North American Construction Group Ltd (NOA) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the North American Energy Partners fiscal 2009 third-quarter earnings call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts, shareholders and bondholders to ask questions. The media may monitor this call in listen-only mode. They are free to quote any member of management, but they are asked not to quote remarks from any other participant without that participant's permission. I advise participants that this call is also being webcast concurrently on the Company's website at www.nacg.ca. I will now turn the conference over to Kevin Rowand, Director of Strategic Planning and Investor Relations of North American Energy Partners, Inc. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining us. On this morning's call, we will discuss our financial results for the three months and nine months ended December 31, 2008. All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO; Peter Dodd, CFO; David Blackley, VP Finance; Chris Yellowega, VP Operations; Bernie Robert, VP Corporate Affairs and Business Strategy; and Kevin Mather, VP Supply.

Before I turn the call over to Rod, I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to management's expectations or predictions of the future are forward-looking statements. All statements made today, which are not historical fact, are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as resulted -- or as reflected in the forward-looking information.

The business prospects at North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. For more information about these risks, uncertainties and assumptions, please refer to our most recent management's discussion and analysis and last year's annual report, which are available on SEDAR and EDGAR. As we mentioned on our last call, management will not provide financial guidance. At this time, I would like to turn the call over to our CEO, Rod Ruston.

Thank you, Kevin. Good morning, ladies and gentlemen. Thank you for joining us today. Our operating performance remained solid in the third quarter despite lower volume in our Pipeline division and reduced demand in the commercial and industrial construction markets. The decline in our Pipeline volume was anticipated and relates to the successful completion of the TMX Anchor Loop project. That was a massive project and it consumed our entire Pipeline capacity for about 18 months. With its completion, Pipeline volume has now fallen off until such time as we secure new work for this division. As I have said before, the holding cost for this division is very low.

Both our Heavy Construction and Mining division and our Piling division performed well during the quarter; although we did start to see the impacts related to the global economic downturn with activity levels in the commercial and industrial construction industries dropping since the end of the quarter.

Accordingly, we expect the construction side of our business to be down in the next quarter and into the fiscal year as some of our customers announced delays and deferments to major capital projects. I want to emphasize that this does not mean construction work will be nonexistent. We are seeing a downturn, not a cessation.

Exxon's Kearl project and Albian's Jackpine Mine are still proceeding with construction at full pace, and it will be necessary for oil sands operators to undertake small to medium-size construction projects on existing operations as part of maintaining the ongoing business. And I am sure you're all aware of the stimulus package introduced by the Canadian federal and provincial governments, which will create more opportunities in the infrastructure sector.

Meanwhile, consistent with our expectations, recurring services, which represents the single largest proportion of our revenue, continued to grow during the third quarter and recurring services, including mining, overburden removal, hauling, reclamation and other services that we provide to support the daily operations of active mine sites. These services tend to be largely immune to the changing oil prices because active oil sands mines have a large fixed cost component and therefore, could only achieve competitive unit production costs if they are running at full capacity.

Consequently, while there is some fluctuation in production levels in response to maintenance and other operational requirements, existing oil sands operations continue to produce even through a downturn in oil prices. That served us well in the third quarter and we expect it to continue to do so in the next quarter and into fiscal 2010.

Looking at our overall results for the quarter, while we did see some decline in consolidated revenue as a result of reduced work in Pipeline and commercial construction, this was largely offset by the strength of our oil sands business. Despite lower consolidated revenues, we were able to maintain a solid profit performance, an important achievement in these challenging times.

Turning to some of the divisional highlights that factored into our solid results. Our Heavy Construction and Mining segment had another strong quarter, growing revenue by 29% for the third quarter and 31% for the nine months compared to the same periods last year. Recurring services were with the biggest contributor to this growth as we continued our long-term relationship with our customers, securing additional work at Albian's Jackpine and Muskeg River Mines and at Syncrude. We also benefited from construction activity on the capital projects, including Petro-Canada's Fort Hills project and Suncor's Voyageur project prior to these being deferred.

Our Piling segment experienced a 5% third-quarter revenue decline, primarily because of weakness in the Commercial Construction segment. Margins, however, were higher during this same period due to the process of a number of outstanding change orders. For the nine months, Piling revenues increased by 9%, which is a testament to our very strong half. Margins were slightly lower in the current year as a result of a lower risk project mix, which included more time and materials contracts.

Over in Pipeline, revenue fell to CAD18 million from CAD77 million a year ago when we were at the peak activity level on the TMX contract. On the nine-month basis, the revenue decline was less dramatic with revenue falling to CAD101 million from CAD113 million last year.

The TMX project showcased our expertise with large diameter pipe. It allowed us to successfully tackle one of the most environmentally challenging pipeline projects this country has ever seen. And it made a consistently strong contribution to our top and bottom line. This project also allowed us to develop an excellent relationship with a customer -- with a great customer and increased the potential for work on additional opportunities in the future. And we were delighted to be a part of that project.

At this point, I will call on our CFO, Peter Dodd, to provide more detail on our third-quarter financial results. Peter?

Thank you, Rod and good morning, everyone. I am going to review results for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. Rod just talked about the results of our three segments with stronger revenue from Heavy Construction and Mining helped to offset much of the decline in the Pipeline and Piling revenue. This left us with consolidated revenue of CAD258.6 million, which was down nearly 5.9% from last year. Despite the revenue decline, third-quarter gross profit marginally increased to CAD51 million, reflecting a higher gross margin for the period of 19.7% compared to 18.4% last year with all three segments driving this result.

Turning to the bottom-line results, we recorded an operating loss of CAD2.2 million compared to an operating income of CAD33.2 million last year. This was almost entirely due to a CAD32.8 million goodwill impairment charge that was recorded for the Pipeline segment. The impairment charge reflects a less optimistic outlook for our Pipeline segment as a result of changing market conditions. We are still seeing significant opportunities in this division, but the competitive landscape has changed in both the number of bidders competing for work and the margins and risk that our competitors are willing to accept.

Turning to net income, we recorded a third-quarter net loss of CAD0.41 per share on a fully diluted basis compared to a net income of CAD0.67 per share last year. The loss reflects the noncash impacts of a goodwill impairment and unrealized gains and losses on foreign exchange and derivative financial instruments. Eliminating the impact of the non-cash items, our third-quarter net income would have been CAD0.49 [See Press Release] compared to CAD0.50 last year. Once again, a stable result in these difficult times. I should also mention that we recorded a cash gain of CAD3.7 million net of tax resulting from the cancellation of our US dollar interest rate swap.

Turning to capital. Total acquisitions for the third quarter were CAD69.3 million. These acquisitions were funded through CAD52.2 million of operating leases, CAD8 million of capital leases and the remaining CAD9.1 million was funded in cash. The CAD52 million of operating leases includes our second electric cable shovel, eight trucks and various ancillary equipment to support growth in recurring services on existing oil sands mining operations.

Looking at liquidity. Under our CAD125 million working capital facility, we had CAD20.8 million of outstanding and undrawn letters of credit to support the performance guarantees on our customer contracts, resulting in approximately CAD104.2 million of borrowing availability as at December 31, 2008.

One of the highlights for us was the improving balance sheet and cash position during the quarter. Thanks to solid operating performance and prudent cash management, we ended the quarter with CAD42 million in cash compared to CAD10 million of borrowing at the end of the previous quarter. This compares favorably to the same time last year when our net cash position was CAD1 million.

Finally, on the SOX compliance front, we continued to make progress in developing, implementing and assessing the effectiveness of new processes and internal controls in accordance with our objective to have no material weaknesses.

That summarizes the third-quarter results. I will now turn back the call to Rod to tell you about our outlook.

Thanks, Peter. Our outlook going forward reflects the realities of the current economic environment. In challenging times, businesses focus on reducing costs, controlling spending and conserving cash and of course, our industry is no different. As I mentioned earlier, two major capital projects that we have been involved with have been delayed. While our Piling and Industrial Construction work on Suncor's Voyageur expansion was largely complete, the postponement of Petro-Canada's Fort Hills project is likely to have a negative impact on our Heavy Construction and Piling revenues going forward.

We believe our recurring services business is very secure. However, we will see some variability as customers adjust to the economic climate over the next few quarters. As I have said before, these operating oil sands cannot stop, even in an environment of low oil prices. The best strategy is to operate these projects at full capacity to minimize unit production costs. These operations form the bulk of our recurring services and thanks to the robust development activity in the oil sands these past few years, there are now more operational mines than ever. These mines will continue to expand as they mature and it is unlikely that they will scale back output once they are up and running. For these reasons, we expect our recurring services revenue will continue to grow over the long term, even in the current relatively low oil price regime.

On another matter and not related to the economic downturn, we ceased operations in December on an overburden removal contract because we were ahead of the customer's start-up scheduled. The shutdown is in effect until the end of April, at which time we will begin to ramp up -- ramp back up to full capacity. I want to re-emphasize that this is in no way related to the current economic conditions, but is rather a scheduling matter and once the plant commences operation, we do not expect a recurrence.

I also want to point out that we have been able to quickly and effectively redeploy equipment from the overburden removal project to service other customers. This is a direct result of the exceptional relationships we have forged with our oil sands customers and reflects the strategic position we enjoy on every major site in the oil sands. We believe that this operational flexibility is one of our key competitive strengths. It benefits our customers. It benefits us.

Turning to other areas of our business. The outlook for Commercial and Industrial Construction remains poor, but some of this void could be filled as federal and provincial governments free up money for infrastructure projects.

Finally, we are currently looking at several new Pipeline projects, but we don't expect any near-term announcements.

All in all, like others, we are facing challenging times, but we have reason for optimism. We occupy market niches that will provide ongoing demand during this downturn and in fact, that demand could increase. We have significant expertise and competitive strength to enhance our ability to compete effectively. We have a strong relationship with every oil sands producer and we are working to find the most efficient and cost-effective ways to provide them with services.

We have used the good times to build our fleet and our capital needs are now very low. We have developed effective management systems to provide flexibility to our business activities. And we have a stable financial position with good access to cash and no debt repayments due for three years. I believe these strengths will help us manage effectively through these uncertain times. And with that, I will now hand back to the operator to open the conference for questions.

(Operator Instructions). Matt Duncan, Stephens Inc.

Good morning, guys. Rod, I guess really the first thing I have got is sort of looking forward here, can you help us sort of understand what portion of your Heavy Construction and Mining revenues are recurring in nature and what the growth rate of those revenues has been like recently?

The proportion that is recurring is sort of 60% and what I can say is I have been out in the market a few times and I've said what will happen in an environment such as this is that contractors will get better access and then more work because what will happen is that the big producers will cut their own capital spend. The limited capital that they will spend will tend to go more towards the upgrade than it will towards the mining operations. And the mining operators will be told to go to contractors for equipment rather than going to buy new equipment themselves. We are definitely seeing that happen.

Okay. And then if I look at your Pipeline segment, it sounds like the right way for us to think about modeling that right now would be just to model zero revenues there. It sounds like you guys haven't -- don't have another contract in place, aren't sure when you will. Maybe if you can talk abut sort of what the prospects look like there and sort of give us a little more detail on what the changes have been like in the competitive landscape that have made you guys to decide to write off the goodwill for that segment.

Well, the changes in the competitive landscape -- there are still Pipeline projects going ahead, but there is a number of more competitors than there were before vying for the work. And in particular, unlike us, a lot of the Pipeline groups have to keep their equipment going, so they tend to be very, very low margins or will take on fully fixed-price contracts and take every bit of risk there is to take. And we won't do that because there is no need for us to do it. I wouldn't -- if you are looking 12 months out, what I have said before is that we would expect, on an average run rate, our Pipeline division should do between CAD$30 million and CAD40 million a year.

Do you think that is still a fair number to use given the changes you have seen in the competitive landscape or would we do better to -- better served to think below that right now?

Yes, we think over the next 12 months looking forward, that would be a reasonable number, may be a little bit lower. There is still pipeline activity out there and we still think that we have got some competitive strengths that could get some of it.

And then last thing here and I'll just back in queue, just looking at your cash flows and your balance sheet for a minute. You guys obviously generated a lot of operating cash flow this quarter. Kind of thinking about your free cash flow over the next 12 months, do you have any big equipment purchases planned at this point? And if not, sort of what is the maintenance level CapEx that we should be thinking for the next 12 months and what do you think you can generate in terms of free cash flow?

I'll take that, Rod.

Okay.

Matt, we have said that our sustaining CapEx is CAD30 million to CAD40 million. We have grown the fleet, as you know, the last couple of years substantially. We have some equipment required for the final stages of our ramp-up on our major overburden contract in the first quarter. That is all operating leased as you know. I would expect we would be spending this next year much closer to the sustaining CapEx than in the past. Obviously, if we see significant opportunities for growth, we will do that. We are not constrained for capital. That is really a matter of what is in front of us, but right now, we are very happy with our fleet and in some sense, we've really optimized our fleet position by what we have spent in the last couple of years going forward.

Okay, thanks, guys.

Bert Powell, BMO Capital Markets.

Thanks. Good morning, Rod. Just on the G&A side, in the past, I think you have indicated that you have a reasonable degree of flexibility to manage that down in a tighter environment. Can you maybe speak to that a little bit? Give us some color in terms of outside of just normal kind of ducking and weaving kind of stuff where you can take major chunks out of G&A.

We never duck and weave. I have never needed to; I'm too short. In the current environment, we do expect that -- the total revenues we've got for next year will be down in relation to our Piling divisions, our Pipeline division in particular. So we will manage the G&A to suit that. We have tended to run the G&A up a little bit over 7% in the past, while we were getting in 7% of revenues, while we were getting in place a whole lot of systems and processes. We are using consulting capability and all the rest of it. That will all go away and I think if you are doing your modeling and you brought our G&A down to sort of 6%, 6.5%, that is what it will be.

I know you are using a lot of consultants for I guess not only IT, but also the internal systems work. Have they all gone away or are they in the process of going away? Are the projects done and now working or is this sort of these were nice to have in a growing environment, but we don't need them today, we will revisit that later and we can just take that chunk out?

To a large extent, they are on the decline at the present time. So we are finishing a whole lot of important projects off. There are probably one or two that we are saying, you know, there is one there that, if we could get it all done in a year, we would, but do we really need to, so let's stretch that one out. Maybe one or two of those. But generally speaking, the major projects that we have been doing are pretty much in place.

Okay. But there is an element of G&A that is not that variable. Is it reasonable to expect that you could lop kind of CAD15 million out of a CAD70 million number next year?

That is probably a little bit high. but we could certainly do CAD10 million.

Okay. And just back -- I just want to triangulate the comments that Peter made. You are buying equipment for overburden removal to meet demand, but you have a little bit of a temporary stop in the contract. Can you just -- are we talking about the same contract here or is this -- the temporary one is not -- this is the CNRL contract, correct?

You said it.

Okay. So just explain to me why you are buying equipment when you are not working? Is it just delivery scheduled?

Yes, it is a short-term stop. We stopped in December. We expect to be going again by the end of April and all the indications that we have got from the clients at this point in time are that they are testing and run-up is going extremely well and in fact, our Vice President of Operations is actually concerned that we might have enough equipment that won't -- that it won't be short because they'll push that thing hard as they possibly can once they get it going. And we do expect it to come back on the schedule if they put to it.

What we did as soon as they told us about it was we rang up other clients and basically the way it works is they paid a holding cost -- that organization paid the holding cost of keeping their equipment on-site. Then we were able to help them out by saying, look, we will take an EX8000 shovel. We will take a number of trucks, we will move them off that site and we will give them to other customers that were looking for that type of equipment.

So you are mitigating for your client?

We more than mitigated it actually. And then we will just return that equipment when we start up. I reiterate what I said in the discussion that there is no other organization in Fort McMurray that has the capacity to be as flexible as that with a customer and just take equipment from one site to another because no one works across the site like we do.

Okay. Thanks. I'll get back in queue.

Jacob Bout, CIBC World Markets.

Good morning. Just a question on the CAD12 billion in shovel-ready infrastructure projects. The main advantage -- or where you're going to be able to take advantage of that is on the Piling side?

Actually, I think it works in two ways. Certainly, the area of our organization that will be right up front to that type of spending would be our Piling division because just about everything they do in infrastructure will require piling of some sort and we are very competitive in that area. But I think the other thing that you need to take on board is that every infrastructure spend that is done somewhere in the province, even if we don't get it, it takes a potential competitor that would otherwise be hunting around in our workspace away. So it benefits us right across the board.

And as it stands right now, if you take a look at your end markets for the Piling work, what percent would be tied to work in the oil sands, what percent would be tied to, say, infrastructure?

I couldn't do that split, but I think we could probably forecast that our Piling is likely to be down by about 30% to 40% next year.

Okay. And then just what is your backlog right now? And what would be the composition of the backlog?

I don't know. I will come back to you with that question when we are answering another one in a pointed time.

Okay. And then last question, just on capacity utilization of your fleet for mining and site prop, where are you at right now versus where you were six months ago and what would you project over the next six months?

Our Vice President of Supply can answer that.

We continue to run the about the same utilization rates with the Mining and Heavy Construction fleet. Typically, in the winter quarter, we see higher utilizations and we are seeing that now. We have always run with a fleet of rental equipment such that, in the event of any type of slowdown, we are able to turn a bunch of that rental equipment back and not impact the utilization of our fleet and we have done that over the past four months.

Okay. So what has been the decline in the rental equipment then?

The rental equipment decreased from about 240 units back in September to about 75 units at present.

Okay. Thank you very much.

Chad Friess, UBS.

Good morning, gentlemen. I was wondering if you could speak about the opportunity for overburden removal at the Kearl mine, including the timing for the potential project award, as well as how competitive you think the bidding process is going to be.

We think there is a number of opportunities for overburden removal type contracts in the Fort McMurray area. And certainly Kearl is one of those. Our expectation is that they will do contract overburden removal. If they do come out with a request for proposal, I am sure that we will be very competitive.

In general, how much pricing pressure are you seeing in the oil sands and to what extent are you able to pass that on and turn to your suppliers?

We are not seeing particularly large pricing pressure. You have got to remember that our biggest competitor in the oil sands is the oil sands producers themselves. We do most of our work on a cost reimbursable basis. We do some unit price as well, but we work cost reimbursable on all the sites they own and because of cost reimbursable, they know the cost of running out of trucks. They know the margins and everything else that we get. So it has always been a very open book type of arrangement.

I'd point out, and I pointed this out in the market as I have gone around before, that in the entire 3.5 years that I have been here, and this is right through all the good times of great booming economy up in the Fort McMurray area, there hasn't been one new competitor into the oil sands come up against us in heavy truck type work.

And the reason for that is the barriers to entry up there are enormous. The competitors that were already there, which I've pointed out before -- Cow Harbour, Klemke, and Cross -- have all grown in the same way we have grown, but no new competitor has come in. So really the number of -- the amount of equipment that is there now is the same amount of equipment that was there last year. So there is no -- and the access for anyone to come in in this environment from the south and say, well, I have got some big trucks that are not working down in the mine somewhere, I think I will get up into the oil sands, the ability for them to do that is extremely limited.

Just if I can -- while you are on the call -- just say to Jacob Bout, the backlog number is -- sorry -- CAD665 million. That is for Jacob to answer his question.

Thanks, gentlemen.

Ben Cherniavsky, Raymond James.

Good morning, gentlemen. You have been very helpful on providing a little bit of visibility in numbers around Mining and Pipeline for the next 12 months and into fiscal 2010. What do you think the net-net impact on Mining is if you can grow your recurring revenue stream for all the reasons that I think you convincingly lay out? But net that against obviously reduced new construction activity and a lower backlog. Are we looking at kind of like a flat revenue outlook for that division?

For the Mining and site prep division?

Yes, just for Mining site prep.

We are looking at sort of flat to maybe a bit of an increase.

Bit of an increase. Okay. And on the claim orders -- (multiple speakers)

We'll certainly continue to grow -- the recurring revenue will continue to grow. It is just difficult to really assess at this point in time how fast it is going to grow. In fact, it could be quite rapid.

Right. But at 60% of the revenue, if the new mining -- if the new construction activity really -- if that gets cut in half, say, I don't know pick your number, you're going to have to grow that pretty aggressively, the recurring stream, to make up for that, right?

Yes, but you've got to think about what the -- I thought this might be what you are getting at. You have got to think about the new construction type revenue. As I have said before, Jackpine is going to continue. It's 60% done. They are not going to stop it. There is no way. Kearl has made an announcement saying they are definitely going ahead, so they are going to continue with their construction.

We are not doing the initial dirt works on that -- earth works on that project, but I have absolutely no doubt that there is going to be a number of other significant construction jobs on that project, that we will have a very good chance of being involved with. The ramp-up of CNRL, once they get going, that will build our recurring revenue very rapidly because we will start a site services agreement there. So there is plenty of work out there for our Heavy Construction division.

Right. That makes sense. Thanks. On the -- on your equipment fleet and the value, first of all, what have you seen to pricing in general? And secondly, if you need to sell or downsize any of your fleet, is there any risk? Like have you adequately depreciated this equipment or is there any risk you might be selling it at a loss into the market in these times?

We depreciate our equipment based on hours of use and we think we have depreciated it in the proper fashion.

But have you looked -- I mean just given the sudden change in activity and pricing, does it concern you at all that --

No, we have been -- we have sold small equipment even in this market and we haven't had any difficulty with it. Some you make a small profit on, some you make a small loss on, but it hasn't been a problem, hasn't been a concern. It is not a concern looking forward and we don't expect to be selling equipment. As Kevin Mather said, VP Supply, we have always run a program of risk mitigation by owning some of our equipment, leasing some of our equipment and renting some of our equipment. In a downturn, all we do is the rentals we send back. If we need to go to the next stage then we won't buy out a lease that is completed and we will send -- we'll just say to the leasing company, well, you take it, we don't want it. So we don't see any issue at all in that area.

Right. I'm just wondering if you could make a general comment on have you monitored pricing at all. I mean Caterpillar said very broadly that they thought used equipment prices fell 10% last year. Have you seen -- have you monitored the market at all to have a comment on that?

Yes, Ben. Kevin Mather here. The used equipment market is falling. Typically, our used equipment is sold at the end of its asset life. So we have already depreciated it down to a very small amount of its original purchase price. So we would be looking at 10% of a very small number to begin with.

On the new equipment side of things, we haven't seen the pricing impacts or pricing changes from the equipment suppliers yet. But typically, there is about a six-month lag as they start paying less for commodity prices. As the pressure starts to hit, their prices will change. But equipment availability has improved significantly such that equipment that was previously 18 months out is down to about 6 to 12 months.

Right. So you would expect new prices in a few months to start coming down with used?

Correct. We have also seen an improvement in the tire market, the availability of tires for the majority of our trucks, including a decrease in the tires that aren't coming from brokers or some of the trucks, including the 240 ton trucks. We have seen significant improvements there to the degree of about half the prices of about a month ago.

Okay, that's very helpful. And one last question if I may. Just a point of clarification on your claim orders, I assume the revenue from those -- they come in without any associated costs and fall to the bottom line net of tax. Is that (inaudible)?

Ben, there are really two types of activities that happen with respect to claims. On the one side, what will happen is we will get unsigned change orders or activities that are going on where we don't have the paperwork and all the documentation in place. So we still have legal entitlement to recognize revenue up to costs associated with those activities and that is actually what we have disclosed in this quarter in the claims note. So the revenues that you see there, we have actually got costs and we've recognized revenue up to costs. And then in subsequent periods once the paperwork catches up and we get all the approvals in place then we will recognize the additional revenue, which is the incremental profit associated with those previously unsigned change orders. So that is the one side of the equation.

Then there are instances where we will get into disputes with customers and for example, the pipeline claim that we referred to back in the first quarter. In those instances there, we will identify costs that we have legal entitlement to revenue and in that particular example, there was CAD3 million that we recognized up to costs in prior quarters. Then when that dispute is subsequently resolved, we will recognize whatever additional incremental revenue that there is out of that claim.

So I don't suppose you have an estimate handy on what the net EPS contribution of the -- those -- sorry -- those reimbursements were in the quarter?

No, I don't have that to hand, no.

Okay, great. Thanks a lot, guys.

Matt Duncan, Stephens Inc.

First, David, just a quick follow-up on that. My understanding is you guys deal with claim orders as a regular part of -- change orders and claims is a regular part of your business and maybe the way we ought to think about it this quarter is just a little bit higher than usual quarter for those change orders. Would that be the right way to look at that?

Yes, exactly. Yes, it does fluctuate.

Okay, thanks.

To give you an example of that, that was in part pushed by the client themselves. For example, when Suncor Voyageur decided that they were going to postpone their project, one of the things they said is they wanted to resolve any outstanding billings and change orders, etc. before the end of the year. So there is a client push to clean things up.

Okay. A couple of other things if I may. Rod, if we were to assume just for modeling purposes that the next couple of quarters maybe your Pipeline revenue is zero, what sort of inherent costs do you have with that segment that we need to model in? Just kind of what is the base cost level with no revenue for that segment I guess is the question?

About three people. We have -- it's a very small team -- three to five people.

Okay. Can you help maybe quantify for us the impact on your Heavy Construction and Mining revenues from being off of the CNRL side for a complete quarter? How much of that equipment -- have you been able to redeploy and sort of what is the revenue run rate that that job had been on so we can maybe try and figure out what the hit you take to revenue for this one quarter is for that pause on that job?

Probably the easiest way to look at it is actually the change in the backlog. I think it was about CAD20 million that we identified in our backlog numbers. It will be the approximate drop. Again, it depends a little bit on where that equipment gets redeployed, so we may end up generating as much, if not more, revenue, perhaps less. Again, it just depends on the activities that that other equipment is involved in. The only pieces of equipment that typically wouldn't move would be the very large pieces like the two electric shovels and in those cases, we at leased covered our fixed costs there.

Okay. And then if I look at the Fort Hills project, their language about their expectations for that job has obviously changed recently. What is your sense for when work on that job may resume and how does that delay sort of being extended impact you guys?

The Fort Hills, and this is just a Rod Ruston expectation we know or view without any outside indication from anybody, but I think that now that they are going through the cost analysis, they are certainly going to see that the demand for labor is significantly lower. I think there is 900 operating engineers now out of work up in Fort McMurray compared to three or four months ago when there was none. So the availability of labor has increased quite substantially. Steel prices have come down. My guess is you will find that they are looking to make a move around mid this year or in the sort of September quarter this year.

Okay. Then a couple final things here and I will jump back. First of all, the hedge that you guys had -- the swap agreement that you guys had canceled is going to expose you to interest rate and foreign currency exchange risk. Do you have any plans to rehedge those risks or are you going to leave yourselves exposed for the time being?

Matt, we are looking at that at the moment. We could lock in the hedges now depending on the forward curves. As we pointed out in the MD&A, the actual impact on us depends upon what happens to LIBOR in particular and if LIBOR increases back to what has been historically a more usual level than the current level then that reduces the exposure quite a bit. But we are looking at that now. The plan is -- typically, we hedge our exposure when we can. We are looking at the overall economics at this stage of what we are doing.

Thanks. And then the last question I have got is if I look at your equipment cost line, it stayed quite a bit higher than what it normally runs at and the answer here may just be that that is a change in the mix of your work towards Heavy Construction and Mining and away from Pipeline. But if you could just kind of tell us, on a dollar basis -- it was CAD55.5 million on the equipment cost line this quarter. Is that the kind of run rate to look at going forward or how do we think about that when normally the December and March quarters, you have a much lower expense there given that you are on more of a preventative maintenance program. How do we need to think about the equipment cost line?

I think you have taken it about right there. The increased cost as a result of having a larger fleet and in particular, in the Mining and Heavy Construction areas. So we would expect to see the seasonality that we have seen in the past, which is the December and March quarters are a little bit lower than the other quarters as we do preventative maintenance work and catch up on backlog during the first two quarters that we have given you.

So then was this CAD55.5 million a little bit abnormally high or is that what a December quarter may look like going forward?

That is typical of what we would expect to see going forward because of the larger fleet size we are running. In particular, the larger heavy equipment.

Okay, thanks.

Chirag Patel, Jefferies & Co.

Good morning. Just wanted to get a -- make sure I had the number correct. I thought that I heard Peter say that the number, excluding non-cash items, was CAD0.49 or is that CAD0.59?

It's CAD0.59.

Okay, CAD0.59. And what should we be looking at as far as a tax rate going forward?

The tax rate currently is running at around about 29%. Given the legislative changes, that is going to start to decrease. I think next year it is dropping to around about 27%, and then I think it ultimately gets to 25% a couple of years out.

Okay. And then on a capital expense side, as we look at 2009, the fiscal year, what are we -- are we still running at right around CAD200 million for this year and then dropping off to the more of CAD35 million to CAD40 million kind of range for the following year, or are we lower this year now?

What we have said in the past, Chirag, is that we expected, when we are growing our fleet, that it would be CAD150 million to CAD200 million. But we also pointed out that, in any one year or any one quarter, we have -- there's such a long leadtime for equipment that we can't have equipment come earlier or later than expected. So that can be a -- that is just an estimate that (inaudible) either large or a small, depending on the flows of the equipment on the production line. And right now, of course, some of the leadtimes have reduced, so we may see that increased in one year and then reduced the next year.

Going forward, we have said that we don't expect to have anywhere near the same growth in CapEx, either leased or cash going forward. In the past, it would be more like sustaining CapEx, but there will be some growth opportunities. As Rod said, we are not looking at a zero growth scenario at all here, but clearly, we will be a lot less than what we've been spending in the past.

Okay.

Even with the growth opportunities though, as Kevin said, we have gone from 200 pieces of rented equipment down to about 100 or 70 pieces of rented equipment, even with some of the growth opportunities, but not all trucks can be rented. So the biggest of the trucks aren't available for rent, but others certainly are and we will look at rent first before we go out and commit to capital spend.

Okay. And then one final question regarding the labor costs. You mentioned that there is 900 operating engineers out of work currently. How does that labor front affecting you guys in particular? More readily available, cheaper labor at this point?

It is certainly more readily available because when you have got 900 people sitting on the side of the road looking for work, you have the benefit of being able to choose rather than sort of pick the last one on the line. So when people talk about the increase in labor costs in Fort McMurray over the last couple of years, the particular increase, while there were increases in base rate wages, the real cost of increased labor was in reduced productivity because you were -- you had run out of all of the experienced people and you were hiring in a lot more less experienced and people that were completely new to the type of work they were doing. So your productivity drops.

What you will see now is a few things will happen. One is some of the retention dollars that various organizations were paying out to get people and retain people within their workforce will be disappearing, so that will reduce labor costs. Base rates will stay around about the same generally, but productivity will improve and we are certainly seeing that.

All right, I appreciate it. Thank you, guys.

Bert Powell, BMO Capital Markets.

David, I have a note that there is a couple of large truck leases coming in in Q4, so I guess two things. One, is that still the case? And if I look at the disclosure in terms of operating lease expenditure expectations in 2010, in your filings you have CAD42 million. So if those trucks are coming in, does the CAD42 million contemplate that?

Yes. First of all, in terms of the additional trucks coming in, I think there is 9 more big trucks that we are looking at.

Sorry, 9 more?

Yes.

That is over this quarter and next quarter.

Yes.

Right.

In terms of the timing, I mean whether it all comes in Q4 of the first part of Q1.

Right, yes. I was just trying to figure out -- okay, so they are coming, so I'm just trying to figure out the impact if it is in your disclosures with respect to anticipated lease expense of CAD42 million in 2010. I'm assuming they are all operating leases. Does that contemplate those trucks?

They are all for CNRL, and to service that contract we require them to build up in the capacity that we are expecting to move for (inaudible) next year, all part of the original contract.

Right. I'm just trying to figure out the financial impact.

The commitment schedule that you are looking at, that actually only refers to contracts that we have in place. So we don't actually have those lease contracts formally signed yet. We won't do that until the trucks actually arrive, so that would be incremental to that CAD42 million.

Can you give me a sense of what the annual operating lease expense would be for those trucks then?

Not off the top of my head. I would just be guessing if I try to pull a number.

Okay. But it is going up?

Right.

Is there anything that falls away in 2010?

What you see in terms of the commitment schedule as it starts to decrease longer term, that's just reflecting as those current leases mature. So that's why you see a dropping off in future years.

Okay. And I just want to get back to the equipment costs, you know, with truck tires down. The way you account for that, we wouldn't see the benefit of that until subsequent quarters, right, as you start to get that new product on the trucks and start charging it out; correct?

Correct. We still have some of the more expensive tires in inventory that we will have to use up, and we anticipate using up this quarter. But the decreased costs associated with that, the tire premiums in particular, are one that we've passed along to owners. That is one of the things that we're trying to do to help them with their costs as well.

Okay. So you should see the expenses go down, but the margins go down.

Yes, it's really a flowthrough, so there has been no impact on margins.

It won't impact margins, but it will impact with expenses.

So just trying to understand the answer you gave on equipment costs. If we have pipeline activity expected to be down, wouldn't we expect equipment costs to start to come down as well, along with the revenue?

The equipment costs on jobs such as pipeline are a very small portion of the cost.

No, no, piling -- sorry, piling.

Both piling and pipeline, the equipment costs are extremely small portion of the cost. The largest as a percentage of cost, mining and heavy construction, you are looking at much more significant cost in the revenues in that division. So that is why the equipment costs continue to increase, even though the piling and pipeline revenues are down.

Okay. So a good kind of basic quarterly number is going to be in the CAD50 million range.

At present revenues for mining and heavy construction, correct.

Okay, that's great. Thank you.

Gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, everybody. That is the closing comment. We are in -- the business is in good shape. We've got lots of opportunity going forward. We are seeing many inquiries from our customers about availability of equipment for them, so we see things as still being very solid.

Construction side will be down a bit, but I have got to say we are still bidding some quite significant piling projects as well, and some quite significant pipeline projects.

We thank you for joining us again on the conference call. If you have any additional questions or anything like that, by all means get in touch with Kevin Rowand, and those questions that we can answer we will certainly help you with.

Thank you. This concludes the North American Energy Partners conference call. Have a wonderful day.