Finished Production:

Our coil production was 1,726,000 tons in 2006, down 2% from 2005. The decline from 2005 resulted from our decision to reduce output volumes to accommodate inventory reductions in plate and tubular markets. Our steelworks produced 1,910,000 tons of discrete plate, an increase of 20% over 2005.

Our coil processing and tubular operations (excluding NSG) consumed 623,700 tons of purchased hot rolled coils, an increase of 93% over the 323,500 tons consumed a year earlier. The principal reasons for the increase were higher demand for our energy tubular products and increased plate sales opportunities.

The number of man-hours required to produce a ton of coil or discrete plate averaged 0.69 in 2006 for the combined steelworks compared to 0.68 in 2005.

Our pipe mills (excluding NSG) produced 13% more tons than a year earlier predominately due to increased large diameter orders. The man-hours required to convert finished steel to one ton of finished pipe averaged 2.45, up from 2.25 man-hours in 2005. Man-hours per ton increased in 2006 due to higher value-added pipe finishing. The large diameter mills in Regina experienced a 69% utilization rate in 2006 versus 42% the prior year.

Selling, General and Administration Expenses:

Selling, general and administrative expenses of $111.5 million were 34% higher than the $83.3 million in 2005. The increase in expenses related to increases in stock based compensation units, valuation of stock based compensation, NS acquisition costs and amortization of intangibles, increases in salaries and personnel, and IT consulting expenses. Selling, general and administrative expenses represented 3.0% of sales compared to 2.7% in 2005.

Interest on Long-Term Debt and Interest Income:

Interest expense on long-term debt decreased to $27.4 million in 2006, down 23% or $8.3 million from 2005. The reduction relates to a significant reduction in long-term debt (excluding NSG acquisition debt funded in December 2006) through scheduled repayments, redemptions and open market purchases. Interest expense related to the NS acquisition was $3.3 million in December. Interest income increased $16.5 million to $33.1 million due to higher average cash balances through November and higher interest rate increases compared to 2005. Through November 2006, we had averaged $2.9 million per month of interest income due to the generation of cash from operations.

Income before Income Taxes and Income Tax Expense:

Income before income taxes increased $111.4 million to $995.0 million in 2006 as a result of the favorable commercial and operating performance previously described.

Income tax expense totaled $351.9 million in 2006, an increase of $54.1 million over the $297.7 million reported in 2005. The effective tax rate was 35.4% compared to 33.7% in 2005. The effective tax rate for 2006 was higher than the effective tax rate in 2005 due to the recognition of certain deductions (Extraterritorial Income) in 2005 for which the benefit had not previously been taken. In addition, the 2006 state tax rate increased resulting in a revaluation of our deferred tax liabilities. The tax rate also increased as a result of the recognition of additional contingent liabilities. See Note 7 of the Consolidated Financial Statements footnote for further discussion.

2005 Compared to 2004

Revenue of $3.03 billion in 2005 was an increase of $501.3 million, or 20%, over 2004, resulting from significantly higher year-over-year prices in all product lines. Our average unit selling price, inclusive of raw material surcharges, increased to $876 per ton in 2005 from $711 per ton in 2004.

Our average unit selling price in 2005 for steel mill products increased $122 per ton to $771 per ton, a 19% increase over the $649 per ton average price in 2004. Our average unit selling price for tubular products increased 30% or $251 per ton to $1,101 per ton.

Cost of sales increased 13% to $2.05 billion compared to $1.81 billion in 2004. Factors that impacted cost of sales in 2005 were increases in the price of natural gas, electricity, alloy inputs and freight, as well as unabsorbed fixed costs and direct expenses relating to unplanned maintenance outages and safety evacuations in Mobile due to the hurricanes in the Gulf Coast region.

Gross margins were 32.4% of sales versus 28.6% in 2004, reflecting a higher energy tubular product mix, as well as higher average pricing for the year in most products, which offset previously referenced increases in input costs.

In 2005, a total of $1.1 billion was spent on major raw materials and consumables for our three steelworks, comparable with the spending in 2004. Included in this amount are expenditures for steel scrap, pig iron, alloys, carbon electrodes, oxygen, refractories, limestone, natural gas and electricity.

The procurement of ferrous scrap, our largest input, is on a monthly cycle largely through the spot market. During 2005, we purchased 3.5 million tons of scrap, 8% less than the prior year as high 2004 year-end inventory levels were consumed in 2005.

For 2005, the average cost of scrap consumed declined 2%. Despite the production increase of 8%, these two factors helped keep costs of consumables comparable to the prior year. Scrap consumption costs dropped through the third quarter, but increased in fourth quarter. Our internally sourced scrap provided 6% of our overall needs. Sourcing for the remainder of our scrap needs was readily available.

Energy inputs constitute a significant portion of an electric furnace steel maker’s costs. In 2005, our electricity cost per kilowatt-hour increased 11% and cost per ton of steel produced increased by 13% compared to 2004. Natural gas costs per millions of British Thermal Units (BTU) increased 39%. Although these increases in energy were significant compared to 2004, energy as a percentage of 2005 cost of production was 10% compared to 9% in 2004.

Shipments:

Higher energy tubular shipments related to high drilling rates partially offset declines in steel mill product and non-energy tubular shipments. Steel mill product shipments declined 4% due to the previously mentioned outages and a temporary midyear decline in service center order rates.

Shipments to U.S. customers were 2,498,200 tons, 72% of the total compared to 2,579,900 tons in 2004, while Canadian based customers accounted for 962,200 tons, or 28% in 2005 versus 981,400 in 2004.

Our coil processing facilities in Houston, St. Paul and Toronto, all make temper-leveled cut plate products. Shipments of cut plate from coil processing facilities were 514,000 tons, down 10% from 2004. Canadian-destined shipments decreased 21% compared to 2004 levels, while U.S. shipments declined 5%. Shipments of cut plate declined in Canada primarily by choice as our diverted production to energy tubular goods.

Energy tubular product sales increased 16% or 109,000 tons due to stronger oil and gas drilling activity. The average number of active drilling rigs increased on a year-over-year basis from 1,192 to 1,383 in the US and increased from 369 to 458 in Canada for a combined increase of 18%. Shipments of non-energy tubular decreased from 266,000 to 217,000, or 18%, as we dedicated more production capacity to energy tubular products.