, which is when, by agreement of the parties, evidence of damages was curtailed to the date of judgment.

[5]Nova counterclaims for breach of contract, failure to pay and unjust enrichment, and seeks damages in the amounts of $50,000,000 USD and $719,260.40 CAD. Nova also seeks certain injunctive and declaratory relief. The Nova counterclaim is determined in the second part of this decision.

2018 ABQB 482 (*)

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II.Introduction

[6]By agreement dated July 11, 1997, Nova and Union Carbide Canada Inc. (UCC) entered into a joint venture to build and operate an ethylene plant, which the parties referred to as E3 (hereafter, E3 or the Plant). When E3 was built, it was the largest single-train ethane cracker in the world.

[7]An ethylene plant, or “cracker,” produces ethylene, a hydrocarbon mixture and other

by-products, primarily, in this case, using ethane as a feedstock. Ethylene is an essential element in many plastic and petrochemical products.

[8]This lawsuit involves the operation of E3 and spans the years between 1997, when the joint venture was formed, until the end of 2012, when the parties to the litigation have agreed to cut off their evidence of operations for the purposes of this action.

[9]The construction of E3 was part of a larger project referred to as the “J200 Project”, which included petrochemical facilities both on and off Nova’s massive Joffre petrochemical site near Red Deer, Alberta (the Joffre Site) where Nova had already built two smaller ethane crackers, E1 and E2, and other facilities described later in this decision.

[10]In August 1999, the Dow Chemical Company (TDCC) announced that it was acquiring Union Carbide Corporation (UC). TDCC is the parent company of Dow Canada and Dow Europe GmbH (Dow Europe). UC is the parent company of UCC.

[11]In May 2001, as a step in the merger of TDCC and UC, UCC assigned its rights to the production of E3 to Union Carbide (Europe) S.A. (UCESA). In October 2001, UCC amalgamated with TDCC’s Canadian operations, becoming Dow Canada. At the same time, UCESA merged with Dow’s European corporate entity, becoming Dow Europe. Thus Dow Canada is now a Co-owner of E3 with Nova, and Dow Europe is entitled to Dow Canada’s share of ethylene and other products produced at E3.

[12]E3 commenced operations in July 2001. From early 2001, when Dow began its involvement with E3, problems arose between the two Co-owners. Nova is responsible under the joint venture agreement for sourcing ethane as a feedstock for E3 (the Pool or ethane Pool). Nova decided that it could not share information about the Pool as it was required to do under the joint venture agreements because Dow, unlike UCC, was competing with Nova to obtain ethane for its operations in Alberta. Dow was not in a position to comply with the contractual requirement that only Nova be allowed to source ethane contracts in the E3 “Pool area”, since, unlike UCC, it had been in the business of supplying ethane as feedstock to other facilities it owned in Alberta before the merger.

[13]In addition to these threshold issues, Nova very shortly implemented a scheme called

“ethane allocation”, which limited Dow’s share of ethylene produced by E3 on the basis that Nova had insufficient ethane to meet Joffre Site “demand” for ethane. Nova submits that this scheme is authorized under the joint venture agreements; Dow submits that it is not, and that, at any rate, it was unnecessary, was misrepresented to Dow, and is a breach of Nova’s responsibilities as Operator of E3.

[14]The parties disagree about what E3 was capable of producing, with Dow alleging that Nova failed to run the Plant at maximum capability because it did not need the ethylene for itself and that it sought to limit Dow as its major competitor. Nova submits that the Plant’s capacity to produce was limited by various factors.

2018 ABQB 482 (*)

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[15]Dow sues for damages in the amount of $678,754,502 for its main claims of losses due to ethane allocation and failure to optimize E3’s performance, and $116,740,202 relating to other claims and certain adjustments, $27,176,966 relating to an infrastructure revenue claim, and interest. Dow also applies for provision to be made for the calculation of remaining damages from December 31, 2012 until the date of these reasons. Finally, Dow seeks the removal of Nova as operator of E3 and such consequential relief as follows, including the appointment of an interim receiver or monitor. Nova defends on the basis of contractual authority and necessity, and relies on the limitation of liability provisions of the joint venture contracts and statutory limitation provisions. Nova counterclaims in the amount of $50,000,000 USD and $719,260.40 CAD on the basis of breach of contract, failure to pay, and unjust enrichment. Nova also seeks specific performance or a mandatory injunction, and in the alternative, declarative relief.

[16]This was a seven-month trial with numerous witnesses and a huge production of documents. Twenty-one counsel from six law firms participated in the trial in various capacities. The evidence primarily involved the period of time from February 2001 until the end of 2012 and included operational data for each of the three ethylene crackers on the Joffre Site during that period. Evidence with respect to the historical context of the joint venture from 1998 until E3 was completed was also presented.

[17]The two main issues with respect to the Dow claim are:

a)On the evidence, did Nova convert to its own use part of the ethylene produced at E3 that was contractually owned by the plaintiffs?

Nova concedes that it did take more than its ethylene production proportion of ethylene from E3, and the amount is not in issue. Nova submits that it was justified and had authority to do so.

b)Did Nova fail to run E3 to its productive capacity, and was that required by the Joint Venture agreements?

Nova submits that capacity was restrained by uncommon mechanical issues, but at any rate, there was no contractual obligation to run that way. It was only an objective.

[18]The issues with respect to the Nova counterclaim are identified in the second part of this decision.

III.Detailed Submissions of the Parties with respect to the Dow Claim

[19]Dow alleges breach of contract with respect to the E3 joint venture agreements. It alleges that Nova made decisions based on its own corporate needs and strategies, disregarding the rights of Dow and treating E3 as if it was a wholly-owned Nova plant and not owned jointly with Dow.

[20]Dow submits that Nova, through ethane allocation, took part of the ethylene and other products produced at E3 that belonged to Dow under the terms of the joint venture for its own use. Prior to June 30, 2004, Dow’s ownership proportion of E3 (defined in the joint venture agreements as Ethylene Production Proportion or EPP) was 44.484% and Nova’s EPP was 55.516%. Thereafter, Dow exercised an option that resulted in Dow’s EPP increasing, and, as a

2018 ABQB 482 (*)

Page 11

result, each Co-owner’s EPP was 50%. Dow submits that Nova converted some of Dow’s share of E3 production for its own use through ethane allocation, referred to as the Allocation Claim.

[21]Dow also submits that Nova failed to run E3 at full rates as it had a duty to do under the joint venture agreements and as both Co-owners have consistently requested and nominated. Its resulting claim for loss is referred to as the Optimization Claim.

[22]The specifics of Dow’s claims in respect to these allegations are as follows:

a)Nova’s imposition of ethane allocation has been:

(i)a repeated course of conduct in the nature of conversion; and

(ii)a breach of section 3.02(a) of the Plant Co-Owners Agreement (COA) and section 13.2 of the E3 Operating and Services Agreement (OSA), both of which mandate that Dow receive its EPP of the products produced at E3.

b)Nova’s failure to run E3 at full rates has been:

(i)a breach of its duties as agent to meet the Co-owners’ nominations for ethylene; and

(ii)a breach of sections 4.3(b), 4.4 (a) and 7.3 of the OSA.

[23]Dow also submits that Nova, as an E3 Co-owner, has breached section 3.2(c) of the OSA and section 3.11 of the COA.

[24]In addition, Dow submits Nova failed in its duty:

a)to pay Dow its share of the infrastructure capital fees;

b)to deliver aggregate Pool ethane to E3 (and by using cleaner incoming ethane for use

at its plant E2, using ethane with more CO2 at E3, and charging Dow the average Pool price);

c)to account to Dow for each individual co-product produced at E3; and

d)to act appropriately as Operator when it took steps that put it in breach (recognizing that some of these obligations are designated as “Operator obligations”). In other words, Dow submits that Nova as Co-owner caused Nova as Operator to be in breach of its duties.

[25]Nova submits that the Dow plaintiffs now attempt to revise and rewrite the commercial bargain in their interpretation of the joint venture agreements. Specifically, Nova says Dow’s interpretation:

a)requires a supply guarantee;

b)ignores the Ethane Pooling Principles;

c)results in a production guarantee; and

d)leads to unlimited liability of Nova.

[26]Nova submits that an ethane shortage justifies its development and use of ethane allocation, and that Dow knew about ethane allocation as it was occurring and failed to object to it. Further, Nova submits that it operated E3 to its productive capability, subject to mechanical issues that constrained production.

2018 ABQB 482 (*)

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[27]Nova submits that even if it is found to have breached the provisions of the joint venture agreements, the Dow plaintiffs’ damages claim is fundamentally flawed because:

a)the Operator is not liable for any damages barring a finding of gross negligence or wilful misconduct, and even then, any claim for loss of products, loss of profits and loss of production are barred;

b)the Allocation and Optimization Claims are limitations-barred prior to June 29, 2004, and certain ancillary claims are barred in their entirety;

c)even if damages are not entirely barred, the Dow plaintiffs are not entitled to the damages they have claimed and have failed to prove their alleged losses:

i)Dow Canada has no entitlement to E3 ethylene;

ii)the plaintiffs have not assessed damages based on the existence of separate legal entities acting in their own rational interests;

iii)TDCC’s actions, not Nova’s, caused many of the plaintiffs’ losses;

iv)the Dow plaintiffs have not proven many of their losses:

A)unlimited demand is a fallacy;

B)the Asset Utilization Database (AUDB) was not proven and is not reliable; and

C)raw material losses recorded in the AUDB are not evidence of lost production due to lack of E3 ethylene; and

v)the Dow plaintiffs failed to mitigate their losses; and

d)Dow’s damages expert improperly relied on unproven facts and made methodological errors in assessing damages.

[28]The specifics of Nova’s counterclaim will be dealt with later in this decision.

IV. Facts

[29]The facts as I have found them are set out both in Appendix A and in my analyses of the issues. Where there is a discrepancy between the facts set out in the Appendix A and other parts of this decision, the facts set out in the Appendix A prevail, unless indicated otherwise.

Appendix B sets out an Acronym Glossary for ease of reference.

V.Principles of Contractual Interpretation

[30]The Alberta Court of Appeal has recently set out a useful review of the applicable principles of contractual interpretation in IFP Technologies (Canada) Inc v EnCana Midstream and Marketing, 2017 ABCA 157 at paras 79-89, leave to appeal to SCC refused, 37712 (April 5, 2018).

[31]The goal of contractual interpretation is to determine the objective intent of the parties at the time the contract was made through the application of legal principles of interpretation: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at para 49. To this end, “the exercise is not to determine what the parties subjectively intended but what a reasonable person would

2018 ABQB 482 (*)

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objectively have understood from the words of the document read as a whole and from the factual matrix”: Geoff R Hall, Canadian Contractual Interpretation Law, 2nd ed (Markham: LexisNexis, 2012) at 33. Accordingly, disputed contractual terms must be interpreted, not in isolation, but in light of the contract as a whole: Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4 at para 64.

[32]In Sattva, the Chief Justice commented that courts ought to “have regard for the surrounding circumstances of the contract – often referred to as the factual matrix – when interpreting a written contract”: at para 46. Further “ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning”: at para 47.

[33]Evidence of surrounding circumstances is not used to add to, subtract from, vary or contradict a contract, but as an objective interpretive aid to determine the meaning of the words the parties used: Sattva at paras 59-61. As stated in IFP at para 81:

[While the surrounding circumstances] cannot be used to craft a new agreement, a trial judge must consider [them] to ensure the written words of the contract are not looked at in isolation or divorced from the background context against which the words were chosen. The goal is to deepen the ... understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.

[34]A trial judge must consider the relevant surrounding circumstances even in the absence of ambiguity: IFP at para 82 [citations omitted]. Surrounding circumstances are explained in IFP at para 83:

... As to what is meant by surrounding circumstances, this consists of “objective evidence of the background facts at the time of the execution of the contract ...

that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”: Sattva, supra at para 58. Examples of relevant background facts include: (1) the genesis, aim or purpose of the contract; (2) the nature of the relationship created by the contract; and (3) the nature or custom of the market or industry in which the contract was executed: Sattva, supra paras 47-48; Geoffrey L. Moore Realty Inc. v The Manitoba Motor League, 2003 MBCA 71 at para 15, 173 Man R (2d) 300; King v Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80 at para 72, 270 Man R (2d) 63: [Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., [2016 SCC 37] at paras 30, 106.

[35]The Chief Justice further commented at para 83 of IFP that surrounding circumstances can include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”, citing Sattva at para 58, where Lord Hoffman is quoted in Investors Compensation Scheme Ltd v West Bromich Building Society, [1998] 1 WLR 896 at 913 (UKHL).

[36]Evidence of negotiations is not itself admissible as part of the factual matrix: Hall at 29; Keephills Aggregate Company Limited v Riverview Properties Inc, 2011 ABCA 101 at para 13. Nor generally are prior drafts of an agreement: Wesbell Networks Inc (Receiver of) v Bell Canada, 2015 ONCA 33 at para 13. As stated in IFP at para 85:

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Page 14

...[E]vidence of negotiations is relevant insofar as that evidence shows the factual matrix, for example by helping to explain the genesis and aim of the contract: Hall, supra at 30, 80. Moreover, written evidence of those negotiations is far more objective evidence of the parties’ intentions than after-the-fact evidence from opposing parties about oral statements made during negotiations. [emphasis in original]

[37]With respect to the role of parol evidence in resolving ambiguity, the Chief Justice commented at paras 86-87 of IFP:

Further, where a contract itself is ambiguous, extrinsic evidence, that is parol evidence, may be admitted to resolve the ambiguity. ... In the face of ambiguity, the interpretation promoting business efficacy is to be preferred so long as it is supported by the text: ...

Mere difficulty in interpreting a contract is not the same as ambiguity: ... A contract is ambiguous when the words are “reasonably susceptible of more than one meaning” ... An ambiguity in the contract also allows courts to consider evidence of the parties’ subsequent conduct post-contract: ... But it must be understood that even under this ambiguity exception to the parol evidence rule, there are limitations as to what parol evidence is admissible. In this regard, evidence as to the parties’ subjective intentions is generally inadmissible. [citations omitted; emphasis added]

[38]Commercial contracts should be interpreted in accordance with sound commercial principles and good business sense: John D McCamus, The Law of Contracts, 2nd ed (Toronto: Irwin Law, 2012) at 763-766. The standard imposed by a requirement of commercial reasonableness was considered in Hall at 245:

...Clearly it is highly contextual, dependent upon the relevant circumstances and the facts of the case. This point was well expressed in a labour arbitration decision in the following terms:

...What it means is efforts that are reasonable in the circumstances all things considered. What is reasonable in the circumstances will obviously depend on the facts of particular case.

The standard of commercially reasonable efforts does not oblige a party to exhaust all possible means of fulfilling the condition, nor to undertake steps which are expensive, time consuming or commercially irresponsible.

[39]Provisions should not read in isolation, but in harmony with the agreement as a whole: McClelland and Stewart Limited v The Mutual Life Assurance Company of Canada, [1981] 2 SCR 6.

[40]Generally, words should be given their ordinary and literal meaning: Indian Molybdenum Ltd v The King, [1951] SCR viii. However, if there are alternatives, the court should reject an interpretation or a literal meaning that would make the provision or the agreement ineffective, superfluous, absurd, unjust, commercially unreasonable, or destructive of the commercial objective of the agreement: Consolidated-Bathurst Export Ltd v Mutual Boiler & Machinery Insurance Co,[1980] 1 SCR 888; Scanlon v Castlepoint Development Corp (1992), 11 OR (3d)

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744 (CA), leave to appeal to SCC refused, 23427 (August 5, 1993); Aita v Silverstone Towers Ltd (1978), 19 OR (2d) 681 (CA).

VI. Allocation Claim

A.Factual Context

[41]There is no dispute that Nova was concerned at the senior management level about the merger of Dow and UCC. Nova management was particularly concerned about the prospect of sharing information about E3 with the only other major purchaser of ethane in Alberta, which was also its major competitor. It took action shortly after the announcement of the merger in August 1999 to ensure that information about ethane supply contracts, previously available to UCC under the terms of the E3 joint venture agreements, not be made available to Dow, and it terminated meetings of the feedstock subcommittee set up under the agreements. It filed objections to the merger with the US Federal Trade Commission and the Canadian Competition Tribunal, submitting unsuccessfully that Dow should be required to divest its interest in E3 as a condition of the merger.

[42]As early as the spring of 2000, Nova management was discussing options to alleviate its competition concerns. Notes from a meeting dated February 14, 2001 of members of a small working group formed by Nova in response to the announcement of the merger indicate that Nova’s “wish list” included minimizing the supply of ethylene to Dow, taking Dow out of E3, and increasing Nova autonomy in managing the ethane Pool.

[43]The evidence establishes that in late 2000 or early 2001, Allan Broenink, at the time a manager of the Ethylene Business Team (EBT), was the originator of the concept of ethane allocation.

[44]As described in the Factual Overview and Chronology in Appendix A, Mr. Broenink and members of the EBT first checked the E3 joint venture agreements to see if there was any provision regarding the distribution of ethane to E3 in periods of perceived shortfall, and found nothing. Mr. Broenink found justification for the concept in provisions set out in a 1996 agreement called the Post-1998 Agreement among Cost-of-Service Customers of E2. He conceded that, in formulating the concept, it was his responsibility to produce the best commercial result possible for Nova. He also acknowledged that, although he was aware of the provisions of the OSA that would have allowed Nova to declare an insufficient supply of ethane as an event of force majeure, Nova senior management had directed that this provision not be used for a shortage of ethane, as it would require disclosure to the public investment markets.

[45]It is also clear from the evidence that, at the time, Nova knew that it would not require more ethylene than it was able to produce at the Joffre Site until the end of 2001.

[46]Nova now finds justification for ethane allocation in section 4.6 of the OSA, which will be discussed later in this decision.

[47]The first clear discussion of ethane allocation with Dow occurred on June 2, 2001. Although the Joint Venture Management Committee (the E3 Management Committee) met on June 1, 2001, ethane allocation was not on the agenda. Instead, Mr. Broenink and George Pan, Nova’s Director, Ethylene Business, met with Hugh Fergusson and Steve Williams of Dow in a separate meeting.

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[48]Mr. Fergusson and Mr. Williams had become involved in Dow’s Alberta operations through the UCC/Dow merger earlier that year and were Dow’s representatives on the E3 Management Committee. Mr. Fergusson, who became Vice President, Hydrocarbon and Energy for Dow in Canada, joined the committee in February 2001, and Mr. Williams came on board later.

[49]Mr. Broenink’s presentation to Mr. Ferguson and Mr. Williams indicated that the ethane supply to the Joffre Pool had been less than actual demand for several months. This was inaccurate, in that a recent internal Nova presentation had confirmed that Nova’s share of ethylene from the Joffre Site was higher than its expected demand.

[50]The presentation stated that E1 was then not operating due to scheduled maintenance. If E1 started up on June 1, 2001, the Nova people indicated that, “Joffre would be in immediate ethane allocation”.

[51]Nova proposed that it would defer the E1 startup and “deem” ethane allocation (and hence, ethylene production) as if E1 had started up on June 1, giving Nova and Dow percentages in production corresponding to what was defined as “Feedstock Fractions” in the joint venture agreements. “Feedstock Fractions” are the amounts that the Co-owners are to pay for their share of the Pool ethane acquired by Nova. They are a lower percent than the EPP. Thus, during this period of deemed ethane allocation, Dow would obtain less ethylene from the joint venture than it would be entitled to, given its EPP.

[52]Mr. Fergusson did not recall this meeting. He testified that the main focus of the E3 Management Committee’s activity in the spring and summer of 2001 was ensuring that E3 would be up and running and achieving commercial operation. He was aware of Nova indications that it was experiencing an ethane shortage, guessing that he first became aware of that in the summer of 2001, following E3’s rate trial. He recalled being told by Nova that this was a temporary situation. He understood that, under the protocol being proposed, each of E1, E2 and E3 “would share in the pain.” He understood that this would have some impact on the amount of ethylene Dow would receive, that it would lose ethylene pounds at E2 and E3, but that there would be no economic consequences for Dow at E1.

[53]For the period that E1 was offline in the spring and summer of 2001, Mr. Fergusson accepted Nova’s recommendation as outlined in the presentation.

[54]Mr. Broenink conceded that there was no disclosure during the meeting of the economic impact of deemed ethane allocation on Nova as opposed to Dow. He acknowledged that he was not aware of any occasion on which Nova disclosed to Dow that, under ethane allocation, Dow was receiving a different percentage of its demand for ethylene than Nova was. Nova never disclosed the extent to which its internal or external demands were met during periods of ethane allocation.

[55]On June 4, 2001, Mr. Broenink reported in an internal newsletter that Nova had initiated ethane allocation with Dow and that this allowed Nova “to capture about 30,000,000 pounds of ethylene previously assumed [by Dow] in June”. This refers to the reduced amount of ethylene delivered to Dow as a result of deemed ethane allocation.

[56]The temporary deemed ethane allocation was only supposed to extend to the end of the E1 outage. E1 went back on-line on September 10, 2001, but despite this, Nova imposed a new form of ethane allocation on Dow until February 2002. In mid-September, all three plants were

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operational, and Nova was supposedly allocating ethane to each plant, as opposed to the earlier version of ethane allocation that distributed ethylene as though there had been a deemed allocation of ethane at E1. No one at Nova sought agreement from Dow on this form of ethane allocation, but Mr. Broenink informed Margaret Eastman of Dow in September 2001 that ethane allocation was continuing.

[57]Nova concedes that, despite its representations to Dow that ethane was being allocated to each plant, the scheme that commenced after September 10, 2001 did not involve any actual allocation of ethane to the three plants. Ethane was only “notionally divided”. In reality, Nova regularly allocated more ethane to E3, and then took part of Dow’s EPP of the ethylene actually produced at E3.

[58]The reason for actually allocating more ethane to E3 is clear: E3 was the newest, most efficient cracker and could produce more ethylene at a lower cost.

[59]On December 18, 2001, Mr. Fergusson questioned why an E3 daily status update that he had received had reported that E3’s production for that day was 81.4% of capacity, and that E3’s “current constraints” were described in the document as a “business plan”. Mr. Fergusson noted that E3 was running at about 600 million pounds per year below capability and “unless I misunderstand the situation this shortfall is entirely the result of a shortage of ethane”. Mr. Pan of Nova responded that he agreed that “business plan” was too broad a description to explain

E3’s operating rate versus capability, and the description would be changed to “ethane supply”.

[60]It was Mr. Broenink’s responsibility, as manager of the EBT, to decide whether or not to impose ethane allocation, with the assistance of two other members of the team. Mr. Broenink decided that if current ethane supply was less than 165,000 barrels a day, the ethane nameplate capacity of the three crackers exclusive of the E1 Toll, ethane allocation would be imposed. The E1Toll was an agreement whereby up to 600 million pounds of Dow ethane could be processed into ethylene through E1. The term of the agreement was from January 1, 1999 to December 31, 2008.

[61]The evidence establishes that no one at Nova told Dow prior to the fall of 2004, at an E3 Management Committee meeting or elsewhere, that when Nova imposed ethane allocation, each cracker at the Joffre Site did not in fact receive its pro rata share of supply based on nameplate.

[62]In August 2002, Mr. Pan sent Mr. Fergusson a draft agreement called the “Joffre Site Agreement”, and a draft amendment to the existing E2 optimization agreement among Dow, Nova and others, both prepared by Mr. Broenink. In addition to referring to Nova’s proposal to use propane as an alternate fuel for E3, the draft agreements provided that all feedstock acquired for the Joffre Site would be pooled, and each cracker would be allocated a portion of the Pool based on ethane nameplate or Feedstock Fractions. It also provided that all ethylene and co- products produced at the Joffre Site would be pooled and allocated among the three crackers based on the Feedstock Fractions, which was basically the ethane allocation scheme that Nova had already been implementing. The amendment referenced to this the idea as “site optimization”.

[63]Mr. Fergusson told Mr. Pan and Graham Flint, Nova’s Vice President, Western Operations, that this proposal was not something Dow would agree to. I accept that Mr. Fergusson did not understand that Nova was already implementing “site optimization” through ethane allocation. Although Dow declined to participate in propane use and declined the site

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optimization amendments, Nova proceeded with the use of propane as an alternate fuel and continued to impose ethane allocation.

[64]Mr. Fergusson testified that, from time to time, Nova would talk about optimizing the Joffre Site, the theory being that, regardless of ownership, Nova would manage the three crackers however it saw fit and that E3 would be part of the site as a whole. Whenever this was mentioned by Nova, he “pushed back as hard as [he] could”. Dow’s view was that E3 was a stand-alone facility and it made no sense to combine the operations of E3, the “world’s greatest, newest ethane cracker”, with E1, a plant that was 30 years old.

[65]Mr. Fergusson wrote to Nova management in September and October 2002, pointing out that “if there is a shortfall of ethane … this would be an event of force majeure”. He wrote again in January 2003, asserting that Nova’s obligation to maximize production to meet demand at E3 was completely clear, and that Nova’s other obligations were not Dow’s concern. He noted that what was happening was in fundamental breach of Nova’s obligations.

[66]Mr. Flint and Rick Henson, Vice President, Petrochemicals, were aware that Dow was opposed to ethane allocation. When Chris Foy, Nova’s “resident expert” on the E3 joint venture agreements, spoke to them in October 2003 about obtaining Dow’s consent to ethane allocation, they indicated that there was no point as Dow would not enter into such an agreement.

[67]During the years of his tenure as Vice President of Dow, Mr. Fergusson attempted to negotiate a manufacturing joint venture with Nova, under which each of Nova and Dow would be responsible for supplying their pro rata share of ethane feedstock to E3, thus resolving Nova’s allegations of a shortage of feedstock.

[68]In April 2004, at a meeting of senior executives of Dow and Nova, Mr. Flint made a presentation that included references to “[the] Joffre Pool developed to ensure equitable sharing between [Nova] and UCC of ethane supply risk/cost”. The presentation noted that there would be no ethane available to increase E3’s capacity as anticipated by the Capacity Optimization Program (COP) undertaken in 2002 to improve E3’s performance until “Base Ethane Supply” had been filled.

[69]The presentation included a pictorial explanation to Dow executives of ethane allocation. Nova did not explain that it was actually allocating more ethane than disclosed to E3 and taking a larger share of the ethylene produced at E3 for itself. The presentation purported to show the “allocated share” of ethane for each plant, and that “such methodology ensures that each of the ethylene plants receives the same percentage of available ethane as they have paid fixed costs for”. Nova was not imposing ethane allocation at the time of the presentation.

[70]Mr. Ranesh Ramachandran became President of Dow Canada and head of hydrocarbons in May or June 2004, commuting to Calgary from Houston until September 2004.

[71]Mr. Ramachandran said that his expectation when he became President of Dow Canada was that E3’s capacity was '''''''' ''''' ''''''' billion pounds, with Dow entitled to half of the ethylene output. Dow almost always nominated 100% of its share of the output. He became concerned when he discovered that E3 was not producing as much ethylene as was expected. He first inquired internally about this at Dow and then raised the issue with Nova.

[72]Mr. Ramachandran testified that he was given many reasons why E3 was not running as hard as it should, but the predominant one was that Nova did not have enough ethane to run through E3. Mr. Ramchandran was referred to a Nova nomination email dated June 30, 2004

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directed to Ms. Eastman. It confirmed that Nova was nominating 100% of its share of E3 production for July 2004. It also noted that “[b]ased on ethane supply forecasts, ethane allocation will be in effect in July, 2004”.

[73]Mr. Ramachandran testified that this was the first time that he was exposed to the term

“ethane allocation”. He tried to find out what it meant. He testified that the Dow employees were a little confused by the term, but indicated that it was probably related to the fact that Nova did not have enough ethane to run E3 at its full rate, so there must be some sort of allocation. Different people were telling him different things.

[74]On July 21, 2004, Mr. Ramachandran emailed a list of issues and questions to Val Mirosh of Nova for the purpose of developing a position paper on what was happening. His questions included the following:

a)During periods when the Pool does not have sufficient ethane to supply capacity requirements for each of E1, E2 and E3, on what basis is the available ethane allocated among those three plants? What other factors (other than scheduled shutdowns for maintenance and other work), including contractual provisions that bind Nova, affect decisions about the rates at which to operate manufacturing units?

b)Having exercised the option on the seventh furnace, Dow’s Ethylene Production Proportion (being its entitlement to a share of all products of E3) is now 50%. Are there other factors that Nova believes affect Dow’s entitlement to E3 outputs (ethylene and other products)? If so, what are they and pursuant to what provision of what agreement or instrument binding on Dow do they operate?

c)In the case of (a), are the applicable decisions sanctioned pursuant to a provision of an agreement to which Dow or Union Carbide is a party or some other instrument that is binding on Dow? If so please describe ...

[75]Ms. Eastman sent Dow’s August 2004 nomination for E3 ethylene in a format different from prior nominations, nominating “the greater of [Dow’s] 50% share of E3 nameplate capacity or its 50% share of E3 actual production”.

[76]Mr. Broenink responded that, due to “insufficient ethane feedstock in the pool to meet site demands,” Dow would receive “the equivalent volume of ethylene derived from its 25.578% share of the available ethane in the pool ...” Mr. Broenink conceded that what he meant by site demands was 165,000 barrels a day, a number derived from the nameplate capacities of the three crackers minus the E1 Toll, and not related to actual demand at all.

[77]Mr. Ramachandran was unsatisfied with Mr. Broenink’s letter and he, Mr. Fergusson and Nova management including Mr. Flint met on August 11, 2004.

[78]Mr. Flint testified that he attempted to describe how ethane allocation worked in an email dated August 12, 2004.

[79]The email referred to “requirements of E1 and E2”, which Mr. Flint conceded did not mean actual requirements but hypothetical requirements if E1 and E2 were filled to their nameplate.

[80]He also conceded that when he referred to demands for ethylene production, he meant capacity. In the email, he indicated that each plant received the same percentage of available

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ethane as their percentage paid for fixed costs. Mr. Flint conceded that this was not accurate, that Nova was actually taking ethane from E1 and E2 and using it as E3 ethane.

[81]Mr. Ramachandran completely disagreed with the concept as it was described to him. He tried to resolve the issue by suggesting alternatives, such as Dow paying a higher fixed cost percentage, but received a response from Mr. Flint that, for the first time, referred to section 4.6 of the OSA as a rationale for ethane allocation. That section, discussed later in this decision, includes an acknowledgement that the Operator will provide Services to all facilities on the Joffre Site. Mr. Flint’s response, included the following comments:

...

Ethane supply is being allocated to each of the Joffre assets in accordance with the Operator’s obligations to provide services to all facilities on the Joffre Site, including E1 & E2, without discrimination on the basis of ownership of any one particular manufacturing unit at the Site.

I have attempted to point out that allocating ethane in times of shortage on a preferential basis to E3 results in the other plants at Joffre being short of ethane supply to meet their ethane demands.

...

Preferentially supplying ethane to E3 would breach the Operator’s obligation to not discriminate on the basis of ownership but more importantly effect NOVA’s ability to supply its third party and internal ethylene supply commitments.

[82]Mr. Flint conceded that the reference to “demands” in the second excerpted paragraph was “not quite true”, as it was actually a reference to nameplate capacity. He also acknowledged that he did not disclose to Mr. Ramachandran that Nova was not supplying ethane to each cracker according to the Feedstock Fractions but instead was supplying more ethane to E3.

[83]Mr. Flint also acknowledged that, despite the reference to the reason why ethane was not allocated preferentially to E3, preferential allocation is what Nova had actually been doing. He conceded that, at time of ethane allocation, Nova considered itself free to supply ethane to any of the three crackers, and generally decided to put more in E3. Thus, Nova was receiving the benefit of a greater portion of E3’s ethylene than its contractual EPP most of the time, more than it had nominated, and Dow was receiving less than its EPP most of the time, less than it had nominated.

[84]Mr. Ramachandran attempted to find a solution to the issue, and also expressed concern over Nova’s failure to run E3 at maximum rates. Various offers and counter-offers were made throughout the fall of 2004. In September, Nova made a streaming proposal to Dow that Dow found to be unacceptable. Mr. Fergusson provided a critique of the proposal, commenting that the strongest argument Dow had was non-performance under the OSA, but that litigation would take a long time to resolve in a booming market for ethylene. Mr. Ramachandran agreed.

[85]He reported internally in November 2004 that he had learned that Nova was taking the position that, even if there was more ethylene made in E3, Dow was not entitled to 50% of the E3 output. Mr. Ramachandran said that Dow made it clear that it disagreed with what Nova had been doing, and the business solution was to bring more ethane into the system. He was still hopeful that, through the use of streaming and other mechanisms, litigation could be avoided.

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[86]On November 22, 2004, Nova sent Mr. Ramachandran a draft letter of intent to address the supply of ethane issue. The letter again included a provision that purported to “formally” adopt the ethane allocation protocol as a means of allocating ethylene production.

[87]Mr. Ramachandran told Nova that it was silly to try to back-door something into an agreement on an issue about which they had a fundamental difference of opinion.

[88]In May 2005, however, Dow agreed that between May 1, 2005 and October 31, 2006, it would accept an ethane allocation protocol during periods of time in which there was an insufficient supply of ethane from the Pool to meet Pool user demand as a condition of a streaming agreement. However, Nova actually imposed ethane allocation during the term of this agreement if available ethane supply was less than the nameplate capacity of the three crackers less the Dow toll, rather than on the basis of the demands of the pool users.

[89]At an October 2005 meeting of senior representatives of Dow and Nova, Dow again told Nova that the allocation protocol was not in accordance with the E3 joint venture agreements and that 50% of any ethylene and co-products produced at E3 during these periods belonged to Dow. Nova reiterated that it was allowed to allocate ethylene from E3 in the manner in which it did. The parties agreed that Dow would take the lead in designing a mechanism to stream additional ethane to E3.

[90]The evidence is clear that in January 2008, Nova recognized that Joffre’s Site capacity was substantially higher than Nova’s ethylene demand, and that, to meet such demands, Nova could run E3 and E2 to capacity and limit E1 to a low level of production. It also recognized that, if it filled E3 up to its full capacity of ''''''''' BPY and delivered half of the ethylene produced to Dow, Dow would be balanced in its ethylene demand and would not need to use the expensive E1 Toll.

[91]In December 2008, Mr. Broenink informed Dow that demand at the Joffre Site had dropped dramatically and would not recover until sometime in 2009. As “Operator”, he indicated that Nova would reject a “significant portion of December’s ethane supply” to reduce working capital. However, he advised that Nova was forecasting a potential shortage of ethane “to meet Joffre demand” in 2009, and ethane allocation may be required later in 2009. This was despite advice from David Tulk, a Nova employee who was at that point purporting to act as Operator. Mr. Tulk’s initial concerns were that he was “not comfortable with the risk” Nova was taking with this plan, as “[o]nce a barrel is rejected, it is gone forever” and that the second and third quarters of 2009 would be very challenging. Dow objected to this plan, indicating that Nova had no authority to do this without the prior consent of the E3 Management Committee, but Nova proceeded with the plan.

B. Parties and Agreements – Summary of Key Provisions

[92]The E3 joint venture is governed by 11 project agreements, all dated July 11, 1997. The original signatories are Nova (then Nova Chemicals Ltd.) and UCC. All of the contracts relate to E3; matters relating to E1 and E2 are not included in the contracts except in a limited way.

[93]On May 1, 1998, UCC assigned to UCESA its interest in the “Inputs” and “Outputs” of E3, and the rights and obligations in and to the same. Since October 2001, the plaintiff Dow Canada has been the legal successor to UCC and the plaintiff Dow Europe has been the legal successor to UCESA.

[94]The two agreements that are the most relevant to this action are the COA and the OSA.

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[95]Under the COA, each Co-owner owns the “Products,” being the ethylene and other products produced by E3, in quantities pro rata to its respective Ethylene Production Proportion (EPP). Section 3.02 provides that the Co-owners agree to design, construct and operate the Plant with the objective of meeting the reasonable requirements of the Co-owners and that, except as otherwise agreed by a Co-owner with respect to its entitlement, each Co-owner shall be entitled to receive all Products produced at the Plant in quantities pro rata to its respective EPP.

[96]The COA provides for the establishment of an E3 Management Committee to “oversee, supervise and direct, on behalf of the Co-owners, the ownership, management and use of the Plant”. The COA provides that the E3 Management Committee decisions require the “unanimous consent of the Co-owners at any meeting or by way of a resolution in writing”.

[97]The OSA provides that, among other things, unanimous consent of the E3 Management Committee is required before there may be any curtailment of E3’s production.

[98]Section 4.1 of the OSA provides for the appointment of Nova as Operator with full power and authority to act as the sole and exclusive agent of the Co-owners “for the purposes necessary to carry out its duties and obligations under [the OSA] as the agent of the Co-owners, in accordance with, and subject to, the provisions of [the OSA]” and the direction of the E3 Management Committee.

[99]The Operator is defined in the OSA as “that Person appointed as such... in its capacity as operator of the Plant and not in any other capacity”. Under the COA, the Operator means Nova in its capacity as Operator of the Plant pursuant to the OSA.

[100]Section 1.6 of the OSA stipulates that, “[e]xcept as expressly provided [in the OSA] in respect of the Operator”, the OSA “shall not be considered to have created an agency relationship between any of the Parties” [emphasis added]. It also provides that “[n]othing at law or in equity and nothing contained in this Agreement shall be construed to create or impose fiduciary obligations between the Parties or on the Operator to the Co-owners.”

[101]Section 4.3 of the OSA sets out some of the Operator’s duties, subject to the terms of the agreement and the direction of the E3 Management Committee. These duties include:

a)conducting the “Operations”, which are defined as the work and activities performed in respect of E3, including the production of ethylene from E3 and other products produced at E3 “with the objective that [E3], subject to the direction of the Management Committee, will optimize Product production and achieve first decile performance when compared to other ethylene plants in North America”; and

b)subject to sections 4.5 and 4.6, provide the “Services”, defined as being all services and utilities to the extent required to be supplied to E3 to permit the Operator to conduct the Operations, including “Ethane Services”, defined as a portion of the Services to be provided by the Operator including the acquisition of ethane.

[102]Thus, one of Nova’s duties as Operator under the OSA is to acquire ethane feedstock with the objective of optimizing the production of ethylene and other products from E3. Dow submits that this means acquiring enough ethane feedstock to fill E3; Nova disagrees. It is not necessary that I decide this issue, however, because Nova has conceded that at all times it had acquired enough ethane to fill E3.

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[103]The OSA provides for the creation of a “Pool” of contractual rights to purchase ethane from third parties.

[104]The Pool is defined as “the aggregate of all Ethane ... arrangements” existing at any particular time “which have been entered into or obtained by the Operator in providing the Ethane Services” [emphasis added]. Thus, the terms “Operator”, “Operations”, “Ethane Services” and “Pool” in the OSA all refer, directly or indirectly, to E3. However, Nova may request ethane from the Pool for two other uses: use at E1 and E2, and use as an ethylene buffer for the Cochin Pipeline. Either Co-owner as a “Pool User” may request ethane from the Pool for other uses, although neither did. The Operator has the discretion to agree to supply ethane for such other uses.

[105]The OSA authorizes Nova to acquire unlimited volumes of Pool ethane without Dow’s consent. Nova was free to acquire more ethane than necessary to fill E3, at whatever price it chose to pay. Thus, the average Pool price paid by Dow may increase if Nova chooses to purchase more ethane than necessary to fill E3, but that was a contractual risk accepted by the Co-owners. There are other contractual provisions that provide a method of reviewing and controlling this discretion.

[106]The OSA provides that, monthly, each Co-owner is required to provide a “nomination” of its estimated requirements for ethylene production in the coming month. In section 7.1, the Co- owners are required to provide a one-month estimate, a three-month estimate and a quarterly estimate, and the Operator is required to provide a forecast of its ability to produce ethylene from E3 during the various periods. The longer-term estimates were abandoned by both Co-owners shortly after E3 became operational. Subject to section 7.2, every month each Co-owner is obligated to take delivery of the quantity of ethylene from E3 so nominated and produced in its EPP of daily E3 production. Section 7.2 allows a Co-owner to change its nomination up to the day before the month begins. The Operator is required to use reasonable efforts to meet such adjusted nomination. There is no nomination procedure for E1 or E2 included in the OSA.

[107]Each of Nova and Dow almost invariably nominated their full entitlement to E3’s production. However, if a Co-owner nominates less than its full entitlement, the other Co-owner is entitled to take up the remainder.

[108]Section 13.2 of the OSA provides that, subject to certain exceptions not relevant to the issues, each Co-owner has the right to take in kind “a proportion of the Products produced at [E3] equal to its respective Ethylene Production Proportion”. The Operator, also subject to certain exceptions, has the duty of delivering to each Co-owner “a proportion equal to its Ethylene Production Proportion [or EPP] ... of ethylene as and when produced by the Plant at a certain delivery point and other products, as and when produced at E3, at the plant gate.”

[109]As noted previously, under the OSA, the Ethylene Production Proportion, or EPP, is defined as a party’s proportionate entitlement to ethylene production from E3 at a specific time. The definition provides that:

A Party’s Ethylene Production Proportion shall at the commencement of Initial Operations be that proportion of Ethylene production from the initial Capacity of the Plant to which such Party is entitled and thereafter, upon any expansion of the Plant, shall be adjusted to include a proportion of the incremental Capacity of

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such expansion equivalent to the proportion to which such Party has participated in the construction of such expansion.

[110]Schedule G of the OSA sets out a sample determination of the EPPs for the initial

capacity of E3. It provides that “[t]he starting point in the calculation for [EPP] is the Base Plant and each Co-owner’s right with respect to such Plant” is then set out. The initial EPPs are calculated to be 44.48% of production for UCC and 55.52% for Nova, increasing to 50/50 if, as it did, Dow elected to buy into a seventh furnace.

[111]Thus, Dow submits, and I agree, that, as the Co-owner’s agent, the Operator is to receive its product nominations as requests for ethane in order to produce ethylene in accordance with the nominations, which the Co-owners are then entitled to take in kind. It submits that the sole exception is if the Operator lacks the “ability” to meet the nominations of its principals.

[112]In addition to the Operator’s designation as the agent of the Co-owners and the provisions noted previously, the joint venture agreements contain additional provisions relating to the operations of E3:

a)Section 7.3 of the OSA provides that “[i]t is the intent and objective of the Co-owners that the Plant continually operate (subject to scheduled turnarounds) at not less than Ethylene Nameplate Capacity of the Plant and that each Co-owner continually take 100% of its Ethylene Production Proportion of Product produced at the Plant.” Dow refers to this as the “duty to operate at full capacity.” Ethylene Nameplate Capacity (ENC) means “the capacity of an ethylene plant to produce ethylene in a year as determined by the Operator in the manner provided for in Schedule E”. In other words, ENC is the estimated actual capacity of the Plant to produce ethylene in a year, taking into account certain deductions.

b)As previously noted, the Services required to be provided by the Operator include “Ethylene Services”, a subset of Services generally. This includes acquiring the ethane required to permit the Operator to conduct Operations [ss 4.3(c), 1.1(x), (bj) and (c1)] (hereafter, “the duty to provide Ethane Services”). The parties to the OSA acknowledge in section 4.6 that Nova will be providing “services in the nature of Services” to all facilities on the Joffre Site as “operator of the balance of the site,” which is consistent with Nova’s right to acquire ethane in excess of the requirements of E3, “with the objectives of maximizing efficient, flexible and safe operation of the Site as a whole without discrimination on the basis of ownership of any particular manufacturing unit at the Site...”

c)As noted previously, Nova as Operator must conduct E3’s Operations as agent of the Co-owners “in accordance with, and subject to the provisions of the [OSA] and the direction of the Management Committee”. Section 4.2 of the OSA provides that, subject to any limitations imposed by the Management Committee, “the Operator shall conduct the Operations in accordance with this Agreement and shall perform the duties provided for in Section 4.3 in a manner as would a prudent operator of a like petrochemical production facility”. Since duties set out in section 4.3 include, indirectly, the provision of Ethane Services, the provision of such Services is subject to the standard of care of a prudent operator. Section 4.3(c) refers to Services, of which Ethane Services are a subset, and which therefore include as a duty of the Operator the acquisition of ethane for E3. In performing these duties, the Operator is

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acting as agent for the Co-owners, as set out in section 4.1. Section 4.3 does not purport to list all of the duties of the Operator; it specifically is subject to the “terms of this Agreement”, some of which set out additional duties.

d)Section 4.4 of the OSA sets out actions by the Operator that require Management Committee approval, including any action to cease or curtail production at E3.

[113]Nova submits that, where the parties have deliberately selected and repeatedly used words such as “duties” or “obligation” to describe a contractual requirement incumbent upon the Operator, the absence of such terms in another sections of the joint venture agreements should be interpreted by the Court to mean that the parties did not intend the other provision to impose or imply such a duty or obligation. Such an interpretation, Nova argues, ensures commercial certainty, which the parties intended Article 4 to afford to both agent and principal.

[114]However, Article 4 does not simply set out the duties of the Operator. It is entitled

“Operator and Management Committee”, and provides, in part, for the division of responsibilities between the Operator and the E3 Management Committee, including what the Operator cannot do without E3 Management Committee approval. For example, section 4.4 provides that the Operator cannot cease or curtail production at E3 without E3 Management Committee approval, subject to certain exceptions such as force majeure. Article 7, which sets out other duties of the Operator, is entitled “Nomination Procedure” and describes the interaction between the Operator and the Co-owners with respect to nominations. Section 4.1 does not restrict the Operator’s appointment as agent to the duties set out in section 4.3, but provides that it is the agent of the Co-owners “for the purpose necessary to carry out its duties and obligation under this Agreement”.

[115]Section 13.2 sets out certain obligations of the Operator in the event a Co-owner decides to take ethylene or co-products in kind.

[116]The force majeure provisions of the OSA as set out in Article 23 provide that a party’s contractual obligations may be suspended by reason of, among other things, a “shortage of

...feedstock.” A party prevented from fulfilling any obligation by a force majeure must promptly give the other party notice of the force majeure and the affected obligations, including reasonably full particulars.

[117]The term “Feedstock Fraction” is referred to in section 5.3 of the OSA, under the heading “Allocation of Ethane Fixed Costs”. The section reads as follows:

All Ethane Fixed Costs invoiced to and paid by the Operator in a Month shall be allocated to the Pool Users in accordance with their respective Feedstock Fraction. The Feedstock Fraction applicable to a Co-owner in a Month and the Ethane Fixed Costs allocated to such Co-owner in such Month will be reflected in the Feedstock Cost Statement delivered to such Co-owner in such Month ...

[118]Ethane Fixed Costs are defined as the costs of acquiring, administering and storing ethane for the Pool. Pool Users are defined as Nova and UC in respect of their total entitlement to request Pool ethane, and Co-owners are defined as UC and Nova in their capacities as owners of E3.

[119]Section 5.9 sets out the method of determining the Feedstock Fractions. Feedstock Fraction is defined at any particular time in respect of Nova as “the fraction which results when the Total NOVA Pool Ethane is divided by the sum of the Total NOVA Pool Ethane and Total

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Union Carbide Pool Ethane” and, in respect of UC, “the fraction which results when the [Nova fraction] is subtracted from 1.00000.

[120]Total Nova Pool Ethane means the aggregate of Nova Proprietary Ethane and Nova Joffre Ethane. The difference between these two categories is not relevant to the issues in this litigation.

[121]Section 5.9 also sets out how the Initial Feedstock Fractions of the Co-owners are to be calculated. Further discussion of section 5.9 and the use of Feedstock Fractions is found under “Damages.”

[122]Section 2.1 of the OSA provides that the Operator will account for and allocate to the Co-owners the costs associated with the acquisition and handling of ethane in accordance with section 5, and that Appendices F(A) and F(F) set forth the form of Feedstock Cost Statement to be issued.

[123]Appendix F(A) of the OSA sets out the form of monthly Feedstock Cost Statement and Appendix F(B) provides a sample feed stock fraction calculation.

C.Concept

[124]Section 3.11 of the COA provides that each Co-owner agrees to act honestly and in good faith, and in accordance with the provisions of the joint venture agreement with respect to the ownership and use of the Plant, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise as co-owner in comparable circumstances.

[125]Section 5.01 provides that no Co-owner shall be liable to the other Co-owner, as a result of the joint ownership or use of the Plant, for any Excluded Damages.

[126]Nova admits that when it imposed ethane allocation, it took part of E3’s production that would have been allocated to Dow if E3’s production had been allocated in accordance with the EPPs. The amounts are not in issue. Nova concedes that it took for itself more than its EPP of E3’s ethylene and products, and gave Dow less than its EPP.

[127]While Nova says that “there was no written ‘rulebook’ concerning the imposition of ethane allocation”, it submits that it followed a consistent formula. Nova says that, following E1 resuming operations in September 2001, it implemented ethane allocation as follows:

a)in a month when the available ethane forecast from Nova’s ethane suppliers and inventory was less than 165,000 bpd (which Nova characterizes as sufficient ethane to operate all three crackers at the Joffre Site at what it called Site Nameplate Capacity), Mr. Broenink would direct that ethane allocation be implemented;

b)ethane allocation was discontinued on rare occasions where Nova had lower demand for ethylene in the coming month;

c)once allocation was implemented:

(i)Pool ethane was notionally divided between the Pool Users based upon their respective Feedstock Fractions;

(ii)all ethane was then pooled and processed at the Joffre Site to maximize ethylene production. This generally meant running E3 in preference to E1 and E2, subject to:

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A)E3 plant constraints; and

B)E1 and E2 entering false load operations; and

(iii)E1, E2, and E3 would move to low conversion operations, thus maximizing the ethylene yield from the available ethane; and

d)ethylene produced at the Joffre Site would be distributed between Nova and Dow Europe pro rata to their respective Feedstock Fractions.

[128]Nova concedes that the result of ethane allocation was that Dow’s share of ethylene production was generally less than its EPP of E3’s actual ethylene production, and Nova’s share of ethylene production was generally higher than its EPP.

[129]Nova also concedes that “ethane allocation” as it was practiced after September 2001 did not involve actual allocation of ethane to the three plants; ethane was only “notionally divided”.

[130]Nova used certain software to track ethylene production at and delivery from each of the three crackers. When ethane allocation was imposed, a Nova employee would manually replace the contractual, hard-coded EPPs and enter what Nova calls the “modified EPPs” into the computer program. Dow’s modified EPP would almost always be lower, and Nova’s almost always higher, than the contractual EPPs.

[131]It is also noteworthy that Nova calculated E3’s “share” of ethane by using its original design nameplate capacity figure, but calculated higher “shares” for E1 and E2 by using their updated, higher nameplate capacity figures. Nova also factored into the calculation about whether ethane allocation should be imposed the maximum possible E1 Toll volume, not the volume actually processed. In time, Nova abbreviated this threshold calculation for imposing “ethane allocation” on Dow to “165,000 barrels of available ethane.”

[132]In deciding whether 165,000 barrels per day of ethane was available in a given month, Mr. Broenink would take into account Nova’s forecast of fresh ethane supply and what was available from storage. Ms. Eastman was notified of whether ethane allocation would be imposed through the nomination process. Once Mr. Broenink had decided that ethane allocation would be implemented, one of Nova’s EBT members would create a preliminary production plan.

[133]From June 2002 onward, the preliminary production plan was subject to consideration by the Nova Joffre Production Planning Team (the JPPT). The purpose of the JPPT was to maximize the production of ethylene at E1, E2 and E3 during periods of alleged feedstock shortage at the lowest cost per incremental pound. However, the JPPT played no role in deciding when ethane allocation was to be imposed. Mr. Broenink made that decision until he left the EBT at the end of 2004, and then Mr. Baker made the decision in the same manner.

[134]The JPPT optimized production by running all three crackers at the Joffre site at low furnace conversions, by filling E3 with ethane first (subject to avoidance of false load at E1 and E2), and cracking propane at E1 and E2 as an alternative feedstock.

D.Analysis

[135]The factual questions with respect to this claim are whether, on the evidence, Dow has established that, through ethane allocation, Nova converted for its own use part of the ethylene produced at E3, contrary to the joint venture agreements, and whether Dow knew about and/or

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consented to such ethane allocation. The legal question is whether the joint venture agreements authorized Nova to implement ethane allocation.

[136]There is no express provision for ethane allocation in the E3 joint venture agreements. Based on the COA, each of Nova and Dow owns the ethylene and other products produced at E3 pro rata to their EPPs.

[137]Dow submits that ethane allocation is prima facie a conversion and a breach of contract. However, Nova submits that certain provisions of the E3 contracts authorize Nova to impose ethane allocation by implication.

[138]The following is an analysis of Nova’s submissions in that regard:

a)Nova attempts to justify the use of Feedstock Fractions in its calculations under ethane allocation as the basis that this “conformed” to the OSA, submitting that “the Pool Users’ entitlement to Ethane from the Pool derives from their agreement to pay the Ethane Fixed Costs associated with the volume of Ethane which they have requested from the Operator”. This ignores the Co-owners’ entitlement to their EPP of ethylene, which is the issue here. Nova also argues that the use of Feedstock Fractions reflects the parties’ intention that Pool ethane was for use at all three ethylene plants at the site. Dow does not argue that Pool ethane could not be used for E1 and E2, only that the OSA did not create an equal entitlement of all three plants in that regard. As Dow has noted, Nova was free to acquire ethane in excess of what was necessary for E3, and to supply it to E1 and E2 upon request.

b)Nova also submits that the method of allocating ethane to the Pool Users is consistent with the Post 1998 Agreement, which, it submits, “forms part of the factual matrix within which the OSA was negotiated” and which can be used as an interpretive aid in considering the OSA. This does not help Nova, since the Post 1998 Agreement contains express language relating to site optimization that is missing from the OSA. If site optimization was what the parties intended, Nova had the example of specific language that would accomplish this, and it was not used in the joint venture agreements. The Post 1998 Agreement was a different agreement between different, albeit somewhat overlapping, parties.

c)Section 5.1(d) of the OSA provides that ethane “shall be made available to all Pool Users in accordance with the provisions of this Article 5”. Nova submits that this means that it was justified in imposing ethane allocation.

However, this provision does not authorize allocation of Pool ethane on the basis of Feedstock Fractions or otherwise. “Pool Users” are Nova and Dow. Dow is a Pool User in respect of both the quantity of ethane that Dow has requested be delivered and the Operator has agreed to supply for use at E3, and for other uses outside of E3 upon request and as agreed to by the Operator. Nova is a Pool User in respect of both the quantity of ethane that Nova has requested be delivered by the Operator and the Operator has agreed to supply for use at E1, E2 and E3 (and for minor buffer usage) and for other uses, upon request and as agreed to by the Operator. Section 5.1(d) does not imply that ethane requested for E1 and E2 or for other uses could be supplied by the Operator in any way that would leave E3 deficient. A preference for supplying E3

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is not created by the definitions of Pool Users, but by the clear duty of the Operator to conduct Operations with the Objective of optimizing Product production at E3.

In fact, Nova never made a formal request of the Operator to supply ethane to E1 and E2 in years before these plants were transferred to its subsidiary, Nova Chemicals Canada Limited, in 2001 and 2004, and the only request for additional ethane from Nova or its subsidiary was made by Nova on May 9, 2009 in relation to E1, and never followed up.

The Operator is, in any event, not required to supply ethane from the Pool for E1 and E2 unless it agrees to do so. It is the definitions of “Services” and “Operations” that are key, and neither require the Operator’s agreement to fulfill its section 4.3(b) and

(c) duties.

Nova submits that a combination of the definitions of Pool Users, Feedstock Fractions and Nova Joffre Ethane mandates that ethane is to be made available in accordance with the Feedstock Fractions of the Pool Users in E1, E2 and E3. This interpretation requires the definitions of “Services” and “Operations”, and the references in “Nova Joffre Ethane” and “Union Carbide Joffre Ethane” to the requirement of the Operator’s agreement to supply and to the Operator’s duty under section 4.3(b), to be disregarded, and cannot prevail.

The reference to the remainder of Article 5 does not help Nova. The objective of section 5.1 is to obtain for the Co-owners “the lowest cost, secure supply sources of ethane”, and it is expressly stated to be “subject to the terms and conditions of this Agreement”. As noted by Dow, Nova is free to acquire further volumes of ethane for E1 and E2, and, in fact, the price of that ethane would be averaged out in the Pool and shared by Dow, ensuring that Nova could not feed cheaper ethane to E1 and E2.

Nova submits that subsections 5.1(c) and 5.1(d) of the OSA, through their reference to “Pool Users”, give force to the intention of the parties that Ethane Services are to be provided to the whole of the Joffre Site without priority to any particular plant.

However, “Ethane Services” are a subset of “Services”, which are services required to be supplied to or at E3. “Pool Users” means Nova and UCC/Dow, including with respect to both Joffre Ethane and Proprietary Ethane, but both uses require a request of the Operator and the Operator’s consent to supply. As noted previously, there is no evidence that Nova requested Joffre ethane for use at E1 or E2, other than a single instance that was not followed up. The only evidence of requests is that each of Nova and Dow almost always nominated their entire share of ethylene from E3 in accordance with the OSA, implying a request for enough ethane to produce that amount of ethylene. Neither section 5.1(c) nor 5.1(d) refer to equal priority; in fact, much of Article 5 refers to the process that a Co-owner must go through to access Proprietary Ethane. If ethane is requested for E1 and E2, and this would result in the Operator being unable to comply with its duty under 4.3(b), the Operator would have to refuse or to obtain more ethane to meet the additional demands.

d) Section 4.6 of the OSA entitled “Provision of Services” reads as follows:

The parties acknowledge that Nova, in addition to being Operator of the Plant, is also operator of the balance of the site and that, in

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accordance with and subject to the provisions of this Agreement, services in the nature of the Services are being provided to all facilities on the Site (and in the case of Ethane Services the Operator will also provide such services to Pool Users for Proprietary Ethane and to Nova in connection with its Corunna Plant operations) with the objectives of maximizing efficient, flexible and safe operation of the Site as a whole without discrimination on the basis of ownership of any particular manufacturing unit at the Site and achieving overall lower costs for such services, based on inter alia scale, inventory management and centralized procurement expertise. [emphasis added]

[139]Nova submits that this section entitles it to ration ethane among the plants at Joffre as it sees fit.

[140]This mischaracterizes section 4.6, which is, as Dow submits, a shield provision, not a sword. It is an acknowledgment by the Co-owners that Nova is also the Operator of the rest of the Joffre Site, and provides services similar to ethane supply to its other facilities. It permits this situation for the purpose of the objectives of: (1) maximizing efficiency, flexibility and safety in the operation of the Site, without discrimination on the basis of ownership; and (2) achieving overall lower costs. The words “without discrimination on the basis of ownership” modify the objective of efficient, flexible and safe operation of the Site, and are as much for Dow’s protection as for Nova’s. In other words, in providing services to facilities other than E3, Nova may not discriminate on the basis of its ownership of the other facilities. These words do not qualify the obligation to provide 50% of E3’s output to Dow or the Operator’s obligation to acquire ethane for E3, or its duty to optimize production at E3.

[141]Nova refers to the phrase “without discrimination on the basis of ownership of any particular manufacturing unit at the Site” as a “contractual obligation”, but it is an acknowledged objective, not an obligation, and specifically, an objective with respect to “maximizing efficient, flexible and safe operation of the Site as a whole.”

[142]Nova submits that ethane allocation had four elements, all of which are founded in section 4.6 of the OSA:

1.the Operator’s obligation not to discriminate in the provision of the

“Services” including Ethane Services on the basis of plant ownership;

2.the Operator’s entitlement to allocate Ethane amongst the three ethylene plants at the Joffre Site in the event of a feedstock shortage consistent with this obligation of non-discrimination;

3.the Operator’s entitlement to optimize the efficient and flexible operation of the entire Joffre Site in order to maximize the quantity of ethylene manufactured on a site-wide basis; and

4.the Operator’s power to “deem back” ethylene production to E1 and E2 so as not to discriminate in the provision of “Services” to the three ethylene plants on the basis of ownership, as Ethane that would otherwise have been supplied to E1 and E2 was instead streamed to E3 in order to maximize site-wide ethylene yield.

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[143]With respect to the first element, Nova submits that section 4.6 of the OSA “required and empowered Nova to provide Services, including Ethane Services, to all three crackers at the Joffre Site.” This is not correct. “Services” are defined by the OSA as services provided by the Operator to the Co-owners “to or at the Plant”. The acknowledgement in section 4.6 stipulates that, in addition to Nova’s provision of the Services to the E3 Co-owners as the Operator, “services in the nature of the Services are being provided to all facilities on the Site” by Nova as “operator of the balance of the Site”. This makes it clear that these other services are not “Services”, and the Operator is not providing them, rather they are provided by Nova in another capacity as the operator of the balance of the Site under other arrangements. Nova submits that while services to or at the Plant, the scope of “Ethane Services” extends beyond E3. This too is incorrect. “Ethane Services” are a subset of the “Services” that are to be provided to E3.

[144]As noted by Dow, it makes no sense for a provision in an agreement between the Co- owners of E3 and their Operator as part of a joint venture relating to E3 to have an overarching purpose of “governing” how services are to be provided to other units on site that have different ownership, may have their own contractual arrangements, and are not even all ethylene plants. What does make commercial sense is that section 4.6 is an acknowledgement that the Joffre Site includes other plants, and that, on that Site, Nova has other roles that might intersect with its role as the E3 Operator.

[145]I find that section 4.6 is a recognition of Nova’s role in providing services to other facilities on the Joffre site, that because of this, economies of scale may be achievable, and that section 4.6 is the Co-owners’ acknowledgment that this is a permissible state of affairs as long as Nova did not favour itself over its Co-owner’s interests.

[146]With respect to the second element, that “the Operator’s entitlement to allocate Ethane amongst the three plants” in the event of an ethane shortage consistent with “the obligation of non-discrimination”, as noted, there is no right of ethane allocation in the OSA, and the Operator’s duty to optimize production at E3 affords preference to E3 in the allocation.

[147]The third element, the Operator’s entitlement to optimize the efficient operation of the Site “in order to maximize the quantity of ethylene manufactured on a Site-wide basis”, is also an inaccurate characterization of section 4.6. Nova’s obligation to optimize production is set out in section 4.3(b), which imposes a duty on the Operator to conduct Operations “with the objective ... of optimizing Product production” at E3. Section 4.6 does not mention the optimization of production. At any rate, Nova concedes that ethane allocation did not maximize ethylene production on a site-wide basis, as it did not create any greater volume of ethylene produced at Joffre, but instead altered the shares of ethylene that were delivered to Nova and Dow.

[148]The fourth element is also a skewed interpretation of section 4.6. The prohibition against discrimination does not empower the Operator to do anything; it prevents conduct that may be discriminatory. There is nothing in section 4.6 that allows the Operator to deem back ethylene production to E1 and E2 or that allows ethane that would otherwise be supplied to E1 and E2 to instead be streamed to E3 “in order to maximize site-wide ethylene yield”. This interpretation implies a great deal into section 4.6 without justification.

[149]Nova submits that, insofar that Nova has a duty as Operator under section 4.3(c) to provide Services to E3, that duty is subordinated to the provision of Services to the whole of the Joffre Site, relying on the words “Subject to Sections 4.5 and 4.6” in section 4.3(c). However,

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section 4.6’s acknowledgment of Nova’s provision of services to other Joffre facilities is itself “in accordance with and subject to the provision of this Agreement”. If section 4.6 was intended to subordinate otherwise clear duties of the Operator, and if the words “without discrimination on the basis of ownership” were intended to be an over-arching contractual duty and empowerment, that overarching duty and power would have been drafted in a clear manner, and it would not be necessary to contort the words of section 4.6.

[150]It is noteworthy that Nova recognized that Dow would not agree to any “site optimization” agreement, despite its efforts to promote that principle. Site optimization does not make commercial sense in the context of the joint venture.

[151]I also note Nova’s admission that the EBT initially reviewed the E3 contracts for

language permitting some form of ethane allocation, and found none. Section 4.6 was not raised as a justification for ethane allocation until Mr. Flint’s August 12, 2004 email. While the issue of whether section 4.6 authorizes ethane allocation is a legal question of contract interpretation, this failure to find any clear power to impose ethane allocation by the EBT supports Dow’s allegation that Nova’s view at the time was that section 4.6 did not provide the required authorization.

[152]In support of the fourth element, Nova also submits that, through a combination of sections 5.2, 4.6 and 7.1, Nova as Operator has no obligation to supply sufficient ethane from the Pool to run E3 at maximum capacity or to meet the Co-owners’ nominations at the expense of E1 and/or E2. In particular, Nova submits that it:

a)had broad discretion pursuant to section 5.2 of the OSA to provide Ethane Services, with no requirement of consent from the E3 Management Committee;

b)was to provide Ethane Services with the “objectives of maximizing efficient, flexible and safe operation of the Site as a whole without discrimination on the basis of ownership of any particular manufacturing unit at the Site” pursuant to section 4.6; and

c)was only obligated to provide the Co-owners with a “forecast of its ability to produce Ethylene during the forecast periods” subsequent to receiving the Co-owners’ nominations, pursuant to section 7.1.

[153]As noted previously, the objective of maximizing the efficient, flexible and safe operation of the Site without discrimination was an objective, not a duty, relating to “services in the nature of Services” to all facilities on the Site, not “Ethane Services”. It was not an over-arching contractual imperative that could be interpreted in a manner that overrides the duty to provide Ethane Services. Taken as a whole, these provisions do not eliminate the Operator’s duties to provide Ethane Services to E3, even as an implied term. At any rate, the joint venture agreements include a prohibition against implied terms.

[154]Nova submits that an interpretation of the contracts that would require the maximization of ethylene production at E3 is an “elevation” of a commercial joint venture into a supply agreement with obligations of guaranteed delivery. If by this, Nova means a commitment to acquire enough ethane to fill E3, that is one of Nova’s duties as Operator as part of the provision of Services. Nova submits that it is commercially unreasonable for the contracts to be interpreted as imposing a duty on it as Operator to acquire enough ethane to fill E3 “for a nominal and fixed annual fee of $2.7 million”. In fact, the annual fee also includes the recovery of substantial costs for Nova personnel, including, for example, more than $15 million in 2011. It allows Nova to

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share site costs that it would otherwise be solely responsible for. At any rate, Nova concedes that it always had enough ethane to fill E3. There is nothing commercially unreasonable about imposing a contractual duty on the Operator to do so, subject to the force majeure provisions of the joint venture agreements.

[155]Nova also submits that it would be unreasonable for it to agree that it would never buy ethane for use at E1 and E2 if preferential loading of E3 resulted in a shortage, but Dow does not make that assertion. There is nothing in the joint venture agreements that would prevent Nova from buying ethane for the Pool to ensure that Nova would not be short of fuelstock at E1 and E2, and Dow was contractually obliged to help pay for that ethane even if the cost of it increased the average Pool price that the Co-owners shared.

[156]Nova submits that the terms of the OSA that authorize Nova to acquire unlimited volumes of Pool ethane at whatever price it chooses to pay is in conflict with the objective set out in section 5.1, which is to secure the lowest costs secure supply sources of ethane. I agree with Dow that this conflict does not exist.

[157]The objective of securing the lowest cost, secure supply sources of Ethane for the Pool does not excuse failure to provide sufficient ethane to fill E3. The Operator has the duty to enter into contracts as necessary for the “Operations” and the Operations include the production of ethylene and the provision of “Services”. Services include all services and utilities required to be supplied to the Plant, and include Ethane Services relating to the acquisition of ethane. There is nothing in the OSA that allows Nova as Operator to decide not to acquire ethane if it considers it too expensive.

[158]In contrast, there are provisions of the OSA that contemplate a Co-owner objecting to the acquisition of ethane if such acquisition would adversely affect the average Pool price. Section 5.8(b) permits a Co-owner to object to any request by the other Co-owner for Proprietary Ethane where such objecting Co-owner is of the opinion that “the effect of complying with such request would be to significantly increase the total average unit Ethane cost of the Pool”. Similarly, section 5.12, which sets out a mechanism for a Co-owner to request ethane for use outside the Pool area, grants the Operator in subsection (vi) the discretion not to acquire the requested ethane where such an acquisition potentially “significantly increases the total average unit Ethane cost of the Pool”. The parties thus granted each Co-owner the right to veto an acquisition of Pool ethane by the other Co-owner for its private use, and they granted the Operator discretion to decline to acquire Pool ethane for the private use of a Co-owner if such an acquisition would significantly increase the average Pool price. They granted no such discretion, however, to avoid the Operator’s general obligation to acquire sufficient Pool ethane to provide the Services to the E3 Co-owners and to meet their ethylene nominations.

[159]In addition, the creation of the Feedstock Subcommittee provides the Co-owners with the necessary information to monitor the Operator’s acquisition of feedstock, and take action at the E3 Management Committee level if a Co-owner objected to an acquisition on the basis of cost or otherwise (although Nova discontinued the operation of the Subcommittee when the Dow merger was in progress).

[160]The contracting parties thus provided for the Operator to acquire “for the Co-owners the lowest cost, secure supply sources of Ethane for the Pool” until enough had been acquired. I agree with Dow that what the OSA does not countenance is that the Operator, having acquired enough ethane for E3 as contractually required, would then choose, on its own criteria, not to

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acquire further ethane at the lowest cost then available, allege a shortage, and take back part of the acquired supply for the use of a plant owned by a Nova affiliate, purporting thereby to leave E3 “short”. I am satisfied by the evidence that this is what Nova did for much of the term of the joint venture when it imposed ethane allocation. When Nova was acquired by IPIC, a change of strategy occurred and Nova switched to making as much profitable ethylene as possible, even if average ethane costs were higher and downstream margins were thereby lower. Dow submits, and I accept, that the fact that, in order to meet its new internal commercial mandate, Nova paid more for ethane and acquired much more of it, demonstrates that ethane was available at prices that Nova had previously chosen not to pay.

[161]Nova submits that giving priority to the Co-owners’ ethylene nominations under section 7.1 of the OSA and streaming all ethane in the Pool to E3 until those nominations are satisfied ignores Nova’s request, as a Pool User, to make ethane available to it for use at E1 and E2.

[162]The evidence does not establish, however, that Nova made any requests as a Pool User for ethane to supply E1 and E2 at nameplate capacity. Mr. Tulk acknowledged that, other than the monthly nominations of the E3 Co-owners and a letter in May 2009, he was not aware of any Pool User requests for ethane for E1 and E2.

[163]Dow submits that the Co-owners’ nominations were their requests, and Nova only requested ethane to fill its nomination for E3 production. If Nova had made such a request, it would, as Operator, have had to evaluate its ability to supply from the Pool.

[164]Nova submits that, if an obligation to first fill E3 with ethane from the Pool exists, it should be found in Article 4, which sets out the Operator’s duties. It submits that the objective set out in section 4.3(b) of optimizing product production and achieving first decile performance is an indication that an unqualified obligation to fill E3 first should also have been included in the Operator’s duties if this was the intention of the parties, This argument arises from Nova’s submission that the Operator’s duties are restricted to Article 4, which I reject.

[165]Nova submits that there is no obligation, implied or express, upon the Operator to source a particular quantity of ethane from the Pool in order to run E3 at some operating rate that Dow maintains is required by the OSA. Dow submits that the Operator has an obligation to use reasonable efforts to meet the Co-owners’ obligations so long as it has the ability to do so.

[166]Nova argues that Dow’s claim of an obligation rests on three assertions:

a)that Nova as Operator is agent of the Co-owners;

b)that ethylene nominations are an instruction from the Co-owners, as principals, to source a quantity of ethane sufficient to meet those nominations; and

c)that the Operator must fully satisfy the nominations or be in breach of the OSA.

[167]While Dow says that this is Nova’s theory, not Dow’s, it submits that these assertions have been established in any event.

[168]With respect to whether Nova as Operator is the agent of the Co-owners, Nova refers to this as a “contrived” theory of agency and submits that the extent of the Operator’s duties as agent are established and limited by section 4.1 of the OSA. Dow does not dispute that the nature of the agency relationship is as set out in the OSA, however, Dow submits that Nova is appointed as agent for the purposes of carrying out all of its duties under the OSA, and not just under Article 4. A noteworthy example is the requirement of section 13.2 of the OSA that the

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“Operator shall deliver to each Co-owner a proportion equal to it EPP of ... ethylene ... and other products ... produced” at E3.

[169]There is no dispute that the analysis of whether an agent-principal relationship exists, and the scope of any such relationship, is largely fact-driven. Where an agency relationship arises from an express contract between the agent and principal, the nature of the contract between the parties will determine the nature of the agency, including the duties and obligations or actions the agent is to undertake on behalf of the principal. Neither instructions nor undertakings will be implied into a contract of agency where they are prohibited by the contract itself. There is also no dispute that, in construing the terms of a contractually created agency relationship, reasonable principles of contractual interpretation will be used in determining the agreed-upon undertakings or instructions the agent was to accomplish. Agents must act within the terms of their authority: Fine’s Flowers Ltd v General Accident Assurance Co of Canada (1977), 17 OR (2d) 529 (CA) at para 53.

[170]The appointment of Nova as agent for the Co-owners under section 4.1 is for the purpose of carrying out the duties and obligations of Operator under the OSA. The appointment is subject to the provisions of the OSA and the direction of the E3 Management Committee. There is nothing in section 4.1, or in the other sections of Article 4, that restricts the appointment to the duties and obligations of the Operator under Article 4. As noted previously, the Operator has additional duties set out in other parts of the agreement.

[171]While the standard of care of a “prudent Operator of a like petrochemical production facility”, as set out in 4.2, refers specifically to the duties set out in section 4.3, that does not indicate that the status of the Operator as agent does not exist with respect to all of its duties and obligations under the agreement. The duties set out in section 4.3 refer specifically to the operations of E3, in which context, the standard of care set out in section 4.2 is a guideline and a limitation.

[172]It is instructive that the standard of care of a prudent operator applies to the section 4.3(c) duty of providing the Services, which includes ethane acquisition, contrary to Nova’s submission that this duty falls outside the gambit of agency.

[173]While section 1.6 of the OSA provides that the agreement is not to be considered to have created an agency relationship between the parties, this declaration is specifically noted to be “[e]xcept as expressly provided ... in respect of the Operator”. While it is true that section 1.6 also provides that nothing in law, equity and the OSA shall be construed to create or impose fiduciary obligations on the Operator owed to the Co-owners, this does not limit the status of the Operator as agent under the agreement.

[174]With respect to whether the nominations are an instruction from the Co-owners to source ethane sufficient to meet the nominations, Nova denies that such an obligation exists. Dow says that it does: that when the parties by their contractual nominations advise of their requirements for E3 ethylene, and the Operator as agent has the ethane to meet those requirements (as Nova concedes that it always had), the Operator as agent must supply sufficient ethane to E3 to meet those requirements. Dow points out that the Operator had no proven obligations under the joint venture agreements to make ethylene for anyone else.

[175]Section 7.1 of the OSA provides that each Co-owner shall advise the Operator of the Co- owner’s best estimate of its requirements for ethylene for each month in the next succeeding

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three months (such estimate being the Co-owner’s nomination for the first of such three months), and quarterly for the next four quarters beyond such three-month period.

[176]The Operator shall notify each Co-owner of its forecast of its ability to produce ethylene during the forecast periods. The Co-owners are obligated to take delivery of the quantity of ethylene they have nominated in their EPP of daily E3 production, unless they adjust their nomination in accordance with section 7.2.

[177]Nova submits that these sections impose only obligations on the Co-owners, and only a reporting obligation on the Operator, and that, at any rate, the term “ability” could include mechanical, feedstock, and storage-related limitations. It argues that, if this section was meant to impose a duty, it would be clearer, and that there is not a corresponding reference in section 4.3, which it says is the only provision that sets out duties of the Operator. As noted previously, I do not accept that submission.

[178]With respect to such “ability”, Dow concedes that feedstock might be a limitation if Nova did not have enough ethane to meet its principals’ requirements, but notes that the issue is purely theoretical, as Nova concedes that it always had enough ethane to fill E3. With respect to storage limitations, each Co-owner was responsible for its own ethylene storage. If Nova had insufficient storage, it could under-nominate. Therefore, Dow submits that Nova’s storage limitations could not be a restriction on its ability to produce.

[179]Nova’s argument that “ability” can encompass mechanical limitations and shortage of feedstock is at odds with the OSA’s force majeure provisions which include occurrences beyond the reasonable control of the party claiming suspension of an obligation, and specifically, shortage of feedstock as an event of force majeure. Nova submits that a shortage of ethane is not a force majeure if it is not invoked by a party claiming suspension of an obligation under the agreement, as Nova submits that, as Operator, it had no obligation to source a quantity of ethane sufficient to satisfy the nominations of the Co-owners or operate E3 at any particular rate of production. As a result, Nova argues that it did not need to declare a shortage of ethane as a force majeure.

[180]This is faulty reasoning. If a shortage of ethane is not a force majeure event because the Operator had no obligation to source enough ethane to operate E3, when would it be a force majeure?

[181]Dow notes that Mr. Flint, who served as Nova’s corporate representative, testified that when Dow and Nova nominated in full at E3, as they did virtually every month, he understood those nominations to require that E3 be operated at capacity such that each Co-owner received its half of the productive capability of E3.

[182]Also, when Nova issued its Notice of Default asserting that Dow’s opposition to the Harmattan project was “contrary to Dow’s obligations under section 3.2(c) of the OSA not to do any act or thing which could cause Nova Chemicals to be in breach of or in default under the Project Agreements”, this assertion, as confirmed by Nova counsel, was a reference by Nova to its obligations under the OSA to fill E3 with ethane.

[183]While Nova refers to other comments by Mr. Flint made in response, these comments are more Mr. Flint’s attempts to justify ethane allocation than his comments on contractual obligations.

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[184]However, Dow’s argument is not as broad as Nova describes it. Dow submits that when principals in an agency relationship, by contractual nominations, advise of their requirements for E3 ethylene, and the Operator as agent has the ethane to meet those requirements, as Nova concedes it always had, then the agent must put the ethane into E3 to meet their requirements. This is particularly so where, as here, the agent has no proven obligation to make ethylene for anyone else under the contract in question.

[185]With respect to what Nova characterizes as Dow’s third assertion, that the Operator must fully satisfy the nominations or be in breach of the OSA, Dow submits that the express measure of the Operator’s duty is its “ability” to produce ethylene during the nomination month. If the Operator has the ability to produce ethylene, but fails to produce it according to the nominations, it is in breach.

[186]Dow says that Nova has repeatedly been in breach because it has not demonstrated any lack of ability to meet the Co-owners’ nominations; merely a lack of willingness to do so.

[187]One of the most basic obligations of an agent is to obey and carry out the instructions of its principals: Andriuk v Merrill Lynch Canada Inc, 2013 ABQB 422 at para 81, aff’d 2014 ABCA 177.

[188]In summary, I find that the Operator had an obligation set out in section 4.3(b) and 7.1 to secure enough ethane from the Pool to run E3 at the rate necessary to satisfy the nominations of the Co-owners. This was not an “ethane supply guarantee”, as it depended on the Operator’s ability to satisfy the nominations. That ability could be affected by mechanical constraints that fell within the definition of force majeure, or the Operator could assert a shortage of feedstock that would fall within the force majeure provisions. As Dow points out, it is not necessary to decide whether the agreements impose an ethane supply guarantee on the Operator, as Nova as Operator always had the ability to fill E3, and often did in priority to the other crackers. It invoked ethane allocation for other reasons.

E.Nova Defences to Allocation Claim

1. Ethane Shortage

[189]Nova witnesses testified extensively about Nova’s efforts to secure ethane sources, specifically about the following factors that Nova submits support its claim of an ethane shortage:

a)Nova expert witnesses Mr. Mathieson and Mr. Bietz opined that there was an ethane shortage in Alberta from 2001 through to the end of 2012, which was the period for which data was available;

b)the ethane shortage was recognized by both Nova and Dow from late 2000 onward. Every Dow ethane manager, beginning in 2000 with Mr. Williams, recognized the ethane shortage in internal Dow communications;

c)the causes of the ethane shortage were beyond Nova’s control. The Alliance Pipeline,

unfavourable NGL prices and higher CO2 all conspired in 2001 to create an unexpected shortage, and thereafter, steady declines in export natural gas flows past the straddle plants at the Alberta borders reduced the amount of ethane available for recovery; and

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d)the ethane shortage recently came to an end as a result of a sea change in the industry

– horizontal drilling and fracking – which made available vast amounts of ethane-rich gas in northwestern Alberta and northeastern British Columbia and ethane-rich oil from the Bakken formation in the Williston Basin of North Dakota.

[190]Nova submits that its efforts to address the ethane shortage were diligent and commercially reasonable. Dow does not agree. As the party asserting a contested proposition, the burden is on Nova to establish that there was an actual shortage in the circumstances: Kelly v Alberta (Energy Resources Conservation Board), 2009 ABCA 349 at para 43. However, it is not necessary to address in detail the efforts made, and the submissions about why they may or may not have been sufficient or reasonable, because I am not satisfied that there was an ethane shortage that would affect the operations of E3.

[191]Nova’s submission that it was justified in imposing ethane allocation because of a shortage of ethane feedstock beyond its control suffers due to the facts established by the evidence:

a)Nova witnesses Messrs. Mathiesen, Tulk and Wade conceded that Nova always had enough ethane to fill E3 and to run it at its maximum productive capacity;

b)by shortage, Nova concedes that it does not mean insufficient ethane supply to fill E3, or even insufficient ethane to fill E3 and Nova’s other ethylene needs at E1 and E2. Rather, it appears from the evidence that Nova’s represented shortage meant insufficient ethane to fill the three Joffre crackers to their name-plate capacity, updated for E1 and E2 but at original design nameplate for E3 (later abbreviated to 165,000 barrels of available ethylene), whether or not Nova actually needed the ethylene that would be produced in that way;

c)Nova did not adduce any evidence that indicates that it was ever short of ethylene to meet its actual demands;

d)ethane allocation did not operate to fill all three crackers with a share of available ethane in accordance with their nameplate capacity in any event, as more often than not, Nova “allocated” the supply to the three plants on only a notional basis and distributed the ethylene made at the site roughly according to the “nameplate” capacities of the plants. As a result, Dow received less ethylene than had E3 been filled with ethane and had Dow then received its EPP of the ethylene produced; and

e)Mr. Ferrigno, Nova’s own expert witness, indicated that, had Nova run E1 and E2 at a minimum safe level and fed E3 the rest of the ethane it had acquired, there was sufficient ethane to run E3 at full rates throughout the claim period, except for a relatively small shortage. If instead of Mr. Ferrigno’s safe level, Nova’s internal maximum safe levels were used, Nova always had enough ethane to run E1 and E2 in a stable fashion and to run E3 at a rate of at least '''''''''' billion pounds per year.

[192]So, while Dow may have accepted Nova’s representations that it was short of ethane as an explanation for imposing ethane allocation at the time, and while there may have been a systematic shortage of ethane in Alberta to fill the aggregate nameplate capacities of all existing Alberta ethylene crackers, the issue of ethane shortage as a justification for ethane allocation does not aid Nova.

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2.Disclosure

[193]Nova submits that Dow was “well aware” that Nova was imposing ethane allocation, with the result that Dow Europe was not getting its EPP from E3. The degree to which Dow and Dow Europe knew about ethane allocation and what Dow was told about the scheme can best be described through an analysis of Dow’s knowledge in the period from June 1, 2001 to May 2004 when Mr. Fergusson was vice president, and then the first few months of Mr. Ramachandran’s presidency.

[194]It is clear that Dow accepted the form of ethane allocation suggested by Nova in June 2001, and also clear that Dow’s acceptance was only for the period when E1was unoperational. When Mr. Broenink advised Dow’s Ms. Eastman in mid-September 2001 when E1 resumed operating that ethane allocation would continue, it was, of necessity, a different form of ethane allocation, since all three crackers were then in operation. It is clear that Nova did not seek approval for the implementation of this new form of ethane allocation from Dow directly, whether through the E3 Management Committee meetings or from Mr. Fergusson or other Dow senior management.

[195]This new form of ethane allocation was imposed from September 2001 until the end of January 2002, from March through the end of June 2002 and in October 2002. It was imposed in January and February 2003, in May 2003 (when Dow acknowledged it in a one month streaming agreement) and then not until July 2003. It was not imposed again until July 2004, at which time Mr. Ramachandran became involved.

[196]The evidence from Mr. Broenink, supported by documentation, is that Ms. Eastman was advised by nomination letters, emails and conversations with Mr. Broenink when ethane allocation would be imposed in a coming month. Dow concedes that it understood from the nomination responses that Dow Europe would be receiving less than the 100% it generally nominated due to the imposition of ethane allocation. Dow also concedes that Ms. Eastman:

a)was aware that Nova’s nomination “often referenced ethane allocation as a reason for Dow not getting its share of E3”;

b)was aware that under ethane allocation “pounds could come from E1 and E2 to get to the total E3 share”. That is, she thought that ethylene was being allocated to the parties from the Joffre Site as a whole, not just E3;

c)believed she would have informed Mr. Fergusson the first time she became aware that ethane allocation was being imposed; and

d)incorporated the effect of ethane allocation into Dow’s supply/demand balances in August 2002, which in turn were provided to a number of Dow personnel, including Mr. Fergusson.

[197]However, Nova represented to Dow as a rationale for ethane allocation that there was a shortage of ethane to meet actual demands, which was almost always incorrect. Nova’s description of how ethane allocation operated was also incorrect: Nova did not disclose that there was no actual rationing of available ethane among the three plants as described, and that Nova was feeding more ethane to E3 and taking some of Dow’s EPP of the resulting ethylene.

[198]Nova submits that ethane allocation was raised at E3 Management Committee meetings between March 2002 and November 2004, and also referenced in the context of Nova’s proposal

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to use propane as a fuel at E3 in the summer of 2002. However, these references did not explain the true nature of ethane allocation and did not disclose that Nova was taking more than its EPP share of E3 production.

[199]Nova submits that Mr. Fergusson raised no objections at the E3 Management Committee level during his tenure. However, it is clear from notes of a meeting of senior Dow and Nova management in mid-September 2001 that, while parties were actively considering scenarios under which the feedstock Pool would be broken up and the joint venture would be transitioned into a manufacturing joint venture, with Dow being responsible for bringing its own ethane to E3, Dow management was confused about what Dow’s share of E3 production was at the time. Mr. Fergusson testified that virtually every Nova invoice had some error, so that there was a constant process of reconciling what Dow had received simply from what Nova had charged.

[200]In December 2001, Mr. Fergusson indicated that he knew E3 was running below

capability, and he understood it was as a result of an ethane shortage. It is implied from this that Mr. Fergusson knew that ethane allocation was continuing in these months, but it is clear that he did not realize what that actually meant.

[201]Mr. Fergusson was clear and credible in his evidence that he never understood that Nova was imposing some sort of “site optimization” or “utilization”.

[202]In February 2002, E3 began a high rate trial. There was no ethane allocation in that month. On March 6, 2002, Mr. Broenink advised Ms. Eastman that ethane allocation would again be necessary. Mr. Tulk gave a presentation on “Joffre short-term feedstock supply” at the March 18, 2002 E3 Management Committee meeting that is noteworthy for what it indicated about ethane allocation:

…all feedstock supply to Joffre (excluding tolls) is pooled and each plant receiving pro-rata share of supply based on ethane name plate…E3 share of the Joffre ethane pool is [about] 51.2 percent, E1 17.2%. E2 31.6 percent Dow’s share of the ethane pool is [about] 22.8 percent .. amendment to [OSA] not anticipated to be required. [emphasis added]

[203]Thus, while Dow’s representatives on the E3 Management Committee were advised that ethane allocation was in effect, and Ms. Eastman may have thought that under ethane allocation Dow could be receiving ethylene from E1 and E2, they were advised that each plant received its pro rata share of supply based on nameplate. Mr. Tulk conceded that he knew that this was not true, that most of the time under ethane allocation, E3 was receiving more than that. When ethane allocation was imposed between September 2001 and June 2002, Nova misrepresented how it actually operated.

[204]Ethane allocation was not imposed from July through the end of September 2002. During that period of time, Mr. Fergusson refused to execute the agreements that Nova had drafted and provided in August 2002 that would have had Dow agreeing to ethane allocation. Nova submits that Dow was only rejecting propane as an alternate fuel when it declined to execute these agreements, but I accept Mr. Fergusson’s testimony that he told Nova that the proposal of site optimization was not something that Dow would agree to. I further accept his testimony that he did not understand that Nova was already implementing “site optimization” through ethane allocation, and that he would “push back” whenever Nova raised the idea of site optimization or of managing the three crackers as it saw fit. The idea that Dow might agree to combine the

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operations of the new, very efficient E3 with Nova’s two older plants does not make commercial sense.

[205]In October 2002, Mr. Fergusson made it clear in an email to Nova senior management that he considered an inability to supply ethane to be a force majeure and that “in no way have we agreed to amend the terms of the E-3 Contract and amend Nova’s obligations to supply…we do not accept…that our supply of ethylene can be reduced by Nova as it sees fit.”

[206]Mr. Fergusson was clearly pushing changes to the joint venture arrangements in order to resolve the issue of feedstock supply, and he continued to do so throughout November and December 2002 when ethane allocation was not being imposed.

[207]In January 2003, ethane allocation was again imposed. Mr. Fergusson testified that he was advised that Dow had offered ethane to Nova and that Nova had declined it on the basis that it did not need it. He was told by Ms. Eastman that E3 was not running at full capacity due to a minor mechanical issue. In response to an email of January 8, 2003 from Mr. Henson with the comment that Nova’s goal was “to create value for yourselves and ourselves, while also meeting our other customer obligations,” Mr. Fergusson responded that Nova’s other obligations were not Dow’s concern, and that if Nova could not supply ethane to E3, it should declare an event of force majeure. It cannot be said that at this point in time, Mr. Fergusson accepted the concept of ethane allocation, even in the form described to Dow.

[208]It appears from an email exchange on March 3, 2003 between a Nova employee and Mr. Miller, an employee at Dow’s Fort Saskatchewan plants, that Mr. Miller became aware that Nova was transferring “ethane feed from E1/E2 to reduce Site energy by making use of E-3’s lower specific energy requirement”. When Mr. Miller responded that he assumed that this meant that Dow’s share of ethylene would increase consistent with Dow’s understanding of how ethane allocation would work, he was advised that, under ethane allocation, Dow got the same production split regardless of which plant was providing the ethylene. The email exchange was sent to Mr. Fergusson, and therefore, it appears Mr. Fergusson had some knowledge that ethane allocation did not work as described to them in March 2002 by Mr. Tulk. However, ethane allocation was not in effect in March 2003, and was not imposed again until July 2003. While Mr. Fergusson executed a one-month streaming agreement with Nova in May 2003 that contained language acknowledging that, in that month, E3 would be on ethane allocation and would only be entitled to a percentage of the total ethane produced at Joffre, he did so in the context of constant complaints about the alleged ethane shortage and for a one-month period.

[209]The agreement is ambiguous, indicating that Dow E3 was to receive its EPP of E3’s ethylene produced from the ethane supposedly being “allocated” pro rata by Nova for the three plants (85,013 “E3 Share” x 0.44484 Dow EPP x 166,185 “Joffre total” = 22.75607%).

[210]In the meantime, Mr. Fergusson continued to press for a different form of joint venture and the break-up of the Pool. After a month of ethane allocation in July 2003, it was not imposed again until July 2004, after Mr. Fergusson was replaced by Mr. Ramachandran.

[211]Whatever Mr. Fergusson may have gleaned from the streaming agreement, in April 2004, Mr. Flint presented a pictorial explanation of ethane allocation to senior Dow management, including Mr. Fergusson, that Nova concedes was “inaccurate, in that [it] did [sic] not disclose that Nova was actually allocating more ethane than disclosed to E3 and taking a larger share of

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the ethylene produced at E3 for itself.” Therefore, at a senior level, Nova was again failing to represent the true nature of the ethane allocation.

[212]Mr. Broenink’s testimony that there were no objections from Dow between 2001 and 2004 is not credible. It is clear from Mr. Flint and Mr. Henson’s conversation with Mr. Foy in October 2003 that Nova knew that it would not get Dow’s express agreement to ethane allocation, and it is clear that during much of that time, the true nature of ethane allocation was misrepresented to senior management of Dow.

[213]Nova submits that the Feedstock Cost Statements (FCS) sent to Dow Europe’s accounting staff in Switzerland every month clearly showed E3’s production and Nova and Dow’s share thereof.

[214]The point is illustrated through an example taken from an FCS for October 2001. On page 4 of that statement, the following appears:

Feedstock Fraction Calculation

 

October 2001 Actuals

E3 Total

Nova

UCC

Ethane Consumption (bbls)

2,412,564

1,422,930

989,634

Ethylene Production (Lbs)

225,408,695

132,946,922

92,461,773

[215]However, on the same page, under “Assumptions”, numerical entries for “E3 Ethylene Production Split” indicate Nova and UCC/Dow’s respective EPPs, as are 55.516% for Nova and 44.484% for UCC.

[216]Nova’s submission is therefore that Dow accounting personnel ought to have ignored the assumption and performed a calculation that would have indicated that the assumption was incorrect for these months in which ethane allocation was imposed. This would be in the context of what was being represented to senior Dow management about the operation of ethane allocation.

[217]An FCS issued for the month ended February 28, 2001, before ethane allocation was introduced, was also put into evidence. In this statement, UCC’s share of the ethane fixed cost was calculated on the basis of its Feedstock Fraction, and, by contrast, UCC’s share of ethane variable cost was calculated on the basis of volume used. The volume of ethylene produced was shown as divided between the Co-owners in accordance with their ownership shares or EPPs.

[218]Beginning in 2001, Dow’s accounting team prepared spreadsheets entitled “E3 Ethylene Summaries”, which reflected, among other things, Dow’s calculation of the amount of ethylene it had received compared to what Nova had received as a percentage. These summaries did not, however, indicate production from E3 ethane.

[219]In summary, the only month that Dow could be considered to have had sufficient and uncontradictory information about the nature of ethane allocation during Mr. Fergusson’s tenure was in June 2003. Although shortly thereafter, Mr. Flint presented a description of ethane allocation that contradicted what Mr. Ferguson could have learned from Mr. Miller, I find that Dow’s claim for allocation loss in June 2003 is barred from recovery for limitations reasons. This is discussed later in these Reasons.

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[220]In May or June 2004, Mr. Ramachandran became President of Dow Canada, and he immediately started to question what ethane allocation was all about. The evidence indicates that from the beginning of his term, Mr. Ramachandran made it clear that he disagreed that Nova had the authority to impose ethane allocation. It is also clear that ethane allocation was described to Mr. Ramachandran in a misleading and misrepresented manner in Mr. Flint’s emails of August 12, 2004 and August 14, 2004. Mr. Ramachandran did not learn until the fall of 2004 that Nova was taking the position that Dow was not entitled to 50% of E3’s actual output.

[221]Thus, Dow did not know about the true nature of ethane allocation from May or June 2004 until the fall of that year, and did not consent to it at any time during Mr. Ramachandran’s time as President of Dow Canada.

3.Misrepresentations

[222]It is clear from the evidence that, with certain exceptions, as noted, what Nova said to Dow about its ethane allocation scheme was not entirely accurate:

a)It was not true that demand for ethane exceeded supply. There was always enough Pool ethane to fill E3, and what was characterized as “demand” was a false premise constructed on the basis of the nameplate capacities of the three plants, when Nova often did not require the ethylene to meet its actual demands. A truthful description would have been “nameplate capacity, a substantial part of which Nova is not using on account of lack of ethylene demand.” Nova has not established, as it would have been required to do had this been a relevant issue, that it ever had insufficient ethane to meet its needs. This defence of justification would fall upon Nova to prove, and the supporting documentation advanced by Nova in the form of E3 monthly reports record feedstock as a constraint for only five days over the six years of the damages period after commencement of litigation in 2006. Many Nova documents reflect that it was generally able to satisfy all of its internal and external needs for ethylene by a combination of (a) improperly imposing ethane allocation on Dow and taking some of Dow’s E3 ethylene; (b) running the three plants at low conversion; and (c) cracking a small amount of propane. By these actions, Nova bridged its own ethylene gap while leaving Dow short. There may have been a provincial shortage of ethane compared to the nameplate capacities of all facilities, but that is not Nova demand; and

b)It was not true that Nova was rationing Pool ethane to the three Joffre plants so that each received what Nova called its proportionate share. Nova said Co-owners were cut back equally at E3 and were sharing the pain, however Nova’s needs were being met. Almost always, Dow received less than its EPP of E3’s production and Nova received more.

[223]While Nova’s demands for ethylene would not be something that would need to be disclosed in a joint venture in the ordinary course, the issue is whether they can be misrepresented without consequence.

[224]When Nova proposed “Joffre Site optimization” to Dow, which is what Nova had been doing all along, Dow’s response was negative but Nova continued anyway. Nova tried several times to get Dow to agree to its ethane allocation but Dow would not do so.

[225]The evidence discloses that, had Nova acquired more ethane and run E3 at its available capacity, an additional 5,225,930,000 pounds of ethylene would have been produced. To produce

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this additional volume, approximately 13,000 BPD of ethane would have been required. Mr. Flint estimated Nova’s so-called ethane “shortfall” at 10,000 to 15,000 BPD. I am satisfied by the evidence that Nova could have acquired such volumes at prices less than it paid for ethane 12 years later.

[226]Even if Nova had been able to establish an ethane shortage, that was no justification for failing to fill E3 to capacity as required by the joint venture agreements. As noted by Mr. Fergusson, Nova’s requirements for E1 and E2 were its own concern.

F.Analysis of Ethane Allocation as a Breach of Contract

[227]I find no justification in the joint venture agreements for Nova’s imposition of ethane allocation. First, Nova’s theory of ethane allocation depends on the idea that E1, E2 and E3 are each somehow entitled to a notional share of the Pool ethane, which it equates to Feedstock Fractions. However, while Feedstock Fractions exist under the joint venture agreements, plants do not have Feedstock Fractions; only the E3 Co-owners do. Second, the OSA contemplates only three purposes for Feedstock Fractions: to calculate the Co-owners’ respective responsibilities to pay Ethane Fixed Costs; to adjust for inventory costs and credits; and to divide up the Pool ethane supply contracts between the Co-owners in the event the Pool is unwound. Third, in non- allocation months, Nova did not distribute ethane to the plants in accordance with Feedstock Fractions, but in accordance with EPPs as provided by the agreements. The OSA does not restrict E3 to any particular share of Pool ethane.

[228]Nova submits that its use of Feedstock Fractions was justified because it is consistent with provisions in the Post 1998 Agreement, which, it submits, forms part of the factual matrix within which the OSA was negotiated and can properly used as an interpretive aid. A prior contract is not dispositive of the meaning of a later contract where the contract at issue differs from the earlier contract prima facie. In this case, the fact of the earlier contract merely demonstrates that, had the parties intended to follow the method of allocating ethane on a site- wide basis, they had a clear example to follow, and did not adopt it.

[229]In an amendment to its pleadings, Nova denied that it, as Operator, is bound by any contractual duty to preferentially load E3. The issue, however, is Nova’s duty as Operator to comply with the nominations of the Co-owners when it had the ability to do so, and it did, and to conduct the operations with the objective that the Plant will optimize Product production. In actuality, preferentially loading E3 was the sensible thing to do in order to maximize efficiency. In any event, there can be no question of preference. The Operator’s only obligations under the OSA are in respect of E3.

[230]One of the fundamental duties of an agent is not to deceive or mislead its principal. To the extent that Nova was acting as Operator in implementing ethane allocation, it was improper for Nova to deceive or mislead Dow about both the premise of its “ethane allocation” scheme, including purported “demands” for ethane that exceeded supply, and about what Nova was doing when it imposed the scheme – taking for itself some of Dow’s E3 ethylene: Harland v Fancsali (1994), 21 OR (3d) 798 (Div Ct) at para 8; Bhasin v Hrynew, 2014 SCC 71 at para 73.

[231]The force majeure provision in the OSA and other contractual provisions expressly contemplate that ethane might be in limited supply. These terms are an answer to Nova’s submission that an ethane shortage was unforeseen, that the OSA did not provide for such a situation, and that Nova was somehow entitled to invent and impose its “ethane allocation”

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scheme. Nova senior management directed that force majeure not be declared in connection with feedstock supply issues. The evidence leads to the conclusion that the real reason for ethane allocation was Nova’s own interests, its lack of a need for further ethylene to satisfy its requirements and a strategic plan to control a competitor. There is nothing prima facie wrong with such a strategy, unless it breaches contractual obligations.

[232]I also find that Dow has established that it did not know, nor ought it have known the specific circumstances that give rise to its allocation claim before the fall of 2004, and that its allocation claim is not statute-barred, as will be discussed more fully under the heading “Limitations of Actions.”

[233]The effect of ethane allocation as actually practiced by Nova allowed Nova to take for itself a portion of Dow’s contractual EPP on the basis of a theory that the joint venture agreements that governed E3 were subordinate to an unsubstantiated obligation of site optimization. Also, when ethane allocation was implemented, the amount of ethylene obtained by Dow depended in part on how much Nova chose to produce at E1 and E2, even though there was no contractual provision that made Dow’s take of ethylene from E3 dependent on how much ethylene Nova produced from its other facilities.

[234]Nova as Co-owner is in breach of both section 3.2(c) of the OSA under which it covenanted not to do any act or thing that would cause it or the other parties, to the agreement to be in breach of the agreement, and also in breach of Section 3.11 that requires it to act honestly and in good faith and in accordance with the provisions of the joint venture agreements

[235]Thus, under either Nova’s description of Dow’s theory of the claim of breach arising from ethane allocation, or Dow’s more nuanced theory, Dow has proved its claim. Nova’s defences of justification and knowledge fail, except for a single month in the period. I find that Nova’s imposition of ethane allocation is also a breach of section 3.02(a) of the COA and section 3.2 of the OSA, both of which mandate that Dow receive its EPP of the products produced at E3.

G.Analysis of Ethane Allocation as Conversion

[236]From the evidence, I am satisfied that Nova’s imposition of ethane allocation, with the result that it deliberately took for itself some of the ethylene and co-products that Dow was entitled to, was a repeated course of conduct in the nature of conversion.

[237]Nova as Operator deferred decisions on ethane allocation to the EBT. Thus, Nova as Co- owner committed the tort of conversion arising out of the operation of E3 during periods of ethane allocation as the EBT directed.

[238]Dow advances a claim of conversion. This court has set out the elements of the tort of conversion in Drew Oliphant Professional Corp v Harrison, 2011 ABQB 216 at paras 58 and 59, as follows:

In Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727 (S.C.C.) the S.C.C. defines conversion as “the tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession.”

G.H.L. Fridman, [T]he Law of Torts in Canada, (2nd Ed.) (Toronto: Carswell,

2002) identifies the following elements as forming the tort of conversion:

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7.“A wrongful act”;

8.Involving a chattel;

9.Consisting of handling, disposing or destruction of the chattel;

10.With the intention or effect of denying or negating the title of another person to such chattel.

[239]These elements are all satisfied in this case.

VII. Optimization Claim

A.Introduction

[240]Dow’s claim for damages for failure to run E3 at its full rates is based on the following allegations:

a)E3’s productive capability was always more than its initial design guarantee of 2.81 BPY;

b)after the COP, E3’s productive capability was more than ''''''' BPY;

c)Nova breached its duty as agent to meet the Co-owners’ nominations for ethylene;

d)there were no mechanical reasons for Nova’s chronic underproduction at E3;

e)Nova breached sections 4.3 (b), 4.4(a) and 7.3 of the OSA, section 3.2(c) of the OSA and section 3.11 of the COA.

[241]Dow submits that Nova’s trial theory that it had a broad discretion with respect to production under the joint venture agreements is wrong.

[242]Nova submits that, in responding to an ethane shortage, it has to make decisions relating to how to optimize production at E3 so as to manufacture the most ethylene per barrel of ethane, among other things.

[243]Since I have found that there was always enough ethane to fill E3 to capacity, and that Nova was not entitled to impose ethane allocation, the specific operational strategies deployed by Nova to maximize ethylene output at the Joffre Site as a whole and to optimize ethylene yield at E3 while under-supplying ethane are not relevant to the optimization claim. Dow does not allege that the E3 operations staff did not do a good job of maximizing ethylene production from the ethane available to E3. Nor does it accuse Nova of failing to be a safe or skilful Operator. Dow submits that E3 should have been run to capacity with the adequate ethane that was available to it.

[244]Nova also submits that it encountered unforeseen and unavoidable mechanical constraints that affected production at E3, and that, in view of these constraints, Nova as Operator produced as much ethane as was mechanically possible at E3. It submits that E3 had to be “run to constraint” because of various unanticipated mechanical issues.

[245]Nova submits that it was innovative and resourceful in prudently resolving these issues.

[246]The evidence is clear that E3 rarely ran to capacity. It is also clear that Dow, constantly and consistently, complained about E3’s productivity, and that E3’s production rates were set by the EBT, not by the Plant operational personnel.

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[247]Both Co-owners almost always nominated their full entitlement of E3’s production. When they did so, Mr. Broenink understood that Nova’s responsibility was to run E3 at full rates. Section 4.3 of the OSA sets out the duty of the Operator in that regard. It is to:

... [c]onduct the Operations with the objective that the Plant, subject to the direction of the Management Committee, will optimize Product production and achieve first decile performance when compared to other ethylene plants in North America.

B.Evidence of Productive Capacity

1. Sanjeev Kapur

[248]Sanjeev Kapur, an independent consultant to the petrochemical industry, was called by Dow as to give opinion evidence as an expert in the design of ethylene plants and the assessment of their performance and capability.

[249]Mr. Kapur completed a bachelor’s degree in Chemical Engineering in 1980 at Panjab University in Chandigarh, India. He has more than 30 years of experience in working for engineering, construction and technology companies. His responsibilities have included technology management, process design and development, marketing and business development, commissioning and start-up, and the hiring, training and development of process engineers.

[250]Mr. Kapur has worked on numerous major projects as a technology consultant and as an expert conducting feasibility and configuration analyses. As an independent consultant, his focus is olefins-based petrochemical businesses and the deployment of technologies for building best- in-class facilities. He has authored and presented papers on topics related to olefins, integration and process technologies, and is an active member of the Ethylene Producers Committee of North America.

[251]In Mr. Kapur’s opinion, the productive capacity of E3 was, at a minimum, ethylene at the average rate of 2.81 BPY from its performance test in May 2001 until the Plant’s mini- turnaround in September 2001; ''''''''''''' BPY from the September 2001 mini turnaround until the mechanical completion of the COP in August, 2003; '''''''''''' BPY from August 2003 until the September 2008 turnaround; and '''''''''''' BPY post-2008 turnaround. In his opinion, the ethylene nameplate capacity (ENC) of E3 is '''''''''''''' BPY post COP.

[252]Mr. Kapur also was of the opinion that Nova did not achieve first decile performance for production of products.

[253]Mr. Kapur defined productive capability as the ability of the Plant to produce ethylene as it is mechanically set in the ground. He indicated that his concept of productive capability is very similar to the model set out in Schedule E of the OSA, which provides a sample calculation for determining plant capacity from a rate trial, and that the methodology he used to come to his opinion was very similar to the Schedule E methodology.

[254]Mr. Kapur started with E3’s test against performance guarantees from May 7 to May 10, 2001 which indicated that E3 met or exceeded the performance guarantees and was proven to produce the equivalent of 2.81 BPY during the test.

[255]He noted that the main factors impacting annual ethylene productive capability are as follows:

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a)Hourly plant capacity for seven furnaces operation – This represents the capacity that can be handled in the plant’s back-end separation section when furnace capacity is not limiting and the plant conditions correspond to the first year of operation after turnaround. This capacity was used in calculations when seven furnaces are available.

b)Hourly plant capacity for six furnaces operation – When one of the furnaces is unavailable due to decoke or maintenance, the plant runs with only six furnaces in operation. This hourly plant capacity represents the capacity that can be handled with six furnaces in operation, and, in this case, plant capacity will normally be limited by the maximum capacity of each furnace.

c)Conversion of ethane to ethylene – Conversion of ethane to ethylene is one of the parameters in maximizing production, as the unconverted ethane is recycled back and therefore artificially increases the load on processing steps involved.

d)Ethane content in fresh feed – Ethane content in the fresh feed influences the ultimate ethylene yield.

e)On-stream factor, availability – The following factors influence plant availability for production:

i)annual on-stream factor for non-turnaround year – The annual on-stream factor accounts for any unplanned shutdowns of the plant that represent loss of production during a non-turnaround year. A higher on-stream factor represents higher capacity utilization.

ii)turnaround cycle between major plant turnarounds – The plant requires planned turnarounds for maintenance and inspection. Longer turnaround cycles normally represent higher capacity utilization.

iii)turnaround duration for major plant turnaround – The duration of turnaround has an influence on the availability of the plant and therefore productive capability.

iv)furnace availability for seven and six furnaces in operation – Furnace availability is influenced by run length between two decokes, decoke duration, number and duration of mini-shutdowns, and number and duration of major shutdowns.

f)Fouling rate – Fouling of plant equipment between turnarounds can influence the plant productive capability over time. Productive capability of a plant decreases due to fouling in the separation/feed separation sections.

[256]Mr. Kapur calculated hourly capacity rates in Mg/hr for seven furnaces and for six furnaces based on contributing factors that impact the availability of furnaces, such as run lengths, decoke duration, mini/major shutdowns and on-stream factors. He used a single furnace maximum feed rate of '''''' Mg/hr, with a run length of 40 days at maximum feed rate, 50 days with normal feed rate, two decoke days, an on-stream factor of 99%, a turnaround cycle of five years, a turnaround duration of 35 days, mini-shutdown of 12 days, major furnace shutdowns of 32 days, mini-shut downs once every two years with furnaces having one mini turnaround in four years, major shutdowns once every four years per furnace.

[257]He used a figure for loss of plant capacity due to fouling of 0.2% per year.

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[258]Nova criticized Mr. Kapur for not using plant data. He confirmed that he reviewed the Plant monthly reports where they had information relevant to a particular time frame. He reviewed the E3 Management Committee minutes. He noted that daily operating logs did not provide much information, other than with respect to specific issues. He stated that he had sourced each input for his calculations from Nova documents, E3 operational data, or both, and demonstrated this through his testimony.

[259]Mr. Kapur noted in his report that the rate trials in February and March 2002 indicated that E3 was capable of producing more than '''''''''''''' Mg/hr (''''''''% of original design capacity). The average capacity was '''''''''''''' Mg/hr (six furnaces with a feed rate of less than ''''''' Mg/hr) and it appeared that operations with six furnaces did not limit capacity.

[260]Mr. Kapur noted that the documentation demonstrated an annual on-stream factor of 99%. Thus, in his opinion, the Plant was capable of producing '''''''''''' BPY from mini-turnaround in 2001 until mechanical completion of the COP.

[261]He indicated that the COP was designed and implemented to increase the productive capability of E3, to utilize some of E3’s in-built over-design to achieve ''''''''% of hourly design capacity. He noted that the rates achieved by the COP during a rate trial in 2004 exceeded the project objectives, and the results from the rate trial were considered a success.

[262]Mr. Kapur’s report states that the rate trial established that hourly capacity with seven furnaces, post-COP, was based on ''''''''''''''''' Mg/hr. However, the Plant had demonstrated sustained higher rates of '''''''''''''' Mg/h (during May 11 to 26, 2004) and daily average rates as high as ''''''''''''' Mg/h (on May 14, 2004) based on actual operational data.

[263]His six-furnace hourly capacity is based on the data from rate trials for individual furnace capacity at '''''' Mg/h and 65% ethane conversion.

[264]Nova submitted that Mr. Kapur’s choice of 2002 rate trial days to calculate hourly capacity was not rationalized, but he testified that, if he had taken the full range of days from the rate trial, his hourly capacity number would have been higher, so he decided to use a lower, conservative number.

[265]While Nova is correct that Mr. Kapur’s hourly capacity of '''''''''''' Mg/h has not been proven during six-furnace operation, Mr. Kapur explained how he had translated the data available from seven-furnace operations during rate trials to arrive at his six-furnace hourly capacity. The fact that Nova had not chosen to operate six furnaces at this capacity does not mean that the Plant was not capable of doing so, given the results of the rate trials. Mr. Kapur’s opinion relates, not to how the Plant was operated, but how it was capable of operating.

[266]The total furnace feed of ''''''''' Mg/h for six furnaces corresponds to ''''''''''''' Mg/h ethylene capacity (based on average of 2004 high rate data, which was nearly ''''''''''''''' Mg/h of ethylene capacity corresponding to almost '''''''''''''' Mg/h of furnace feed, taken from actual operation data). Using average data from rate runs, six-furnace capacity is based on '''''''''''' Mg/h as an alternate approach. ''''''''''''' Mg/h capacity was used for six-furnace operation.

[267]Thus, Mr. Kapur calculated ethylene productive capability for a turnaround duration of five years (2003 to 2008) after implementation of COP, which would result in '''''''''''' BPY.

[268]Mr. Kapur noted that E3 went through a turnaround in 2008 to address regular maintenance, inspection and cleaning. His calculation of productive capability for this period is

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based on a capacity run in early 2009. In his view, this productive capability was corroborated by industry experience based on creep, or the tendency of the productive capability of a plant to increase over time due to better operational skills.

[269]Mr. Kapur testified that, in general, his industry experience is that the increase in productive capacity due to creep always more than compensates for the decline in capacity due to fouling. Even so, he did not use any factor for creep in his calculations.

[270]The hourly capacity based on seven-furnace operation and run length were the only changes relative to the previous period. He summarized the reasons for these changes:

a)Seven-furnace hourly capacity was changed from ''''''''''''''' to '''''''''''''' Mg/h based on a rate trial from March 13 to 16, 2009. During this rate trial, the Plant could achieve

'''''''''% capacity without by-passes open; and

b)run length basis for normal feed was changed from 50 days to 70 days and this change was based on Nova’s own assessment as well as actual operating data.

[271]He therefore calculated ethylene productive capability for a turnaround duration of five years (2008 to 2013) as ''''''''''''' BPY. This is much higher than E3’s initial design guarantee of 2.81 BPY.

[272]Mr. Kapur noted that E3 could achieve higher productive capability post-COP, based on plant maximum rates and Nova documented performance. He reviewed the following operation parameters, which in his view have been demonstrated through E3’s historical performance:

a)hourly capacity – seven furnaces: ''''''''''''''' Mg/h (''''''''% of original design);

b)run length for maximum feed: 50 days;

c)furnace mini-shutdown: eight days; and

d)furnace major-shutdown: 21 days.

[273]Based on these historical performance levels, Mr. Kapur was of the opinion that post- COP, E3 had achievable productive capability of '''''''''''' BPY.

[274]Mr. Kapur indicated that, in his view, his productive capability determinations are

conservative. His analysis of available operating and performance data confirmed his opinion, as did his industry experience and reference to Nova’s internal analysis. He also calculated E3’s ethylene nameplate capacity (ENC) using Schedule E methodology from the OSA and came up with a value of '''''''''''''' BPY.

[275]Mr. Kapur testified that the methodology that he used for his opinion is a “fairly common” and “fairly well accepted” methodology in the industry, and is similar to the methodology that Nova itself used from time to time in its analysis of plant capacities.

[276]Nova submits that Mr. Kapur failed to account for actual conditions encountered. This is not accurate: it is clear that Mr. Kapur distinguished in his opinion between productive capability and utilization. As he noted in cross-examination, what he did was to analyze all the data that was available to him, which included details of mechanical constraints from time to time. From that information, he assessed the capability of E3. By way of example of what his opinion identified, he referred to the allegation of lack of ethane. If that constraint existed, the Co-owners

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of E3 would not be able to use the productive capability of the Plant, but the productive capability would still exist. The lack of ethane would be a utilization issue.

[277]Mr. Kapur was also very clear that his opinion was not a theoretical opinion, that he looked at all the data available on E3, and that his analysis was “very much based on the E3 capability, and it is not a standard design basis; it is based on what E3 is actually physically on the ground and how it has operated.”

[278]He acknowledged that certain mechanical issues may have occurred in E3’s operational history that decreased the utilization of the Plant, but pointed out that “if the business requires you to do certain things, you will make all efforts to get there. But if business doesn’t require you to achieve certain capacity or require you to run at higher levels, you can wait. It all depends on what the motivation factors are.”

[279]Mr. Kapur testified that his industry standard methodology accounts for all the operational maintenance issues that normally would be seen in the industry and how plants would normally achieve their capabilities “if you do all the maintenance and operation in a timely fashion.” He also noted that his methodology reflects all expected and normal industry practices, that it is expected that problems will be fixed, but “it can happen the business really doesn’t require that capacity. In those cases, you may not address the problems because you’re trying to minimize your costs on maintenance or – if you don’t have the need”.

[280]Mr. Kapur was cross-examined extensively on his opinion, but was unshaken. Nova submits that his opinion suffers from the following defects:

a)Mr. Kapur’s lack of operational experience caused him to overlook mechanical limits on E3’s capacity.

While he acknowledged that he had never operated an ethane cracker, Mr. Kapur has extensive experience in process design, process development, and implementation of that design in the field. He has worked on around 50 projects similar to E3, about one-third of which involved ethane as a feedstock. He has provided assistance to engineers in the field, helping with performance test evaluations, helping to expand or debottleneck existing facilities, looking at constraints and advising how to remove them. It was clear from his testimony, as well as his resume, that Mr. Kapur is eminently qualified to give an opinion on productive capability, and also clear that he did not overlook the mechanical issues in E3’s performance history. As he indicated, the methodology he used is solid, and it “allows for all the regular maintenance, and if you address these issues on a proactive timely basis, you should be able to achieve the productive capability, so it’s not a theoretical number”. Nova suggests that accepting Mr. Kapur’s assessment would require that the evidence of the plant witnesses be rejected. That is not the case. The admissible evidence of the plant lay witnesses relates to the actual utilization of E3, not its productive capability.

b) Mr. Kapur’s on-stream factor of 99% was far higher than E3’s actual on-stream time.

In his testimony, Mr. Kapur demonstrated from documentary evidence that, once force majeure issues are removed from the calculations, his opinion that E3 consistently achieved better than 99% onstream time in non-turnaround years was valid. His opinion was supported by the testimony of Mr. Gent, who was

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acknowledged to be Nova’s most qualified lay witness. As Mr. Kapur explained,

99% is not a theoretical number:

We started off with this plant in the process basis of design, which was 98 percent with overall 2 percent provision for the unplanned outages as we saw a moment ago in the process design basis. And then we look at various documents, which [have] Nova’s internal assessment in there, and those were 99 percent. So we’re talking about these numbers very specific to the facility E3 here...

c) Mr. Kapur’s fouling factor was far below the fouling actually experienced at E3.

The fouling factor of 0.2% was also used by Mr. Wilke of Nova in his ENC redetermination proposal. Mr. Kapur explained his use of the 0.2% fouling factor in his calculations. He noted that, from the COP time frame on, fouling was only a limiting constraint when E3 was operating with seven furnaces because that was when the Plant’s back-end separation section was limiting in capacity. Mr. Kapur supported his use of the fouling factor with plant production data. When pressed on cross-examination, he noted that the time Nova actually took to address the fouling issue was “unprecedented in my experience in the industry”. He suggested methods by which the fouling issue could have been mitigated, and noted that he struggled to understand why the problem was allowed to go on for as long as it did. Other witnesses have commented on the extent that fouling actually interfered with productive capability of E3 in a manner that supports Mr. Kapur’s use of the 0.2% factor.

d)Mr. Kapur used furnace capacity and feed rates that were higher than E3 was capable of achieving.

Mr. Kapur demonstrated through his testimony and use of testing documentation from 2002, 2003 and 2006 that the rates he used were achievable. Again, he emphasized the difference between productive capability and utilization, and emphasized that productive capability can be present even when it is not utilized. When challenged on cross-examination about whether he would respect the judgment of the operators, he responded that, as he had done, he would look at all the documentation in coming up with productive capability numbers that were achievable. He referred to documentation that demonstrated that Nova personnel had come to the same conclusion with respect to furnace capacity and feed rates including in their dealings with the Solomon Surveys and Submissions to the Alberta Government. He noted that Nova had made no attempts to test a '''''' Mg/hr feed rate after the COP implementation.

e) Mr. Kapur did not take into account five-furnace operation.

Mr. Kapur explained that, in his view, avoidance of five-furnace operation was a matter of scheduling. Testimony from Nova lay witnesses indicates that Nova took a relaxed view in bringing furnaces on line when high production was not required by the EBT. I cannot disagree with Mr. Kapur’s opinion that, for the

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most part, five-furnace production could be avoided by planning and by diligent normal maintenance.

[281]When asked whether he would accept it if the operators told him that they could never have achieved '''''' Mg/hr through six furnaces, he responded:

I would at least expect that, if there are written COP objectives on which the whole COP debottlenecking was done, that it would have been attempted, and even if it was not attempted, to ... before the Callidus burner replacement, it should have been at least attempted after the Callidus burner replacements, and -- well, you did show [me] times they were running less than six furnaces. I didn’t see any of those time frames the furnaces were attempted to run at '''''' [Mg/hr]...

with due respect, these are one-line statements, and normally I have done all my calculations based on a lot of data, and that tells me more.

[282]Mr. Kapur was clear that his productive capability opinion was not maximum capability, but the productive capability that could be achieved easily by E3, based on a conservative approach. From his testimony, tested by cross-examination, I accept his opinion as valid and reasonable.

[283]Mr. Kapur’s opinion that Nova did not achieve first decile performance for production of products was based on his view that the Solomon benchmark of “capacity utilization” is the appropriate method of determining whether Nova met the objective set out in section 4.3(b) of the OSA. He noted that capacity utilization measures the percent of ethylene capability that is utilized by a plant in a given year and that this is the indicator of success in optimizing product production. Solomon groups plants in four segments, each representing 25% of the participating plants. These segments are referred to as quartiles, with the first quartile being the best performers.

[284]E3 participated in Solomon Benchmarking Surveys for 3 years (2003, 2007 and 2011) since start-up. Nova provided the information for these studies. Mr. Kapur noted that in all survey results, E3 did not achieve first decile performance when compared with other ethylene plants in North America.

[285]In 2003, between 51and 75% of the participants performed better than E3. The data reflects that approximately 63% of the participants outperformed E3.

[286]In 2007, between 51 and 75% of the participants performed better than E3. The data reflects that approximately 60% of the participants outperformed E3.

[287]In 2011, between 76 and 100% of the participants performed better than E3. The data reflects that approximately 80 to 90% of the participants outperformed E3.

[288]E3 was ranked 33 out of 36 participants in North America for ethylene capacity utilization.

[289]It is clear from the analysis of the data that Nova did not achieve first decile performance in capacity utilization, which I accept from Mr. Kapur’s opinion is the appropriate metric for measuring productive capability.

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2.Chris Wallsgrove

[290]Chris Wallsgrove was called by Nova and was qualified to give opinion evidence as an expert with respect to the design of ethylene plants, including the assessment of plant performance and capacity.

[291]Mr. Wallsgrove obtained a Bachelor of Chemical Engineering at the University of Bradford, UK in 1969. Since then, he has had jobs and projects in Europe, the US, Canada and the Middle East, and has been involved with the evolution of ethylene technology. His experience includes petrochemical and refining technology development, plant operations, process design, marketing, business development, commissioning, startup, plant and project troubleshooting, training, project engineering, engineering management, research, conceptual process configuration, and proposal preparations and presentation.

[292]Mr. Wallsgrove has been an independent consultant since 2013. He was involved in the E3 design, and in considerations about expanding ethylene production at the Joffre Site.

[293]Mr. Wallsgrove was retained to review and provide a rebuttal report to Mr. Kapur’s report in light of his experience and knowledge of industry-accepted practices.

[294]In his report, based on his review of limited documents provided by Nova counsel, Mr. Wallsgrove estimated E3’s capability to be ''''''''' BPY. At trial, he testified to an alternative calculation that suggested a capability figure of '''''''''' BPY.

[295]Mr. Wallsgrove used the term “available capacity” in his report, a different concept of capacity from the one that Mr. Kapur used. He defined available capacity as “... on a long-term basis, how often, as a fraction of a year, say, is the plant delivering the designmental [sic] revenue to the customer, the owner, and that includes running at lower throughput. It includes off-spec operation, and it includes anything that detracts from the ability to run at nameplate.”

[296]Mr. Wallsgrove’s opinion on effective availability was 95.7%, which he reached initially from his experience, and then corroborated by taking data from an April 2015 article by HB Solomon Associates LLC entitled “Top 7 Causes for Lost Olefin Production”. He added the data from the article together and subtracted the resulting 4.3% from 100%, although he conceded that the plants discussed in the article are not directly comparable to E3.

[297]As Mr. Kapur points out in his response report, the 99% that he used in his opinion was based on the historical performance of E3.

[298]In calculating E3’s capacity, Mr. Wallsgrove used 8400 hrs per year of production, even though in the 2003 COP, the Co-owners used the design number of 8500 hours. He used a 40- day turnaround number, even though the process design basis for E3 uses 32 days, and the COP and Mr. Kapur use 35 days. Mr. Wallsgrove was aware that Nova’s own proposal for redetermination of E3’s ENC in 2007 prepared by Mr. Wilke used 8500 hours and an onstream factor of 99%, and that Nova had recorded an onstream factor of 100% in 2006 and 2007, but he testified that, without a persuasive explanation, those numbers did not coincide with his definition of effective availability.

[299]As noted by Dow’s expert, John Holloway, Mr. Wallsgrove’s conclusion that E3, as it exists today, could be expected to produce '''''''''' BPY uses an on-line availability that is less than E3’s actual performance and less than E3’s COP design. Correcting Mr. Wallsgrove’s calculated on-line availability to E3’s actual availability over the evaluation period results in an E3

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productive capability of ''''''''''' BPY, which is consistent with Mr. Kapur’s opinion with respect to productive capability. Mr. Wallsgrove failed to consider Nova’s own reported capacity for E3, including E3’s rate trial results that demonstrate E3’s productive capability greater than Mr. Wallsgrove’s reported capacity.

[300]Mr. Wallsgrove stated he had no reason to disagree with Mr. Holloway’s comment mathematically. Given that I accept Mr. Kapur’s use of 99% annual on-stream time, there is effectively little difference between Mr. Kapur’s productive capacity and Mr. Wallsgrove’s adjusted calculation.

[301]Mr. Wallsgrove’s opinion on the meaning of “first decile performance” was based on a limited review of documents, and relied not on the language of the OSA, but on the original design project objectives. For that reason, I prefer the opinion of Mr. Kapur.

[302]Mr. Wallsgrove agreed that keeping plant maintenance costs down for a period of time can have implications elsewhere. He noted that:

if you neglect maintenance, … [the] primary job of maintenance is preventive and spotting when things reach the end of their life and changing them before they reach the end of their life. If you minimize that work, in other words, you don’t necessarily analyze every pump, every compressor, eventually the plant is going to come crashing down because something breaks, and yet, the objective of cost- effective maintenance should be to prevent those breakdowns.

[303]He acknowledged that one way of saving money on maintenance would be by deferring it or by extending furnace decoke cycles beyond their design lengths. When that happens, Solomon metrics, such as capacity utilization, can slip. He referred to this as “common sense.”

[304]Although Mr. Wallsgrove “strongly disagreed” with Mr. Kapur’s feed rate of '''''' Mg/hr as non-sustainable, the evidence is clear that E3’s furnaces operated regularly with capacities higher than the 53 Mg/hr that Nova submits is appropriate. In the absence of rate trials that would test the rate feed, Mr. Wallsgrove was of the opinion that a feed rate of '''''' or ''''''' Mg/hr would be possible for E3. In fact, the furnaces operated at those rates and higher from time to time.

C.Nova Defence of Mechanical Constraints

1.Introduction

[305]As previously noted, Nova submits that E3 was plagued with a series of unanticipated mechanical constraints that impacted production at the Plant. Both parties led expert evidence on the issue of mechanical constraints. Nova also led evidence from Plant operations personnel that it submits demonstrates that Nova was innovative and resourceful in prudently resolving these constraints. Nova submits that, at all times, it produced as much ethylene at E3 as was mechanically possible with the available ethane feedstock.

2.John T. Holloway

[306]John Holloway testified as an expert on behalf of the Dow plaintiffs. He was qualified to give opinion evidence on the operation and maintenance of ethylene plants, including the effect of such operations and maintenance on productive capability.

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[307]Mr. Holloway earned a Bachelor of Science and Masters of Science in mechanical engineering in 1966. Upon graduation, he joined Dow Chemical Company, where he worked for more than 30 years. He had various positions with responsibilities in operations and maintenance, engineering and technology management. He also played a role in evaluating potential ethylene plant acquisitions and in the expansion of existing Dow facilities.

[308]He now lives in central Texas and has been a Senior Technology Consultant with the Sinclair Group, Ltd. since 1998, providing services to industries including the petrochemical industry. The majority of his work involves major mergers and acquisitions, assisting in the due diligence process.

[309]Initially, Mr. Holloway and the Sinclair Group were retained to evaluate E3 and to respond to any expert reports submitted by Nova with respect to E3’s operations and maximum production capability. Mr. Holloway was asked to independently evaluate whether there was anything apparent from the E3 operational documents produced in the litigation that indicated that E3 could not have achieved its maximum production capacity from the performance tests in 2001 through 2012.

[310]Mr. Holloway indicated in an opinion dated January 16, 2014 that he did not find any uncommon operational issues. In his opinion, the operational issues identified in the produced reports and documents should not have prevented E3 from operating at maximum production capacity over the time period in issue. He noted that prudent operators expect the kinds of operational issues identified and plan for them accordingly.

[311]Mr. Holloway’s first report was based on a review of all of the following produced documents among others:

a)Joffre Olefins/Polyolefins Weekly Reports and OPO Bi-Weekly Reports;

b)JPPT Meeting Highlights;

c)Ethylene 3 Management Committee meeting minutes;

d)E3 Daily Status Updates;

e)E3 Daily Production Reports;

f)E3 Monthly Reports;

g)Solomon Study Reports from 2003, 2007 and 2011;

h)Process flow sheets; and

i)E3 Historian data.

[312]He or a member of his four-person team also reviewed presentations made by Nova personnel, some emails and pre-trial questioning transcripts.

[313]Mr. Holloway testified that, after reviewing documentation and providing his report, he received rebuttal reports from ESI and Mr. Wallsgrove in April 2014. After commencing a review of these, he received a second ESI report that was different from the first. He issued a sur- rebuttal report dated September 24, 2014. For the purposes of his second report, Mr. Holloway and his team made a list of the issues that were identified in the rebuttal reports and analyzed them.

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[314]After his second report in December 2014, Mr. Holloway and his team received tens of thousands of additional documents from Nova. He and his team members reviewed these new documents. Some of them they had already received. The new documents included the entire operating logs, including actual operating instructions, which had not been included in the initial production. They also included summary documents prepared by Nova personnel on some of the major issues at E3.

[315]Mr. Holloway testified about various issues that had been identified in the rebuttal reports, Nova’s opening statement at trial and the questioning of Yost Kieboom, one of Nova’s lay witnesses.

[316]Mr. Holloway defined productive capability as a plant’s ability to produce ethylene over at least a year, perhaps five years, between planned turnarounds.

[317]It was Mr. Holloway’s opinion, stated in his sur-rebuttal report, that, with few exceptions, Nova has not operated E3 in a manner that achieves its productive capacity. He noted that Nova has run E3 at reduced furnace operating rates, both with respect to feed rates and conversion rates. In addition, Nova’s mode of furnace operation has never tested the true productive capability of E3, but rather placed an unnecessary load on the finishing section, primarily the C2 Splitter, while producing ethylene at lower-than-productive capability rates. It was Mr. Holloway’s opinion that E3’s productive capability is much greater than what Mr. Wallsgrove and ESI have reported.

[318]He supported Mr. Kapur’s capacity opinion, and found his methodology and data to be correct and consistent with common industry practices and the operating data and experience of E3. He agreed that E3’s mechanical availability was 99%. He explained that the Stone & Webster manufacture original process guarantee stipulated a guarantee of 98% availability. He noted that within the first three years of operation, E3’s availability was actually a little greater than 98%, and “then after operating the plant for three years, Nova decided that ... the real availability should be 99%, and lo and behold, they demonstrated that”.

[319]Mr. Holloway noted the difference between 99% availability, which Mr. Kapur explained is availability between major turnaround years, and 97 or 98%, which would include all outages, planned and unplanned, such as power failures.

[320]He noted that he had reviewed the outages that occurred at E3 during the period at issue and concluded that an average of 11 days per year off-line as a design basis and as used by Mr. Kapur in his productive capability calculations is reasonable and achievable. Under lengthy and vigorous cross-examination, he explained and maintained his opinion.

[321]Mr. Holloway reviewed the operational issues that had been raised by Nova as constraints to production in the Wallsgrove and ESI reports, the Nova opening statement and Mr. Kieboom’s questioning, analyzing each as follows:

a)He explained why weather did not constrain E3, since the design of E3 had included a number of features that suited it for cold temperatures. He also noted that there was only one minor mention of weather issues in the operating documentation;

b)He explained why size did not constrain E3, and why size was in fact an advantage, and the design of E3 was an improvement over older plants;

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c)He identified two design issues that he considered to be of note: the depropanizer tower issue and the problems with the furnace burners. Mr. Holloway acknowledged that the depropanizer tower problem was a design issue. He noted that ineffective modifications had been attempted in 2000, but that the problem with the depropanizer tower and the furnace burners had been dealt with in the September 2001 mini- turnaround, He gave credit to Nova for identifying the problems and fixing them. Mr. Holloway acknowledged that while the depropanizer issue may have caused a loss of production early on, E3 could still operate at a high rate. He testified that he had not identified any significant design-related issues with the operations at E3 after 2001;

d)He addressed power outages. He identified four power failures in 12 years of operation and analyzed them on a time line. Three of the outages occurred by January 2004 and one was in March 2011. He did not find the fact of four power outages surprising, but the real point for him was “if you look at the availability of E3, it was not impacted by power outages”. In his opinion, power outages may have impacted plant utilization, but not productive capability, which is measured in years, and not weeks or months. He noted that the reliability data he reviewed indicated that, over time, power outages were not a problem;

e)Mr. Holloway discussed overheating of the acetylene reactor. He conceded that there had been two incidents, that these incidents indicated an issue with the plant operators being able to react in time to the problem, and that this led to operator retraining and improvements in the process control system. He noted the problem was resolved in 2000, with a final solution in 2001, and that the issue has never shown up as a production constraint since;

f)He reviewed the C2 splitter fouling issues, and ESI’s claim that capacity was reduced to 95% between June 30, 2010 and October 19, 2010, and then limited to '''''''''%. Mr. Holloway again analyzed the issue on a timeline, noting that fouling in E568 was noticed by staff in October 2007 but that it took over two years to come up with a solution, which he characterized as fundamentally slow. In his view, the reason for this was that Nova did not need the ethylene. The E568 issue was finally resolved by changing the E568 core in October 2010. He noted that, in the meantime, in March 2009, E3 ran at ''''''''% of design nameplate, so the problem was obviously not a restriction at that point in time. E3 ran at ''''''''' BPY actual production in June/July of 2012. In July, fouling in E565 was discovered, but it was not resolved until 2014, which again, Mr. Holloway noted, was “just slow”.

In summary, Mr. Holloway characterized the C2 splitter fouling issue as a restriction, but not as a constraint, because, in his view, Nova never tested the constraint. Over the time period, E3 averaged 2.6 BPY of production. He noted that the claim that E3 was limited to 95% between June 30 and October 19, 2010 was never tested because the plant never reached 95% during this period. Mr. Holloway did not agree with the submission that the plant was limited to ''''''''''% thereafter, because he indicated that there were operational fixes, such as increased conversion, that could fix the problem.

g)With respect to the TD405 issue, Mr. Holloway noted that this piece of equipment operated from start-up to 2003, and that then, minor wear was fixed. It then operated from mid-2003 to 2008, and showed wear, so the lift rods were changed. He did not feel that this was unusual, and noted that pieces of equipment that show wear should

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probably be changed at every turnaround. In July 2010, Nova discovered the rods were wearing because E3 was being operated at such low rates. He indicated that there would be no issue at the high operating rates. ESI claimed production was limited to 100% in October/November 2011, and the rods were changed for a third time. Mr. Holloway’s concern was that it took a long time to solve a problem that could have been easily fixed. In his opinion, there was no impact on E3’s productive capacity. He pointed out that Nova had never tested the alleged constraint;

h)The next issue that Mr. Holloway addressed was the ethane superheater, E650. ESI alleged that fouling in the E650 constrained production. Mr. Holloway noted that the issue was discovered in 2003, a solution was found that made a major improvement, fouling continued and in June 2005, Nova did a more thorough cleaning and the E650 was back to design conditions with a slight but acceptable pressure drop. It continued to foul, and Nova came up with an experimental operating procedure that was acceptable. In 2008, Nova cleaned the fouling again. Mr. Holloway suggested an operational fix, but pointed out that he had never seen this fouling show up as a production constraint in the Nova documentation;

i)Mr. Holloway commented on the issue of debris in the cooling water system, and ESI’s comment that, in 2011, “it appears capacity was lost but the problems have been intermittent”. He described this as an isolated occurrence with no evidence of how it had affected production, other than the Plant being down for a short period of time to clean the exchangers;

j)The next issue was the de-ethanizer exchanger, E502, and the concern of excessive vibration during a pre-COP rate trial, which, he noted, had been raised by Nova for the first time during the trial. Mr. Holloway was of the view that this issue was a major part of the COP and that, following replacement of the exchanger, it was never a problem. He indicated that this had no impact on production, before or after replacement;

k)Mr. Holloway addressed the complaint that the K400 seals had leaked on four occasions during the period at issue. He attributed the problem to operator error and natural wear, and noted that, other than the four occasions when the plant was down due to this phenomena, the failures did not limit production;

l)Nova submitted in its opening statement that heat transfers in the C2 refrigeration unit caused a small loss in November 2008. Mr. Holloway investigated this, and found a note in documentation that indicated that on one day, there was a process control issue within the C2 refrigeration system. He noted that the report that mentioned the issue listed “nomination/business plan” as the major constraint;

m)Mr. Holloway discussed the variety of furnace issues raised by Mr. Wallsgrove, ESI and Nova in detail. He characterized as maintenance issues the USX nozzle issue, the issue of the burners, including tips, the coils issue, the crossover piping issue and the variable frequency drives (VFD) and fan bearing issues. He addressed ESI’s availability comments separately. His comments on the maintenance issues, in summary, are as follows:

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i)USX nozzles – eventually all were changed, and he would expect them to be changed. If this is done in conjunction with a coil changeout, there should be no impact on production;

ii)burners, including tips – this caused serious problems in early days, and, as acknowledged previously, was a design issue:

-by the September 2001 mini-turnaround, the burners were modified and functioning normally;

-after that, some secondary burner tips were plugging, which is not unknown to occur. In Mr. Holloway’s opinion, this could be remedied by removing and cleaning them, but he conceded that this is “a nuisance;”

-the burners were changed to Callidus burners over roughly a three-year period. This may have been a safety concern, but not a limit on production when production statistics during these years are considered, and there were no problems after the change-out;

iii)coils – Mr. Holloway noted that these need to be replaced every four years and issues of blisters, high metal temperature and bulges are not unusual. The pattern of coil changes at five to six years indicated to him that Nova was not pushing their furnaces hard enough and was “babying” the furnaces. His assumption was that Nova did not need the ethylene.

On this issue, he noted that Nova was not following the proper procedure when experiencing high tube metal temperatures, that it should have be decreased conversion and decoked as soon as possible. Nova was extending runs between coking too long, for an average of 73 ½ days when it should be about 40. This was also an issue of feeding coils less on lower conversions, or “babying” the furnaces;

iv)crossover piping – This was raised by Nova since the trial began. Nova had concluded that reducing sulphur in the system had led to leaks in piping. In Mr. Holloway’s view, this did not impact production. This was done between 2010 and 2012 . Since 2011 and 2012 were, from the data, good production years, no matter how complex the changeover was, it was managed effectively and did not impact furnace availability; and

v)VFD and fan bearings – This was also raised by Nova since the trial began. Mr. Holloway indicated that this equipment can be spared. If it is a continuing problem, the equipment should be changed before it failed. However, in his review, this does not appear from data to have impacted furnace availability.

[322]With respect to ESI’s discussion of furnace availability, Mr. Holloway noted that he accepted ESI’s numbers for the purpose of his opinion, even though he knew that there were periods of time when the furnaces were not maintained or worked on in a timely manner, when furnace maintenance was delayed or stretched out to save maintenance costs. Mr. Holloway and his team took the ESI “furnaces available” numbers, raised the conversions of the furnaces to the design conversion of 65%, and calculated production in BPY at three different feed rates. They assumed in the September report a full year of operation of 8,760 hours, but for the purpose of

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his opinion at trial, he changed to an 8,500 hours per year basis, or 97% of what was originally in his report. At 53 Mg/hr, the original design basis, average production was '''''''''' BPY. At ''''''

Mg/hr, it was ''''''''' BPY. At '''''' Mg/hr, the COP design basis, it was ''''''''''' BPY. Mr. Holloway compared in graph form the time set out in the COP objectives for furnace turnaround, when coils were changed (being 32 days under COP objectives, 30 days under Schedule E and Nova’s demonstrated change time of 21 days) to the longest actual downtime per furnace in the time period at issue. The actual production numbers were far higher than even the 32 days of the COP objective. Mr. Holloway’s opinion from this data was that Nova did not need the furnaces, and therefore left them down from time to time.

[323]Mr. Holloway’s conclusion was that furnaces were not a production constraint to E3, that the furnaces were not operated to maximize production, that the furnace issues, though complex, were not unusual and were managed, and that furnace availability was more than sufficient to meet E3’s needs.

[324]Finally, Mr. Holloway graphed the mechanical issues on a timeline and compared them to actual production at E3, and noted that there was no relationship.

[325]Mr. Holloway was a highly professional and candid witness. He was clearly very knowledgeable about the operation and maintenance of ethylene plants. He referred to work done by his team when it was appropriate, and displayed no bias against Nova in his evidence.

[326]He explained the errors in his September report’s Statement of Unnecessary Days Off- line by pointing out that he and his team had not received the full disclosure of operational documents until after his report had been completed. As he noted, they did not receive the entire “operators log” until a few months before trial, months after he had completed his original report relying on “raw” data. He did not attempt to argue the point when the new disclosure appeared to contradict the data on which he had relied.

[327]I do not accept Nova’s submission that Mr. Holloway was a biased witness. He had been, of course, a long-time Dow employee and in the late 1990’s was a consultant to Dow. His particular experience, first with Dow in best practices and trouble-shooting, due diligence in evaluating the acquisition of new plants and working with plants to identify incremental expansion, and later with the Sinclair Group in consulting on mergers and acquisitions, verifying the assets, determining whether they were capable of producing, whether there were plant health issues, how much it would cost to repair the issues, energy performance and opportunities to improve plant performance, all made him an excellent candidate for the opinion he was asked to give.

[328]I did not detect that his experience with Dow imbued his opinion with anything inconsistent with good maintenance and operations practice. He certainly had a fulsome and detailed knowledge of the mechanical issues that Nova submits affected the productive capability of E3.

[329]Dow points out that Nova made no objection under Rule 5.36 of the Alberta Rules of Court, AR 124/2010, to the admissibility of Mr. Holloway’s report. As noted by Cromwell, J in White Burgess Langille Inman v Abbott and Haliburton Co, 2015 SCC 23 at paras 40 and 53, independence and impartiality bear not just on weight but also on admissibility of the evidence. Concerns about independence and impartiality are best addressed at the qualification stage. Mr. Holloway was cross-examined at that stage about his relationship to Dow, but no argument was

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made about bias at that time. I agree with the Court in South Yukon Forest Corp v R, 2010 FC 495 at paras 1202-1207, rev’d on other grounds 2012 FCA 165, leave to appeal to SCC refused, 34936 (December 6, 2012) that, as a matter of trial fairness, Mr. Holloway should have had an opportunity to address the allegation of lack of independence during his testimony. However, this failure does not prejudice Mr. Holloway in this case, as I perceived no failure to give his evidence professionally, based on his experience and a thorough review of the operational documentation, despite having to cope with successive waves of production.

[330]Nova makes the argument that, in the absence of any analysis of operational issues in Mr. Holloway’s first report, “Nova did not consider the mechanical constraints to be the issue [Dow] made of [them] until Mr. Holloway’s sur-rebuttal report in September, 2014”. This is odd logic: Mr. Holloway did not consider the operational issues to be constraints on productive capability until Mr. Wallsgrove and ESI raised them, and therefore did not analyze them in detail until they were raised by Nova’s expert witnesses.

[331]Nova submits that Mr. Holloway was in error for some references he made to the “Plant Production Restrictions” portions of the Manufacturing West Reports. These monthly reports provided by Nova to Dow are acknowledged by Nova as having the most accurate reports of what Nova says were constraints on production. Nova submits that Mr. Holloway used the wrong table in the reports for identifying constraints. Mr. Holloway testified that he used the “Plant Production Restrictions: Explanation” rather than the “Plant Production Restrictions: Constraints” table. He testified that the latter table, which appears to measure “constraints” in hours of constraint rather than in pounds of product lost, gives no measure of the severity of the alleged constraint or whether it had a material effect on production in the period, and it didn’t “make sense” to him to use it. Later evidence at trial from Mr. Wilke disclosed that in July 2012, near the end of the damages period, Nova stopped including the table used by Mr. Holloway, which measured constraints in terms of pounds of product. It was not until January 2015, that Nova moved to a new system to report constraints as a production shortfall in pounds against maximum production capacity.

[332]I accept that, given Mr. Wilke’s testimony of the difference between the tables, Mr. Holloway was mistaken in referring to the one he did, but that does not, as Nova submits, indicate that Mr. Holloway improperly failed to identify any constraints to achieving Mr. Kapur’s productive capacity. Although he referred to this table, it was clear that he made an exhaustive review of the E3 records in coming to his opinion that there had been no unusual operational issues impacting Nova’s ability to run E3 at its productive capacity. When ESI’s rebuttal report suggested otherwise, Mr. Holloway made a second exhaustive review of the records, and he further confirmed that each of the issues identified by Mr. Wallsgrove, by ESI and by Nova at trial were overstated, or that Nova failed to address them expeditiously, or that no actual constraint was ever demonstrated. He confirmed again that these issues should not have impacted Nova’s ability to run E3 at its productive capability.

[333]Nova seeks in part to contradict Mr. Holloway’s opinion through the inadmissible opinion evidence of Nova lay witnesses. The issue is not the credibility of the witnesses, but the fact that, had Nova sought to have them give opinion evidence, they should have been qualified as experts, subject to cross-examination on their qualifications, advance notice of their opinions and scrutiny of the basis on which they formed their opinions.

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[334]Nova also faults Mr. Holloway for what it characterizes as omissions in his September 2014 report, despite the fact that Mr. Holloway described a massive receipt of records from Nova after the report was issued, and addressed all of the issues from his review of the newly produced records at trial.

[335]The following is an analysis of Nova’s additional criticisms of Mr. Holloway’s opinions:

a)Nova suggests that Mr. Holloway was unaware of the instability in the C2 splitter system at an early period of time, and he ignored an issue of acoustic vibrations in E- 502. However, Mr. Holloway testified about both these issues in his examination-in- chief and in cross-examination. He was clearly aware of them, but was of the opinion that they were not listed in the documentation as a constraint.

b)Mr. Holloway testified that fouling in the C2 splitter system was a restriction but not a constraint because Nova “never got to 95% during that time”. Although Mr. Holloway was not cross-examined on that issue, Nova submitted in its written argument that the Nova Historian shows that E3 reached 95% of hourly nameplate capacity for nine days in August 2010, with Mr. Kieboom later testifying at trial that this was a test of the constraint.

c)Nova submits that Mr. Holloway was confused about his task based on a cross- examination about production goals. Read in context, this exchange during cross- examination does not indicate that Mr. Holloway was mistaken about his retainer to produce an opinion on whether there were constraints on E3’s productive capability.

d)Nova counters Mr. Holloway’s suggestion that there was an operational fix to the problem of polyethylene fouling in the reboiler with Mr. Kieboom’s later opinion on the issue. Mr. Kieboom was not qualified to give expert evidence, and I accept Mr. Holloway’s expert opinion on this issue.

e)Nova faults Mr. Holloway for indicating that he had not seen the E3 joint venture quarterly report in which the reboiler constraint was documented. On cross- examination, Mr. Holloway indicated that, while he had seen the monthly reports, he had not seen or reviewed the quarterly reports. While it was suggested to him that at a certain point, the monthly reports were replaced by quarterly reports, Mr. Holloway was firm in his testimony that he and his team had monthly reports for the period at issue. The quarterly report at issue was for the third quarter of 2012, near the end of the damages period. In written argument, Nova submits that the quarterly reports were produced before Mr. Holloway issued his written opinions. I found Mr. Holloway to be a credible witness, with a remarkable memory for thousands of reports produced over an eleven-year period. I believe that, for whatever reason, he had not received this quarterly report for review. However, he addressed it when he was presented with it, and it did not affect the validity of his opinion.

f)Nova submits that Mr. Holloway’s calculation of the reboiler limitation was incorrect mathematically, and that it should be '''''''''''''% instead of '''''''''%. This is an issue of methodology and is not a major issue that would affect his opinion or his credibility.

g)Nova submits that Mr. Holloway’s calculation that a feed rate of ''''''' Mg/hr would have been sufficient to run E3 at its full COP productive capability was false by his own admission in cross-examination. This is a mischaracterization of Mr. Holloway’s

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evidence. He was clear that his calculations were an example of furnace capability at different feed rates. He noted that E3 had operated with six furnaces at 53 Mg/hr for extended periods of time and ethane vaporization was not a limitation, but that Nova had never operated at '''''' Mg/hr.

[336]Mr. Holloway was the most experienced and convincing expert witness with respect to the issues on which he was asked to opine. He answered questions directly and thoughtfully. I accept his opinion that each of the mechanical issues identified by Mr. Wallsgrove, by ESI or by Nova at trial were overstated, or that no actual constraint was demonstrated. I also accept his opinion that Nova failed to address mechanical issues expeditiously, which was corroborated by the testimony of several of the Nova lay witnesses.

3.Scott Ferrigno

[337]Scott Ferrigno was the author, with Mark Woods and Shane Steagall, of a report dated January 14, 2014 relating to Nova’s counterclaim against Dow, which will be referred to in the counterclaim decision. The authors also prepared a rebuttal to the expert report of Mr. Kapur dated April 15, 2014, and an update to their report dated June 15, 2015, responding to Dow’s damages expert, Charles Mikulka. The three authors operate under the aegis of Ethylene Strategies International, LP (ESI), a consulting company run by Mr. Woods.

[338]Mr. Ferrigno earned a Bachelor of Science in Chemical Engineering, as well as a Master of Science in Chemical Engineering, focussing on modelling and simulation work, from the University of Connecticut.

[339]Mr. Ferrigno testified that 100% of his work relates to ethylene. He has been an independent consultant in the petrochemicals industry since April 2007, mainly working for ethylene plants in the US Gulf Coast, with the exception of this litigation. He has more than 20 years’ experience in ethylene production technology and optimization, as well as ethylene unit operations, ethylene production simulation and modeling, and ethylene unit fouling / failure analysis and resolution. Most of his work (approximately 80-85%) is spent physically sitting in a control room or an administration building on a plant site. Mr. Ferrigno has never been responsible for the design or building of an ethylene plant, and has never been responsible for the initial commissioning of an ethylene plant.

[340]Mr. Ferrigno was cross-examined extensively on his qualifications, and the scope of and limitations to his ability to give expert opinion evidence as originally described.

[341]After submissions on the issue, I allowed Mr. Ferrigno to give opinion evidence as an expert with respect to the operations of an ethylene plant, limited to the assessment and mitigation of constraints; the optimization of an ethylene plant, including plant rate testing; and the simulation and modelling of an ethylene plant, including plant troubleshooting and the creation of mass and energy balances.

[342]Mr. Ferrigno described himself as the technical expert and Mr. Woods as the commercial marketing expert. He advised that he wrote the entirety of the rebuttal to Mr. Kapur’s report.

[343]Mr. Ferrigno was asked to assume the following in giving his opinion with respect to the rebuttal report:

a)that the ENC of E3 is 2.81 BPY, and that it has never been changed by the parties;

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b)that in November 2007, the parties agreed that if they were to set a new ENC for E3, it would have been '''''''''''' BPY with bypass valves closed, or '''''''''''' BPY with bypass valves left open (which would require capital investment);

c)that Nova as Operator only had available to it the amount of ethane actually delivered to the Joffre Site from 2000 until present; and

d)that ethane was to be made available to the Operator of the Joffre Site to be used with the objective of maximizing efficient, flexible and safe operation of the Joffre Site as a whole without discrimination on the basis of ownership of any particular manufacturing unit at the site and:

(i)that all ethane contributed to the Pool was to be made available to all Pool Users in accordance with the Feedstock Fractions of E1, E2 and E3;

(ii)in the alternative, that all ethane contributed to the Pool was to be made available to E3 first until it was operating at its maximum capacity, except to the extent that E1 and E2 need to operate at or above stable false load points; or

(iii)in the further alternative, that ethane was to be directed to E3 first until it was operating at its maximum capacity, regardless of other Joffre Site ethane requirements.

[344]In order to establish “stable false load”, Mr. Ferrigno was asked to assume that E1 and E2 would not operate below a point where the likelihood of tripping would greatly increase. With respect to whether E1 or E2 had to be shut down under assumption d)(iii), E1 would be shut down first. Mr. Ferrigno made no independent investigation to verify the reasonableness of any of the four assumptions.

[345]Given my decision on ethane allocation, I will not address Mr. Ferrigno’s opinions with respect to assumption d)(i). Nor have I considered his opinion with respect to the first assumption, that all ethane contributed was to be made available to all Pool users in accordance with the feedstock fractions of E1, E2 and E3.

[346]With respect to the first alternative assumption in d)(ii) that all ethane contributed to the Pool was to be made available to E3 first until it was operating at its maximum capacity, except to the extent the E1 and E2 need to operate at an above stable false loads, Mr. Ferrigno did not use the actual experience of E1 or E2 when he assumed that false load was 55%.Operational data exists that established 40% or 45% for E1 and 50% for E2 as actual false load percentages. Mr. Ferrigno acknowledged that all plants are different, and that there was no doubt that E1 could operate at 45% but used the 55% number as more “sustainable” in his experience.

[347]With respect to the second alternate assumption, where E3 is filled to maximum and E1 and E2 divide the rest, he was of the opinion that E1 would often not have enough ethane to run, and would have to be shut down repeatedly and restarted when the situation changed. Mr. Ferrigno acknowledged that he was aware that Nova had considered putting E1 on block operations, essentially shutting it down, and that, before E3 was built, Nova had put E1 on block operations for a month or two in the summer to balance its production with actual demand. He also acknowledged that modifications can be made to a plant to allow lower operations.

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[348]He calculated the amount of ethane produced at the Joffre Site for each of these two scenarios as follows:

 

E1 Ethylene

E2 Ethylene

E3 Ethylene

SUM

 

billion pounds

billion pounds

billion pounds

billion pounds

Alternative 1

11.649

13.466

35.717

60.832

Alternative 2

7.763

15.667

36.452

59.881

[349]Mr. Ferrigno acknowledged that the difference between alternative 1 and alternative 2 is about 735 million pounds, a relatively small number. He also acknowledged that, if his false load figures were lower, the difference between the two alternatives would be even less.

[350]He was asked to address the following questions:

a)whether Nova performed in a manner as would a prudent operator of a like- petrochemical facility, so as to conduct operations with the objective that E3, subject to the direction of the E3 Management Committee, would optimize product production and achieve first decile performance when compared to other ethylene plants in North America; and

b)what ethylene could have been produced by E3 over the period of this litigation given the various alternative scenarios. Given my decision on ethane allocation, the surviving questions are the difference between the actual volumes produced at E3 and:

(i)scenario d)(ii): E3’s ENC of 2.81 BPY from E3’s performance test run in May, 2001 until the effective date of the agreement between the parties in November 2007 regarding a new ENC, and thereafter, the difference between the actual volume produced at E3 and the new ENC agreed upon by the parties; and

(ii)scenario d)(iii): the amount of ethylene that would have been produced using E3’s maximum sustainable capacity from the inception of E3 to the present.

[351]These scenarios were selected for Mr. Ferrigno by Nova counsel.

[352]Mr. Ferrigno further divided the scenarios into five, as follows:

a)E3 nameplate capacity of 2.81 BPY during the performance test in May 2001: an assumption he was instructed to make;

b)E3 nameplate capacity of 2.81 BPY changing in January 2008 based on an alleged agreement of the parties at the November 2007 E3 Management Committee Meeting, as follows:

(i)with bypass valves closed, E3 nameplate capacity of ''''''''''''' BPY, and

(ii)with bypass valves open, E3 nameplate capacity of ''''''''''''' BPY;

c)E3 nameplate capacity set to maximum sustainable capacity:

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(i)based on the three formal rate trials (2001 performance test, 2002 rate trial and 2004 rate trial); and

(ii)based on the three formal rate trials and the two periods of high production rates (April 2004 and May 2009).

[353]For each of the five different scenarios above, Mr. Ferrigno calculated the effective capacity (what the plant could do), the available capacity (what the plant can do reflecting actual reliability issues, outages, etc) and the resulting ethylene production shortfall for the defined period July 2001 through December 2012.

 

 

 

 

 

 

 

 

Ethylene Production

 

Effective Capacity

Available Capacity

Shortfall

Scenario #

Billion Pounds

Billion Pounds

Billion Pounds

 

 

 

 

 

 

 

 

 

 

 

 

1)

'''''''''''''''

 

'''''''''''''''''

 

'''''''''''''

 

 

 

 

 

 

 

 

 

 

 

 

 

2)a)

'''''''''''''''

 

''''''''''''''''

 

 

''''''''''''''

 

 

 

 

 

 

 

 

 

 

 

 

2)b)

'''''''''''''''

 

''''''''''''''

 

 

 

 

''''''''''''''

 

 

 

 

 

 

 

 

 

 

 

 

3)a)

'''''''''''''''

 

'''''''''''''''

 

 

 

''''''''''''

 

 

 

 

 

 

 

 

 

 

 

 

 

3)b)

'''''''''''''''

 

''''''''''''''''

 

 

''''''''''''

 

 

 

[354]Actual production of E3 during the time period from July 2001 through December 2013 was '''''''''''''''' billion pounds.

[355]Mr. Ferrigno was not aware that Mr. Wade had testified that Nova had never prepared a determination of ENC in accordance with Schedule 3, or that the E3 Management Committee had never purported to establish E3’s ENC. He noted that, in the ethylene manufacturing industry, it is standard practice to change the nameplate capacity after the plant has demonstrated the new capacity. He also noted that normally, after turnarounds or expansions, the real capacity would change.

[356]He was instructed to select the three main scenarios by Nova; the subsets of the second and third scenario were his idea.

[357]With respect to the first question, Mr. Ferrigno’s opinion was that it was not the intention of the original owners that E3 would always be in the top decile of North American ethylene plants during the 80-year life of the OSA. In his view, “top decile” was an “objective” and was stated in the OSA as a goal not a requirement. He conceded during cross-examination that this was beyond the scope of his opinion.

[358]He also acknowledged that he had performed his analysis on the understanding that, once the design and construction of E3 were complete and operations began, the objective was to optimize product production.

[359]With respect to the second question he was asked to address, he compared his calculation of ENC to that performed by Mr. Kapur, as follows:

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E3 Ethylene Nameplate Capacity Operation Periods

Start-up to performance test run in 2001

From performance test run until mini turnaround in 2001

From mini turnaround in 2001 until mechanical completion of COP

From COP mechanical completion until 2008 turnaround

Post 2008 turnaround

*corrected for hydrocarbon losses

Kapur – Annual

ESI - Annual

Productive Capability,

Productive Capacity,

BYP

BPY*

no analysis performed

no analysis performed

2.81

 

 

2.81

 

 

 

 

 

 

 

''''''''''''''

 

''''''''''

 

 

 

 

 

 

 

''''''''''''''

 

'''''''''

 

 

 

 

 

 

 

 

''''''''''''

 

 

'''''''''

 

 

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[360]Mr. Ferrigno testified that the most significant differences between his numbers and Mr. Kapur’s are as follows:

a)E3 maximum furnace capacity

[361]Mr. Ferrigno used 53 Mg/hr, instead of the '''''' Mg/hr used in the Kapur report. He acknowledged that tests demonstrated that individual furnaces were able to sustain the rate of ''''''

Mg/hr for one run, but was of the opinion that there were “numerous technical issues” with operating multiple furnaces at '''''' Mg/hr. I note that Mr. Wallsgrove conceded that a feed rate of

'''''' or ''''''' Mg/hr was possible, and that E3 furnaces operated regularly with capacities higher than 53 Mg/hr. For these reasons and the reasons set out in the discussion of Mr. Kapur’s opinion, I accept '''''' Mg/hr as reasonable and achievable and find that Mr. Ferrigno’s use of 53 Mg/hr for his calculations is inappropriate.

b)Average furnace availability

[362]Mr. Ferrigno was of the opinion that the annual on-stream factor of 99% used by Mr. Kapur was overly optimistic and did not represent the historical performance of E3. Mr. Kapur demonstrated from plant documentation and data that his 99% availability figure in non- turnaround years was achievable and in fact had been achieved by E3. On cross-examination, Mr. Ferrigno’s calculation of plant availability indicated errors in calculation and use of data.

c)E3 plant availability

[363]On cross-examination, it became apparent that Mr. Ferrigno’s calculation of E3’s average furnace availability suffered from a number of errors in the numbers used in his model, and was unreliable for that reason. He also used subjective and opaque reasoning to get to the furnace availability number used in his calculation. His evidence indicated mathematical manipulation of the data that was based, not on Nova data, but on the perception of constraints. This led to unrealistic numbers for furnace availability.

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d)Hydrocarbon losses

[364]It appears from the cross-examination that Mr. Ferrigno’s calculations double-counted hydrocarbon losses.

e)Fouling factor

[365]I find that Mr. Ferrigno’s use of a fouling factor of 0.6% is far too high. He chose to ignore Nova documentation that used a fouling rate of 0.2%, and attributed too much loss of capacity to the fouling issues.

[366]Mr. Ferrigno criticizes Mr. Kapur for deviating from the Schedule E calculations. However, Mr. Kapur used Schedule E as a validation check of his independent assessment of productive capability. Mr. Ferrigno also deviated from Schedule E in his opinion in certain places.

[367]One of Mr. Ferrigno’s criticisms is that Mr. Kapur updated E3’s actual capacity prior to the actual trials that corroborated the change of capacity. Mr. Ferrigno stated that it is standard practice in the industry to change the ENC only after a plant has demonstrated the new capacity in a trial. However, Mr. Kapur was measuring actual capacity changes, not when it may be appropriate to make a formal change in ENC, which, at any rate, was never done with respect to E3. Mr. Ferrigno’s comments, however, raise the issue of why rate trials did not follow more closely after an event that might be intended to increase capacity. For example, the rate trial after the September 2001 mini-trial was not completed until March 2002.

[368]I accept Mr. Kapur’s method of measuring capacity as being more realistic than Mr. Ferrigno’s method.

[369]Mr. Ferrigno analyzed the results of five rate tests he had found in the documentation for E3. He acknowledged that he was surprised not to find any sort of formal reports of rate trials after January 2004.

[370]Mr. Ferrigno criticized Mr. Kapur for using a COP objective number in some of his calculations, but he conceded on cross-examination that Mr. Kapur had used actual data, including yield data from all the post COP high rate runs, which gave an average ethylene yield figure of 76.6%, rather than the 75.93% used by Mr. Ferrigno.

[371]Mr. Ferrigno initially testified that he had reviewed many of the same documents reviewed by Mr. Kapur and Mr. Holloway, including the operator logs that were only disclosed to the Dow experts after their reports had been completed. He noted that, originally, he had relied on the E3 Furnace Production Plan, which is a live document, but later discovered that there were some differences between the plan and the raw data from the Nova historian of operations. He noted that there were some errors in the data where furnaces were down when they were recorded as being up, but that the errors largely cancelled out. Mr. Ferrigno was not given unlimited access to Nova documentation, but he testified that he had reviewed thousands of documents. He conceded that he had reviewed some of the documents he listed in his testimony after his reports were written and that these documents were “brought to his attention”. These new documents, including operator logs and daily status reports, were shown to him shortly before the commencement of the trial. He conceded that he did not review them all. He commented that “[w]hat happened during the reports is where I was missing information or information I speculated existed, but I didn’t have available to me, I was forced to use my industry experience.”

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[372]ESI was asked to determine the following with respect to the Holloway reports and the report of Dow’s damages expert, Charles Mikulka:

a)Were there any operational issues experienced by E3 that limited its ability to produce at its capacity? If so, provide an assessment of E3’s capacity in light of the operational issues.

b)Were there any mitigation strategies that the plaintiffs could have pursued to limit or reduce the lost volumes of ethylene set out in the Mikulka report?

c)Mr. Mikulka assumes that TDCC would always have purchased the plaintiffs’ ethylene derivative products manufactured with E3 ethylene. Please assess TDCC’s ethylene derivative demand to determine the reasonableness of this assumption.

d)If the plaintiffs had received the additional ethylene from E3 set out in the Mikulka report, would the resulting ethylene derivatives have realized the prices used in the Mikulka report?

[373]Mr. Ferrigno addressed questions a) and b), and Mr. Woods addressed questions c) and d). Their opinions with respect to questions b) through d) are discussed later in this decision.

[374]With respect to question a), Mr. Ferrigno’s April 15, 2014 rebuttal report to Mr. Kapur’s report included the following disclaimer:

The authors acknowledge that there were specific plant operational and reliability related issues that occurred from time to time at E3. Investigating each of these issues and determining their effect on the calculated capacity numbers was beyond the scope of this report.

[375]Mr. Ferrigno conceded that, when he issued his June report responding to Mr. Holloway less than eight weeks later, in which he commented on a number of Pleavlant operational issues, he had not received any new documents from Nova.

[376]Mr. Ferrigno described his approach to his opinions with respect to Mr. Mikulka’s report as follows:

So what you have to do when you calculate the capacities is kind of what I’ve done here You go through and you figure out from the rate trials what the plant could do. You put in the availabilities, and you put in the fouling, and you do the various things. And I think that’s pretty much what I did.

Now, if you’re going to come back and ask me what shortfalls are you going to get from that? Well, now I’ve got to dig a little bit deeper into what would have prevented them from achieving those capacities that they clearly demonstrated during certain rate trials. So one of them, then, would be I would look carefully at plant availability. And I would subtract the availability that was in the capacity calculations and then reapply the actual plant availability.

For me, actually I did them both the same. I used the same for both. But you could see where Mr. Mikulka took away 99 percent and then put in actuals. The next step is you look at actual constraints that would have prevented achieving that capacity The capacity is still there. It doesn’t change anything in the April report. The plant trial tells us what it can do. The problem is when you calculate a

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shortfall, you have to then account for those things. So those pounds couldn’t have been made. [emphasis added]

[377]He said that he had been working on an operational analysis, but that it was not completed in time to be included in the April report. He conceded that he had never been the lead operation of any petrochemical plant, and had never actually worked at an ethane-only ethylene plant, but only flexible ones that also use naptha.

[378]Mr. Ferrigno concluded that there were a number of “uncommon operating issues” at E3 that limited E3 during some periods of time from operating at maximum production capability. He testified that he identified the operational issues that he referred to in his June report from Nova’s manufacturing updates, other than the issues with the E-502 vibration, which Nova personnel brought to his attention He noted that, originally, before he received the operator logs and incident reports, it was very difficult to find the mechanical issues that he later commented on in the data that he had.

[379]The “uncommon” operational issues identified by Mr. Ferrigno were as follows:

a)furnace burner issues – Mr. Ferrigno agreed that there were no further problems after the original burners were replaced with Callidus burners;

b)depropanizer tower issues – Mr. Ferrigno acknowledged that the problem was resolved in the September 2001 turnaround;

c)fouling in C2 splitter recycle ethane vaporizer – Mr. Ferrigno acknowledged that E3 had produced ethylene at a very high rate during the period surrounding the discovery of the fouling and the attempts to resolve it. He was not aware of the operational fixes to this problem that had been suggested by Mr. Holloway. He had not been apprised of Nova witness Mr. Kluthe’s assessment that E3 could still run at rates of '''''''' to

''''''''% of nameplate in the June 2012 time frame, and that certain operational fixes would compensate for the fouling;

d)reactor catalyst changeout – Mr. Ferrigno acknowledged that the problem was resolved during the September 2001 turnaround; and

e)the TD-405 - Mr. Ferrigno identified a concern of two months duration in 2011.

[380]Mr. Ferrigno does not mention as constraints the many other mechanical issues that Nova submits affected capacity.

[381]Mr. Ferrigno was cross-examined about his opinion that the E3 furnaces could not be operated at ''''' Mg/hr, and his criticism of Mr. Holloway in that regard. He was referred to a Stone & Webster report to Nova dated September 2003 at a time when the furnace coils and burners had not been replaced, and the venturis (which Nova submits were a problem) were in their original condition. Mr. Ferrigno admitted that he had not read the document. The report refers to Nova’s desire to optimize the operating capacity of E3, and its query about whether the furnaces could be operated “at a sustained continuous target capacity of '''''' Mg/hr of ethane feed.” The report includes the following comments:

... Nova has already demonstrated that the furnace can be operated at ''''''

Megagrams an hour without any hydraulic constraint.

...

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The performance of the furnaces with the existing burners were at or very close to meeting Nova’s criteria of acceptability at the required capacity of '''''' Megagrams an hour. It, therefore, follows that only a modest investment to achieve a modest improvement in burner performance can be justified.

[382]This document was referred to in Mr. Kapur’s report. Mr. Ferrigno was referred to other Stone & Webster documents that had been cited in Mr. Kapur’s report, including one entitled Nova E3 Furnace Capacity Increase Study, that indicate that '''''' Mg/hr had already been successfully achieved under previous furnace test runs. He did not alter his opinion, commenting that the trials referred to were individual furnace trials, and that he would need to see a six- furnace trial to affect his opinion. He referred to the lack of a formal furnace trial at '''''' Mgs/hr. As noted in Mr. Kapur’s opinion, data from the seven-furnace run can be used to calculate a six- furnace operating number.

[383]Mr. Ferrigno was also referred to numerous emails and presentations during which Nova internally referred to much higher capacities for E3 than in his opinion. He attributed this, unpersuasively, to “optimism by managers”.

[384]For the reasons set out herein, I accept Mr. Holloway’s opinion with respect to the issue of mechanical constraints over that of Mr. Ferrigno.

4.Nova Lay Witnesses

a)Admissibility of Evidence of Lay Witnesses

[385]Many pages of Nova’s written argument consist of detailed monthly analyses of E3’s capacity and alleged mechanical constraints encountered throughout periods of time. Much of this detail refers to actual production from month to month. Some of that production was “constrained” by ethane feedstock availability. Nova submits that evidence of actual production during periods other than when ethane allocation was imposed indicates “maximum rates achievable” by E3, because of a list of mechanical constraints. The written argument includes a number of opinions expressed by Nova lay witnesses about the maximum rates achievable during these periods. For example, Nova relies on testimony of Ron Just, E3’s Optimization Engineer, about operations that occurred in September 2001, describing certain mechanical constraints and operational decisions. Then, Nova states that “[i]n summary, Mr. Just gave evidence that E3’s maximum capability in September 2001 was ''''''''''' MMlbs”.

[386]Dow submits that much of what Nova’s lay witnesses had to say about E3’s capacity was impermissible opinion evidence.

[387]This issue arose during the trial and I addressed it in Dow Chemical Canada ULC v Nova Chemicals Corporation, 2015 ABQB 401.

[388]I referred to the Alberta Court of Appeal decision in Alberta (Minister of Justice and Attorney General v Echert , 2013 ABQB 314 at para 28, Russell Brown, J. (as he then was) refused to admit a police officer’s evidence that activities involving two vehicles were consistent with drug transactions. Justice Brown gave two reasons for inadmissibility of the evidence: the opinion was not one that ordinary people with ordinary experience would be able to form and it was not “merely a compendious mode of stating ... “facts [that] were too evanescent in their nature to be recollected, or too complicated to be separately and distinctly arranged”” [citations omitted]. In other words, facts cannot be too subtle or complicated to be narrated as effectively without resort to an opinion.

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[389]With respect to the specific objections that were before me at the time, I found Mr. Just’, testimony with respect to the maximum rates achievable by E3 from a mechanical constraint point of view from September 2001 until June 2003, post-COP, inadmissible. I indicated that the question he was asked to answer was, in essence, hypothetical, since Mr. Just conceded that Nova had not tried to run the plant at maximum capability during this period. I found that the answer did not depend on personal knowledge of observed facts; nor was it a compact way of stating facts that are too complicated to be narrated effectively; nor was the question one on which a conclusion could be reached by a person of ordinary experience. I also disallowed Mr. Just’s testimony on maximum capability in circumstances where such a determination had not been made at the time, and evidence that was an opinion that could not be given by an ordinary person. My conclusion was as follows:

In summary, Nova’s operational witnesses may give evidence of observed facts, including how E3 was run, descriptions of mechanical or operational constraints, the impact of a constraint on E3’s productive capability as they observed it at particular points of time, observations with respect to constraints that were recorded in the course of employment and the impact of a particular mechanical or operational constraint on the maximum productive capability of E3 if such an assessment was made at the time of the constraint. In addition there may be instances where a common sense inference about productive capability that could be made by an ordinary person can be drawn from the observed facts described by the witness. What generally would not be admissible would be an opinion from a lay witness about the productive capability of the based on a hypothetical premise, such as the maximum capability of E3 if ethane allocation had not been imposed at a particular point in time, or the maximum capability of E3 in a situation where no attempt had been made to run to such capability. This type of evidence would be impermissible lay opinion evidence that does not fall within the exception to the rule. Specifically such evidence would not be evidence that persons of ordinary experience are able to give, nor would it be merely a compendious mode of stating subtle acts that could not accurately or adequately be described separately: at para 25.

[390]Nova submits that, after this decision was released, the Court of Appeal in Kon Construction Ltd v Terranova Developments Ltd, 2015 ABCA 249 “clarified this area of the law, confirming the appropriateness of a judge relying on the type of evidence that Mr. Just, Mr. Wilke and Mr. Dennehy provided”.

[391]There is nothing in Kon Construction that would change my analysis of admissibility in this case. The question in Kon Construction was whether certain evidence from officers and employees of corporate litigants was subject to the expert evidence Rules of Court relating to expert evidence. The evidence at issue was described as follows:

a)evidence from a supervising surveyor that he confirmed amounts certified in invoices by analyzing certain raw data processed and compiled by a computer program that generated reports that were sought to be put in evidence as exhibits. These exhibits were found to be admissible and admission of the surveyor’s evidence on the use he made of the data was found not to be a “miscarriage of justice”: para 42;

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b)evidence from the surveyors about which surveys they selected and which computer programs they used was not inadmissible as expert evidence because the litigants “alleged that they had not properly exercised their expertise, and they were entitled to defend themselves by explaining why they did what they did”: at para 43.

[392]Thus, these witnesses could give evidence on why they did what they did at the time at issue in the litigation. The case does not provide a blanket exemption for officers and employees of corporate litigants to give testimony that is hypothetical or does not depend on personal knowledge of observed facts or is not a compact way of stating facts that are too complicated to be narrated effectively or opinions that cannot be reached by a person of ordinary experience.

[393]As noted previously, Nova, in its written argument, makes extensive use of the testimony of its lay witnesses to support its submissions with respect to the productive capability of E3. Much of this evidence is opinion evidence about what would have been achievable had E3 been run at its capability, instead of being constrained on the direction of Nova’s EBT. As indicated in my 2015 ruling, this kind of evidence is inadmissible. Nova details the evidence of its lay witnesses in its written argument with respect to what was produced on a month-by-month basis and then often summarizes that evidence as an opinion with respect to maximum capability during that month. This neither reflects the actual evidence of the witness, nor would it be admissible if it was given in that form. However, I have analyzed the admissible evidence of the following Nova lay witnesses: David Gent, Ron Just, Jeffrey Kluthe, Kevin Wilke, Randy Saunders, David Craig, Yost Kieboom, William Wade and John Dennehy.

b)David Gent

[394]David Gent was Nova’s process team leader for process engineering and process control during the design phase of E3, and technical leader in the commissioning and start-up of the Plant. He was then promoted to a specialist role as Technical Advisor supporting all of Nova’s ethylene plants. Mr. Gent was generally conceded by both Nova and Dow witnesses as the person who was most knowledgeable about E3.

[395]To be clear, Mr. Gent was not qualified as an expert, but he had made and been involved in assessments of E3’s productive capabilities at a number of points in time between 2001 and 2012, and was thus able to testify about those assessments.

[396]Mr. Gent testified about the various rate trials of the Plant and the furnaces. He had the following comments with respect to E3’s productive capability:

a)After the guarantee performance test in May 2001, he was satisfied with the burner combustion performance at E3. He authored a paper with Mr. Wade in the summer of 2001 that indicated that furnace availability could significantly exceed design. The paper indicates that E3 had been running at 100% onstream time for a period of more than seven months, and that “significant success” had been achieved.

b)Depending on the circumstances, he would have portrayed E3 as having more than the design capacity of 2.81 BPY. Leading up to the COP, his assessment of E3’s capability at the time was in the range of '''''''''' BPY.

c)During the high rate trial of 2002, which was part of the lead-in to the COP, Nova was able to move the operation of a single furnace up to an ethane feed of ''''' Mg/hr, although it observed some localized overheating of the coils and hotspots that appeared to be due to flame rollover and a steam capacity issue. It also observed an

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issue with the venturis. He noted that he was of the view at the time that the tested furnace “was proven out reasonably well at the ''''''' Mg/hr rate in terms of a lot of its associated equipment.” The steam capacity issue was reasonably fixable. The fundamental concern was the apparent flame rollover, creating hot spots. He commented that there were modifications that could be done with respect to the venturis.

d)Mr. Gent referred to the plant high rate trial between February 11 and March 6, 2002, which was terminated early due to an unrelated plant trip. He noted that the rate was increased gradually to where E3 was running at a range of '''''''' to '''''''''% of nameplate rate. He indicated that Nova observed a number of constraints “that were starting to come into play at that capacity;” but that these rates were achievable with seven- furnace operation. He indicated later in his testimony that, had the test continued, it may have demonstrated a higher rate, which, he testified, was subsequently demonstrated by the COP. Mr. Gent testified that, in order to get to the maximum rates that were observed, the venturi issue had to be addressed. He did not note any other significant issues, although he indicated that various items in the Plant would need to be rectified or modified to allow long-term operation at these rates.

e)Mr. Gent referred to the furnace rate trials that took place later in 2002 as being “a mixed bag” of results, indicating that some work needed to be done to sustain ''''''

Mg/hr furnace operation in the long term.

f)The COP target was ''''''''% of design capability, ''''''''''' to ''''''''''' BPY based on 8,400 hours per year, or '''''''''' BPY based on 8,500 hours per year. Mr. Gent was comfortable with that assessment, and believed it to be achievable. He noted that it was based on “the concept of having 99% reliability” in terms of operating the Plant. He testified that:

...when we developed the E3 design, we used 8,400 hours, which historically had been based on the 98 percent number, so yeah, we were comfortable with going to 99. That was somewhat based on our history with our other ethylene plants at Joffre that had been capable of that kind of reliability performance.

He said that he considered 8,500 hours and 99% achievable. He noted that the tests had indicated that ''''''''% could be achieved, and that ''''''''''% was achievable when Nova did some further engineering work. He commented that modifications to the feed vaporization system were not included in the COP because “the team that evaluated that part of the plant felt there would be enough ... capability to accommodate the '''''''''% with the data they had”. To run at ''''''' Mg/hr required some changes to the burners.

g)Mr. Gent agreed that the work scope for the COP was “low-hanging fruit” that it was not specifically capacity-related, but more a case of fixing operating spot problems and safety concerns. He gave as examples the acetylene reactor issue, which he said was only used in emergencies, and the E-502 exchanger issue, about which he commented, “one can debate that that’s a capacity-related issue”. He testified that Nova was not really looking to upgrade capacity because the capacity was there from

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a thermal point of view. He characterized the goal of the COP as being able to sustain existing capacity, but conceded that this type of “revamping” generally resulted in making more capacity than the target.

h) Mr. Gent was referred to an internal email dated July 2002 in which he commented:

E3 has demonstrated the ability to run at an instantaneous capacity of up to ''''''''% of nameplate. However, there are some operating and reliability issues that would prevent this type of capacity from being sustained on an annualized basis. The 2003 turnaround presents an opportunity to address these issues with some minor capital changes to the current plant design.

He agreed that this referred to the E3 high rate trials in 2002, which involved seven furnaces. He agreed that the reason for performing a rate trial with seven furnaces was to test the finishing or back end of the plant. In the same email, Mr. Gent indicated the following:

Furnace Modifications

The primary issue for Furnace capacity is the performance of the burners at higher rates. A single Furnace high rate trial has identified the occurrence of a significant flame impingement onto the pyrolysis coils. This had previously been a problem at the original Furnace design rate, but was resolved by a re-design of the burners and the associated combustion air systems. It is anticipated that further combustion design modifications will allow acceptable operation of the burners without flame impingement at higher rates. This will involve working with the furnace designer, Stone & Webster, and the burner manufacturer, John Zink, in order to develop an appropriate set of modifications. Stone & Webster have drafted a preliminary proposal for the conceptual phases of this effort. [emphasis added]

The email set out a potential schedule for resolving this issue that would take two years and two months. Stone & Webster is the ethylene process and furnace technology licensor responsible for the design of E3.

i)As indicated later, furnace modifications were delayed until the burners were replaced between 2006 and 2009 by Callidus burners. Mr. Gent acknowledged that the final COP report indicated that the Stone & Webster study was initiated as a consequence of the high rate trial on the first furnace, referred to previously, but that subsequent high rate trials on other furnaces in late 2002 and early 2003, when the furnaces were able to attain 40 days of run length at ''''''' Mg/hr and 65% conversion, were unable to show a repetition of the impingement.

j)In the report, Mr. Gent indicated that Stone & Webster was unable to discover a mechanism for the flame pattern. He testified that Nova was of the view the study was inadequate.

k)In an email dated October 8, 2003 to Mr. Miller at Dow, Mr. Gent commented that Stone & Webster had made a recommendation on an avenue to pursue for burner modification, but:

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... I don’t believe that we have sufficient confidence in the conclusions of this work to agree with pursuing their recommendation at this time. We believe that we need to understand the problem better and to be able to have some quantitative way of measuring it. One possible approach involves the use of a CO sampling probe to allow us to measure the flame shape in terms of incomplete combustion. We are looking to pursue options such as this in order to move forward on this issue.

As you know, we have had some success in running the Furnaces at higher rates without seeing the same problem that we saw on the original Furnace rate trial. On the other hand, we have also seen some blistering problems low down on the coils that cause some concern, although these are not necessarily rate dependent. So we will continue to pursue several options including potential burner tip upgrades to avoid plugging and potential coil material changes. [emphasis added]

Mr. Gent indicated that the reference to “rate dependent” meant feed rate.

l)In April 2004, Mr. Gent made a presentation to the E3 Management Committee on E3 expansion opportunities. In the presentation, he noted the rate test to '''''''''% of the plant design rate at the completion of the COP, and his assessment of a “likely instant rate” of ''''''''''''''''''''%. He commented in his slides that “furnace availability is the key to long-term sustainability” and that furnace concerns were tube failures and burner performance (flame rollover). He acknowledged that these were the same issues that had been under consideration since the January 2002 high rate trial. He conceded that this did not mean that it was not possible to run at the COP rate, that “[i]t would certainly be possible to run at the COP instantaneous rate with seven furnaces operating”. He also acknowledged that he expected that at the time, coil replacements were being undertaken, and that when that began, E3 would be capable of improved performance.

The presentation contemplated further expansion above the COP targeted productive capability, and considered the addition of an eighth furnace. Mr. Gent’s slides indicated that there were two ways to potentially expand beyond ''''''''''' BPY: increasing the capacity availability and increasing the feed rate.

With respect to availability, he suggested changes to coil material and modifying or replacing the burners. With respect to increased feed rate, he listed limits to going beyond a feed rate of '''''' Mg/hr, and increasing the feed rate to about '''''''''' Mg/hr.

Mr. Gent explained the difference between capacity availability for furnaces, which was 92% at the time of his presentation, and plant onstream time of 99%. Furnace capability percentages account for time offline for recoking and maintenance.

Mr. Gent’s summary slide indicates the following:

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(i)with six furnaces running at COP design rate of '''''' Mg/hr and the existing furnace availability of 92.5%, the average annual rate is ''''''''''''''% of the original design annual rate of 2.81 BPY;

(ii)with seven furnaces running at ''''''' Mg/hr and furnace availability of 92.5%, the average annual rate was ''''''''''''''%;

(iii)with seven furnaces at a feed rate of ''''' Mg/hr and availability up to 96.1, the average annual rate was ''''''''''''%; and

(iv)with seven furnaces at an increased feed rate of 63.6% and 92.5% availability, the average annual rate was ''''''''''''%.

m)Mr. Gent acknowledged that E3 was designed for full production of 2.81 BPY with one furnace down, although, when all furnaces were available, they would be operated at a lower feed rate, increasing their run length, which he described as a milder operation of the furnace. He also acknowledged that the seventh furnace allowed additional capacity if Nova increased the feed rate. He confirmed that, depending on furnace availability, seven furnaces would be available about 50 to 60% of the time, and six furnaces 40 to 50% of the time.

n)He also testified that his assessment at the time was that when seven furnaces were available, it was not necessary to have a feed rate of '''''' Mg/hr to achieve the COP rate of about '''''''''% above original design capability. He acknowledged that, after the 2003 turnaround, it was his assessment that when E3 was running seven furnaces, it could produce well in excess of the COP rate of ''''''''%.

o)Mr. Gent was referred to a comment in the minutes of the E3 Management Committee meeting at which he made the presentation to the effect that “E3 has never been able to operate the furnaces at '''''' Mg/hr due to the current condition of our furnace coils”. He clarified that this referred to the condition of the coils at that time, which were due for replacement. It is also noteworthy that, while the minutes reflect that Mr. Flint indicated that Nova was not interested in further expanding ethylene manufacturing capability at E3, and Mr. Fergusson agreed, Mr. Fergusson’s agreement was in response to Mr. Flint’s reference to the need for ethane supply to increase.

p)Mr. Gent confirmed his opinion expressed in a June 8, 2004, email about replacement of venturis that:

The overall plant rate effect of periods at 6 Furnace operation and periods at 7 Furnace operation may still be consistent with achieving COP (''''''''%) plant production. This is because it has been demonstrated that the plant can be operated well in excess of COP rates (to approx. ''''''''''%) when 7 Furnaces are online and the 6 Furnace impact may be mitigated to just a few percent below COP.

This is what Mr. Gent described as “saw-tooth operation”, when the plant operations alternate between seven-furnace operation and six-furnace operation.

The email related to the replacement of venturis, which Mr. Gent indicated could be combined with a coil change-out to minimize cost. He pointed out that two coil

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replacements were scheduled in 2004. However, the venturis have still not been replaced to date.

The email also referred to another way of addressing the issue, methods of addressing the E-650 exchanger fouling, which was also not pursued.

q)Mr. Gent was cross-examined about a request he had received from Ms. Apuzzo to provide an estimate of the capital that would be required for Dow to expand its LHC-1 facility. In his report dated July12, 2004, he made the following comment about E3:

E3 underwent some minor capital modifications at its first full turnaround in 2003. These were designed to exploit capability that was essentially already built into the plant. This … has added about the same percentage increment (''''''''''''''%) from original design nameplate.

He also prepared a chart comparing capacities of LHC-1 with E1, E2 and E3, including “debottlenecks” that had been completed (in bold), being the original design and the COP, and those contemplated for E3. The E3 numbers are as follows:

Nova/Dow E3

Capacity

BPY% Design

2.81100%

'''''''''''''''''''''''

''''''''''''''''''''''

''''''''''''''''''''''

r) In a May 3, 2005, internal email, Mr. Gent commented that:

It has been identified that the E3 COP nameplate capacity of ''''''''''

billion pounds per year cannot be sustained based on current operation of the furnaces. This is primarily because of a long- standing (since original startup) combustion issue that leads to flame impingement on the furnace coils and a consequent reduction in coil life, run length and operating capacity.

This was before the burner change-out that commenced in late 2006, which he noted had not yet been approved by Nova for full funding. He also referred to the need to replace the venturis. In the email, Mr. Gent estimated the cost for the modifications of the burners plus the venturis to be between $7 to 10 million, and noted that these were “capital expenditures that are in line with sustaining capital budgets”.

s)Mr. Gent was referred to an email from Randy Saunders dated January 2, 2008, in which he indicated suggested that the E3 furnaces were capable of ethane feed rates between '''''' and '''''' Mg/hr.

[397]Mr. Gent’s testimony underlined that Nova failed to move quickly on a number of operational resolution issues. By way of examples:

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a)In July 2002, Nova was still evaluating potential bottlenecks at E3 that had been identified by the 2001 performance tests, nine months earlier.

b)The proposed furnace modifications identified in the July 2002 email were scheduled to occur over the space of 28 months. This period of time was referenced in the October 25, 2002 initial draft of the COP Owners Objectives, which set out the intent of the project as being to ensure that E3 could reliably operate at a capacity that is consistent with the highest operating rate that has been demonstrated to date. The document also indicates that the project would implement any modifications that are deemed necessary to support this goal, subject to acceptable economics, and set out the same 28-month schedule to implement furnace modifications.

c)In later months, there were furnace rate trials in which there were three successful runs of 40 days or more at ''''''' Mg/hr feed rate and 65% conversion, albeit with some hot spot issues.

d)In February 2003, the revised COP Owners’ Objective removed the reference to furnace work timing and instead indicated that furnace modifications “can be completed during the individual furnace turnarounds while the plant is in operation”.

e)A few months later, at the February 25, 2003 E3 Management Committee meeting, Dow was informed that: “[n]o definitive path forward is available at this point to improve furnace capabilities beyond that which is currently available. Once the planned scope has been executed further high rate trials will enable a better understanding of whether furnace modifications will be warranted”.

f)Despite this, the burners were not replaced until between the end of 2006 and 2008, four years or more after Mr. Gent’s first email identifying the issue.

g)Between the Plant turnaround in June 2003 and the email to Mr. Miller in October 2003, Nova had not run any further trials on the furnaces. In fact, no further attempts were ever made to run the furnaces at any rates between '''''' and '''''' Mg/hr.

h)The venturis still have not been replaced, even given Mr. Gent’s June 2004 recommendation.

[398]In summary, however, Mr. Gent’s testimony supports both Mr. Kapur and Mr. Holloway’s opinions with respect to E3’s productive capability to a far greater degree than it supports those of Mr. Ferrigno or Mr. Wallsgrove.

c)Ron Just

[399]Ron Just was a Nova engineer who was involved in the design of E3 as a senior process engineer. He was posted to Stone & Webster’s design offices in Houston from December of 1996 to the end of February 1998 as part of Nova’s process engineering team.

[400]Mr. Just’s primary responsibility was the cracking furnaces, the crack gas compressor system, the C2 splitter, the heat pump and some of the utilities.

[401]After the Houston phase, the project team worked with Fluor Daniel in Calgary. Fluor Daniel was responsible for the detailed engineering.

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[402]After August 2000, Mr. Just remained on the project team for the E3 start-up as optimization engineer, remaining in that position until August 2003. He took on a position with Nova unrelated to E3 at that time, and left Nova at the end of August 2004.

[403]Since 2012, he has been hired as a consultant by Nova to review historical data and records.

[404]As previously discussed, the scope of Mr. Just’s evidence was the subject of objections by Dow, leading to my decision about the admissibility of Nova’s lay witness evidence. The following is a summary of Mr. Just’s admissible evidence. Mr. Just gave extensive evidence of early mechanical issues. He testified that:

a)After the first phase of the furnace high rate trial, “we were not prepared to operate individual furnaces at above 53 Mgs/hr, other than on a test basis,” given the burner performance issues that Nova was encountering at E3. Mr. Just testified that, of the seven furnace tests, four did not meet the minimum run length criteria, although Nova thought it had an explanation for the shortest of the runs. He testified that another issue with burner performance was plugging in one of the furnaces.

b)Mr. Just testified about comments he made in a Nova application to the Canada Revenue Agency in 2003 that referred to the history of flame rollovers in the furnaces. In the application, he commented that, in August 2000, E3 was limited to running at feed-rates of 34 Mgs/hr rather than the design rate of 53 Mg/hr as a result of the flame rollover issues. However, the application indicated that work done by January 2001 allowed the furnaces to be operated at design production rates, and further changes in February 2001 demonstrated acceptable flame performance. In a paper prepared in March 2004, he concluded that, about eight months after the initial furnace test, final successful burner modifications had been proven and furnace performance had exceeded design run length at design conditions of 53 Mgs/hr at 65% or 68% , although he did indicate in the paper that long-term effects were unknown.

c)Mr. Just was taken to the Stone & Webster engineering study of September 2003, specifically the following paragraph relating to a simulation that took place at E3 on October 24, 2002:

The results of the simulation were inconclusive. In other words, there were no obvious and clear distinctions between the simulation of operations at 53 metric tonnes, deemed to be good, and the operation at '''''' metric tonnes, deemed to be bad. Such conclusions were quite consistent with the site observations. No consensus could be reached between witnesses on whether the furnace operating at 53 metric tonnes was better or worse than the furnace operating at ''''' metric tonnes.

Mr. Just agreed with these observations, indicating that it was a concern that they did not have a good way to see the difference in the flame performance.

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Mr. Just also confirmed on cross-examination that there were periods of time during which Nova ran the furnaces at higher than 53 Mgs/hr. He acknowledged that there was little or no re-testing of the furnaces, even the ones that had passed the test.

He noted that by April 2001, E3 had acceptable flame patterns, leading to a replacement of all furnace burners tips by September 2001.

d)After the plant high rate trial, and up until the June 2003 turnaround, Nova was not prepared to run above the design parameters for E3 because of vibration on E-502, except for a few days of testing in the August 2002 time frame. He acknowledged that the E-502 was replaced in the COP, and he did not know the results.

e)It was difficult for him to comment on what E3’s capabilities were after he left E3 in August 2003.

f)When “ethane” or “business plan” was shown as a constraint in the operators’ log, that meant that the plant could have produced more but for lack of ethane. Mr. Just testified that the daily report, the monthly reporting to the Co-owners and the E3 Manufacturing West reports were a more accurate indication of what the plant constraints than the operators’ log entries.

g)When monthly reports indicate no internal operational constraints, but the plant highlight section of the report refers to operational issues, that meant that the operational issues may be of concern, but they were not a constraint on production.

h)In the calendar year 2001, about 4.2% of constraints as reported to the Co-owners were attributable to operational internal constraints: the number was about 7.5% in 2002 and about 8.6% to August 2003.

i)He could see from E3’s early operations that it was able to operate above design annual production without having to execute any significant scope or spend any significant dollars.

j)With respect to the venturi issue, he conceded that he had noted in his furnace maximum rate trial report dated July 8, 2003 that the venturis were not anticipated to be a run length constraint at higher rates.

k)He conceded that during his tenure as optimization engineer, Nova frequently ran its furnaces at extended length, surpassing the design contemplation of 42 days.

l)Mr. Just was cross-examined about his closing reports on the furnace tests, and issues with respect to the decoking of the furnaces that may have affected the tests. He conceded that the TMTs that were of concern in the report did not exceed design parameters for TMTs except with a few exceptions. He also conceded that during the secondary tests, Nova reduced the feed rate at the direction of the JPPT on one of the furnaces that had not passed the test, due to an ethane shortage situation. He also conceded that, of the three furnaces that were not in the high-rate trial, one was run for very long periods of time at feed rates not exceeding 53 Mg/hr during his tenure, one was only run at a rate exceeding 53 Mg/hr for a few hours during the Stone & Webster simulation and the third was run for very long periods of time lower than design rates and conversions.

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m)He and his team never considered resolving the C2 splitter problem by increasing conversion rates.

n)After the rate trials were completed in the spring of 2003, Nova rarely ran the furnaces at the design conversion rate of 65%, instead running at a lower conversion rate to maximize ethylene yields under ethane allocation.

o)Mr. Just was referred to an email he authored dated January 14, 2003 that noted as follows:

Attached are summaries of the performance of H220 and H260 during the high rate trials that were performed on each of the furnaces in November/December of last year. Each of these furnaces exceeded the 40 day run length target that is required at the higher operating rates (''''''Mg/hr) to support the Capacity Optimization Project. The decoke on H220 was much longer than what would be acceptable to meet COP rates, but I think we may have extended the decoke beyond what was required.

[405]Mr. Just was asked why the next revised version of the COP Owner’s Objectives dated February 10, 2003 had deleted its references to furnace modifications. He stubbornly refused to acknowledge that the documentation indicates that, after the COP was completed, and as result of further testing, further furnace work could be accomplished, or that Dow was advised through these revised Owners’ Objections that the COP targets could be met without furnace modifications. In this area, as in others, Mr. Just showed himself to be a partisan witness, intent on promoting his present view that mechanical restraints interfered with E3’s productive capability in the early years.

d)Jeffrey Kluthe

[406]Jeffrey Kluthe worked at Nova from August 2005 to the end of 2006 as an optimization engineer at E3. He then became an improvement engineer until the end of 2009, and after that, an optimization engineer working in simulations, developing an optimization computer model for E3.

[407]Mr. Kluthe testified about the C2 splitter fouling, which he indicated was “deemed to be” the constraint that would most restrict E3’s ability to produce ethylene between April and the summer of 2013. He noted that, since July 3, 2012, E3 had been operating with seven furnaces online at the design conversion of 65%, so that furnaces were not a plant constraint. He testified that the Plant ran at a rate of ''''''''% of nameplate capacity on July 3, 2012, with the C2 splitter as a constraint. He extensively described the computer modelling he did to investigate the issue. The model produced at a rate of '''''''''%. To provide “wiggle room”, he changed this to '''''''''%.

[408]Mr. Kluthe confirmed that the directions on how much ethylene to produce at E3 came from the business people at Nova.

[409]He was the person who completed the Solomon Study in 2007, and he confirmed that he made efforts to submit accurate information. He entered an annual capacity for E3 in the Solomon Study of '''''''''' BPY, and he confirmed that this was its capacity when everything was functioning correctly and there was enough feedstock to run it at capacity.

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[410]Mr. Kluthe was cross-examined about the 2009 rate trials in which rates in the range of

''''''''''''''% of design capacity were achieved. He acknowledged that these results had been reached at about the same time as concerns were expressed about the E-568 ethane vaporizer in the C2 splitter, and had been achieved before that piece of equipment was changed in October 2010.

[411]Mr. Kluthe also acknowledged that, for a period of time at the end of June into July 2012, E3 operated at rates over '''''''''% of design. This was at a time when the fouling in the C2 splitter had gotten progressively worse.

[412]When asked if, during his tenure up until the end of 2012, there was any obvious reason why E3 could not run at a higher rate than 65%, he responded:

I would agree that if we were able to thoroughly test operation at above 65 percent and confirm that it was a safe and reliable operation and that it actually did achieve what we expected it to, then after doing a test or tests like that, then certainly, it would be the right thing to do if it was more profitable, more ethylene production, if those were the results of doing so.

[413]He conceded that he had never seen anything to suggest that it was not worth testing, but that no one during his tenure had tried to run the Plant at greater than 65%.

[414]Mr. Kluthe also confirmed that his modelling showed that the Plant could run at '''''''''% of nameplate, and that his conclusion in April 2013 was that any observed reduction in C2 splitter reboiler throughput capacity could be compensated for by the increase in the vapor/liquid ratio, such that the C2 splitter would be able to operate at the same production limit that was achieved at the Plant back in June and July 2012.

[415]After the modeling, Mr. Kluthe and his team did some testing at E3, resulting in production of about ''''''''% of design rate, or ''''''''''' BPY. Mr. Kluthe conceded that the optimization modelling proved to be somewhat disappointing.

e)Kevin Wilke

[416]Kevin Wilke was the E3 optimization engineer between the summer of 2003 and the summer of 2005. He testified that he considered himself the “Operator”, although there was never any formal designation of that position. He is also a member of the Nova litigation team, and since the summer of 2011, his primary role has been to prepare for this litigation, assisting Ms. Appuzo, Mr. Flint and the other members of the litigation team.

[417]Mr. Wilke testified about mechanical issues, indicating the vibrations in E-502, which he said limited running E3 to the design rate of 318 Mg/hr from the September 2001 turnaround until August 2002. He also testified about fouling in the C2 Splitter System, which was not resolved until the June 2003 turnaround.

[418]Mr. Wilke testified that he generated the data on the Manufacturing West E3 monthly reports that were sent to Dow. He explained that the table in the reports entitled “Plant Production Restrictions – Constraints” listed constraints to production in hours. Thus, Mr. Wilke explained, the “Constraints” table was the proper source for determining constraints.

[419]He advised that the table entitled “Plant Production Restrictions Explanation” compares actual production against the budget for the month, and only those constraints that kept production below the budget are recorded. Mr. Wilke conceded that this particular table “probably created more confusion than value”, and he had a lot of discussions with Dow

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explaining this. Mr. Kieboom referred to this table as “goofy,” but noted that this was the way that the operations people chose to record things. This table was dropped in the third quarter of 2012 when Nova moved to quarterly reports.

[420]Mr. Wilke acknowledged that decisions with respect to whether E3 would be run at high or low conversion would be made by members of the ethylene business team and that he was not involved in decisions as to how much ethylene would be made at E3.

[421]He testified that the highest rate Nova reached with seven-furnace operation between July 2003 and June 2005 was in May 2004 during the rate trial, but said that in order to achieve that rate, Nova was doing a number of things that it normally would not do on a day-to-day basis. In June 2004, E3 sustained ''''''''''''' Mgs of total furnace feed, ''''''''% of nameplate.

[422]Between July 2005 and March 2006, the maximum rate reached was ''''''''''''% of design capacity. From April to July 2006, the maximum rate reached was ''''''''''''''%. From August 2006 to October 2006, the highest rate reached was '''''''''''''%. From November 2006 to February 2007, the maximum rate reached was '''''''''''''%. From March 2007 to April 2007, the maximum rate was

'''''''''''''%. For May 2007 to July 2007, '''''''''''''% was reached.

[423]With respect to six-furnace operation between July 2003 and August 2007, the highest rate reached was ''''''''''''''%, and between September 2007 to August 2008, '''''''''''''%. When there were only five furnaces in operation, between July 2003 and August 2008, the highest rate reached was 87.1%.

[424]Mr. Wilke was asked to describe the “constraint” for each of these periods, using a spreadsheet that he had recently prepared. It is very difficult to determine from Mr. Wilke’s testimony whether he was referring to observations he made at the time, whether he was merely describing mechanical issues that may or may not have had an impact on productive capability, whether he was referring to documents that were not prepared by him and of which he has no personal knowledge, and when he was crossing the line into inadmissible opinion evidence. There were a number of objections about this: Mr. Wilke would begin to identify the source of what he was saying for a short period of time, and then the issue would arise again.

[425]In fact, it was often made clear that Mr. Wilke was being asked to give a current opinion about the impact of the constraints identified in the records that he summarized. As pointed out by counsel for Dow, that is something an expert does, and Mr. Wilke was not qualified as an expert. His evidence was only admissible and given weight when it referred to assessments he made at the time.

[426]Mr. Wilke acknowledged a number of errors in his spreadsheet.

[427]Mr. Wilke was asked on cross-examination whether his work and evidence was an effort to support Nova’s position, or a genuine effort to produce a fair and balanced depiction of what happened in particular months. He indicated that he believed his work was fair and balanced.

However, on cross examination, it became apparent that he had not reviewed what had been reported to Dow, and that many of the alleged “constraints” he testified to were not reported as constraints impacting production to Dow. He suggested that, in what was reported to Dow, only the “primary” constraint for a given period was reported. In fact, in at least one case the “constraint” that Mr. Wilke referred to in his evidence was described in the Manufacturing West monthly report as having no significant impact on production. Mr. Wilke conceded that at least one of the “constraints” that he testified about did not cause a loss of production.

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[428]Mr. Wilke agreed on cross-examination that Nova made a deliberate effort to extend furnace run lengths, and that if an operator wanted to “baby” the furnaces, the way to do it would be with reduced feed rates and lower conversion. He conceded that if an operator did not really care how much ethylene it made, it could make run lengths go quite a long time by doing these things.

[429]Mr. Wilke agreed that when he used the words “we ran to constraint”, that sometimes that meant a level that Nova constrained itself to, specifically with respect to the furnaces.

[430]Mr. Wilkie conceded that, when he suggested that from the fall of 2002 until the middle of 2003 that E3 ran to constraint when there was sufficient feedstock, he was not considering that Nova imposed ethane allocation in all of those months. He also conceded that sometimes Nova ran E3 at high rates because one of the other plants was down, it ran E3 at high rates, although he suggested that it was a matter of good luck that no problems arose.

[431]Mr. Wilkie testified on cross-examination that he had no role in setting metal temperature limits for the furnace coils at E3, nor did he have direct involvement with the E-568 concerns and the E-565 C-2 Splitter concerns.

[432]He conceded that the acetylene reactor issue was resolved during the 2001 mini-turn around. Mr. Kieboom was the primary person involved in the investigation of the E-650 fouling. Others were involved in the debris issue. The E-502 deethanizer exchanger vibration issue was rectified as part of the 2003 COP. Others were involved in the K-400 seals issue and the USX nozzle issue.

[433]Mr. Wilke acknowledged that, although there were a number of people advocating for the replacement of the venturis through the years, including him, and even though the cost of doing so was a relatively minor $350,000, and the sums of money budgeted for maintenance that had been unspent over the years were greater than the cost of the venturi replacement, that replacement had never taken place.

[434]Mr. Wilke was taken to a presentation he had made in January 2004 entitled “Ethylene 3 Performance Test”. The Summary slide indicates that the COP target of '''''''''% was validated and yields were better than expected. It notes “[t]hough the plant wasn’t pushed to an ultimate constraint, the data will help identify creep capacity opportunities. Clearly improving furnace availability will reap the greatest benefits.” [emphasis added]

[435]In an email sent to Mr. Wade and others on January 30, 2004 commenting on the COP performance test, he indicated “[o]verall, the trial was a success.” He indicated that some of the major scope items from the COP project that were validated were:

a)TD405 thrust bearing and steam map – the cracked gas compressor was not constrained at design rates;

b)E502 vibration – the new exchanger did not experience any acoustic vibration problems;

c)TD575 thrust bearing – no temperature limits were reached on the new bearing;

d)Boiler feed water pumps – the new rotors had all been installed and the pumps met performance requirements;

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e)Deaerator performance – although the V920 testing was not complete, preliminary results looked good; and

f)Acetylene reactor blow down system – the time required to depressure the acetylene reactors had met requirements.

[436] The email noted that, although operation at elevated rates would not be considered

“efficient” and further work was required to evaluate the various trade-offs made to address area equipment limitations, it was clear that E3 could operate at COP rates if required for business reasons. Mr. Wilke commented that the key limitation to this internally would be furnace availability and capability, and that this would have to be the primary focus for future creep opportunities.

[437]He acknowledged that there were many periods of time when E3 had capacity that was not being used.

[438]In a presentation he made in October 2006 about the MAC project, he included in the proposed budget the replacement of the venturis at a total cost of $350,000, which he described would raise E3’s base capacity rate from ''''''''''''''% to ''''''''%. In November 2006, he made a presentation with respect to the E3 MAC optimization program that indicated that “E3 has demonstrated over ''''''''% but is limited to <'''''''''''''%. With these modifications, [E3] could achieve over ''''''''% of design capacity.” His estimate of the cost of the work was $1.8 million, the venturi portion being $350,000.

[439]He acknowledged that, in 2007, E3 produced more ethylene than it had ever done,

slightly over '''''''' ''''''''''''''' pounds, in the fourth year of a turnaround cycle when it would normally have been expected to have some decline, and still with the old burners and prior to any MAC work. He conceded that in April 2008, Nova killed the MAC project.

[440]Mr. Wilke also conceded that Nova increased E1 and E2’s nameplate capacities after rate trials, even though it refused to do so at E3. He said he remembered that Mr. Flint said something about there being inadequate feedstock anyway.

[441]Mr. Wilke was aware that Dow wanted E3’s ethylene nameplate capacity formally set at a number that took into account the new expanded capacity from the COP. He was referred to the minutes of the May 24, 2007 E3 Management Committee where Dow formally requested a change to E3’s nameplate. Nova indicated that, in its view, a nameplate redetermination had no relevance or bearing on the productive capability of the Plant. The “Operator”, presumably Mr. Wilke, suggested that performance tests were necessary, and further that a response could wait until October 2007. Dow disagreed and indicated that it wanted work done by the end of July. The Operator indicated that he would attempt to meet this timing, with input from Dow employees.

[442]Later in 2007, Mr. Wilke made a presentation on nameplate capacity. It was not a full Schedule E calculation, but an attempt to come up with a figure that the parties might be able to agree on to be in place for the 2008 turnaround of the Plant.

[443]Mr. Wilke’s presentation indicated that any nameplate capacity figure settled on in 2007 was to be short-term until the 2008 turnaround, with the ability to address perceived mechanical issues, including the bypass issues, in the 2008 turnaround, and that they would aim for a higher nameplate number after that.

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[444]Mr. Miller of Dow sent a subsequent email dated October 12, 2007 that indicated Dow’s support:

Dow supports your alternative method as contained in the attached spreadsheet. This results in an E3 nameplate of ''''''''''''' bpdy through the turnaround cycle or

''''''''' percent of original nameplate. This is based on operating with the bypasses open until the 2008 turnaround, at which time the '''''''''''' percent MAC project scope case will be implemented, allowing the bypasses to be closed going forward.

As discussed in the last management committee meeting, another rate determination will be made after the 2008 turnaround to determine if incremental improvements during the turnaround result in an increase in plant capacity.

[445]However, Mr. Wilke’s proposal was not implemented. Mr. Wilkie acknowledged that, when the E3 Management Committee approved an expense budget, it was not approving the idea that E3’s ethylene production for the coming year had to be the production forecast number, no more, no less.

[446]With respect to the 2003 Solomon study, Mr. Wilke, who was one of the individuals responsible for coordinating the input to the E3 portion of the plant data, confirmed that E3’s historical data was reported to be 2.49 BPY in 2001, 2.62 BPY in 2002 and 2.47 BPY in 2003.

[447]Projected capacity for 2004, 2005 and 2006 was reported to be the equivalent of '''''''''''

BPY, which was the COP target. On an earlier page of the study form, Mr. Wilke had reported a

'''''''% ethylene capacity increase from year-end 2002 to year-end 2003, with the increase being effective June 30, 2003. He used a 99% onstream factor for a non-turnarouund year, being the COP design basis, a 65% conversion rate. His estimate of annual plant capacity as of year-end 2003 on a sustainable basis was ''''''' BPY. He provided these figures shortly after the January 2004 rate trial.

[448]Mr. Wilke did his best to try to qualify these numbers, but his testimony in that regard lacked credibility.

[449]Mr. Wilke was questioned about the data presented in a chart as part of the response to the Solomon study entitled “Causes of Lost Production Opportunity During 2003”. The two largest entries were plant downtime during the COP, and lack of product demand or inventory control. Lack of feedstock was not reported as a reason for loss of production. The reason for the timing of the most recent turnaround was indicated to be a “[f]avourable business climate to take a turnaround, eg, spare capacity.” Mr. Wilke acknowledged that he was aware that Nova was not running E3 to constraint all the time.

[450]As indicated previously, Mr. Wilke’s evidence with respect to constraints was really a litany of Nova’s positions. It was difficult to determine when he was indicating constraints as he observed them at the time, or at a later time prior to trial when he was assisting the litigation team. In this respect, his evidence was sometimes crossed the line of admissible evidence. He was reluctant to acknowledge observations he had clearly made at the time that contradicted his present view, or interfered with his message.

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f)Randy Saunders

[451]Randy Saunders has been involved with E3 since the design phase latterly as a Technical Services Specialist, particularly with respect to its furnaces. He testified extensively with respect to the problems Nova experienced with the furnace burners, including bulges on tubes, hot-spots and flame rollovers, resulting in shorter than expected run lengths. Mr. Saunders testified about the percentage of time that Nova was able to operate with seven furnaces in 2004 (37%) and 2005 (48%). He spoke about the furnace and coil changeouts.

[452]He confirmed that the JPPT told the operations group at E3 what amount of ethane it would have to use to run the Plant, and what conversion rate and feed rate to use.

[453]Mr. Saunders characterized the 2003 furnace rate trials as “inconsistent”. However, he admitted that the rate trials involving three of the furnaces were examples of sustainable operation at COP rates.

[454]He agreed that, of the six rate trials, three had clearly passed. One did not pass on its second go-around because of a flue gas diverter problem and the fact it had undergone an extended decoke and 24 hours in hot steam standby. One continued at ''''''' Mg/hr and 65% conversion for 36 days. That one had its rate reduced slightly, and two days later, the TMTs were within limits, and the furnace continued to operate.

[455]Mr. Saunders conceded that, when the trials were halted due to TMT constraints, those restraints were lower than the design limits, since Nova itself imposed a lower limit. He agreed that formal retesting had never been done when the furnaces were equipped with new coils.

Therefore, the tests had been done with old burners and old coils.

[456]Mr. Saunders testified that in May 2004, Nova tested two furnaces at ''''' Mg/hr at design conversion. One operated for 15 days at '''''' Mg/hr, and was then reduced to '''''''''' Mg/hr because of a concern with the feed values and with TMTs. A second run achieved about the same results with the other furnace. Mr. Saunders commented that “we’d proved pretty conclusively that we couldn’t sustain that kind of operation on the furnaces and expect a reasonable run length.”

[457]The other furnace was run, first for about 11 days and then about 17 days, at ''''' Mg/hr and design conversion. Mr. Saunders attributed this to TMTs, although the operator log indicated a different reason. Mr. Saunders testified that “we” concluded that ''''''' Mg/hr at conversion rate was not an achievable rate.

[458]However, Mr. Saunders acknowledged that during the period of April through June 2004, all seven furnaces were in operation, and E3 had the highest ethylene production to date in its history, with the original burners and coils in place, and despite suspicions of same early damages to the coils due to flame impingement.

[459]Mr. Saunders also acknowledged that the flame rollover issue was likely resolved before Stone & Webster did its investigation and report in September 2003. He also acknowledged that, despite the coil issues he described, the coils were actually operational from four to six years before changeouts took place, albeit with repairs.

[460]Mr. Saunders confirmed that the coils were replaced over a three-year period of time, 2004 to 2006. He was referred to the fact that, for these three years, maintenance costs were significantly below budget, to the extent of roughly $4.7 million. $1.88 million of that number

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had been budgeted for furnaces. Mr. Saunders indicated that Nova had challenges obtaining materials to perform the changeouts.

[461]While Mr. Saunders referred to safety issues with the burners prior to changeout, he conceded that these issues made no difference to how hard the furnaces could be run.

[462]Mr. Saunders also acknowledged that he was under no pressure from the JPPT or Nova management to get the burner issues resolved; further, he only received approval of funding in April 2006, with the last Callidus burner being installed in June 2009.

[463]Mr. Saunders also acknowledged that the conversion rate of 58% was an operating strategy designed to cope with an ethane short environment, that “[b]usiness needs may not allow the furnace to be operated continuously at high conversion” with respect to a 2006 rate trial of one furnace after it had received its new coils.

[464]Mr. Saunders was referred to a presentation he had made at the E3 Management Committee meeting on November 30, 2005. The presentation indicated the following:

Unable to operate at COP rates, '''''' Mgs/Hr and 65% conversion, and achieve 40 day run lengths.

Currently unable to achieve “desired” run lengths at original name plate capacity of 53 Mgs/hr. (We have met the original guarantee point of 40 day run lengths at design conditions, however with the improved coil technology we expect increased run lengths).

Premature tube failures at current plant rates. Failures started to occur after 2.5 yrs operation and would be more frequent at COP rates. Failures have been primarily in the lower portion of the tubes.

E3 has generally been operating at low conversion rates, 58%, to improve ethylene yield. Tube life and run lengths will further deteriorate as we operate at increased conversion rates.

[465]He made basically the same comments in a presentation on April 13, 2006.

[466]Mr. Saunders acknowledged that the December 2006 trial of one furnace that had

received new coils but not new burners indicated it could run for over 40 days at either '''''' or ''''''

Mg/hr and design conversion before hitting any TMT constraint, which was significantly better than what had been achieved in previous high rate trials.

[467]In January 2008, Mr. Saunders reported internally that, over seven years after the time that Mr. Gent had first identified the problem:

H240 has been operating at design feed and conversion (53MG/hr, 65% Conversion) for 119 days on the first run since installation of the burners. Based on present TMT’s this furnace should be able to operate at design for another 1 to 2 weeks. This will be a significant record run length for an E3 furnace at design conditions.

H210 has been operating on the new burners for 88 days on the first run. The first 62 days the furnace was operated at ''''''''% above design feedrate ('''''''''''MG/hr, 65% Conversion), and the remaining days have been at design conditions. Based

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on present TMT’s there should be a significant number of days left on this run. [emphasis added]

[468]Mr. Saunders was referred to an application that Nova had made to Alberta Environment on February 6, 2008. He agreed that Nova would want to ensure that the underlying facts were as accurate as possible. The application states that E3’s annual capacity is ''''''''''''' kta, or ''''''''' BPY.

Mr. Saunders indicated that part of this number was what Nova hoped to produce, but this qualification was unconvincing.

[469]He acknowledged that once the Callidus burners were installed, they did not prevent a furnace from running at ''''''' Mg/hr and 65% conversion.

[470]On April 15, 2008, Mr. Saunders finally reported positive results to the E3 Management Committee.

[471]On August 19, 2008, Mr. Saunders and another Nova employee made a presentation to the E3 Management Committee setting out the E3 Re-Coil Strategy, which was a plan to replace coils with improved coils, indicating that the first set of coils would be on-site for installation by the third quarter of 2009, and that burner change-outs were still in progress and would not be complete until 2009.

[472]One of the slides indicated that the average run length with the new ANK 400 coils was about 105 days at 61.7% conversion and 51 Mg/hr feed, which was more than double the run length at design conversion and feed rate. Mr. Saunders confirmed that, after the 2003 test, Nova had never tested the new coils with the original burners at a feed rate of '''''' Mg/hr and 65% conversion, other than one test of one furnace in late 2006 which, as previously noted, indicated that the furnace ran at '''''' or ''''' Mg/hr for over 42 days before hitting constraint.

[473]Thus, while Mr. Saunders’ testimony confirmed the issues that Nova was experiencing with the burners and the steps it took to resolve the problem, it also indicated that the steps taken were very slow, and that the furnaces were, as Dow alleges, run mildly and well below their maximum capability while these steps were taken. Mr. Saunders and his group received no pressure from management to resolve the problem, despite Nova’s covenant to run E3 with the objective of maximizing production.

g)David Craig

[474]David Craig started at E3 in December 2009 to take over the role of rotating equipment specialist. He testified about issues with respect to the equipment for which he had responsibility at that time:

a)There were two outages involving seals in the K-400 compressor in the summer of 2012. Mr. Craig acknowledged that the effective cause of the failures was that Nova was operating the K-400 for many hours in excess of the 30-40 hour design limit. The seals were replaced. Mr. Craig was not aware that Dow was not claiming damages for these periods when the Plant was down. Mr. Craig acknowledged that the down-time was used for furnace decoking, and that, coming out of the repair of the seals, E3 had seven freshly decoked furnaces;

b)There were failures in the induced draft fan bearings in one of the furnaces in November 2010 and April 2011, leading to furnace down-time of two to three weeks each time. He acknowledged that the bearing at issue had been in service since the

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furnace start-up, and that Nova did not record any business interruption losses due to these incidents. He also acknowledged that he had made recommendations to resolve the problem after the November 2010 problem, but these recommendations were not followed before the April 2011 incident, and in fact were not implemented until November 21, 2011; and

c)There was a deterioration in how much steam could be fed into the TD-405. He noted that the TD-405 had been overhauled in 2003 and 2008 as part of normal operating maintenance procedures. Five months following the 2008 overhaul, the performance of the V1 rack of the unit was deteriorating, resulting in some uncalculated decline in the power of the turbine. He conceded that if the Plant was run hard, there would be no wearing issue with respect to the rods. During the 2009 high rate trial, the Plant ran at ''''''''''% of nameplate capacity with the rods installed in 2008, with no constraint from the TD-405. Mr. Craig testified that, during a Plant outage not related to TD-405 in October 2011, maintenance was done on the TD-405. Shortly afterwards, there was a problem. It is not clear whether this was related to the maintenance. Notwithstanding the problem, the Plant was still capable of operating at 100%. Mr. Craig had noted in documentation that the cost of this outage was most significant to Dow, as Nova was able to do some production management at E1 and E23. Work was performed to replace and improve the TD-405 valves and rods in 2014. Mr. Craig conceded that the work could have been undertaken many years prior to 2014.

h)Yost Kieboom

[475]Yost. Kieboom was a contract engineer for Nova at E3 from 2003 to 2012, working primarily in the finishing area. He testified with respect to problems encountered in E3’s E-650 heat exchanger during the 2003 plant turnaround, leading to fouling. He noted that the first attempts to resolve the issue were unsuccessful. Over the course of the next two years, this caused a pressure drop in the heat exchanger that “we knew was going to limit us”. In making that comment, Mr. Kieboom did not refer to any observations that were noted at the time. Mr. Kieboom acknowledged, however, that during April and May 2004, E3 was able to achieve rates in the '''''''''% range.

[476]In June 2005, Nova tried another method of fixing the problem, but a tornado in Alberta interrupted the process. Mr. Kieboom commented that “we didn’t have enough ethane to run the three crackers at Joffre, and so E3 was taken off line”. Nova used that time to try to clean the fouling at E-650, in addition to other maintenance. One of the strategies to work around the problem was to open a by-pass, but Mr. Kieboom commented that this was not a normal way to operate, as someone has to manually operate it.

[477]After this cleaning in June 2005, the E-650 was operating close to its design level. However, in August 2006, the problem re-emerged. Mr. Kieboom’s group came up with another idea to fix it, which they did not attempt until the fall of 2006 when there was maintenance planned on a furnace.

[478]Mr. Kieboom commented that Nova’s strategy was never to run at less than six furnaces, but to attempt this new fix, they decided to drop to a five-furnace operation. The new idea did not work, so they resurrected what had worked in 2005. Reverting to the 2005 process worked, although not perfectly, but was something that Nova could deal with online and would not impair

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the production of the Plant. Nova continued to use this method to control the pressure drop from time to time; it became “our mode of practice.” However, this led to further problems in the C3 refrigeration system. Despite this, Nova continued with this method of controlling the problem until the 2008 turnaround At that point, a project initiated in 2006 was implemented, which modified some equipment to make the cleaning process easier.

[479]Mr. Kieboom confirmed that the 2008 maintenance and improvements brought E-650 back to near design pressure and in a clean state. It did not foul “enough” during 2009 up to the high rate trial of March 2009 to interfere with production. After that, Nova would fix the fouling as it occurred using the 2005 process.

[480]Mr. Kieboom testified that “we” had noticed a decline in E-568’s operation as early as 2007, but it was not restricting Plant rate. Nova thought the fouling was similar to the fouling in E-650. Nova did not consider increasing the conversion rate as a method of resolving this issue. Finally, in June 2008, Mr. Kieboom’s group attempted the same solution that they had tried on the E-650, but it did not work. They then discovered that what was happening in E-568 was also happening in E-565, namely, a problem with the reboiler in the C2 splitter. However, they had not prepared to do work on the E-565 during the turnaround, so they were unable to fix it. They did attempt a cleaning of the fouling on E-568, but this failed. Samples of substances recovered during the cleaning were sent to the Nova research centre but the results did not come back until October or November 2008.

[481]In a presentation made to Dow dated March 2009, Mr. Kieboom indicated that “feedstock availability prevented testing until February 2009.” He noted that the E-568 and E-565 in the C2 splitter had “experienced a large change or hit a physical limit”. He testified that, after the unsuccessful attempt at cleaning in June 2008, Nova abandoned any further attempts to clean the fouling using the 2005 process. During the high rate tests in March 2009, the E-568 prevented the test from going any higher than '''''''''%. However, Mr. Kieboom’s “Preliminary Conclusions” slide in his presentation indicates as follows:

Preliminary Conclusions

Key differences before turnaround versus after:

Before turnaround E650 fouling had a large influence on the C2R/C3R refrigeration loads

resulted in bypasses in the C3R system being opened

E568 was also becoming a limit for the C2 splitter prior to turnaround due to fouling

Why were we able to achieve ''''''''''% w/o bypasses open, though not able to before turnaround?

E650 was cleaned during turnaround and E568 was partially cleaned during turnaround

A clean E650 resulted in lower refrigeration loads at '''''''''% which the existing control valves could handle

E568 performance also improved slightly after turnaround.

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[482]Mr. Kieboom indicated that, after the cleaning failure in June 2008, the plan was to come up with a solution to be implemented in 2013, the next Plant turnaround. Instead, Nova decided to try to clean E-568 during an outage in June 2010 to repair the steam rack in the turbine. In the minutes of a meeting dated June 8, 2010, it was indicated that E-568 “has been slowly losing duty over the past 10 years of operation. Maximum plant rate and ethylene variable cost are being impacted by the fouling in this heat exchanger. Currently, the maximum plant rate is estimated to be ''''''''' ''''''''% of nameplate.”

[483]Mr. Kieboom did not identify who was the author of this comment.

[484]The attempt at cleaning in 2010 was unsuccessful, and in fact, made things worse. A comment in the incident report indicated:

At this time it is estimated that it will take approx. 12 Weeks to build a replacement heat exchanger (Best Case) E3 will have to be shut down and restarted and the replacement will take approx. 48 hours.

[485]Under “Planning,” it stated: “Inadequate assessment of needs and risks”.

[486]Finally, in July 2010, a request was made to fund a new E-568. The replacement took place in October 2010, but Mr. Kieboom indicated that the Plant was run at a maximum of 95% until then. In May 2012, E-565 began to experience seal issues. Mr. Kieboom indicated that “we put on our work list to install a value to isolate the seal pot if there was ever an opportunity between 2012 [and 2014]”. Mr. Kieboom conceded that the timing of fixing the issue of E-565 was governed by the prospect of Nova’s R3 project coming on-line in 2015 and its demand for ethylene.

[487]In November 2013, the E-565 problem obviously had not yet been resolved, but this is outside of the damages period applicable in this litigation.

[488]It was put to Mr. Kieboom that he had indicated during his questioning in February 2015 that neither E-565 nor E-568 were a constraint on production until 2008. He answered that it was not a constraint in 2008, but that the splitter reboiler started to show signs of a problem in 2012.

He then agreed that neither E-565 nor E-568 were a constraint in 2008. He also confirmed that, during the March 2009 trials, the C2 splitter was only a constraint at ''''''''''%. He was taken to the monthly reports, where it was indicated that the C2 splitter was only a constraint in 2009 for 48 hours, and not at all in 2008.

[489]Mr. Kieboom was referred to an email from a Dow engineer dated July 7, 2010. She indicated in her email:

Thanks again for your time and detailed review yesterday of the issues with E568.

We were looking at the impacted exchangers in the splitter system (E565 and E568) on the PFDs.

I’ve been unable to locate spec sheets for this equipment but the PFDs have the design duty (175 and 38 GJ/hr respectively). At first glance it appeared that E565 should have more than enough duty to compensate for E568 (not for nameplate, but certainly for higher than 65% nameplate rates). I then clued in that you needed a way to get rid of the ethane from the bottom of the tower:

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If you take conversations back up to the 65% design (instead of the ultra low 56- 58%) there will be considerably less ethane and we estimate you should be able to take the plant up to 80% of nameplate ... I believe there is no drawback to moving conversions immediately.

[490]Mr. Kieboom emailed another Dow employee, asking that person to respond, and noted:

Hi Kerry, I will leave it to you to answer. The penalty we continue to pay for providing a little information to Dow.

Currently we have been asked to reduce plant rate not increase. We are also holding conversion low to improve ethylene yield. This has been our operating strategy for some time now.

When the time comes to increase plant rate I am quite sure we will be able to figure out how to maximize ethylene rate given the operating constraints. [emphasis added]

[491]When asked at trial whether he would disagree with the suggestion that it is a common industry practice to ramp up conversion rates when a reboiler is having issues, he responded that, “[w]hen I read this, it was blatantly obvious to me that she didn’t understand how the C2 splitter worked.”

[492]It was pointed out to him that, after the email, Nova did increase the conversion rate to between 62 and 65% for a number of days. This appeared to allow E3 to improve to around 95% of nameplate. Mr. Kieboom indicated that this was a “simplistic view”.

[493]Mr. Kieboom confirmed that the commercial people would direct the operations group with respect to amount of available ethane and conversion rate.

[494]He acknowledged that, when he gave Plant tours from time to time, he would include in his materials that the Plant would produce '''''''' BPY, or '''''''''% of nameplate. For example, Mr. Kieboom was referred to a presentation he had made that indicated that the Plant was debottlenecked in 2003 so that it could produce '''''''''' BPY. He said that he “mistakenly believed that this was a sustainable number” until he was corrected by Mr. Wilke (who is also a member of the Nova litigation team) at a meeting. He later did his own calculation and decided that he had been wrong in his assessment of sustainable Plant operation. This explanation was not credible. I am satisfied that Mr. Kieboom’s present view that the number is incorrect is prompted by loyalty to his employer.

[495]On cross-examination, Mr. Kieboom was taken to the sections of the E3 Monthly Reports that listed Plant restrictions from December 2001 to December 2011, and the fourth quarter of 2012. He confirmed that, until late 2006, by far the largest constraint recorded was feedstock availability.

[496]For example, refrigeration constrained production at E3 in 2004 for only 6% of its hours of operation.

[497]However, from the fall of 2006 when the litigation began, feedstock was reported as a zero constraint from 2007 to 2009, for only 5 days in 2010, and again for zero hours in 2011 and 2012. However, other constraints were recorded at much higher levels. For example, refrigeration was noted as a constraint for 23% of E3’s hours of operation in 2006, and 29.6% in 2007.

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[498]Mr. Kieboom suggested this was a coincidence. He also confirmed that, after the litigation commenced, Nova reported some kind of constraint every day in the monthly reports. He acknowledged that “that’s what I was doing”. Again, this is not credibly a “coincidence” I am satisfied that the notations Mr. Kieboom made in the monthly reports about constraints after this litigation commenced were colored and prompted by the litigation.

[499]I also note, that despite these much higher hours, Mr. Kieboom indicated that the 2005 method of addressing the fouling was something Nova could deal with and would not impair production. It is also noteworthy that Nova did not attempt another method of addressing the problem between the fall of 2006 and the 2008 turnaround.

[500]Given that Mr. Kieboom was not credible in many of his answers on cross-examination, and given his clear animus towards Dow, expressed in his disdain for the advice given by the Dow engineer, I find that his evidence with respect to how mechanical issues affected E3’s productivity was coloured by his loyalty to Nova. It was unpersuasive for that reason. What his testimony does illustrate is that Nova did not diligently pursue solutions, but instead took a very relaxed position with respect to addressing mechanical issues.

[501]For example, it was only when the prospect of R3 coming online and requiring ethylene prompted it that Nova took the step of accelerating the resolution of the E-565 issue. Mr. Kieboom’s testimony supports the inference drawn by Mr. Holloway that Nova did not need more ethylene.

i)William Wade

[502]William Wade has worked for Nova for over 36 years. He became a manufacturing team leader within the E3 project team, working in design and construction and later as a manufacturing leader at E3 from 2000 to 2003 and plant leader for E1, E2 and E3 until 2006.

[503]Mr. Wade viewed himself as the designated Operator, and would organize and chair the E3 Management Committee Meetings. However, he had nothing to do with how much ethylene was going to be made at E3 each month, what conversion rate was going to be used, and whether ethane allocation would be imposed. He had nothing to do with designing ethane allocation or deciding how much ethylene Nova would deliver to Dow in any month. He conceded that someone other than the Operator was making those decisions. He confirmed that the EBT people decided on ethane availability and conversion rates and prepared production plans that were brought to the JBTT to be blessed. When asked what “side” he was on with respect to contentious issues between Nova and Dow, he replied “I was a Nova employee. I still am”.

[504]Mr. Wade testified to a long list of operational issues in 2000, indicating that the Plant was more stable moving into 2001. He was taken through the yearly budgets, and confirmed that they had been approved. He commented on reasons why budget numbers had not been achieved in some years. He noted there were “a variety of Plant issues that you would expect in a new plant”.

[505]Mr. Wade confirmed that, after the E3 performance test, he believe that E3 had some upward capability of a couple of percentage points over the performance guarantees on a sustained basis. He also confirmed that, at the time the COP was being structured, Nova had no current demand for the ethylene that would be produced. He noted that, certainly after mid-2004, Nova was receiving enough ethylene from the Joffre Site to operate its derivative plants at the capacity it wanted to operate them. He was aware that Dow’s demands were not being met. The

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fact that Nova’s demands were being met led to operations at E2 at low level rates and the possibility of block-operating E1. There were conversations beyond 2001 about shutting down E1 or instituting block operations. He acknowledged that how hard E3 would be run depended on how hard Nova was running E1 and E2. There were periods of time when E3 was not run particularly hard because of a lack of Nova demand.

[506]Mr. Wade also spoke about his instructions to reduce production to minimize inventories and reduce operating costs at year-end.

[507]Once the manufacturing people knew how much ethylene they were going to have available at E3, they had some discretion on how to run the furnaces. For instance, in October 2001, a newly decoked furnace was left inoperative “as business needs can be met without it”. At that time, since two Nova facilities were late coming online, Nova had considerably more capacity to make ethylene than it had demands. Laying up of one of E3’s furnaces for the winter would not be a problem, and so it was laid up, despite the nominations of the Co-owners. The business imperative that brought the laid-up furnace back into service was the Plant guarantees rate trial.

[508]Mr. Wade noted that, although you could “make nameplate with six furnaces online”, there would be periods of time that one of those six would have to be dropped for decoke and maintenance.

[509]In January 2002, the reports indicate that one furnace had a 122-day run cycle, as opposed to the 42-day design length. In the fall of 2001, run lengths ranged from 62 days to 93 days.

[510]Mr. Wade also identified furnace run length in 2005 ranging from 126 to 143 days, which he noted cut back on maintenance costs. He acknowledged that decoking of furnaces every 40 days reduced the likelihood of high tube metal temperatures occurring; however, he conceded that his operating instructions were to process the amount of feedstock they had available to minimize the number of decokes and extend the life of the coils. He acknowledged that Nova’s goal was not to run the furnaces hard for 40 days and then decoke them, but to run enough to meet Nova’s needs and get the maximum run length out of the furnaces.

[511]Mr. Wade conceded that Nova ran the furnaces at about '''''' Mg/hr on a more continuous basis at times, rather than the 53 Mg/hr limit that Mr. Just referred to. Mr. Wade identified some periods of time in 2003 when the feed rate of 318 was distributed over 5 3/4 furnaces at around

'''''' Mg/hr, before burner or coil changeouts. In 2004 and 2005, there were instances of Nova running at an overall feed rate of ''''''''', and then running four furnaces at about ''''''''''' Mg/hr and design conversion of 65%. Later that spring and summer, furnaces were run at ''''''' '''''' Mg/hr and design conversion, once again before burner or coil changeouts. Sometimes when Nova was operating less than seven-furnaces, it redistributed feed rates, and sometimes it did not.

[512]Mr. Wade acknowledged that, if feedstock was available, E3 could have been run harder.

[513]He was referred to the performance of one of the furnaces after the burner change. This furnace ran from November 17 until December 29 at '''''' or '''''' Mg/hr and 65% conversion.

[514]Mr. Wade confirmed that he felt the COP objective of increasing capacity to ''''''''''% and running for 8500 hours a year with 99% onstream time was achievable, and “without a doubt, the COP increased the capability of E3”, in his view, in the neighbourhood of ''''''''' ''''''''% of 2.81

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BPY. The constraint prior to '''''''''% was that they had to operate with the control valves in by-pass mode, which was not typical.

[515]Mr. Wade commented that when he reported on “constraints” to the E3 Management Committee in July 2004, he was “just pointing out that there were a few things that, if we were to run those on a continuous basis, I would have like to spend some money on”. They were fixable issues.

[516]At the July 2004 E3 Management Committee meeting, the following discussions occurred:

E3 Capacity Options

Dow would like to understand the option (of further E3 expansion) and keep it open at this time, however, Nova does not have the resources assigned to do further investigation at this time. An agreement with regards to expectations and milestones needs to be reached between Dow and Nova. An action for the next management committee needs to be captured. At that time Nova will need to know if resources will be needed to carry this work forward.

Note: Graeme Flint confirmed (later in the meeting) that Nova sees no justification for further E3 expansion work at this time.

It was requested [by Mr. Miller] that now that the project is essentially complete, the E3 nameplate should be adjusted to show the current capacity and full production rate. Dow indicated that it is common practice that whenever Dow spends capital to increase capacity, the plant is re-rated to acknowledge the capacity change achieved by the upgrade. Dow indicated that the LHC1 has been re-rated to a nameplate capacity of 2.8 billion pounds per year.

Schedule E of the Operating and Services Agreement provides a process/methodology for calculating a revised nameplate capacity for E3. Cec Miller and Eric Wade will review this procedure & bring the issue forward to the next management committee meeting.

. . .

Commercial updates

There are commercial matters that are being dealt with outside of the JV Committee, however they are unrelated to the operation of the plant & performance. Dow is pleased with E3’s current operation and record production achievement.

Cec [Miller] asked whether with regard to feedstock fraction calculation whether there a need for Dow and Nova to sign off? This issue will be addressed during the current discussions outside of the management committee. Nova has offered to temporarily adjust the feedstock fraction to reflect Dow and Nova’s 50/50 ethylene production proportion as a show of good faith during the balance of 2004. Any long term resolution which would have the effect of modifying the feedstock fraction, would need agreement / sign-off by the management committee.

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[517]Mr. Wade agreed that the discussion over changing nameplate capacity continued for some time.

[518]He was referred to an email he had received from Mr. Gent on June 20, 2001 as follows:

One of the things that is in the UCC contract that we (you and I) haven’t established a gameplan for is the determination of E3 nameplate capacity. I don’t know if you recall, but Bob Nabata and I did some work with Keith McGee on this and it is contained within an attachment to one of the contracts (can’t remember which). This might also be considered the High Rate Trial, at least there should be some identified operating constraint that sets the nameplate of the plant. We could use the High Rate Trial as the means to develop the basis for plant nameplate i.e. it wouldn’t be necessarily be the highest rate achieved but would be derived from it.

[519]In an internal audit report dated July 31, 2001, prepared for Nova by Ernst & Young, it was noted that E3 Management Committee approval was required to establish nameplate capacity, “which is expected shortly now that plant trials have been completed”. It was recommended that E3 Management Committee approval be obtained for this. There was no response to the recommendation from Nova.

[520]Mr. Wade merely confirmed that, if the work was asked for, he and Mr. Gent “would be the individuals to do it”, but conceded that at no time did Nova ever bring this before the E3 Management Committee, or prepare a determination of the E3 ENC in the manner provided for in Schedule E.

[521]Mr. Wade was referred to an internal presentation made by Mr. Foy, the commercial contracts person assigned to E3, in November 2001.

[522]The presentation notes that “[w]ith the exception of ethane allocation, Dow’s interests are aligned with Nova’s”. It also noted that “under ethane allocation, any changes to the ethylene nameplate capacity could impact each Co-owner’s share of allocated ethane”. Mr. Wade indicated that there were differences in opinion with respect to this within Nova, but he conceded that a higher Feedstock Fraction for Dow would mean that Dow would get more ethylene.

[523]However, in a presentation revised from Mr. Foy’s earlier internal presentation presented to the February 11, 2004, E3 Management Committee Meeting, Mr. Foy’s language was changed. It now indicated in capitalized, bolded and underlined words that there was no impact on Feedstock Fractions by changing the ethylene nameplate capacity. Thus, Nova failed to present the other view held within Nova.

[524]Mr. Wade referred to his objective as being running the Joffre Site “as one plant, well- spaced” although he conceded that was not the same thing as optimizing production at E3.

[525]He was referred to a JBBT memo that indicated that, in February 2004, Nova turned down ethane spot purchases because it was running out of storage, and was operating at “higher than desired” rates. This kind of thing was not shared with Dow.

[526]Mr. Wade was taken to three months of exceptionally high production in 2004. He confirmed that these three months, when Dow requested extra ethylene because LHC1 was down for turnaround, were “one of our best campaigns through the time that I was there”, but cautioned that he was not able to do his regular maintenance during that time. He agreed that

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these things did not affect the ability of the Plant to run at its demonstrated sustained capability for that period. He confirmed the Plant was running at the COP target rate, some days slightly higher. On May 14, 2004, the Plant reached ''''''''''''''%.

[527]Mr. Wade was taken to the “Plant Constraints” information in the monthly report for June 2004, one of the high production months. Nova reported furnaces for the first six months of 2004 as being a constraint on production more than half the time, however, the effect of this constraint in megagrams of ethylene was only 19.04 Mg against the budget, compared to 120,000 Mg of production for the month, less than 1/2 of 1% of a day’s production.

[528]He was referred to the equivalent report for December 2006, where refrigeration was recorded as a constraint 23% of the time. The year end figures confirm that this amounted to a constraint against budget of only 551 Mg, which is less than 15% of a single day’s production.

[529]Mr. Wade described the intent of the restriction summary as follows:

Well, the intent of the restriction summary is to understand on a monthly, yearly period of time as to what is constraining the plant so you can make decisions around, do I need to do something about that constraint? So the records are accurate in showing what we as the operator wanted them to show, which is, what is the percentage of time that a particular item constraints the plant. And then as you point out, you would look at the volume of constraint to determine whether or not you wanted to actually actively do something about that constraint.

Q If there is one, we really need to look at these Megagrams; right?

A No, you need to look at both because the one – the one is the impact of that constraint. The other is that I couldn’t push beyond that constraint. So if I’m constrained by refrigeration for 23 percent of the time for the next month, that means I can’t push beyond that constraint to see what the next constraint is.

[530]Mr. Wade described this as a tool so that he could request funds from the E3

Management Committee to work on the constraint. He conceded that it appeared from these examples that sometimes, Nova recorded constraints purporting to indicate why production could not get to budget in months in which budget had been exceeded. Therefore, sometimes the constraint reference hindered E3 from achieving some higher levels than the levels it had already reached over budget, and was there to assist in monitoring areas for future improvement.

[531]Mr. Wade confirmed that this high production period was before Nova began to change the E3 burners, and before coil changeout, at a time when the coils and burners were coming to the end of their working life. He confirmed that E3 achieved record production in the first half of 2004, and then strong production in the fall of 2006 before the burners were changed.

[532]Mr. Wade confirmed that blistering on the coils was an event that they had seen before, and it had also occurred at E1 and E2. He also confirmed that coil leaks were not uncommon, although they were happening more frequently in E3 in 2002 to early 2004 time frame. He confirmed that leaks would be monitored and furnaces could be run with coil leaks, although Nova did not like to operate like that.

[533]He acknowledged that there was no pressure to get replacement burners in place more quickly. He agreed that there was pressure to keep repair and maintenance costs down and to

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spread capital expenditures like coil replacement over a number of years, given Nova’s financial situation at the time.

[534]Mr. Wade was taken to internal reports that indicated that, despite the fact that design maximum tube metal temperatures were increased when the new coils were inserted, a decision was made not to increase maximum operating temperatures because “we would likely never operate above the current condition”.

[535]Mr. Wade confirmed that the E3 Management Committee minutes went through an editing process at Nova before they were set out to Dow. Internal documentation with respect to the November 23, 2004, minutes indicates that Mr. Foy added “builds” to the minutes, and asked for builds from Mr. Wade, Mr. Flint and Ms. Appuzzo. The comments that were added improved the minutes from Nova’s prospective on contentious issues. Mr. Wade conceded that at the time “there was concern that we were in a litigation situation and people were sensitive to the wording that [the person taking minutes] put in”. The “commercial people” wanted to review the minutes before they were sent to Dow.

[536]It was noteworthy that, although the litigation did not commence until 2006, Mr. Ramachandran had asked hard questions in the summer of 2004. Mr. Wade acknowledged that this was not the only time minutes had been edited and rewritten before they were sent out. He acknowledged that, just about the time he left his position at E3, Dow formally objected to the process and started to take its own minutes.

[537]Mr. Wade acknowledged that, long before the litigation commenced in June 2006, there was an attempt to keep the commercial issues between Dow and Nova away from the manufacturing people, to preserve a working relationship among the technical people.

[538]Shortly after the litigation commenced, Nova elected to run E3 at some fairly high rates. Most of the coil changeout had been completed, but this was before the first burner change.

[539]Mr. Wade was cross-examined about certain mechanical issues at E3.

[540]He confirmed that the work done in the September 2001 turnaround fixed the depropanizer tower issue to the ''''''''' ''''''''% rate. He confirmed that the acetylene reactor issue was resolved after 2001, and some additional precautionary work was done in 2003 “as we were changing the nameplate of the Plant”.

[541]He confirmed that there were no material issues with the E-565 C2 splitter and E-568 ethane recycle vaporizer until 2006 when he left, that some work was done on them after the 2003 turnaround, and that he could not recall there being an issue after that.

[542]He described some issues with the TD405 steam rack, but could not describe the specific problems.

[543]With respect to the fouling in the E-560 ethane superheater, Mr. Wade described it as a concern when operating at high rates and when operating at very high rates with six furnaces. He said it was manageable with seven furnaces, but running six furnaces at ''''''' Mg/hr required changes to the venturis. He acknowledged that this would resolve the problem, but “it was not a minor cost” and at the time “there wasn’t a feeling that we should spend that kind of capital”.

[544]He confirmed that, although the venturis had been identified as a problem in 2002, and although they could have been replaced when the coils were changed out, they still had not been changed when he left in 2006, and he thought they had not been changed yet.

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[545]He described the debris in the cooling water system as not significant, but commented that it could have impacted production by a few percent.

[546]He acknowledged that the E-502 de-ethanizer exchanger was not an issue after the COP in 2003.

[547]He confirmed that problems with variable frequency drives had been resolved.

[548]Mr. Wade was a credible and candid plant witness. Although he made it clear where his allegiance lay, he did not try to avoid or deny uncomfortable facts. His testimony was illuminating with respect to the degree of severity of mechanical issues, the capacity of E3 even before the coil and burner changeouts, and the credibility of the E3 Management Committee minutes. It also confirmed that key decisions with respect to how E3 was actually run rested with the EBT.

j)John Dennehy

[549]John Dennehy was a manufacturing team leader in human resources when E3 commenced operations. He managed the 2002 turnaround. Shortly after that, he was assigned to other duties, but in 2008 he became a night shift manager to help manage the 2008 turnaround. From 2008 to 2009, he was the Maintenance Team Leader. From 2009 to 2014, he was operations team leader at E3, and presently, he is the E3 Asset Manager.

[550]Mr. Dennehy had assembled three binders of numerous documents, with information on plant operations from 2008 to 2012. From these documents, he had prepared notes for his testimony of “different issues on conditions that were restricting the Plant’s production over that period of time” which he had reviewed with counsel.

[551]As Dow counsel pointed out, many of the documents refer to matters that Mr. Dennehy was not personally involved in. Dow objected to having a lay witness come to the stand with prepared notes such as these. I allowed it on the basis that Mr. Dennehy identify with respect to each document whether he had personal knowledge of it, and noted that issues of credibility could be raised later.

[552]Mr. Dennehy testified about actual Plant performance. He testified about identifying

“what the plant constraint was going to be”. He identified problems with the E-S66 seal potst in 2008, and in 2012, both due to fouling, and he described Nova’s experience with respect to the fouling.

[553]He described the need to replace certain debutanizer bottoms pumps after the turnaround in 2008, which led to reduced rates at the plant for nine days. He described issues that led to Plant shut down, which Mr. Mikulka would have accounted for in his damages calculation. He described five-furnace operation when one furnace was undergoing regular turnaround work and the other was down for unplanned maintenance. He also described five-furnace operation when two furnaces were scheduled for decoking at the same time, because one had been laid up for the winter due to running at low rates as directed by the commercial people, leading to two days of five furnace operation. Mr. Dennehy also described five-furnace operations in April 2009 because one was being decoked, and two others had TMT issues, and other periods of time when burner replacements overlapped on two furnaces. It became apparent that five-furnace operation was often a result of conducting regular maintenance at the same time as unplanned repairs. Mr. Dennehy described how Nova had managed to produce “against” some constraint.

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[554]Mr. Dennehy reviewed many of the constraints that had already been identified between 2008 and 2012, with cross-references to particular incident reports, the JPPT, and sometimes Manufacturing West reports.

[555]Most of these issues had already been described by previous witnesses, and he conceded that others would have had primary responsibility for the issue. He conceded that the averages of maximum capability of operations at E3 that he had testified to for various periods of time were averages that he had recently calculated, and not assessments that he had made at the time.

[556]He was cross-examined about his methodology of selecting periods of time for the averages, and the impact that would have on his numbers, which illustrated that his subjective choice of days made a difference to many of his opinions about maximum capability during these periods of time.

[557]This illustrated the difficulty of accepting testimony from a lay witness that is essentially opinion evidence that should be subject to a report produced in advance and open to rebuttal. It also affected the credibility of Mr. Dennehy’s analysis.

[558]Mr. Dennehy acknowledged that by August 2008, three of the seven furnaces had received new Callidus burners, and E3 was coming off its best production year ever, although 2007 was four years from the last turnaround. He agreed that it was reasonable that by 2007, some fouling had built up, and that it would be dealt with in the 2008 turnaround. He conceded that, by August, 2005, his group was dealing with a clean Plant

[559]Mr. Dennehy also acknowledged that the problem with the seals that he had testified about, identified in March 2009, was not repaired until the 2014 turnaround.

[560]Mr. Dennehy admitted that, on a day-to-day basis, he did not conduct assessments as to what internal or external constraints, if any, there were in E3’s ability to produce ethylene. While there would be discussions in daily meetings, nothing was produced at the time that looked like the notes he produced for his testimony. Personally, he made no notes of alleged constraints in the operlog entries that he was testifying about. He agreed that the real story of what was going on was in the records he had assembled. In particular, any E3 information or data that Nova felt was significant enough to be reported to Dow was set out in the Manufacturing West reports.

[561]Mr. Dennehy acknowledged that E3 provided what the commercial people at Nova directed it to produce, and that, for some of the constraints he had identified, Plant rates were actually reduced because of ethane allocation.

[562]Mr. Dennehy was questioned about the furnace that had been shut down in December, 2008. He described that it had been shut down because they were directed to run at low rates, and it was not needed. He was also referred to JPPT minutes for June 18, 2009, when the operations people were advised that, since PEI’s reactor outage was going on longer than anticipated, there was no issue in allowing one furnace to remain down for a longer period of time. The Plant was directed to be held to '''''''''% of design capability.

[563]Mr. Dennehy acknowledged that none of the “nomination business plan” or “ethane shortage” reasons for running at lower rates appeared in his notes, and he acknowledged that what was often driving E3’s production was the availability of feedstock.

[564]Mr. Dennehy conceded that Nova would sometimes change rates at E3 depending on what was happening at E1.

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[565]He also acknowledged that, once the litigation commenced in 2006, several changes were made in the way constraints were recorded in the Manufacturing West reports. He conceded that from March 2009 until the end of 2012, there were very few operating days when Nova fed more than 53 mg/hr of the E3 furnaces, unless it was at low conversion, despite the new furnace coils and burners. This was the case whether six or five furnaces were operating. He confirmed that the new burners did not represent a constraint against production, but, despite this, the pre-burner exchange period of 2004 – 2007 remains the highest period of production of E3.

[566]For all these reasons. I give little weight to Mr. Dennehy’s testimony.

5.Conclusions on Mechanical Constraints

[567]My conclusions on the specific mechanical constraints described by Nova on which it seeks to rely to support its submission that it ran E3 to its maximum capacity are as follows:

a)Furnace Burners and Coils

[568]Nova alleges problems with plugged burner tips. However, both Mr. Holloway and Mr. MacPherson, Nova’s E3 Maintenance Supervisor, confirmed that plugged burner tips could be quickly and easily repaired without taking a furnace offline. Nova also alleges flame rollover issues but Mr. Dennehy, Nova’s E3 Operations Team Leader, confirmed that no such issues arose after the September 2001 mini-turnaround.

[569]I am satisfied from the evidence that between August 2000 and September 2001, changes were made to the burners, and the replacement of all the furnace burner tips and air-flow reducers was completed by September 2001. Nova acknowledges that the changes enabled the furnaces to operate at design conditions and to achieve the minimum specified design run length, 53 Mgs/hr, while operating at six-furnace operation, at design conversion of 65% and for run lengths of 38 to 42 days. In fact, Mr. Gent and Mr. Woods were of the opinion that furnace availability could significantly exceed design, in Mr. Gent’s view, in the range of '''''''''' BPY. As noted later, in July 2002, Mr. Gent identified the need for a furnace retrofit program. In February 2003, when the E3 Management Committee approved funding for the COP, it recognized that additional expenditures might be required for modifications to the furnace burner tips. The E3 design engineering firm Stone & Webster was retained to investigate observed burner issues, such as tip pluggage and uneven coil heating, and to recommend any modifications needed to reach such objectives.

[570]In September 2003, after completion of the COP, Stone & Webster reported to Nova that there was no evidence of continuing flame impingement. It concluded that furnace performance with the existing burners was already at or very close to the COP objective of '''''' Mgs/hr. It recommended changes to the burner tips.

[571]Nova did not immediately share Stone & Webster’s report with Dow, but reported that success had been achieved in the later high rate furnace trials without burner limitations. All of the E3 furnace burner tips were replaced with new, low profile tips.

[572]In 2003, a non-urgent safety concern was identified that arose during furnace start-up and cool-down that had no impact on the ability of the furnaces to run. In 2005, Nova suggested to the E3 Management Committee that the burners be replaced with new Callidus burners.

[573]In February 2006, new Callidus burners were successfully modeled in simulations up to the ethane feed equivalent of ''''' Mgs/hr. They were installed between 2006 and 2009. The new

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burners fully addressed the safety concerns, they were stable, and they significantly improved heat flux profile. Burners were no longer a constraint on running the furnaces at the COP rate of

'''''' Mgs/hr. Mr. Dennehy, Nova’s E3 Operations Team Leader, and Mr. Wallsgrove acknowledged that the furnaces were capable of higher rates than 53 Mgs/hr, and, in 2008, Nova assessed the maximum feed rate for the new furnaces as being between ''''' and '''''' Mgs/hr.

[574]As Dow notes, this was seven years after Mr. Gent first identified the need for furnace modification.

[575]While Nova relies on testimony of Mr. Just to the effect that, from September 2001 to June 2003, Nova was not prepared to operate any furnace at a feed rate above the design rate of 53 Mgs/hr outside of rate trials and that E3 was constrained to a total furnace feed rate of no more than 318 Mg/hr during six furnace operation, or '''''''''''''% of nameplate capacity, I agree with Mr. Holloway that furnace issues were overstated. The time taken to resolve them was far too long.

[576]Nova’s claim that operating at rates higher than 53 Mgs/hr caused high TMTs relied on tests conducted in preparation for the COP turnaround. Nova conducted a two-phase furnace high rate trial in May 2004. During the first phase, a furnace was run at a feed rate of '''''' Mgs/hr, “successfully demonstrat[ing] that the individual components ... throughout the furnace, were capable of processing '''''' Mgs/hr”. Nova ended the rate trial after 17 days due to reported high TMTs that were below the furnace design maximums, and due to suspected burner flame impingement on the coils.

[577]In the second phase of the high rate trial, Nova tested four furnaces at ethane feed rates of up to ''''' Mgs/hr. One furnace, already online for 17 days, was run at ''''' Mgs/hr at design conversion for 44.5 days. Another, already online for 18 days, was run for 41.7 days. The first furnace was run again for 43.5 days. Nova reported to Dow that it had exceeded its targets in support of the COP.

[578]These tests were conducted before the original furnace coils, which Dow concedes were likely damaged, were replaced.

[579]Dow points out that the approved TMT limits for the improved coils, installed between July 2004 and April 2006, ranged from 1122o to 1133o C, yet the data table assembled by Nova reflects no TMT higher than 1022o C. Similarly, the tube failures raised by Nova were experienced only with the original coils. I agree that there is no reason to suggest the furnaces were ever a constraint on E3’s production once the coils were replaced. It is noteworthy that the E3 Management Committee minutes of July 14 2004 indicate in response to a question about whether the coil replacement schedule could be improved upon, that Nova advised that, given the availability of feedstock and the continued application of ethane allocation, there “would be no benefit to accelerate the furnace turnaround schedule”.

[580]Dow notes that E3’s original design basis assumed a four-year coil life, which was consistent with Mr. Holloway’s opinion of typical industry experience. However, the evidence is clear that Nova tried to extend furnace run lengths, which Mr. Just conceded resulted in higher TMTs.

[581]Rather than using the furnace designer’s TMT limits, Nova set its own maximum operating temperature levels for the furnace coils that were significantly lower. When Nova detected a “high temperature” using these maximums, it did not decoke the furnaces. Instead, it

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curtailed product production by either reducing conversion or reducing the ethane feed rate in an effort to extend run length. In this way Nova tried to extend coil lives to six or seven years, delaying replacements long past their four-year design life. Five of the seven furnaces were left with original coils for nearly six years.

[582]After all the coils had been replaced by April 2006, Nova did not register the new TMT limits with the Alberta pressure equipment safety authority until 2007, and even thereafter, continued to use its own lower limits.

[583]As also noted by Dow, the burners in the E3 furnace were replaced over almost a three- year period. As a result, several furnaces operated for some time with new coils but old burners. In furnace H260, for example, the coils were replaced in 2004, but new burners were not installed until September 2008. However, Nova ran E3 at high rates for the first half of 2004. During that period, the furnace did not experience a single leak, blister or bulge in its coils.

[584]I am satisfied by the evidence that, once new coils and burners were installed, the furnaces were not constrained to 53 Mg/hr or to any other identified rate below '''''' Mg/hr. Starting in November 2006, Nova ran one furnace at '''''' or ''''''' Mgs/hr of ethane feed for 42 days, and starting in October 2007, Nova ran another furnace at an average of ''''''''''' Mg/hr for 43 days. However, after this litigation was commenced, Nova did not conduct any furnace trials to test the

'''''' Mg/hr COP design rate, or any rate between the 53 Mg/hr or less that it ran E3 at most of the time.

b)Venturis

[585]Ethane enters each furnace through the venturis, which equalize the flow of ethane into the coils. To regulate the flow effectively, the venturis require a different pressure on each side.

[586]After the early 2002 high rate trials, Mr. Just recommended replacing the venturis in E3 with larger ones as part of the COP program, given a concern with high header pressure in the ethane vaporization system of the plant upstream of the venturis. No work was performed on new venturis at that time.

[587]In 2004, Mr. Gent noted internally that venturis could be changed inexpensively during upcoming coil replacement work. However, Mr. Gent noted that “we may come close to (or slightly below) COP rates without making this change.”

[588]Nova technical personnel repeated their recommendations in succeeding years, but because of Nova’s internal financial constraints, their recommendations went unheeded.

[589]In 2008, as part of the MAC Project, Mr. Wilke brought forward the venturis replacement program to the E3 Management Committee, at an estimated cost of $300,000 to $350,000. However, the MAC Project was not approved by Nova and the venturis have still not been replaced.

[590]There is insufficient evidence that venturis replacement was necessary in order to run E3 at more than 53 Mgs/hr. However, had they been changed, there appears to be a consensus that E3’s furnaces could be run at a feed rate of '''''' Mgs/hr.

[591]Mr. Wallsgrove suggested that some related operational modifications might need to be addressed, but he said that all of them could be run at that feed. Mr. Holloway agreed.

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[592]In any event, when all seven of E3’s furnaces are available, Mr. Gent acknowledged that the COP feed rate of ''''''' Mgs/hr, based on a conservative assumption as to how often seven furnaces would be available, is not required to achieve COP production rates. Mr. Holloway calculated that a feed rate of '''''' Mgs/hr would have been sufficient to run E3 at full COP productive capability, taking into account E3’s actual furnace availability. Nova’s own expectation was that the MAC Project would have increased E3’s base capacity to '''''''''' or ''''''''% of its old 2.81 BPY design capacity – a capacity of ''''''''''' to ''''''''''' BPY.

[593]Mr. Kapur expressed the opinion that venturis replacement would provide incremental capacity above COP rates. Thus, I am satisfied that the venturis issue was only a constraint on production to the extent that Nova failed to fix a relatively inexpensive maintenance issue after recommendations to replace the venturis had been made as early as 2002. The excuse for failing to changeout the venturis in 2005 was the feedstock supply.

c)E-502 Exchanger

[594]Based on the evidence of Mr. Just and Mr. Wilke, Nova submits that, because of

vibration in E3’s E-502 de-ethanizer cross-exchanger, the plant operators would not operate E3 at total furnace feed rates above the design rate of 318 Mg/hr (six furnaces times 53 Mg/hr each) from the September 2001 turnaround until August 2002. However, while the exchanger was replaced at the time of the 2003 COP work, Mr. Gent, clarified that the replacement was not really a capacity-related item and that capacity was adequate. He testified that, prior to the replacement, his assessment of E3’s productive capability was in the range of ''''''''' TPY. Mr. Holloway confirmed that the E-502 vibration did not constrain production below E3’s productive capability.

[595]From August 1, 2002 to May 27, 2003, “feedstock” and “nomination business plan” were the reason for 96.5% of E3’s constraints in Mgs and 91% in hours. The exchanger is only referred once in an August 2002 “plant highlight” report.

[596]At any rate, Nova replaced the exchanger during the June 2003 COP turnaround, and no further vibration problems were encountered.

d)C2 Splitter – Hydrate Formation

[597]Nova submits that from late August 2002 until June 2003, a hydrate or contaminant problem in the C2 Splitter System constrained E3’s capacity to '''''''''''''' of its hourly nameplate capacity or '''''''' Mg/hr, although no Nova expert witness mentioned any problem. The problem remained unresolved for ten months, but Nova attributed to it a total production restriction of only 402.9 Mgs. Dow points out that, over the same period, Nova reported “feedstock” and “business plan” restrictions of 46,933.7 Mgs and 11,105.2 Mgs respectively, which puts the constraint into perspective.

e)E-568 Exchanger

[598]Nova submits that polymer fouling in the E-568 heat exchanger reduced E3’s capability from ''''''''% in March 2009, to less than ''''''''% in the summer of 2010, and then to approximately 95% from August to October 2010. However, as Mr. Gent and Mr. Holloway noted, fouling is a fact of life in an ethylene cracker, and it is something that a prudent operator identifies and does his best to control.

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[599]Nova attempted to remove the fouling through washes when it was observed in the C2 Splitter system during the 2008 turnaround. These attempts were unsuccessful. By June 2010, E- 568’s condensing duty was down to 72% of original design, which limited plant rates to between

'''''''''' and '''''''''% of HNC. Another attempt to clean the fouling was made in June 2010, but the result was a further reduction in E-568’s capacity. Finally, a new exchanger was ordered.

[600]Nova estimated that a replacement exchanger could be built in 12 weeks and installed in 48 hours, but according to the report, controlling the E-568 fouling was not scheduled as a 2010 priority. Apparently, this was because at the reduced rates Nova proposed to continue to run E3, it did not expect “the E-568 fouling will become a plant constraint” until sometime “prior to 2014, by which time Nova presumed it would need the ethylene. The matter was not a priority for Nova, since it could “displace” its own ethylene production from E3 to E1 and E2 to meet any production restriction.

[601]Nova concedes that it had begun to observe a decline in performance of E-568 in 2007, indicating fouling, and it knew then that if E-568 was fouling, E-565 would too.

[602]Mr. Holloway testified that Nova’s decision not to fix the fouling immediately was

“unprecedented”.

[603]Both Messrs. Holloway and Kapur testified that installing a spare exchanger would have been a reasonable option. As Mr. Holloway explained, tie-ins could have been installed in the 2008 turnaround and a second exchanger installed a few months later. I cannot accept the E-568 Exchanger issue as a true constraint on production, given the length of time it took Nova to address it.

f)E-565 Reboiler

[604]Nova submits that fouling in the E-565 C2 Splitter tower reboiler constrained E3’s productive capability from March 2009 until mid 2012. However, Mr. Dennehy testified that E- 565 was not a constraint at rates of up to '''''''''''''% of design nameplate capacity. Nova did not attempt to run E3 above that level. However, Dow notes that Nova estimated that the E-565 fouling of 1% per year restricted E3 to ''''''''% of design nameplate at the end of 2013, suggesting a capability of ''''''''''% through 2012 and ''''''''% through 2011, even fully taking into account the fouling that Nova continued to permit to linger. Mr. Kluthe’s modeling put the capability figures even higher, suggesting a limitation at '''''''''% of design nameplate in mid-2013.

[605]Once again, it is evident that Nova decided not to address the E-565 fouling because it could meet its own ethylene needs without running E3 at higher rates. In an internal October 2012 presentation, Nova noted that it would not need “full site rates” until “post 2015”, and that “Nova production can be made up by E1/E2”

[606]When Nova’s business forecast changed and it developed a “desire to reach maximum rates in Q4 2014”, it expedited delivery of a replacement reboiler.

g)E-650

[607]Nova submits that fouling in the E-650 superheater and resulting pressure drop issues have periodically affected E3’s productive capability from 2006 through 2008. Toluene washes have been applied. While Mr. Gent testified about other ways of addressing the issue, those were never brought forward within Nova.

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[608]Despite Nova’s submissions that “[f]ouling in E-650 constrained E3’s ... capacity from April 2006 ... until the turnaround in August of 2008”, Mr. Kieboom testified that the toluene washes addressed the issue. Mr. Holloway found no evidence that fouling limited E3’s production. Dow notes that some of the periods of highest production that Nova chose ever to achieve at E3 occurred during periods when it claims E-650 to have been a constraint: August and September 2006, and much of the 2007 year, E3’s highest production year ever. Thus, although the fouling was an unusual problem, I cannot find that it affected E3’s productive capability in a material way.

h)TD-405 Steam Rack

[609]Nova submits that lift rod wear in the TD-405 steam rack caused a “significant mechanical constraint” in 2009 and 2010. However, Nova’s records, supported by Mr. Craig’s testimony, indicate that the lift rod issue could have been avoided had E3 been run at higher rates, which would have achieved the “win-win” result of maximizing production and minimizing the wear on the valves.

[610]This was confirmed by Mr. Holloway, and Mr. Ferrigno agreed that “the lift rod issue ...

wasn’t impacting the productive capability” of E3, and he declined to treat it as a constraint.

[611]Nova submits that another “significant mechanical constraint occurred on TD-405” for a brief period in late 2011. Nova’s estimate in the JPPT at that time was that the steam rack would limit E3 plant rate to ''''''''% of nameplate ethylene production. However, Nova did not run E3 at rates anywhere near ''''''''%, with Mr. Craig noting the cost of Nova’s handling of the issue was “most significant to the JV partner as Nova is able to do some production management via E1 and E2”. Mr. Craig conceded that work on this issue could have been done much earlier.

i)Crossover Piping

[612]Nova submits that crossover piping repairs and replacements caused by the failure and resulting fire created a significant increase in furnace maintenance and reduced furnace availability. E3 first experienced crossover piping corrosion issues in October 2006, after Nova decided to reduce the amount of sulphur injected into the furnaces. Between 2006 and 2010, six failures were recorded, each resulting in about a week of downtime for the affected furnace. In late 2010, Nova began replacing the piping but it took longer than planned. Mr. Eisenhower testified that the replacement piping installed to date has not presented any issues. In any event, as Mr. Holloway explained, the crossover piping replacement has not correlated with any lower furnace availability.

j)Furnace Availability Issues – Miscellaneous

[613]Nova submits that a variety of further “furnace mechanical issues, including the Variable Frequency Drive (VFD) fan bearing and USX failures,” also caused a significant reduction in furnace availability.

[614]After experiencing four VFD failures between September 2005 and August 2006, Nova eventually completed a Root Cause Failure Analysis and began implementing a solution in 2010. Recognizing that its reliance on an outside service provider for repair and its maintenance of an inadequate supply of spares was keeping furnaces offline for longer than necessary. Nova decided by June 2012 to train its own technicians and to keep spares handy. As noted by Dow, this was a “leisurely approach” to resolving the problem. Despite this, as Mr. Ferrigno noted,

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Nova maintained an average availability of 6.316 furnaces over the claim period. Mr. Holloway confirmed that the VFD failures had no impact on productivity.

[615]An induced fan bearing failure occurred in November 2010. Nova kept the affected furnace offline for three weeks. Mr. Craig recommended changes to avoid any recurrence, but Nova had not instituted them by the time that a second failure occurred about five months later. Nova remedied the second failure in about half the time it took to remedy the first one. In any event, Nova attributed no production loss to furnaces on either occasion.

[616]Nova mentions an inducted draft fan coupling “failure” in July 2011, but no mention of this was made at trial by Mr. Craig, the author of the related incident report, or by any Nova expert. Dow submits that this was not a material problem. As Mr. Holloway explained, fan bearing and coupling failures are common repair and maintenance issues at ethylene plants, and it is regular practice to keep spare parts on hand for repairs.

[617]Mr. Holloway also explained that USX nozzle replacements are also part of the standard maintenance of an ethylene plant, able to be made during planned coil changes with no impact on furnace availability or ethylene production. Mr. Eisenhawer, a Senior Nova Mechanical Engineer, confirmed that Nova ultimately replaced E3’s USX nozzles as a “proactive approach to ensure integrity and safety”. Nova seems to submit that the nozzles impacted E3 production, but there is no persuasive evidence of this.

k)Cooling Water System Debris

[618]Nova submits that there was an adverse effect on E3’s productive capability from debris in the cooling water system between July and October 2011. Nova knew of flow restrictions resulting from the debris in July, but decided to wait until October to address them. Dow submits, and Mr. Wade concedes, that Nova could have installed better filters when debris was observed previously, but it did not. Mr. Ferrigno declined to assess any supposed impact for this brief episode, observing that attempting to do so would require “some kind of fancy model”.

l)T-301 Pressure Relief Devices

[619]Nova claims that T-301 Pressure Relief Devices limited E3 to '''''''''% of its design nameplate capacity during “6 plus 1” operation, the very brief period during which a furnace is transitioned into or out of a decoke cycle. Mr. Just testified that this limitation, if it existed, affected E3 only “prior to any COP changes”. Mr. Holloway confirmed this, and pointed out that E3 was run at '''''''''''''%. Nova never reported any associated production loss, and no Nova expert mentioned any such limitation in his report or testimony.

m)K-570 Pressure Safety Valves

[620]Nova submits that K-570 pressure safety valves (PSVs) limited E3 to ''''''''''''% of design capacity during Plant high rate trials in February and March of 2002, prior to the COP. The claim springs from Mr. Ferrigno’s interpretation of a rate trial report. When Mr. Gent reviewed the same data in 2002, he calculated E3’s “likely annualized capacity” to be '''''''''%.

[621]Mr. Ferrigno thought that all three PSVs needed to be in service to achieve rates above

''''''''''''%, and that having all three in service was a safety issue. But Nova apparently considered after the rate trial that two might be sufficient to support COP rates, and in any event, it was prepared to operate with all three “if required to support the COP capacity”, mitigating any associated risk in various satisfactory ways.

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n)K-400 Compressor

[622]Nova submits that fouling in the K-400 compressor caused an unquantified yield reduction at E3. Mr. Wilke purported to estimate an impact on production in 2007 and 2008, but 2007 was E3’s record year. Nova attributed no ethylene production loss at all to K-400 in 2007 or between January and July 2008, despite having a line item for K-400 production losses in its E3 monthly reports. Once Nova performed a wash-oil injection in July 2008, Mr. Wilke agreed that there was no further fouling concern. Mr. Craig conceded that Nova was operating the K-400 compressor for many hours in excess of the 30 – 40 hour design limit.

[623]Nova also consistently spent less than it had budgeted for E3 maintenance. Nova witnesses indicated that, initially, its maintenance budget numbers were too high because of lack of experience with the Plant, but even after 2002, Nova underspent on maintenance to a large degree.

[624]Dow submits that, by not performing maintenance, or deferring it, or extending run cycles well beyond design lengths, short term savings can be accomplished, but at the cost of productivity. The evidence establishes that Nova had no business reasons to run E3 at full rates, and recognized internally that to do so would benefit Dow.

[625]Specific incidents confirm this prioritization of Nova’s needs and requirements over its Co-owners.

[626]In summary, I find that the mechanical issues that Nova submits were uncommon and a reason it was not able to run to its productive capacity were overstated, or, while perhaps a plant issue that needed to be addressed in timely manner, did not constrain production. I accept the opinions of Mr. Kapur and Mr. Holloway that Nova failed to address these issues expeditiously, and the only reasonable explanation is that Nova did not require the additional ethane that timely resolution of the mechanical issues would produce. This lack of prompt resolution is corroborated by the evidence of Nova’s lay witnesses.

[627]I also note the late appearance of the issue of mechanical constraints during the pre-trial process, the late production of thousands of low-level plant records, the fact that mechanical issues had not been pled, and that when Dow asked Nova during the discovery process to identify any constraints that it alleged had limited plant production, Nova’s response was that the question was “not relevant”.

[628]I also note the ambiguity about the “constraint” tables in the monthly reports, confirmed even by Nova lay witnesses, the manner in which “restraints in production” were recorded in several ways, and the testimony of some witnesses that the hours restriction tables were designed to show some constraint for every hour of every month, whether the Plant was being run at full rates or less, whether it was hitting a constraint or whether the restraint was merely the next anticipated constraint.

[629]For all these reasons, I decline to make adjustments to the opinions of Mr. Kapur and Mr. Holloway, which I accept as valid and reasonable. I accept that some of the fouling issues may have been out-of-the-ordinary, but given the length of time Nova took to resolve the issue, and given that Mr. Mikulka’s opinion fairly backs out actual down-time from his calculations, this approach compensates for any minor more-than-normal constraint on production. The same is true with respect to the furnace issues, given the extraordinary length of time taken to resolve the issues, and the continued failure to resolve the relatively minor venturis issue.

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[630]Nova is critical of Dow for failing to call lay witnesses from its own organization who Nova submits have a familiarity with the actual capacity of E3 and the impact of any operational issues on its productive capability. However, these lay witnesses would have run into the same constraints as the Nova lay witnesses with respect to their scope of admissible opinion evidence. Their limited evidence further limited by what had been disclosed to Dow by Nova at the time these mechanical issues arose, would have been of little assistance in addressing the issues.

D. Breach of the Joint Venture Agreements

[631]Dow submits that Nova is in breach of sections 4.3(b), 4.4(a) and 7.3 of the OSA, section 3.2(c) of the OSA and section 3.11 of the COA.

1. Breach of Section 4.3(b) of the OSA

[632]Section 4.3(b) of the OSA under the title “Duties of the Operator” requires Nova as Operator to “conduct the Operations with the objective that the Plant, subject to the direction of the Management Committee, will optimize Product production and achieve first decile performance when compared to other ethylene plants in North America”. This duty of the Operator is subject to the terms of the OSA, including, specifically, actions requiring the approval of the E3 Management Committee.

[633]There are two parts to this duty: optimizing product production is the first, and achieving first decile performance is the second. Mr. Wilke, Mr. Kluthe and Mr. Kilbourn, Nova witnesses, recognized that optimizing production means making as many pounds of ethylene as possible.

[634]As noted, the evidence establishes that E3 was rarely run to capacity. Nova’s stated goal, as set in the objective of the JPPT, was to optimize production and profit to Nova from the three crackers at the Joffre Site as a group, rather than E3 as a stand-alone plant.

[635]Nova submits that Dow misinterprets the word “optimize” in section 4.3(b) to mean

“maximize”, with the result that Dow is implying a production guarantee that does not exist in the OSA. However, Dow responds that it has never alleged that there were guarantees, either with respect to ethane supply or ethylene production.

[636]What Dow submits is that there are contractual commitments that obligate Nova to supply the ethane that was required for Nova to conduct operations at E3 as the OSA provided.

[637]Nova refers to the testimony of its expert, Scott Ferrigno, who indicated that optimizing is not as simple as “maximizing everything;” that optimization involves balancing different things to find a point that produces the maximum profit. Mr. Ferrigno testified that it is true that sometimes optimizing production of product could be maximizing, but “[w]e don’t assume it is until we do the calculations and the math. We optimize”.

[638]In a scenario in which there was always enough ethane to fill E3 to capacity, optimizing product production is not complex, and, as Dow submits, means producing as much product as possible at E3. It is clear that Nova instead conducted operations to optimize Nova’s profit from the Joffre Site as a whole.

[639]Although it described ethane allocation differently, Nova filled E3 with ethane first, with the intention of maximizing production from the most efficient and cost-effective plant. However, it did not allocate 50% of the E3 ethane thus produced to Dow. Dow also complains that, beyond that, Nova failed to maximize E3 product production because it did not need the production itself.

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[640]Dow submits that this is evident from the way Nova chose to run E3, including trying to extend the run lengths of the E3 furnaces beyond design run lengths and running at low conversion on the pretext of ethane shortage, failing to deal in a timely and effective way with fouling and other maintenance issues, and spending less than budgeted and deferring on maintenance.

[641]Even Nova’s expert, Mr. Wallsgrove, was of the opinion that E3 could have consistently been run at a rate of ''''''''' or ''''''''''' BPY, but the evidence discloses that Nova did not run E3 even to that level. Dow submits that Nova knew that, if it could leave Dow short of ethylene at E3, where the cost was lower, and induce Dow to use more fully the E1 Toll, where the cost was higher, that would not just be more costly to Dow but also financially rewarding to Nova.

[642]Nova appears to submit that, given the word “objective” in section 4.3(b), it cannot be in breach of the section since the duty of the Operator is a lesser duty, not an obligation but an objective. This may be persuasive if the evidence indicated that Nova as Operator had tried but failed to comply with this duty due to circumstances beyond its control, or circumstances that would constrain production for reasons that were verifiable and reasonable. Nova is correct that this objective does not amount to a production guarantee. However, it is clear from the evidence that Nova did not attempt to run E3 with the objective of optimizing Product production. I accept that Nova ran E3 with the objective of satisfying its own demands and the objective of optimizing production at the Joffre Site as a whole thereby maximizing Nova’s profit over that of its Co-owner. Plant personnel and Nova management knew E3 could produce more ethylene. Nova management knew that Dow needed more ethylene. After the COP, Nova rarely chose to run E3 at or even near its productive capability. The duty of the Operator set out in section 4.3(b) is not merely aspirational, although it may be limited by the factual context. Nova as Operator thus was in breach of its duty to operate with the objective clearly set out in the agreement.

[643]The second part of section 4.3(b) refers to achieving first decile performance when compared to other ethylene plants in North America.

[644]The Solomon survey reports its survey results in quartiles, not deciles. Section 4.3(b) does not refer to the Solomon survey.

[645]However, reference was made at trial to Schedule “C” of the Project Management Agreement, which described the Co-owners’ project objectives at E3’s design and construction stage. Those objectives were to create a “facility ... capable of ‘first decile’ industry performance and ranking in the following areas, based on the Solomon survey: Return on Capital, Cash operating expenses (Fixed Costs at Joffre) [and] Mechanical availability (%).” Once design and construction were completed, though, and the operations began, the OSA replaced the Project Management Agreement as the parties’ governing contract. Thereafter section 4.3 of the OSA set out the Co-owners’ operational objective for E3 as being to “optimize Product production and achieve first decile performance when compared to other ethylene plants in North America”. Nova submits that, as an antecedent agreement, the Project Management Agreement properly forms part of the factual matrix that the Court must consider in interpreting the OSA.

[646]While that may be, the specific language of an antecedent agreement, if inconsistent with the specific language of the later agreement, cannot override the specific language of that later agreement. The antecedent agreement emphasized first decile performance on return on capital, operating expenses and mechanical availability. The later agreement emphasized product production and first decile performance as compared to other ethylene plants in North America,

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referenced against product production. The previous metrics cannot be read-in to replace product production.

[647]Dow submits that the objective function that section 4.3(b) requires to be optimized is the production of ethylene and by-products, not cost or profit. The trial evidence was clear that the Solomon survey category that measures product production, being a plant’s actual production as a percentage of its reported capacity, is Capacity Utilization. It is also clear in the three Solomon surveys that took place in the period between 2001 and 2011 that E3 scored below the first quartile in Capacity Utilization and thus below the first decile.

[648]Nova did score close to the top in the Solomon category for keeping maintenance costs low, but, as several witnesses conceded, that is not necessarily a good thing in terms of productivity. Thus, on the best evidence before me of E3’s ranking against other North American plants, the Solomon survey, I am satisfied that Nova as Operator has breached the second part of its duty set out under section 4.3(b) by allowing Nova to prioritize Nova’s interests over first decile performance in optimizing Product production.

[649]Nova submits that there is no obligation to continually rebuild E3 in order to achieve first decile performance. Whether or not that is true, it is clear that E3’s productive capability has become higher during the eleven years of operation that are the subject of the damages claim, and whether the Plant will be able to continue to achieve first decile performance in the future will be subject to the circumstances at the time, and the directions of the Co-owners.

2.Breach of Section 4.4(a) of the OSA

[650]Section 4.4(a) of the OSA provides that, notwithstanding section 4.3, the Operator will not cease or curtail production at E3 except in certain circumstances that are not in issue. Dow submits that this is what Nova did in running E3 at less than its full capacity despite the nominations of the Co-owners.

[651]Nova responds in two ways:

i)constraints on production were communicated to Dow; and

ii)approval of E3’s budgets were an approval of the way that Nova chose to operate E3.

a)Constraints were reported to Dow

[652]Nova points out that constraints impacting E3’s production rates were communicated to Dow through E3 monthly reports, E3 daily, and weekly status reports and E3 Management Committee meetings, presentations and teleconferences. It also submits that a number of Dow’s employees had either been involved in the design and operation of E3 or were sufficiently knowledgeable about its operation to maintain a daily model of the Plant.

[653]While it is true that the production rates and constraints were reported to Dow, it cannot be argued that Dow accepted such under-production. From Mr. Fergusson’s early complaints through the rest of the years at issue, Dow continually complained about the rate of production and asked for more ethylene.

b)Budgets as Approval of Operations

[654]Nova submits that, when the E3 Management Committee approved the yearly budget, it was in effect an approval of the extent of E3’s operations. It notes that from 2001 through 2012,

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Dow approved, or otherwise did not object to, the budget and production forecast. The only exception to this was Dow’s objection to the Operator’s manufacturing budget in 2011 and 2012.

[655]Mr. Wade and Mr. Wilke confirmed on cross-examination that they did not consider or treat E3 Management Committee approval of an expense budget based on a production forecast to be any direction or authority to produce ethylene only up to forecast volume, or as E3 Management Committee consent to the curtailment of production to such volume. They confirmed that no one from Nova ever suggested such a thing.

[656]Mr. Flint testified that, after Mr. Ramachandran’s questions had “brought matters to a head between Dow and Nova,” any matter that was contentious was “taken offline” rather than dealt with at the committee meetings. He conceded that he understood “from late 2004, if not earlier ... that Dow had a serious issue with Nova running E3 at less than full rates”. He stated that, to his knowledge, the E3 Management Committee never gave any direction ... “to run E3 at reduced rates, or any direction purporting to override any of Dow and Nova’s monthly co-owner nominations.”

[657]Mr. Van Hemmen, while initially disagreeing, ultimately conceded that Nova had never suggested that budget approval was a direction to produce at lower rates, and that he knew Dow wanted more ethylene than E3 was producing.

[658]Dow notes that the “Budget” is a defined term in the OSA, meaning “the amount of capital or operating expenditures, or both, to the extent approved by the Management Committee for the conduct of Operations during a specified year, or for such other period of time as the Management Committee may determine”. While a forecast of production is a necessary input to the calculation of such expenditures, the defined term “Budget” does not include an amount of production. I agree that it is an authority to spend money, not to curtail production rates.

[659]While Nova as Operator has authority under section 4.3(e) to prepare and present annual Budgets for approval, it has a separate duty under section 4.3(b) to conduct operations with the objective that E3 will optimize production.

[660]If Nova as Operator sought to limit production, it could have sought approval directly from the E3 Management Committee, pursuant to section 4.4(a). It is illogical to interpret the duty to present a budget as an indirect method of allowing the curtailment of production, particularly given the testimony of Mr. Wade, Mr. Wilke and particularly, Mr. Flint.

[661]Thus, I find that Nova as Operator was in breach of section 4.4(c) of the OSA.

3.Breach of Section 7.3 of the OSA

[662]Section 7.3 of the OSA states that “it is the intent and objective of the Co-owners” that E3 “continually operate” at not less than the Ethylene Nameplate Capacity of E3 and that “each Co-owner continually take 100% of its “Ethylene Production Proportion of Product produced at the plant.” The balance of the section deals with the possible scenario of a Co-owner nominating less than its full EPP amount of product, in which case, the other Co-owner will assist the under- nominating Co-owner in fulfilling the objective of taking 100% of its EPP. Whether a breach of this section exists is dependent on what the Ethylene Nameplate Capacity (ENP) of E3 can be said to be.

[663]The evidence establishes that Dow attempted three times to have E3’s ENC adjusted to take into account its expanded capacity. The first request was from Mr. Fergusson following the

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completion of the 2003 turnaround. Mr. Foy and Mr. Wade made a presentation to the E3 Management Committee in February 2004 reviewing the criteria under Schedule E of the OSA to be followed by the Operator in developing a proposed revised ENC for approval by the E3 Management Committee.

[664]The minutes of the February 11, 2004 E3 Management Committee indicate that Mr. Wade and Mr. Foy advised that “any change to the nameplate would have no material impact on the rights of the two Co-owners of feedstock rights under the agreement”. The minutes also indicated that “since the initial feedstock fraction has already been determined, there is no link between the ethylene nameplate and the co-owners’ respective feedstock factions”.

[665]The presentation indicated that “[c]urrently, the Feedstock Fraction of either co-owner does not increase until such time as that additional feedstock is secured”, and that once the Co- owners requested a revision, “the operator shall use reasonable efforts to adjust its ethane contracts to satisfy each co-owner’s request.”

[666]Mr. Fergusson indicated that he would review the presentation internally and get back to Nova in due course.

[667]Mr. Wade conceded that there existed a diversity of opinion within Nova as to whether a revision to E3’s ENC would necessarily entail a change to the Feedstock Fractions.

[668]At the next E3 Management Committee meeting of July 14, 2004, Dow again requested a nameplate adjustment, as the COP project was essentially complete. The matter was delegated to Mr. Miller of Dow and Mr. Wade of Nova to review the Schedule E procedure and bring the matter forward.

[669]At the November 23, 2004 meeting, the minutes indicate that Dow wanted to revise E3’s nameplate based on post-COP capability, but that it was “a low priority for Nova”, that “Nova sees no benefit because the plant is not routinely using the capacity above nameplate” and that the item was “tied into other commercial items currently being discussed”. It was conceded that the feeling within Nova was that the parties were in litigation mode.

[670]The possibility of changing E3’s nameplate capacity was next revisited by the E3 Management Committee at its meeting held on May 24, 2007.

[671]Mr. Humble, a Dow employee and Mr. Wade developed differing models with respect to E3’s potential productive capacity and made a joint presentation at the July 27, 2007 meeting of the E3 Management Committee. At the November 6, 2007 E3 Management Committee Meeting, there was a presentation of an “E3 Nameplate Re-Determination Proposal”, setting out two possible scenarios. The range of nameplate capacity under these scenarios was from ''''''''''''

BPY, or ''''''''''''% of design capacity, to '''''''''''''' BPY, or '''''''''''''% of design capacity, if certain modifications were not addressed during the 2008 turnaround.

[672]Mr. Johnston of Dow asked Mr. Flint at the meeting whether Nova would support revising E3’s nameplate to '''''''''' BPY. Mr. Flint refused. He testified at trial that, since there was inadequate feedstock to operate E3 to capacity, Nova did not see the sense in restating E3’s nameplate capacity.

[673]Nova submits that, because section 7.3 of the OSA refers to the “intent and objective of the Co-owners”, and does not reference the Operator, operating E3 at not less than the ENC is an objective of the Co-owners and not a duty of the Operator. Nova seeks to restrict the Operator’s

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duties to those set out in section 4.3. As noted previously, section 4.3 is not the only provision of the OSA that assigns duties to the Operator. However, it is not necessary to decide this issue, as it is clear that E3’s ENC was not restated from its design ENC, and therefore, there is insufficient evidence to establish a breach of section 7.3.

4. Breach of Section 3.2(c) of OSA and Section 3.11 of the COA

[674]Dow submits that Nova has breached section 3.2 of the OSA, in which the Co-owners and the Operator covenant “not to do any act ... which could cause it or the other Parties to be in breach of ... this Agreement”. Section 3.11 of the COA provides that each Co-owner agrees to act honestly and in good faith, and in accordance with the provisions of the agreement and the other Project Agreements with respect to the ownership and use of the Plant. By imposing “ethane allocation” and taking for itself part of Dow’s E3 ethylene, and by directing that E3 be run to suit Nova’s commercial needs instead of according to the joint venture agreements and the Co-owner nominations, Nova as both Co-owner breached section 3.2 by causing the Operator to be in breach of its contractual obligations, and breached the honesty and good faith provisions of section 3.11. To the extent that Nova claims that any of the maligned conduct was as operator, it breached section 3.2.

[675]Dow points out that, by using ethane allocation, Nova recovered more ethylene than its EPP entitlement under ethane allocation. By failing to optimize production, it deprived Dow of the additional ethylene that E3 was capable of producing.

E. Conclusion on Optimization Claim

[676]As noted previously, I accept the evidence of Mr. Kapur with respect to the productive capacity of E3. I also accept the evidence of Mr. Holloway that there were no uncommon mechanical constraints that ought to have restricted E3 from reaching its full capability, other than some of the fouling. But, with respect to the fouling and the burner replacement issues, Nova’s approach to repairing the issues was slow, a lower priority given that it did not need the extra ethylene that could have been produced.

[677]My review of the evidence of the Plant lay witnesses does not change my view of Mr. Holloway’s opinion. Mr. Gent’s comments in particular did not make Mr. Holloway’s opinion less valid. Some of the lay witnesses were overly partisan and allowed their loyalty to their employer to colour their testimony, but it was clear from all of them that the operations people were not pressed to repair mechanical issues with any speed and that they were under the direction of the Nova commercial people on how to run E3.

[678]I must conclude that Nova as Operator failed to comply with its contractual obligations to run E3 with the objective of optimizing Plan Production and achieving first decile performance.

[679]I am satisfied by the evidence that, although E3 had a design nameplate rating of 2.81 BPY, almost immediately, Nova recognized internally that E3’s productive capability was higher than that and that from September, 2001 until the completion of the COP, E3’s productive capacity was '''''''''''''' BPY.

[680]This evidence includes:

a)internal Nova documentation, such as the April 23, 2001 presentation to the May 14, 2001 E3 Management Committee providing a status update, the high rate trials in February and March 2002, the December 2002 internal analysis, the January 22, 2003

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presentation, the comments in the February 2003 Owners’ Project Objections for the COP, and the December 9, 2003 presentation;

b)Mr. Gent’s testimony that he assessed E3’s capacity as ''''''''''' BPY after the 2001 mini-turnaround, and that during the August 2002 COP Process Design phase, while E3 had “not yet achieved its annual nameplate production of 1,274 kilotonnes of ethylene”, this was primarily due to “business-driven operating constraints”.

[681]I am also satisfied from the evidence that, after the COP was completed in 2003, E3’s productive capability was increased to over ''''''''''''' BPY. The evidence indicates that Nova used capability numbers between '''''''' to '''''''''''' BPY internally for budgeting, planning and forecasting purposes, and sometimes communicated these numbers to Dow.

[682]Again, internal documentation reflects this, including the December 9, 2003 presentation to Nova’s leadership team, the 2004 performance test, the rate at which E3 was run in 2004, some of the material in Mr. Broenink’s April 20, 2004 presentation in Pittsburgh, the December 9, 2004 presentation to the PEBT, the April 2005 presentation, the November 2006 presentation, the December 2006 presentation and the November 2007 presentation.

[683]Following the COP work, Nova conducted a performance test in January 2004 that validated the COP target of ''''''''''% of design nameplate capacity. Mr. Wilke reported within Nova that “[i]t is clear that we can operate at COP rates if required for business reasons.” He confirmed in his testimony at trial that he has “known, from a manufacturing perspective, that there were many periods of time when E3 has had capacity that wasn’t being used”. Referring to some April 2004 JPPT minutes, Mr. Wade testified that “'''''''' percent ...was typically what we would use as a target level” for “full rates” when Nova’s production plan so mandated.

[684]Mr. Gent testified that he assessed E3’s at ''''''''''' BPY soon after the COP.

[685]Nova submits that it used lower forecast capacity figures in the 2004 E3 expense budget, but that only establishes that, while it was using higher capacity figures internally, it communicated a lower figure to Dow.

[686]Nova reported such productive capacity numbers as part of the Soloman survey, at least until 2011, when Mr. Van Hemmen instructed the capacity number to be lowered.

[687]For years, until a member of Nova’s litigation team intervened, Nova personnel reported E3’s capacity as ''''''''''' BPY when they conducted plant tours. Mr. Mathieson, who issued regular reports to the natural gas liquids industry and who testified at trial, reported such numbers to the industry and to Alberta Environment.

[688]Mr. Saunders confirmed that, in 2008, Nova reported to Alberta Environment that E3’s annual capacity was ''''''''' BPY. Converted to an annual number that incorporates a 40-day plant turnaround every five years, ''''''''' BPY is approximately '''''''''''''' BPY, again a number that closely matches Mr. Kapur’s calculation.

[689]The evidence discloses that there were periods after the COP when E3 was run at higher rates between ''''''''''' and '''''''''' BPY, when a Nova plant was on turnaround, or when ethane storage was limited. Examples of such periods are May 2004, March 2007, May-June 2007, and June-July 2012.

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[690]On cross-examination, Mr. Flint testified that Nova’s best information as to the maximum amount of ethylene that E3 has been capable of producing over a twelve-month period is the verified COP capacity, confirmed at ''''''''''' BPY.

[691]In 2005 and 2006, when Nova was investigating whether to build another polyethylene plant at the Joffre Site, Nova reported internally that E3 would produce ''''''''''' to '''''''''' BPY.

[692]These reports included the April 2005 presentation to OPOL and December 1, 2006 draft report to Nova’s executive leadership team.

[693]Although Nova only conducted one rate trial after 2004, that trial in March 2009 revealed a sustainable achievable production rate of ''''''''% of '''''''''', or ''''''''''' BPY.

[694]Therefore, I am satisfied from the evidence that Nova ran E3, not to optimize production of Product, but to optimize Nova’s profit and to optimize the entire Joffre Site. The JPPT’s objective was optimization, not of E3, but of Nova’s profit from the three Joffre plants as a whole. Such Nova witnesses as Mr. Broenink, Mr. Just, Mr. Wade and Mr. Dennehy testified that E3’s production rates were set based on the rates Nova chose to run E1 and E2. Mr. Wade commented that Nova ran Joffre as “one plant, well spaced”.

[695]The evidence also discloses that, before IPIC acquired Nova in 2009, Nova ran E3 for the purpose of reducing “Cash Flow Cycle Time”, a performance measure used within Nova to improve the appearance of its financial reporting. Nova’s standing practice was to reduce inventory as much as it could at quarter- and year-end. At such times, Nova would minimize ethane consumption and curtail E3 so that Nova’s ethylene inventories and working capital performance could appear to be improved, irrespective of the nominations of the Co-owners.

[696]Since I have found that Nova had enough ethane to run E3 at its maximum rate, the issue is whether there are other reasons to justify Nova’s rate of production.

[697]Nova alleges that to have filled E3 to “its productive capability would have necessitated operating E1 and E2 at rates which were consistently uneconomic, frequently operationally unsafe and which would have at times required placing E1 in block operations.” The evidence does not sustain this.

[698]Alleged safety of the other crackers on the Joffre Site does not justify a failure to run E3 at maximum rates. The evidence discloses that, as well as having enough ethane to fill E3, Nova could run E3 to its productive capability and run E1 and E2 in a stable fashion.

[699]If Nova had run E1 and E2 only at the low, “false load” levels required to make up the balance of its ethylene needs, the costs of production at E1 and E2 would sometimes have increased, thereby reducing for Nova the economic benefit of complying with its contractual obligations to fill E3. E1 and E2 could certainly be run safely in their “false load” ranges, but operating them in such a fashion would have increased their production costs slightly.

[700]Finally, while I accept Mr. Holloway’s opinion that there were no uncommon mechanical constraints that would limit E3’s productive capability. Dow’s damages expert uses a more conservative basis to calculate damages.

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VIII. Damages

A.Introduction

[701]Dow’s theory of damages is that, if Nova had properly operated E3 to its productive capability, and had provided the Dow plaintiffs with Dow’s EPP of the resulting products, the Dow plaintiffs would have received hundreds of millions of pounds of cost-advantaged ethylene.

[702]The Dow plaintiffs sell most of their polyethylene production to their ultimate parent, TDCC, which re-sells it in the United States and elsewhere. They claim only damages that have been lost in sales to their parent, as TDCC is neither a party to the joint venture agreements, nor a party to this litigation. Dow notes that its sales to TDCC are made at a discount to market value, and since the lost profits that TDCC would have earned are not included, the damages claimed are less than they would be if calculated against market.

[703]I have referred to the Dow plaintiffs collectively as Dow from time to time in this part of the decision, unless the context makes the distinction important.

[704]The parties agreed to a cut off date of December 31, 2012 for the purposes of their experts’ calculations of damages. Thus, provision for a post-trial “top up” will be needed to account for the period January 1, 2013 through the date of judgment in a fashion consistent with the terms of this decision.

B.Dow Lay Witnesses

[705]Dow called as lay witness David Kyle and Mariano Gutierrez, whose evidence is reviewed in the following sections.

1. David Kyle

[706]David Kyle was product director for low-density polyethylene for Dow in 2007, and product director for gas phase polyethylene in mid-2008, and later global business director with the responsibility of overseeing profit and losses for the Dow in North American region.

[707]He described Dow’s assets in Louisiana and Texas and the LP7 facility in Prentiss, Alberta. He testified that there are two large reactors at LP7, Dow’s biggest and newest facility, referred to as R71 and R72. Mr. Kyle described the reactors as the “crown jewels” of the polyethylene business, as they were competitively advantaged from a conversion-cost perspective and had access in Alberta to a very cheap source of ethylene, according to an external benchmarking study.

[708]Mr. Kyle also described Dow’s three-solution polyethylene reactors at Fort Saskatchewan, which were served by LHC-1, a Dow Cracker. He noted that there was interconnectivity and flexibility in the system, but, generally speaking, it was intended that E3 would connect up with the Prentiss facilities and LHC-1.

[709]As Mr. Kyle noted, ethylene is 80% of the cost of a pound of polyethylene, and therefore, cost competitiveness is a key factor, together with reliability of supply.

[710]He described E3 and LHC-1 as some of the most competitive crackers that Dow has globally.

[711]Mr. Kyle testified that Dow Canada owns the reactors and “the steel on the ground” and that Dow Europe owns the raw materials, the feedstocks that are supplied to the Prentiss reactors,

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and, ultimately, the product produced by those reactors. This product is polyethylene produced from ethylene by Dow Canada in the Prentiss reactors. Dow Europe gives Dow Canada the ethylene and Dow Canada produces polyethylene to give back to Dow Europe. Dow Europe sells the polyethylene to its customers, Dow Canada, TDCC or the Dow Chemical Company. The products are then sold to third parties in Canada by Dow Canada and in the United States by TDCC. Roughly 15 to 20% of the volume remains in Canada, and the rest is sold in the US. Periodically, Dow exports product to other regions of the world, but that involves smaller amounts.

[712]Mr. Kyle testified that, generally, he did not concern himself about which legal entity was selling Alberta polyethylene, as his job was to maximize profits for the broader Dow Chemical Company. He did not have any regard to whether profit would be realized in Dow Canada, Dow Europe, or elsewhere.

[713]He confirmed that he did not always get as much ethylene as he wanted for the Alberta polyethylene assets. He was referred to an August12, 2009 email from the then-president of Dow Canada, copied to Dow’s ethylene planner and Mariano Gutierrez, Dow’s planner for gas-phase polyethylene. The group had been advised that Dow was on ethane allocation '''' ''' ''''''''''' '''''''''''

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[714]Mr. Kyle referred to the cost advantage of the manufacture of ethylene in Alberta as the “Alberta advantage”, being a combination of an abundance of ethane feedstock from natural gas and the lower conversion costs associated with state-of-the-art reactors. He noted that the extent of that advantage varied with the cost of ethylene. The extent and alleged variability of the Alberta advantage is an issue between the parties with respect to whether demand for ethylene existed at all times.

[715]Mr. Kyle also commented on an internal Dow presentation dated February 21, 2008, which compared Dow and Nova’s assessment of the Alberta advantage for the four quarters of 2007. Dow regularly tracked its view of the Alberta advantage, as well as those of Nova from its reports to the media.

[716]He acknowledged that distance was a disadvantage to Alberta product, and had to be taken into account in assessing the advantage. He also acknowledged that the Alberta advantage has narrowed with the increase in production of shale gas, but noted that, even if American Gulf Coast product becomes more competitive, that does not deteriorate the competitiveness of Canada product vis-à-vis the rest of the world, where cost to produce polyethylene is largely based on naptha as a fuel. He stated that Dow would still want to run its Canadian assets as hard as it could to exploit the competitive advantage globally.

[717]Mr. Kyle testified that, to his knowledge, Dow had never chosen to reduce polyethylene production at LP7 in order to produce polyethylene outside Alberta.

[718]He described the difference between “gas phase”, a method of producing polyethylene in which ethylene is injected into a vessel with gas, and “solution phase”, in which ethylene is injected into a solvent system.

[719]Mr. Kyle also testified that, during his tenure as the product director for gas-phase polyethylene, he had been involved in assessments about whether Dow should invest capital to

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expand its poly-ethylene assets in Alberta, but it needed a secure source of ethane before it undertook expansion of its capacity.

[720]He spoke about the project to debottleneck LP7, which allowed the North American gas- phase business to expand Dow’s lowest cost asset while utilizing stranded ethylene available in Alberta.

[721]In an email exchange in April 2009, Mr. Gutierrez, Mr. Kyle and others at Dow discussed

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[722]In another email chain dated in early June 2009, Mr. Gutierrez '''''''''''''' '''''''' ''''''''''' ''''''''

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[723]Mr. Kyle described that production planning would be done annually, attempting to balance sales with production, taking into account anticipated hydro-carbon and feedstock supply. Planning was then done monthly, or more frequently, as issues of supply and demand arose.

[724]In February 2009, Mr. Kyle, Mr. Gutierrez and others at Dow were again part of an email exchange '''''' '''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''' '''''''''''''''' ''' '''''''''''' ''''''''''''''' ''''''''''''''''''''' '''''''''''''''

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[725]Mr. Kyle testified about an internal Dow presentation he and Jose Obregon, who ran the solution business, made to the hydrocarbons business leadership on March 2, 2010. The presentation indicated a downward trend in Canadian ethylene supplies. Mr. Kyle tried to estimate the impact of the lack of ethylene. He noted that:

... in a low-case scenario, we’re falling short in [Canada] by 300 million pounds. In the high case, could have been as high as 500 million pounds. These aren’t

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precise numbers. This is just a ballpark estimate so people could understand the order of magnitude of the situation, the gravity of the situation. And putting together a rough [EBITDA] margin against those volume scenarios, you come up with a range of $60 million to $125 million in [2010] that we were potentially foregoing by not being able to run those assets.

[726]Mr. Kyle also commented in the presentation on the non-financial impact of the ethylene shortage, including the complexity of moving products, the ill-will created by cutting customer demand, and the resource drain to the company of having to work with customers to make adjustments to their manufacturing processes.

[727]He stated that, although he was aware of the litigation, he did not keep any records of third-party sales that he regarded as lost as a result of the under-delivery of E3 ethylene, commenting:

... we were in the business of recording actual sales, not recording sales we

weren’t going to deliver upon ... I don’t get paid to overpromise and underdeliver. So we never would keep records like that. I mean, our job was to sell all that we could sell, not track what we weren’t going to sell ... we adjusted our planning process.

2.Mariano Gutierrez

[728]Mariano Gutierrez, Dow’s Latin America Product Director, testified that it was Dow’s strategy to run its Canadian facilities first, as they were cost advantaged, and then run facilities in the rest of North America. He said that North American operations are primarily ethane-based, and have a cost advantage over naptha-based ethylene as it is produced in Europe or the Pacific area.

[729]Mr. Gutierrez was located in Houston from January 2007 until April 2012. During that time, he held various positions relating to Dow’s global business supply chain, being the Global Gas Phase PE Supply Chain Manager from June 2007 until March 2010, the Global Solution PE Supply Chain Manager for solution polyethylene operations until September 2011, the Global Co-Monomers Manager from June 2007 until April 2012, and the Solution PE Asset Manager from September 2011 until April 2012. In his role as Co-Monomers, or raw material Manager, he was in charge of supply chain planning globally for ethylene, keeping a balance between market requests and what Dow could produce.

[730]Mr. Gutierrez indicated that he was always being pressed to produce more polyethylene to meet customer demand, but he was faced with the capacity he had. He referred to it as being “sold out”.

[731]He testified that there was never a time when there was not a demand for polyethylene made at LP7, Dow’s Alberta plant, other than perhaps during the November/December global financial crisis, but this was only a matter of two or three months. Dow never reduced production at LP7 in favour of producing polyethylene at the US Gulf Coast.

[732]Mr. Gutierrez referred to the ethylene shortage in Canada as a “chronic shortage”. In that situation, he would have to advise the Dow commercial people that he would not be able to supply what they were demanding, and they would have to adjust customer demand accordingly.

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[733]Mr. Gutierrez was referred to ''''''' ''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''''' ''''''''''''' ''''' ''''''''''' ''''''''''''''''' ''''' '''

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[734]Jose Obregon, a product director, made the same comments as Mr. Kyle with respect to not being able to move any solution business to the Gulf Coast.

[735]Mr. Gutierrez indicated that the message he received was that there was the capacity to use the ethylene, the demand for it, and it was all a matter of a limitation of ethane.

[736]Mr. Gutierrez testified that ''''' ''''''''''''''' ''''' ''''''''' '''''''''''' ''''''''' '''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''

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[737]He noted '''''''' ''''''' '''''''''''''' ''''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''' ''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''

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[738]He testified that his recollection was that, ''''''''''' ''''''' ''''''''''' '''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''

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[739]Mr. Gutierrez indicated '''''''' '''''''''''' '''''' '''''''''' ''''' ''''''' '''''''''''''''' '''''''''' ''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''

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C.Expert Witnesses

1. Charles Mikulka

[740]Charles Mikulka was called by Dow as an expert to give opinion evidence concerning the petrochemical industry, including the assessment and quantification of damages.

[741]Mr. Mikulka is Senior Managing Director with FTI Consulting, Inc. in the Petroleum and Chemicals Practice. He has more than 40 years of diversified experience in the chemical and related industries. He has provided litigation support in various matters, and has performed major consulting projects in a variety of industries, including the energy and chemical industries. He has testified as an expert witness in a number of US and international decisions and arbitrations.

[742]Mr. Mikulka was asked to provide a broad overview of the structure and operations of the chemical industry, with a focus on the ethylene and derivatives sector. He was also asked to assess whether or not the Dow plaintiffs experienced any damages in this case and, if so, to quantify those damages.

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[743]Mr. Mikulka worked with a core team of five people at FTI to produce his reports, principally engineers and analysts with economic and financial training.

[744]He prepared an initial report dated January 20, 2014. He then produced an updated rebuttal report dated June 14, 2014 in response to a report prepared by Mr. Williams of KPMG, and also because he became aware of additional information provided through questioning and interrogatories. Mr. Mikulka also then prepared two reports dated September 24, 2014 in response to the KPMG and the ESI rebuttal reports. Mr. Mikulka noted that a few days before he testified, he had received a further report from Mr. Williams, and that he had reviewed the ten- page summary of the report but had not had time to review the 3,400 pages of supporting documentation.

[745]Arising from Mr. Mikulka’s testimony, the damages claimed by Dow through to December 21, 2012, other than for co-products, ethane purity and other adjustments, are as follows:

Dow Europe

Dow Canada

Lost Profits on Incremental Polyethylene Sales

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Lost sales at LP7

Lost sales at the Fort Saskatchewan unit

Lost sales of ethylene to Dow Canada for Fort Saskatchewan unit

Lost Margin Due to Use of Higher Cost Ethylene

Lost margin due to spot ethylene purchases from Nova

Lost margin due to streamed ethylene purchases from Nova

Lost margin due to use of E1 Toll

Lost Profits on Merchant Market Sales

$436,019,645 $9,684,730

9,288,812

23,552,257

18,547,505(2,891,381)

7,494,656(2,109,827)

159,119,994(69,627,833)

Dow Europe lost profits on sales to Dow Canada

124,513,038

 

 

Dow Canada lost profits on merchant market sales

 

(32,209,437)

 

 

 

 

Total

$769,247,095

($87,864,935)

[746]Dow’s main damage claim is calculated on the basis of the variable contribution margin of volumes of ethylene not received. The contribution margin is the delta between the incremental costs of making a pound of ethylene compared to the incremental revenue.

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[747]In his calculations, Mr. Mikulka first applied lost ethylene volumes to polyethylene raw materials losses suffered by the Dow plaintiffs. The first category of damages, “Lost Profits on Incremental Polyethylene Sales,” refers to losses that the Dow plaintiffs incurred because they were unable to produce and sell polyethylene made from lost E3 production. These damages total approximately $478 million.

[748]Mr. Mikulka next applied the remaining lost volumes to higher-cost ethylene purchases Dow made in any period in which they were able to fill their Alberta polyethylene facilities despite the E3 shortfalls, or in which they would have been able to fill them with something less than all of the incremental lost ethylene volumes.

[749]This claim, described as “Lost Margin Due to Use of Higher Cost Ethylene”, totals approximately $111 million on a net basis for both Dow Europe and Dow Canada.

[750]The final category of damages calculated by Mr. Mikulka assumed that any remaining lost volumes would have been directed to the merchant ethylene market, which he used as a proxy for derivative sales that would have resulted from the earlier expansion of derivative capacity, had Dow been able to count on a reliable supply of the volumes of E3 ethylene to which they were entitled. These damages total approximately $92 million on a net basis.

[751]Dow submits that, consistent with its recognized strategy of making ethylene into more profitable derivative products rather than selling merchant ethylene, had the Dow plaintiffs been able to count on a reliable supply of those lost ethylene volumes, they would have increased their derivative-making capability to match. The evidence of Dow’s lay witnesses support this, and Mr. Mikulka indicated that “the whole industry” recognized that Dow is not in the business of making ethylene to sell in the merchant market: it is a consumer of ethylene. Despite this, Mr. Mikulka calculated damages on a more conservative basis that assumed no expansion of derivative capacity. His suggested damages total is thus $118 million less than an estimate that assumed reasonable derivative expansion.

[752]Mr. Mikulka used documents prepared in the normal course of business for both Dow and Nova to calculate damages. He took account data drawn from Dow’s Asset Utilization Database (AUDB) in determining how much more ethylene Dow could have consumed at their assets and infrastructure. Wherever the AUDB data for the Dow Alberta polyethylene facilities reflected a lack of demand for ethylene, Mr. Mikulka did not calculate derivative losses, but applied the lost ethylene volumes instead either in substitution for higher cost ethylene mitigation volumes or as sales into the ethylene merchant market.

[753]Mr. Mikulka made the following assumptions in preparing his opinion:

a)that E3’s production of ethylene and co-products was supposed to be optimized to the full extent of E3’s productive capability;

b)that LP7’s cost efficiency, coupled with the availability of low-cost ethylene from E3, means that its output has a comparative cost advantage over other North American plants. Because of this integrated cost advantage in conjunction with LP7’s capacity to produce polyethylene, and because the Dow plaintiffs could also use E3 ethylene in their Fort Saskatchewan facility, the plaintiffs’ demand for ethylene from E3 would generally be the maximum volume of ethylene obtainable from E3 in any month; and

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c)that during most months beginning in July 2001 and continuing to the date of the report, Nova had not run E3 at its productive capability, even though Nova always obtained enough ethane to do so.

[754]On cross-examination, Mr. Mikulka agreed that he was instructed to look at damages to Dow Canada and to Dow Europe, and to assume Mr. Kapur’s productive capability analysis.

[755]Mr. Mikulka indicated that the existence of demand for incremental low-cost E3 ethylene and derivatives manufactured from the ethylene is demonstrated not only by LHC-1’s high operating rate, but also from the following conduct of Dow and Nova;

a)Dow’s E3 nominations;

b)Nova’s recognition that LP7 would compete for derivative market share;

c)the COP;

d)the debottleneck of LP7;

e)Dow Canada’s purchases of ethylene from Nova;

f)Nova’s conversion of ethylene to which Dow Europe was properly entitled through actual sales;

g)Nova’s expansion of its derivative units; and

h)the recent expansion of US derivative facilities.

[756]With respect to his assumption that E3 did not run to its productive capability, Mr. Mikulka reviewed E3’s operational data, and also the Solomon studies for 2003, 2007 and 2011. He noted that, in each of those years, E3 was arguably rated as one of the lowest-cost ethane- based ethylene crackers in the world, if not the lowest, always in the first or top quartile in terms of low-cost, efficient operation. It was rated much differently when it came to capacity utilization. It was in the third or fourth quartile, toward the end of the curve. He commented that E3 was big, efficient and low-cost, but with respect to productive capability, there was “ low production out of the asset, so E3 was underperforming in that area.”

[757]Mr. Mikulka reviewed Mr. Kapur’s analysis and concurred with his approach and methodology, and his ultimate assessment of productive capability of E3.

[758]Mr. Mikulka explained that, in reaching his opinion, he started with Mr. Kapur’s analysis of productive capability, but because he calculated damages on a monthly basis, he could not use an average annual downtime that was spread over a number of years, or put into a specific year over 12 months. He had to know when the actual plant outages occurred.

[759]He took Mr. Kapur’s analysis, and stripped out the periods when Mr. Kapur anticipated a turnaround would occur and its duration and his estimated downtime. This way, he came up with what he termed “effective capacity,” or what E3 could produce if it ran at its productive capacity without any outages. Then, using Nova’s records of the operations of he factored back into his analysis the actual days and months E3 was not operating for whatever reason.

[760]Mr. Mikulka’s calculation of damages thus makes no claim for periods when E3 was not operating, which in my view accounts fairly for the downtime whatever uncommon mechanical constraints may have caused had they been addressed diligently. Mr. Mikulka then assessed the

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period when E3 was operating. He noted that in his analysis, he tried to represent the reality of when E3 was operating to come up with the ability to produce ethylene in the marketplace.

[761]Nova criticize Mr. Mikulka’s opinion on the following five bases:

a)entitlement to damages;

b)unlimited demand;

c)reliance on the AUDB;

d)lack of experience; and

e)the Empress force Majeure period.

a)Entitlement to damages

[762]Nova submits that, since Dow Canada has no contractual entitlement to any inputs or outputs at E3, Dow Canada has no claim for loss of ethylene from E3. This submission is analyzed later in these Reasons.

b)Unlimited demand

[763]Nova submits that Dow’s damages claim is based on unlimited demand for ethylene. Dow responds that the question is not whether there was unlimited demand, but whether Dow had the demand for the additional ethylene above the volumes it actually received that it would have received as its full EPP of E3’s optimized product production. Dow states that this amount is specific and finite. Between July 2001 and December 2012, Dow received ''''''''''''''''''''''''''''''''''''

pounds of ethylene from E3. As a result of Nova’s failure to provide Dow with its full entitlement, Mr. Mikulka has determined that Dow was deprived of an additional ''''''''''''''''''''''''''''''''

pounds of ethylene over the same period – roughly a 20% increment above what it actually received. Thus, demand for that additional 20% increment is what is in issue.

[764]Dow submits that there was abundant evidence at trial of full demand for all the E3 ethylene Dow could obtain. Contrary to Nova’s submission that there is no direct evidence of month-by-month demand, Dow cites the evidence of monthly nominations of Dow’s full share of E3 production. Of the 138 months in the damages period, there were only three months when Dow under-nominated.

[765]Many Dow witnesses confirmed Dow’s demand for additional evidence from a fully- optimized E3. As Dow notes, Mr. Kyle testified that obtaining full production from the Alberta polyethylene assets was always the goal: “To make the most money, we had to run those assets flat out because of their competitive advantage”.

[766]Mr. Gutierrez testified that Dow commercial directors were constantly pushing him to produce more ethylene. He indicated that his customers were always willing to buy more, but that he was always sold out.

[767]Mr. Fergusson indicated that Dow’s refusal to agree to propane cracking was not because Dow did not have the demand, but because the lack of sufficient ethane was a Nova problem, Dow considered that it should bear the additional cost of propane.

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[768]Mr. Ramachandran testified that Dow nominated its absolute maximum entitlement from E3, and that instructions were to run the crackers as hard as they could, especially at LHC-1 and E3 because that was the lowest cost ethylene in Dow’s portfolio.

[769]Dow points out that Nova’s expert Mr. Woods candidly acknowledged that the plaintiffs likely could have produced and sold more polyethylene derived from E3 ethylene. Mr. Woods testified that he had “no doubt” that Dow would have been able to sell every pound of polyethylene manufactured from Dow’s share of a fully optimized E3 because “[t]he demand was there”.

[770]Mr. Woods acknowledged that the cash cost advantage of low-cost Alberta polyethylene made it attractive in comparison with product from other sources, and that polyethylene produced from the Dow E3 lost volumes would have been among the most cost-advantaged in North America for much of the damages period. He noted that when LP7 started up, even though demand in the US was falling, LP7 was able to displace more marginal (higher cost) sources of ethylene. Further, he acknowledged that “the most marginal pound” would be displaced into the export market, and that LP7’s pounds were not that most marginal pound.

[771]As previously noted, Mr. Mikulka listed a number of the factors that demonstrated the existence of demand for incremental E3 ethylene and derivatives manufactured from the ethylene, drawn from conduct of both Dow and Nova. He also looked at the AUDB to understand why the assets did not run as hard as possible.

c)Reliance on the AUDB

[772]Both Mr. Mikulka and Nova’s damages expert witness, Mr. Williams, referred to the AUDB to calculate damages, although Mr. Williams expressed reservations about doing so. Nova submits that the Dow plaintiffs and Mr. Mikulka are “blindly relying” on the AUDB to represent demand. That characterization cannot be sustained. Mr. Mikulka used the AUBD, not to quantify Dow’s demand or to establish damages, but as a cap or restriction on damages. As he indicated, absent such a restriction, more of the Dow plaintiffs’ damages would be in the high margin category of polyethylene losses. By limiting “demand” to the “Raw Material Loss” category of the AUDB, such damages have been limited to the Dow plaintiffs’ existing capacity to produce polyethylene.

[773]Mr. Mikulka testified that he used the AUDB to look at the ability of LP7 and the Fort Saskatchewan facility to consume what the demand was for ethylene supply from LP7 through

E3 . He noted:

The assumption I said [that] every pound would have been spoken for was based on other assumptions. I limited myself to what the raw material loss that was identified in the asset utilization database depicted.

QSo the raw material losses coupled with your overall view that production from LP7 with E3 ethylene is always in demand?

AYes. Based upon what was going on the marketplace, you know, debottlenecks, construction, the Alberta advantage, the North American advantage, other facilities being built in North America, both ethylene and polyethylene, you know, this R3 reactor expansion that’s going on as we speak ... all of those elements factored into the opinion that E3 ethylene converted into polyethylene would have found a home.

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QI think, as you said in your rebuttal report, sir, that those were all things that you looked at to confirm your assumption?

ACorrect.

[774]Dow submits, and I agree, that calculating polyethylene losses on the basis of the restrictions implicit in the AUDB understates the Dow plaintiffs’ damages. As Mr. Kyle testified, Dow’s philosophy in the operation of its Alberta derivative assets has been to invest capital to expand capacity whenever possible, a philosophy limited only by the availability of a reliable, consistent supply of feedstock. Mr. Mikulka observed that, consistent with this philosophy,

'''''''''''''''' ''''''''''' '''''''' ''''''''''' '''''''''''''''''''''' '''' '''''' ''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''''' ''''''''''''''''''' ''''''''''''' '''''''''''

''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' '''''' ''''''''''''''''''' '''''''''''''''''' ''''''' '''''''''''''''''''''''''''''' ''''' '''''''''' ''''''''' ''''''''' ''''''''''''''''''' ''''

'''''''''''''''' He concluded that '''''''''''''' ''''''''' '''''''''''' '''''''''''''''''''''''''''''''''' ''''' ''''' '''''''''''''''' ''''''''''''''''''''''''' '''''''''''

''''''''''''''''''''''' ''''' ''''''''''' '''''''''''''' ''''''''''''''''' '''''''' '''''''''' ''''' ''''''''''''''''''' '''''''''''' ''''''''''''' ''''''''' '''''''' ''''''''''''''''''' '''

''''''''''''''''''''' ''''''''''' '''''''''''''' '''''''''' '''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''' '''''' ''''''''''''' ''''''''''''''''''''

[775]Nova submits that the AUDB measurement of non-production against Dow’s

optimization tool, Maximum Asset Capability or MAC, somehow overstates losses, but I am persuaded by Mr. Mikulka’s explanation that it does not. Mr. Mikulka, who has experience both with Dow’s AUDB and with other similar databases, testified that the MAC measurement is eminently achievable, as did Mr. Gutierrez and Mr. Holloway. Dow notes that, since it received less than its EPP of ethylene for LP7, if anything, LP7’s calculation of MAC has been unduly limited. The evidence indicates that Nova has recently developed its own AUDB-type database, also using a standard which is essentially a MAC.

[776]Nova submitted in its written argument after the trial that the AUDB was not in evidence for the truth of its contents. Dow argues that this submission is a late and improper attempt to resile from the usual practice, followed through the trial, for the introduction and acceptance of records into evidence.

[777]Nova attached to its written argument a January 2015 email exchange between counsel before the trial started, which indicates that Nova was not prepared to admit the AUDB for the prima facie truth of its contents. It also attached a letter sent by Nova counsel to this effect in September 2015, when the trial was almost over.

[778]The January 2015 email exchange addressed the potential admission of exhibits under the parties’ Agreed Exhibit Protocol. As the trial unfolded, very few exhibits were admitted into evidence by that Protocol. The vast majority were admitted in the conventional way.

[779]The September 2015 letter came approximately seven weeks after Dow had completed the main part of its case, and had called all of its lay witnesses. It referred back to the Protocol, which Dow submits had never suggested would limit in any way the parties’ ability to offer proposed exhibits at trial in the usual fashion.

[780]Nova also states that it mentioned during its opening statement that the AUDB could not be relied upon to prove alleged demand and lost sales.

[781]However, despite the earlier email and whatever was said in Nova’s opening statement, the AUDB was introduced into evidence on multiple occasions during the trial without objection until the September 2015 letter. On no such occasion did Nova challenge the admission of the AUDB into evidence, or suggest that it was to be treated as less than a full exhibit, including as a

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truthful record of its contents. Nova often itself offered it as an exhibit, relying on the presumed truth of its contents, in cross-examining a witness.

[782]As noted in Foley v Alberta (Administrator, Motor Vehicle Accident Claims Act), 2002 ABCA 297 at paras 57, 63-65, counsel at trial may make strategic choices, including deciding not to object to inadmissible evidence. Where counsel refrains at trial from objecting to the admissibility of what might otherwise be inadmissible evidence, and even acts upon the evidence, any right to object to the reception of the evidence is effectively waived for reasons of trial fairness. Given the apparent acceptance of the AUDB at trial, despite Nova’s earlier comments and Nova’s own use of the AUDB , I find that Nova must be taken to have waived its earlier objections.

[783]At any rate, I am satisfied that the AUDB satisfies the business records exception to the hearsay rule for records made in the usual and ordinary course of business. While it was not proved as a business record in the usual way, a number of witnesses described the history and rules of the AUDB, speaking to its importance and accuracy as a reliable, ordinary course, business record. Mr. Mikulka testified about his extensive previous experience with the AUDB and similar databases, referred to variously as “production gap files”, “variance files”, “lost production files” and “asset utilization databases”. Mr. Ferrigno testified that he was familiar with the inherent reliability of such databases from past practice; he agreed that they are the “most reliable place to find information about things that were limiting a plant.” Mr. Kyle explained that the AUDB data “underpins” Dow’s entire $12 billion per year polyethylene portfolio, and thus is required to be credible and reliable. He described Dow’s rigorous “procedures and processes in place that oversee how this data is input, how it’s managed, how it’s aggregated.” While admitting that he had nothing to do with its creation, Mr. Gutierrez testified that he, too, uses the AUDB in his supply chain roles and considers it to be “a powerful tool that we have within the business that allow us or allows the people that are running the business to really understand your production losses, to really understand what the key metrics are from manufacturing”. He testified that he had a high level of confidence and trust in the AUDB because of the extensive rules and procedures in place to govern its use.

[784]The extensive rules, procedures and processes described by Messrs. Kyle and Gutierrez with respect to the AUDB are outlined in the “Global Asset Utilization Resources (GAUR) Definition Details Documentation”. That document provides detailed explanations of seventeen categories of production losses, offers guidance as to when each category is to be used, and details the multi-level data review process employed to ensure the accuracy and effectiveness of the data. The evidence discloses that all data is reviewed twice or three times for accuracy: once at the plant level, once at the Tech Center level and, if necessary, once at the Site Integration level. The GAUR discloses that all employees charged with entering data into the AUDB at the plant level, and all employees changed with conducting first-level reviews of the data, must complete training certification prior to assuming their responsibilities.

[785]I find that the AUDB is admissible evidence for the truth of its contents.

[786]There is one remaining issue arising from the use of the AUDB. It appears that the way in which information was recorded in the AUDB changed at least once in 2007/2008, based on a verbal direction. This direction resulted in the recording of raw material shortages in place of what had previously been recorded as LP7 Lack of Demand. However, the reason for this change was explained by Mr. Gutierrez.

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[787]Nova submits, from cross-examination of Mr. Ramachandran, that the creators of the AUDB had a motive to mispresent information in it in a way that would assign blame to a lack of feedstock, rather than to mechanical constraints. However, while Mr. Ramachandran candidly agreed to a human tendency to try to look good, he also noted that Dow had “a pretty good audit mechanism ... where we go in and make sure that nobody is playing games with these things.”

[788]Mr. Mikulka disagreed with Nova’s characterization of a motive to misrepresent, and I find that there is no evidence to sustain it.

d)Lack of experience

[789]Nova submits that Mr. Mikulka’s “inexperience” as a damages expert was evidenced by his response to Nova expert Mr. Williams’ argument that Dow should have further mitigated its damages by using the E1 Toll. Mr. Mikulka’s comments on that issue were that any excess in the E1 Toll that Dow had available to it was principally sold to Nova. When taken to a specific month in which it appeared that there may have been capacity to use more of the E1 Toll, he commented that it was necessary to investigate whether Dow had the ethane to run the E1 Toll. He noted that, if ethane was put into the E1 Toll instead of being sold to Nova for use in the Pool, there would be economic consequences that would have to be considered before anyone would be able to determine whether or not it made economic sense to Dow or Nova to do that. Further comment on this issue is found in the analysis of Mr. Williams’ evidence. After considering both submissions on the issue, I accept Mr. Mikulka’s reasoning on this issue, and do not find that his view reflects any inexperience as a damages expert.

[790]Nova also submits that Mr. Mikulka’s inexperience was highlighted because, in Nova’s view, he sought to characterize what he called “sales” in his initial report as “inventory transfers” in rebuttal. Mr. Mikulka adequately explained the point he was attempting to make. The conflict between Mr. Mikulka and Mr. Williams on this issue revealed what is a different philosophy of categorization that does not affect either opinion in any material way. In my view, this is not a sign of inexperience, but of differing views of expressing the same set of facts.

e)The Empress force majeure period

[791]A tornado significantly reduced ethane supply from the Empress straddle plants that supplied ethane to Joffre in the summer of 2005. Nova shut down E3 for a full month, and declared force majeure. Nova submits that the Dow plaintiffs claim damages for undelivered E3 ethylene during the force majeure period, even though E3 was not operating for part of that time.

[792]However, even though Nova did not formally release its reliance on force majeure until September 2, 2005, E3 resumed operations by July 20, 2005, and produced ethylene for the rest of July and all of August 2005.

[793]Mr. Mikulka appropriately calculated damages for the Dow plaintiffs in the parts of July and August when E3 was up and running and producing ethylene.

[794]Additional testimony and evaluation of Mr. Mikulka’s opinion is included in the analysis of Mr. Williams’ opinion later in these Reasons.

f)Liquid Co-Products

[795]Dow Europe claims damages for:

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a)the failure to receive the correct mix of co-product from E3. Dow submits that, since Nova was providing Dow a Joffre Site average mix of ethylene co-products such as propylene, butadiene and pyrolysis gasoline, as opposed to the specific mix and volume of co-products produced by E3, it suffered damages. This is one of the co-product components of the main claims of allocation and optimization;

b)the failure to receive its EPP of co-products, which is the other co-product component of the main claims; and

c)the failure to receive correct volumes of co-products due to E3 not running at design conversion.

[796]Damages calculated by Mr. Mikulka for these three categories of claims are as follows:

Failure to receive correct mix of co-products

$

1,174,618

Failure to receive EPP of co-products

$

12,597,100

Failure to receive correct volume of co-products

 

 

due to E3 not running at design conversion

$

26,005,370

 

 

 

 

$

39,777,088

[797]Dow notes that, in 2009, in the course of working with Nova on other co-product issues that have since been resolved, Lorrie Deutscher discovered that Nova had not been accounting to Dow for Dow’s EPP of each liquid co-product as such co-product was produced at E3. Instead, Nova had been calculating a revenue share for Dow based on the aggregate of all co-products produced at the Joffre Site. However, the mix of co-products produced at each plant is different and the value of each co-product is different.

[798]Ms. Deutscher testified that she raised the issue with Kerry Hargreaves of Nova. Mr. Hargreaves indicated in an internal document that “[w]hen I read [the OSA] I read that [Dow] should get 50% of each. It doesn’t say “each” but I also don’t read that they get 50% of the sum of all products. If I were a third party reviewing this then I interpret 13.2 as they get their EPP of each co-product”. Mr. Hargreaves concluded that Nova was misinterpreting the OSA. Despite this internal advice, Nova has not changed its methodology on a going forward basis.

[799]With respect to the third category of co-product damages, Mr. Mikulka explained that when E3 is run at lower than design conversion, the Plant produces fewer co-products, but consumes less ethylene. He calculated the difference between the co-products that should have been produced against the value of ethane that was saved.

[800]Mr. Woods submitted that the additional ethylene produced more than makes up for the redirected co-products produced, but Mr. Mikulka emphasized that he calculated the difference between the greater amount of ethylene and the lower amount of co-products based on a wider, more appropriate, range of conversion factors than the narrow range used by Mr. Woods. He verified his calculations from data obtained from COP.

[801]In answer to a comment from Mr. Woods about validity of the data with respect to receiving the correct mix of co-products, Mr. Mikulka confirmed that he made his calculation on the difference in the mix of co-product from data in the Nova historian about E1, E2 and E3.

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[802]In response, Nova notes that the liquid co-products from the three plants were physically commingled and stored together before they were transported off site. It submits that Dow’s Mr. Miller knew this and that he had been aware since 2002 that that was the way that Nova’s infrastructure was set up. However, Dow points out that such commingling has no bearing on ownership and accounting. Given that the amount of each individual co-product produced at E3 is measured and there is no physical commingling across co-products, it submits that there is no reason why each co-product cannot be accounted for by the EPPs.

[803]Nova appears to justify its treatment of co-products by reference to a marketing agreement between the parties that was finally terminated in 2007. However, this agreement did not change Dow’s right to its EPP of co-products.

[804]With respect to whether liability for these claims is excluded under section 14.1 of the OSA, Nova submits that the only damages for liquid co-products not subsumed within the allocation and optimization claims are those relating to the failure to receive correct volumes of co-products , and that damages claimed by the Dow plaintiffs under this heading are for loss of products or loss of production, a claim that is barred by section 14.1.

[805]Dow submits, and I agree, that the definition of loss of products or loss of production is not so broad as to cover Nova’s conversion of Dow’s products. Further analysis of the scope of section 14.1 is found later in this decision.

[806]With respect to whether the other two categories of claim are subsumed within the main claims, Dow notes that it claim its share of the missing co-products based on the actual ethylene production, so that there is no overlap with the E3 Production Shortfall Claim.

[807]Mr. Williams testified that, although he did not deal with this head of damage in his report, he checked Mr. Mikulka’s calculations, and confirmed that Mr. Mikulka calculated damages under this category for the same credit that he accounted for in his other heads of damage. Thus, he was of the opinion that Mr. Mikulka double-counted on this issue. However, he gave no specifics. I am satisfied from my review of Mr. Mikulka’s opinion that there was no double-counting.

g)Ethane Purity Claim

[808]Dow claims damages as a result of E3 receiving ethane with a higher CO2 content than the blended site average. In effect, it says that E3, and thus the Co-owners, were paying for less ethane and more CO2 than based on the blended site average cost that it was charged.

[809]Dow submits that there is nothing in the OSA that entitles Nova to divert purer ethane

from the Pool to its own plants, E1 and E2, and to deliver higher CO2 ethane to E3. Inherent in the definition of “Pool” in the OSA, which uses the word “aggregate”, is a mixing of all sources of ethane.

[810]Dow submits that diversion of the lower CO2 ethane to E1 and E2 for Nova’s benefit (or for the benefit of its affiliate which ultimately came to own E1 and E2), without any disclosure to Dow, is a breach of Nova’s obligations both as a Co-owner and as the Operator.

[811]Damages calculated by Mr. Mikulka for this category of Claim are $19,238.330. They measure only what was paid for ethylene that was not obtained by E3 due to higher stripping of CO2, not for any margin on sales of additional ethane that may have been received.

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[812]Mr. Mikulka noted that, from start-up of E3 to sometime in 2002, the three plants were getting different concentrations of ethane. From 2002 to sometime in 2004, the ethane stream

was blended. Then, in 2004 and continuing to 2008, because the CO2 content of ethane coming into Joffre Site was increasing, ethane with a higher content of CO2 was again fed to E3 as it had the capability of handling higher CO2 content streams.

[813]Although E2 had been upgraded and could handle the same higher levels of CO2, ethane with a lower level of CO2 was directed to both E1 and E2. E1 was not upgraded, and costs for a full upgrade of E1 would be as high as $40 million, according to Mr. Wilke.

[814]In 2009, Nova began to price ethane to E3 based on the energy content of the ethane that was being fed to the Plant so that E3 was only paying for actual ethane. The claim is for the period before this change was made.

[815]Dow submits that:

a)Nova purposely took steps in setting up the ethane delivery infrastructure at Joffre after 1995 and in blending/not blending to ensure that cleaner ethane was preferentially streamed to E1 and E2;

b)Nova did so for its own gain, so that it or its affiliate received more pure ethane per barrel at E1 and E2 than was in the average Pool barrel E3 paid for, and to save itself up to $40 million in otherwise necessary upgrades at E1;

c)Nova did not disclose to Dow what it was doing, and did not seek the approval of Dow or the E3 Management Committee; and

d)Nova failed to establish any system to ensure that any Nova employee would even turn his or her mind to the impact that this conduct would have on Dow as a Co- owner of E3.

[816]Nova’s written argument corroborates Dow’s first submission: it is clear that Nova set up the ethane delivery infrastructure at the Joffre Site after 1995 to ensure that ethane with higher

CO2 was preferentially streamed to E3, while ethane with lower CO2 was streamed to E1 and E2. It also appears clear that this was to avoid the necessity of upgrading E1.

[817]From documentation and testimony, Nova recognized that the installation of a second ethane feed line at the Joffre Site would provide an opportunity to “preferentially stream cleaner ethane to E1/E2”. When there was only one line, all plants feeding from that line by necessity

received the same ethane. However, the second line could be set up so that the lower CO2 ethane went to E1 and E2 and the higher CO2 ethane went to E3. Nova management recommended that the second feed line be installed “bearing this in mind”.

[818]Mr. Wade testified that:

The place where we landed was that E3 would be designed for the new AEGS

spec of 6% CO2. There was an evaluation of what needed to be done and/or did we need to spend capital in E1 and E2 to be able to process that material. My recollection was that E2 was modified, the Amine system was modified to be able

to handle 6% CO2, and the Amine system in E1 was not modified and a process to stream Cochrane leg ethane or southwestern leg AEGS into E1 and Empress leg material into E3 and then a combined stream with the two feeds going to E2 was

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put in place so that a capital expenditure didn’t need to occur in E1. [emphasis added]

[819]I also agree that Nova’s submissions do not support its position that Dow knew what was

occurring before 2007, other than Dow knowing the CO2 content of what was delivered to E3. In 2006, Dow was merely informed that E1 and E2 feedstock composition “could be the same or different”, that “there are two lines coming into the facility that are blended. The composition will not always be the same in E3 due to the blending”, although at that time there had been no blending since 2004. This advice advice from Mr. Wilke as “Operator” , I agree with Dow, was opaque.

[820]Nova submits that the Pool Users are not entitled to ethane of a specific composition, as long as the ethane they receive meets AEGS specifications. However, Nova itself concedes that “though comprised of multiple Ethane supply contracts, the Pool constitutes a single source of supply”. Nova acknowledges that the Pool is not to be divided into its component supply contracts, but is instead an aggregated whole intended by the parties for use as ethane feedstock at all three ethylene crackers at the Joffre Site. Further Nova acknowledges that this is the basis for the invoicing of both Ethane Fixed Costs and the Ethane Variable Costs on a pooled basis.

[821]While Nova as Operator has discretion under section 5.2 of the OSA, this discretion must be exercised honestly and in good faith and not to favour one Co-owner’s interests over the others. Nova as agent had the obligation to account fairly to its principal.

[822]Nova submits that this conduct does not constitute Gross Negligence or Wilful Misconduct under section 14.1 of the OSA, which would render the Operator liable. It submits that this was at worst an error of judgment or an honest mistake. Given that Nova as Operator failed to disclose or be candid about what was actually occurring, I cannot accept that characterization. This was Wilful Misconduct, or at the least Gross Negligence, as there was no system in place to determine the differential in impact this decision was having on the Co- owners.

[823]Mr. Wilkes testified that he knew that blending was “potentially possible” before E3 ever commenced operations. When asked by Dow at the E3 Management Committee in May 2007

whether E3 was receiving higher CO2 ethane, he responded that blending was possible but not typical, and did not disclose that blending had occurred for more than two years. This was not “openness and responsiveness” as alleged by Nova.

[824]In addition, it is not clear from the evidence that this was an Operator decision. Nova as Co-owner created the operational concerns it submits led to the preference, such as the capability of E1’s amine unit and the way ethane flowed to the plants. Thus, Nova as Co-owner is in breach of its duty of good faith under the COA, and for causing the Operator to be in breach of section the OSA. The rationale of Operator’s discretion does not explain why, even though E2 had the

same CO2 capability as E3, Nova elected to direct the higher CO2 ethane to E3. Mr. Mikulka’s evidence indicates that Nova did not have to stream cleaner ethane to E1 and E2; there were times when it blended the stream. It is also apparent from what Nova’s commenced doing in 2009 that it could have adjusted the billing to E3 to address the difference.

[825]Therefore, I allow Dow’s ethane purity damages in the amount of $19,238,330.

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h)Adjustment Claims

i)Life-to-date accounting reconciliation

[826]As Mr. Mikulka described this, Nova prices E3 on the basis of a cumulative, or life-to- date, accounting basis. In other words, it takes the total volume consumed from inception to date against total dollars paid. Nova divides that into that month and uses that value as the price, as opposed to the actual ethane purchased and consumed in a specific month.

[827]As this is cumulative, there is no adjustment or reconciliation at a period of time to zero it out. According to Mr. Mikulka, effectively E3 was overpaying for ethane it was receiving over the damages period, and the claim he calculated under this head of damage, $15,507,355, is Dow’s portion of this overpayment.

[828]However, Mr. Tulk testified that the Operator’s use of the life-to-date method was explained to the Dow plaintiffs at a meeting with Chris Foy of Nova in May 2001 and, as a result of this meeting, Mr. Tulk believed that they understood the life-to-date method and had agreed to its use.

[829]The Dow plaintiffs’ corporate officer confirmed that the Dow plaintiffs met with Mr. Foy in 2001, and that they:

a)were aware of the Operator’s use of the life-to-date method by September 24, 2002, as a result of the 2001/2002 audit;

b)were aware of the Operator’s continued use of the life-to-date method through subsequent audits for the 2001, 2008, 2009, 2010 and 2011 fiscal years;

c)paid the Ethane Variable Costs knowing that these costs were calculated using the life-to-date method; and

d)did not object to the Operator’s use of the life-to-date method at any time prior to March 23, 2012.

[830]Thus, Dow knew or could have reasonably discovered as early as September 24, 2002, that the Operator was calculating Ethane Variable Costs using the life-to-date method. Since the claim was first raised in Mr. Mikulka’s report in 2014, damages prior to January 2012 are barred pursuant to the Limitations Act, RSA 2000, c L-12. An analysis of this is found under the heading “Limitations of Actions.”

[831]However, although Nova points out that the Fifth Amended Statement of Claim does not raise or seek this relief, I note that Nova has been aware of Dow’s disagreement with the practice since 2012. Thus, there is no prejudice of surprise to Nova. Given the decision I have made on Nova’s application to amend its pleadings on the last day of trial, I extend the same opportunity to Dow pursuant to Rule 3.65 of the Rules of Court with respect to future breaches, such amendment to be filed and served within 90 days of the date of this decision.

[832]In the circumstances, Dow has failed to establish that it is entitled to damages under this heading prior to 2012.

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ii)Ethane Fixed Cost Adjustment

[833]This claim relates to the interpretation of the definition of “Feedstock Fraction” in the OSA. According to section 5.9(a) of the OSA, the Feedstock Fraction means at any particular time in respect of:

a)Nova, the fraction that results when the Total Nova Pool Ethane (which means on the facts that existed in the damage period, the quantity of ethane that Nova uses at E1, E2 and E3) is divided by that quantity plus Dow ethane for use at E3; and

b)Dow, the fraction that results when Nova’s Feedstock Fraction is subtracted from 1.00000.

However, section 5.9(b) states that the “initial” Feedstock Fractions of the Co-owners shall be determined such that:

a)the “initial Nova Joffre Ethane quantity shall be equal to that quantity of Ethane required to produce a quantity of Ethylene in a year equal to the sum of the [ENC] of [E1, E2 and Nova’s [EPP] of the [ENC] of the Plant as of the commencement of Initial Operations, less the quantity of Ethane, if any, processed pursuant to any Tolling Agreements”; and

b)The “initial [Dow] Joffre Ethane quantity shall be equal to that quantity of Ethane required to produce a quantity of Ethylene in a year equal to [Dow’s EPP of the ENC] of the Plant as of the commencement of Initial Operations”. [emphasis added]

[834]At the time the initial Feedstock Fractions were established, Nova used the total amount of the E1 Toll, 600 million pounds, to establish the fractions.

[835]Nova did not adjust the initial Feedstock Fractions in accordance with the actual usage of the E1 Toll, which terminated in 2008, and in fact still uses the initial Feedstock Fractions despite that termination.

[836]Dow submits that the initial Feedstock Fractions should have been adjusted to take into account actual usage of the Toll, in accordance with section 5.9(b).

[837]Mr. Mikulka calculated the amount of this claim as $42,214,429.

[838]Nova submits that this claim must fail because the OSA provides for how and when the Feedstock Fractions will change, either increasing or decreasing, in sections 5.9(c) and (d), and requires written notice to the Operator in either case. However, section 5.9(c) sets out that the Feedstock Fraction of a Co-owner will be increased if either Co-owner requests an increase in its entitlement to Joffre ethane, in which case written notice to the Operator must be provided, and the Operator must use reasonable efforts to accommodate that increase. Certain conditions apply to that request to increase ethane entitlements. Section 5.9(d) applies to a request to decrease a Co-owner’s feedstock fraction if a material event occurs that would result in a decrease in its ethane requirements. However, Dow’s claim does not relate to either a request for an increase or decrease of entitlement to Joffre ethane, but merely the adjustment of the initial Feedstock Fraction on a continuing basis to take into account the quantity of the E1 Toll actually processed, with both parties remaining entitled to the same quantity of ethane as before.

[839]The inclusion of the words “at any particular time” in section 5.9(a), and “the quantity of Ethane, if any, processed pursuant to any Tolling Agreements” in section 5.9(b) implies an

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adjustment to the Feedstock Fractions as circumstances change. Nova submits that this interpretation is commercially absurd, since it would require Dow and Nova to constantly buy or sell portions of their ethane as set out in section 5.6(g) of the OSA in inventory to give effect to variations caused by the varied use of the E1 Toll.

[840]However, this section does not require actual sales, but deemed acquisitions or dispositions, an accounting exercise, and at any rate, the requirement to vary Feedstock Fractions in this way ceased when the E1 Toll was terminated in 2008.

[841]However, the Dow plaintiffs’ corporate officer confirmed that Dow was aware that Nova was calculating Feedstock Fractions in this way since 2001, and the claim was only raised in the Mikula report, I find that the claim for damages under this heading is barred under the limitations statute during the damages period.

[842]With respect to future damages, however, I find that Mr. Mikulka’s interpretation of section 59(b) is correct, and that this is a continuing breach. Given that I have allowed Nova’s application to amend its pleadings on the last day of trial, I will extend the same courtesy to Nova, pursuant to Rule 3.65 and direct that Nova shall file and save such amendment if it wishes to pursue this claim within 90 days of this decision.

iii)Plant cost recovery

[843]This category is a credit to Nova for the amount Dow would owe to Nova based upon Dow taking Nova’s under-nomination of ethylene, as calculated in the OSA. It applies to the five months when Nova actually under-nominated, and amounts to $2,627,659. Nova accepts this.

2.John Williams

[844]John Williams was called by Nova as an expert to give opinion evidence concerning the assessment and quantification of damages in this case.

[845]Mr. Williams is a Chartered Accountant, Chartered Business Valuator and has been recognized as a specialist in Forensic and Investigative accounting by the Canadian Institute of Chartered Accountants. He is a Managing Director with Alvarez & Marsal Canada – Global Forensic and Dispute Services in Calgary, Alberta. Prior to that, he was with KPMG for approximately 29 years.

[846]Mr. Williams has been qualified in other superior courts in Canada as a forensic accountant and as an expert in damage quantification and business valuation issues. Some representative examples of matters in which he has provided expert evidence include contractual disputes, a patent infringement dispute, an assessment of economic losses, and lost profits as a result of the termination of a contract.

[847]Mr. Williams was retained to provide an expert rebuttal report in response to the Mikulka report and to prepare his own assessment of the Dow plaintiffs’ damages. He was instructed not to address Mr. Mikulka’s final three heads of damage, being liquid co-product damages, ethane priority and the three adjustments made by Mr. Mikulka.

[848]He was instructed to make the following assumptions in estimating the Dow plaintiffs’ damages:

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a)that the Court finds that Nova was required to provide Dow Europe with 44.484% of the ethylene produced at E3 until June 30, 2004 and 50% thereafter, regardless of the application of the allocation procedures (the allocation claim);

b)that the Court finds that Nova was required to produce ethylene as set out in Dow’s expert reports by directing ethane to E3 in preference to E2 and E1 at all times (the optimization claim);

c)that the two Dow plaintiff components of Dow Europe’s claim to E3 ethylene, the allocation claim and the optimization claim, are separate claims and are to each be assessed separately, first dealing with the allocation claim and then the optimisation claim;

d)that the two Dow plaintiff companies are separate legal entities and that damages flow to each based on their contractual entitlements, including that:

e)Dow Europe is the party entitled to ethylene from E3 and to all polyethylene produced at LP7;

f)apart from E3, Dow Canada is the exclusive purchaser of ethane for Dow Canada and Dow Europe’s ethane requirements, including E3 streaming, the E1 Toll, any and all spot ethane sales to Nova or third parties, and for use as buffer on the Cochin Pipeline; and

g)Nova is the exclusive purchaser of the ethane feedstock required for E3 operations except during periods covered by streaming agreements;

h)alternatively, assume that the Court finds that the Dow plaintiffs are jointly entitled to damages despite being separate legal entities;

i)that E3’s productive capability is as set out in ESI’s updated capacity spreadsheet, provided to KMPG on June 30, 2014. Mr. Williams did not attempt to validate the ESI calculations;

j)that during the period of the force majeure in effect between June 22 and September 1, 2005, Nova had no obligation to produce ethylene for Dow Europe; and,

k)that Dow has no optimization or allocation claim for the following periods:

i)prior to June 29, 2004; and

ii)from May 1, 2005 to October 31, 2006.

[849]Mr. Williams testified that these assumptions addressed matters not within his expertise, and he conceded that he had not assessed whether they were reasonable.

[850]In addition to the foregoing assumptions, Mr. Williams also made the following assumptions:

a)the conversion rates from ethylene to polyethylene for LP7 and Fort Saskatchewan as set out in the Mikulka report are appropriate for the purposes of estimating incremental polyethylene production;

b)any incremental polyethylene sales made by the Dow plaintiffs would be based on the selling price of the lowest margin products sold by Dow Europe or Dow Canada in a given month;

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c)the net cost of E1 tolled ethylene is as calculated in the Mikulka report (where available) for each of the months in question;

d)the allocation claim volume of ethylene is based on the EPP Shortfall calculation in the Mikulka report;

e)up to December 31, 2008, Dow Canada could acquire (on average) 50 million pounds of ethylene each month using the E1 Toll (600 million pounds per annum/12 months);

f)the unit conversion costs for polyethylene at LP7 and Fort Saskatchewan are as calculated in the Mikulka report;

g)the cost of ethylene produced at E3 is as set out in the Mikulka report;

h)the AUDB is accurate and complete, except as otherwise indicated in Dow Undertaking Responses 732, 733 and 737. Mr. Williams acknowledged that Dow was not asserting a claim for these identified periods;

i)given incremental ethylene from E3, Dow Europe (on a stand-alone basis) would have:

i)reduced its purchases of higher-cost ethylene from Dow Canada;

ii)manufactured additional polyethylene at LP7; and

iii)sold any remaining ethylene to Dow Canada.

j)given incremental ethylene from E3, Dow Europe and Dow Canada (on a combined basis) would have:

i)reduced their purchases of higher-cost ethylene from Nova;

ii)manufactured additional polyethylene at LP7 and Fort Saskatchewan; and

iii)sold any remaining ethylene to third parties through Dow Canada;

k)higher-cost ethylene is eliminated in the following order when calculating damages on a combined basis: spot sales, ethane streaming and E1 Toll;

l)in a month where Nova originally under-nominated for less than 100% of its EPP, and E3 is assumed to operate at the capacities set out in the ESI capacity spreadsheet, Nova will nominate for its full EPP;

m)higher-cost ethylene, when calculating Dow Europe stand-alone damages, is acquired at the Dow intercompany transfer price from Dow Canada;

n)'''''''' '''''''''''''''''' '''' ''''''''''''''''' '''''' '''''''''''' '''''''''''''''''' ''''''' '''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''''''

''''''''''''''''''''''' '''' ''''''''''' '''' '''''''''''''''''''''''''' '''''''''' ''''''' '''''''''''''''''' ''''''''''''''''''''''''

o)the local market price for merchant sales is based on actual selling prices to '''''''''''', net of a discount determined in accordance with Dow’s intercompany transfer pricing policy;

p)in a month where Dow does not take its full EPP or Nova’s under-nomination or turnback, there are no damages relating to the allocation claim or the optimisation claim; and,

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q)the calculation of the Lost Margin Due to Use of Higher Cost Ethylene is based on the cheapest source of ethylene available at the time.

[851]For purposes of his calculations, Mr. Williams was instructed to rely on the E3 Availability Capacity Scenarios provided by ESI. These scenarios changed from Mr. Williams’ written report to the date of his testimony.

[852]Mr. Williams made an adjustment to the ESI E3 Availability Capacity Scenarios calculated by ESI for the period from June 22, 2005 to September 1, 2005 to reflect the impact of a tornado that caused a force majeure to be declared at E3 by Nova. He was instructed by counsel to use the following ESI Capacity Table, which he referred to as a “force majeure assumption”. The following table summarizes the “available capacity” he used for his calculations:

E3 Available

 

ESI Scenario A

 

 

 

ESI Scenario B

Capacity

 

 

 

 

 

 

 

 

 

(Million Ethylene

ESI

Adjusted

ESI

 

Adjusted

Lbs.)

 

ESI

 

 

 

 

ESI

June 2005

179.37

179.37

'''''''''''''''''

 

''''''''''''''''

 

July 2005

86.60

0

''''''''''''

 

 

0

 

 

August 2005

246.01

0

'''''''''''''''''

0

 

 

Total

511.98

179.37

''''''''''''''''

 

 

'''''''''''''''

 

 

[853]I have eliminated the ESI Scenario A calculated by Mr. Williams, as it was clear from Mr. Ferrigno’s testimony and cross-examination that it is not a useful scenario. However, it is noteworthy that Mr. Williams calculated ESI Scenario A damages, despite being aware, as he conceded on cross-examination, that in reality E3 produced more ethylene than he was being asked to assume that it was capable of. He conceded that he did not challenge this scenario with his client, and chose to accept it as an assumption. Mr. Williams testified that he was entitled to make the assumption he was directed to make, despite its obvious flaws, because it was a matter outside of his expertise.

[854]With respect to ESI Scenario B, Mr. Williams conceded that, although he had no reason to doubt Mr. Mikulka’s statement that E3 produced more ethylene in 22 of the 138 months set out in ESI’s capacity calculation, he did not question that calculation, again because it was outside his area of expertise. He also conceded that he did not know whether the actual production data for E3 would represent whether the Nova employees at E3 were trying to run E3 hard or whether they were running it at reduced rates on instructions from the Nova business people.

[855]In his June 6, 2014 report, Mr. Williams performed two separate sets of calculations.

[856]One set of calculations dealt with Dow Europe on a stand-alone basis, so the damages in that scenario relate only to Dow Europe. In a separate calculation, he prepared a combined damages assessment for Dow Europe and Dow Canada. Within each of those assessments, he prepared separate calculations for the allocation claim and for the optimization claim. The allocation claim is based on the allocation volumes, on which he and Mr. Mikulka agreed. The optimization claim is based on the ESI Capacity Scenarios.

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[857]Within each of those calculations, Mr. Williams ordered damages in the following manner:

a)he dealt with mitigation volumes and mitigation damages;

b)he dealt with lost polyethylene sales; and

c)he dealt with lost merchant ethylene sales.

[858]In all of the calculations, he used the contribution margin approach, except mitigation, on which he used a cost differential approach. In preparing his calculations, he used the AUDB because it was the only information that he had available to get to some understanding of what lost sales may have been in each of the months in question.

[859]Mr. Williams then received Mr. Mikulka’s surrebuttal report in September 2014. Mr. Mikulka agreed with some of Mr. Williams’ comments and made some changes accordingly. Mr. Mikulka agreed with Mr. Williams with respect to excluding lost polyethylene sales from LHC-1 when lack of demand was recorded, but continued to calculate lost merchant ethylene sales during those months. Mr. Mikulka’s surrebuttal report contained revised calculations.

[860]Mr. Williams prepared an update to his report dated February 17, 2015, re-doing the calculations he had done previously so they were responsive to Mr. Mikulka’s new numbers. In the meantime, he had received additional documentation.

[861]Mr. Williams updated and changed his initial report in response to certain of Mr.

Mikulka’s comments. He then issued a report dated March 16, 2015 when he discovered that he had made an error in accounting for royalty expenses in his February report. Mr. Williams prepared a second amendment update dated June 16, 2015 related to some updated capacity numbers provided to ESI.

[862]Mr. Williams’ calculation of damages for Dow Europe and Dow Canada on a combined basis are as follows:

Dow Europe / Dow Canada Combined Basis

ALLOCATION

CLAIM

 

 

 

 

 

 

Base Case

 

 

 

 

(A)

$68,272,347

 

 

 

 

 

Reduction

for no damage

to

(B)

4,313,830

June 29, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reduction

for

no

damage

 

 

between

May

1,

2005

to

(C)

3,937,469

October 6, 2006

 

 

 

 

 

 

 

 

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