Finished Production:

A total of 1,764,700 tons of coil were produced by our steelworks, down 1% from 2004. Our steelworks produced 1,498,800 tons of discrete plate, an increase of 5% over 2004. Regina and Montpelier posted production increases in finished product year-over-year.

Our coil processing and tubular operations consumed 323,500 tons of hot rolled coil purchased from third parties, supplementing our own production. This was 8% more than the 296,800 tons consumed a year earlier. The principal reason for the increase was higher demand for energy tubular products.

The number of man-hours required to produce one ton of coil or discrete plate averaged 0.68 for the combined steelworks.

Our pipe mills produced 5% more tons than a year earlier due to the impact of higher drilling activity on demand for OCTG. The man-hours required to convert finished steel to one ton of finished pipe averaged 2.25, up from 2.01 man-hours in 2004. Man-hours per ton increased in 2005 as we added finishing capabilities at our Red Deer and Blytheville facilities which were previously outsourced. The large diameter mills in Regina experienced a 42% utilization rate in 2005 versus 36% the prior year.

Selling, General and Administration Expenses:

Selling, general and administrative expenses of $83.3 million were 35% higher than the $61.5 million expenses for 2004. Salaries and benefits increases of $7.2 million were primarily related to the valuation of stock based compensation as well as performance incentives. During the year, we incurred $2.2 million of additional administrative and consulting expenses related to Section 404 of the Sarbanes-Oxley Act of 2002. In addition, consulting expenses, research efforts related to the Frontier Pipe Research Centre, and increased charitable contributions increased administrative expenses by over $7 million.

Interest on Long-Term Debt:

Interest expense on long-term debt decreased to $35.6 million in 2005, down 35% or $18.8 million from 2004. The reduction relates to a significant reduction in long-term debt through scheduled repayments, redemptions and open market purchases. During 2005, $231.0 million of long-term debt was retired, primarily through early retirement and open market purchases. The debt redemption efforts resulted in debt extinguishment expense of $16.4 million.

Income before Income Taxes and Income Tax Expense:

Income before income taxes increased $264.7 million to $883.5 million in 2005 as a result of the favorable commercial and operating performance previously described.

Income tax expense totaled $297.7 million in 2005, up over the $178.2 million reported in 2004. The effective tax rate was 33.7% compared to 28.8% in 2004. See Note 7 to the Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

Our business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in our steel-making and finishing operations and to remain in compliance with environmental laws. Our short-term and long-term liquidity needs arise primarily for capital expenditures, working capital requirements and principal and interest payments related to our outstanding indebtedness. We have met these liquidity requirements with cash provided by operations, equity, short and long-term borrowings, capital and operating leases, state and local grants and capital cost reimbursements.

Cash Requirements:

We have ongoing commitments under various contractual and commercial obligations at December 31, 2006 as shown below. The information presented does not include planned capital expenditures.

Contractual Obligation Payments Due by Period ($ millions)

Long-term Debt: (including current portion)

Long-term debt (excluding capital lease) is all unsecured and consists of various notes, debentures and financing issued since 1997.

We currently have the ability to refinance the $350.0 million bridge loan under the $750.0 million syndicated credit facility, and as such, we classified the repayment of the bridge loan in the contractual obligations schedule to coincide with the maturity of the $750.0 million syndicated credit facility.

The 6.00% Solid Waste Disposal Revenue Bonds, Series 1997, (due 2007), as well as the 8.11% Taxable Industrial Development Revenue Bonds, Series 1999, (due 2009) are both subject to financial covenants and to certain other customary covenants (including limitations on liens and sale and leasebacks). The 6.875% Financing and the 8.75% Notes, and Capital Lease are not subject to any financial covenants. The 8.75% Notes, however, contain restrictions and limitations on liens, and sales and leasebacks. In connection with the NSG acquisition on December 1, 2006 the Company entered into $1.1 billion of financing credit facilities which included a $750.0 million syndicated credit facility (five year $250.0 million term loan facility and $500.0 million revolving credit facility) and a 364 day $350.0 million bridge loan. It is expected that the $350.0 million bridge loan will be refinanced with the issuance of other indebtedness in 2007. Both the term loan and bridge loans are variable rate borrowings and subject to financial covenants and certain customary covenants (including limitations on liens and sale and leasebacks). Non-compliance with any of the above covenants could result in accelerated payment of the related debt. We were in compliance with all covenants on December 31, 2006.

The Montpelier Steelworks’ sale and leaseback of the melt shop, caster and related equipment was completed in 2000. For U.S. GAAP purposes, this transaction was recorded as a financing lease, with no recognition of the disposal of the assets. For Canadian GAAP purposes, this transaction was treated as a sale and the subsequent lease payments as operating expenses. We have an option, but are not obligated, to purchase the equipment after seven and ten years for predetermined amounts and at the end of the 15 year lease term for the fair market value of the equipment, subject to a residual guarantee of $37.5 million.