North American Construction Group Ltd (NOA) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the North American Energy Partners fiscal 2010 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 nacg.ca.

I will now turn the conference over to Kevin Rowand, Director Strategic Planning and Investor Relations of North American Energy Partners Inc. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you for joining us. On this morning's call we will discuss our financial results for the three and nine months ended December 31, 2009. All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO; David Blackley, CFO; Chris Yellowega, Vice President Operations; Kevin Mather, Vice President of Supply Chain and Estimating; and Bernie Robert, Vice President of Corporate Affairs and Business Strategy.

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 management's expectations or are predictions of the future are forward-looking statements. All statements made today which are not statements of 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 reflected in the forward-looking information.

The business prospects of 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 December 31, 2009, Management's Discussion and Analysis, which is available on SEDAR and Edgar.

As previously mentioned, management will not provide financial guidance. At this time I will turn the call over to our CEO, Rod Ruston.

Thank you, Kevin, and good morning, ladies and gentlemen. Thank you for joining us today. I am pleased to report that operating performance was strong during the third quarter as demonstrated by our results -- CAD44 million of consolidated EBITDA in the third quarter and CAD95 million on a fiscal year-to-date basis.

This result demonstrates a few important facts. First, it clearly shows that even without the gold rush-like construction activity the recurring work involved in servicing the existing mining operations of the major oil sands players in the region is significant, necessary, and ongoing. This underpins the long-term sustainability of our oil sands-centric business model.

Secondly, it demonstrates our ability to work with our customers and maintaining our strong focus on cost control through the economic downturn. And, finally, it demonstrates the payoff from significant investments we have made in our equipment fleet, systems, and people over the last few years.

During the period from early 2005 to October 2008 when oil sands construction was booming we focused on three things. Building a well-balanced equipment fleet that can effectively service the demand for construction contractor services. Installing systems for proper maintenance and management of that fleet that will ensure its stability in the harsh -- its availability in the harsh climate and terrain of northern Alberta.

And training people, our people, to be effective managers and operators who understand the business, can work with the customers, and to drive execution of our work with the strongest possible focus on safety and quality.

As a result, we have been able to maintain tight discipline when it comes to beating new business and during project execution. We have been able to -- sorry, and during project execution we have been able to rely on our highly capable project team to ensure good equipment utilization and high-quality product.

Our technically strong project execution has been fully supported by our safety performance, which has reached new levels of excellence through our concerted effort to introduce our new, modern safety management system over the last few years, and cost control mechanisms which have allowed us to achieve a CAD4.3 million reduction in G&A expense in the quarter. As a percentage of revenue, third-quarter G&A was 6.7% compared to 7.4% during the same period last year.

Now looking briefly at our segment results, Heavy Construction & Mining revenue was down 7% in the third-quarter and down 16% year to date compared to the same periods last year. The declines in both periods reflect lower project development revenues as a result of reduced development activity in the oil sands.

Recurring services revenue in the third quarter was up 20% compared to the same period last year. On a year-to-date basis recurring services revenue was comparable to last year in spite of the first-quarter shutdown of the CNRL due to plant commissioning and reduced contractor activity at Syncrude due to plant maintenance.

The third-quarter growth in our recurring services business reflects increased activity at Shell sites under our new three-year master services contract and increased services to Suncor under our then 12-month mining services contract, which was due to expire in December 2009. This contract has since been renewed for an additional 12 months and has been expanded requiring us to provide additional capital. Sorry additional capacity.

Third-quarter growth in recurring services also reflects increased activity at CNRL as we return to planned production levels under the ten-year overburden removal contract.

Turning to Piling, revenues for both the third-quarter and the year-to-date periods continue to be negatively impacted by weak commercial and industrial construction markets and by the reduction in high-volume oil sands projects. We expect to face continued strong competition for the available work in this sector in the near and midterm. However, our expansion into the Ontario market is expected to help offset reduced activity in the commercial market in the West.

We are seeing more encouraging results in our Pipeline segment where activity started to pick up as we get underway with two new pipeline contracts in British Columbia. Maxhamish North Loop project, which is the first phase of Spectra Energy's two-phased expansion plan, was temporarily delayed by warmer-than-average November temperatures in northern BC. We developed a revised plan for the customer incorporating this weather delay and we expect the project will proceed to completion on schedule.

Our performance on this contract will be a key factor in our negotiations to secure the second phase of this project, which is scheduled for construction this summer.

Overall we are pleased with our third-quarter and year-to-date results and we believe that we are performing well in the midst of challenging economic conditions.

At this point I will call on David Blackley to provide a more detailed third-quarter financial results.

Thank you, Rod, and good morning, everyone. I am going to review results for the third quarter ended December 31, 2009, as compared to the third quarter ended December 31, 2008.

Reduced volumes in our three segments continued to put downward pressure on our top-line results during the period. Consolidated revenues of CAD222.7 million were down 14% from last year. However, our gross margin was very strong at 21.3%, up from 19.7% last year. This in turn helped us achieve a gross profit of CAD47.4 million on our revenue.

Turning to operating income. In the third quarter we generated operating profit of CAD30.9 million, 13.9% of revenue, up from an operating loss of CAD2.2 million last year. Excluding the impact of goodwill impairment, last year's operating profit would have been CAD30.5 million or 11.8% of revenue.

The improvement in operating margin reflects improved gross margin and reduced G&A expense as a percent of revenue. The CAD4.3 million reduction in G&A was driven by our determined efforts to lower cost and improve our business processes. We also achieved net income of CAD0.57 on a diluted per-share basis in the third quarter, up from a net loss of CAD0.41 per share last year.

Backing out the impacts of various non-cash items, we would have posted net income per share of CAD0.40 in the current period versus CAD0.59 last year on a diluted per-share basis.

Turning to capital, total equipment additions for the third quarter amounted to CAD33.9 million, sustaining capital expenditures were CAD3.1 million, and the remaining CAD30.8 million of new equipment with growth capital which arrived late in December and was immediately put to work. In terms of financing, CAD28.7 million of total equipment additions was financed through operating leases leaving CAD5.2 million of cash capital expenditures during the quarter.

Looking at liquidity, under our CAD90 million revolving credit facility we had CAD20 million of outstanding and undrawn letters of credit to support performance guarantees on our customer contracts leaving approximately CAD70 million of borrowing availability as of December 31, 2009. Our cash position at December 31 was CAD96 million, which was slightly down from CAD99 million at the beginning of the fiscal year.

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

Thanks, David. At this time a year ago some commentators voiced doubts and concerns surrounding the viability of the oil sands region and consequently of our business given the price of oil. We responded to those statements by reiterating our business strategy and emphasizing the stability of our recurring services business, which is based on both the nature of oil sands mining and our strong relationships with every major customer -- every major producer.

I am pleased to note that our results since then have proved our point. Let me try to elaborate on why we anticipate the stability of recurring services business will continue to strengthen.

First, the resource and the customers we deal with. The oil sands is a large, viable resource that can be developed in a cost-effective, safe, and environmentally conscientious manner. But this is not a place for the faint-hearted or the fly-by-night. Look at some of the major players making significant investments in the oil sands region -- Exxon, Shell, Canadian Natural, Suncor, Total, Husky, ConocoPhillips, EnCana, the list goes on.

This is a business for strong, established operators who are committed for the long term. You don't invest the kind of time, effort, and money these organizations have committed to walk away when the oil price fluctuates.

Second, the environment in which we operate. This is a region where temperatures vary over the year from plus 90 degrees Fahrenheit to minus 50 degrees Fahrenheit, where equipment is operated in conditions ranging from highly abrasive sands to waterlogged muskeg and frozen tundra. Understanding how to execute and work successfully in conditions like these is crucial to our success and only comes through decades of experience.

Our customers understand these challenges and know that North American is one of the best operators in the industry. That is not just anyone with a truck and a loader is going to be able to operate in these conditions.

Finally, operational efficiency. Operational flexibility is a key success factor in any business. If your business is tied to a singular course of action, you are at risk if the business environment changes. Using contractors provides our customers with operational flexibility which they want as part of maintaining their competitive cost position. Our extensive and diversified fleet of equipment and our operational presence on the sites of every major producer in the oil sands enables us to provide them with the flexibility at a competitive price.

We provide the ability for the customer to increase production capacity because we have the equipment big enough to fit into the customers' production fleet and the trained operators that understand the customers' operational requirements. We provide the customer with the ability to build roads and bridges on site because we have the expertise and equipment necessary to do this type of work as well.

Our strategy has always been to offer excellent service at a fair price based on the risks associated with the work. For greater work certainty, that is longer contracts, we offer lower margins and we believe our clients understand and respect this approach. It is this long-term sustainability of the oil sands as an end-market coupled with our ability to meet the unique needs of our customers that has helped us build and maintain a strong base of recurring services revenue.

This is an area of our business that we expect will continue to be a driver for us as the existing oil sands operations grow and as new projects come online.

But recurring revenue is not the only part of our business. We are also a construction contractor as well as a mining contractor, and we see opportunities in the oil sands related to the project development side of our business starting to look more promising. Progress continues on the construction of Imperial Oil's Kurl mine and Shell's Jackpine mine, both of which have been under construction continuously since 2008.

Announcements from Suncor, ConocoPhillips, and Husky that their respective projects will commence construction in 2010 and more recently indications by CNRL that a green light for Horizon Phase 2 and the Kirby SAGD Project are anticipated late this year all signal a return to more favorable market conditions and increasing demand on service providers and construction contractors. These announcements bode well for all our divisions.

These are positive developments in and of themselves, but I wanted to emphasize what we see as another positive development that is that we expect that the pace of oil sands development will remain quite orderly. We view this as a positive because it results in a more stable business environment. We see a more ordered market as a benefit to all stakeholders.

Turning to our Piling business, we expect that weak commercial and industrial construction markets and strong competition for contracts will continue to put pressure on revenue and margins for the balance of the year. However, as I said previously, we are seeing opportunities on the oil sands-related project development side of our business starting to look more promising, and all of our divisions stand to benefit from this activity.

As evidence of this, I am pleased to say that as I speak we are driving the first of several thousand piles on Exxon's Kurl site. Our recent acquisition in Ontario is also ramping up. We are bidding infrastructure projects and making inroads with potential clients in that region. We expect that the initiative to open shop in Ontario will somewhat offset the reduced size of the commercial construction markets in the West.

We expect our margins in this segment will continue to be tighter as the market is more competitive, but we also expect a continued positive contribution from our Piling team.

Over in Pipeline we have two new contracts and we will be working on these through the remainder of the fiscal year while we continue to look for additional opportunities. Overall, while the market conditions remain weaker than we have seen in the past and increased competition for contracts continues to put pressure on our revenue and margins, we see opportunities in all areas of our business.

One opportunity in particular is the environment. Stakeholders are demanding more stringent environmental standards for oil sands developments and the government has responded with increased regulation. Oil sands producers already spend large sums, both directly on remediation of mined out areas and implementing effective environmental controls and indirectly on research into new technology.

We as an organization have already been heavily involved in the environmental remediation of oil sands with many years of mine reclamation under our belt. However, we see that the demand for services is going to increase as a result of both the Alberta government requiring faster rehabilitation of tailings ponds and through the desire of producers to reduce their overall footprint.

With this in mind, we have developed some strategic relationships with other organizations which, when coupled with our own capabilities, has enabled us to offer a service to our customers to meet the government parameters for remediation of tailings ponds. This is still very much work in progress but we are excited about the enormous potential in this area.

Another key area of focus for the Company is cleaning up our balance sheet. As you will be aware, we have CAD200 million of bonds due for repayment in December 2011. At the same time we have CAD90 million revenue -- sorry, we have a CAD90 million revenue and considerable cash available for use in our business.

We are currently looking at opportunities to restructure our debt and have engaged advisors in this regard. We have not reached any conclusions as to the best strategy at this time but we are cognizant of the considerably improved debt market conditions and expect to access these markets as part of the strategy.

So as we look forward our focus will remain on safe and cost effective execution of the work we have, on identifying and winning the projects that leverage our strengths and offer reasonable returns, and on developing new markets in environmental services and building the financial structure for our business to grow and be successful.

With that, I will now turn the call back to the operator.

(Operator Instructions) Matt Duncan, Stephens Inc.

Good morning, guys, and congrats on a very good quarter. Rod, the first question I have got, this piling contract at Kurl. You said several thousand piles and it sounds like work is just starting. Can you give us some brackets around what the contract value there may be?

No, but I can tell you that the amount of work that is going to go on at Kurl for piling -- it's a very, very wet clay site and there will be a considerable workload that will keep our Piling group going, I believe, for a fair time.

Let me ask that a little bit differently then. Should Piling revenue in fiscal '11 be up from fiscal '10 given what you are seeing from that project and the potential for others?

It will be in the order of about CAD10 million over the next seven months of revenue there and potential for it to grow.

Okay, so it is additive then. Okay. That is helpful.

Then when I look at your gross margin -- you guys obviously had a much higher gross margin this quarter than what you had expected and what we had expected. I am just curious what you now feel like a sustainable gross margin level is for you guys on an annual basis realizing that the December and March quarters are going to be better than June and September. But this number continues to track higher than expectations and I am just wondering where you think it settles at?

I think we really need to look at the two combination of items that drove that in the quarter. One was very successful construction project. It was well executed, it was on time, it was on schedule, and we made very good money as a result of that. So that certainly helped some of the margin improvement, particularly on the Heavy Construction & Mining side.

The other big pickup for us was on the equipment in terms of the utilization. We saw a lot more utilization of our larger fleet, capacity fleet so that helped to drive that big favorable variance on the equipment side. We have also realized some cost savings that we believe are permanent in nature in the equipment group and we are looking at passing some of those cost savings on to our customers.

So we don't expect to see the same kind of gross margins in the coming quarters. We expect it to normalize back to the levels that we have talked about before sort of that 16%, 17% range.

Okay, but it sounds like you have also found some cost savings and you are executing well. Is it fair to say that you are probably trending to the upper end of that rather than the lower end given that the cost savings you have picked up since we originally talked about that 16% to 17% range?

Yes, all things being equal then we would expect to be at that upper range. Keep in mind as well that the mix of work can also play a part in that margin. If we are doing a lot more work that involves bringing in third-party materials and subcontractors, we typically don't make the same margin on that type of work.

So as project development revenue comes back as well that is something else that will play a part in it.

Okay. And then, Rod, for the outlook for new construction projects, obviously you referred to quite a few things that have been announced recently, most of which are with companies that have been customers of NOA's in the past. When do you feel like you might could actually see some of those projects turn into revenue for NOA?

I know you guys have won this piling job at Kurl so it's already starting to on a small basis. But are there some bigger jobs out there you think you guys could win that could maybe show up in the fiscal '11 numbers?

Some of the work we expect will be starting in the summer of this year.

And then last couple of things here and I will jump back in queue. First, just a modeling question, on the equipment that was added in December that is under operating leases, Dave, can you give us some sense what that should do to your equipment operating lease expense on the P&L on a quarterly run rate basis?

We don't have that number offhand, exactly what the leasing costs associated with that equipment is.

Okay. And then last thing here, just kind of some questions around the balance sheet and it sounds like the potential for a new bond issue. Can you give us a sense of -- I guess right now, if I remember correctly, it's a $200 million denominated bond but you know your Canadian obligation is CAD263 million.

How much of that amount do you think might issue in a new bond? Any sense of what the timing may look like and what the interest rate may look like on that? And then what sort of maturity do you hope you get on that?

Matt, we are looking at a number of factors right now. We haven't really settled on any particular strategy as Rod mentioned earlier. We are working with our financial advisors to determine what the best strategy is, but certainly with the tightening of the spreads over the last six, seven months with the strong activity in the bond market that is one option for us.

We are also looking at a substantial cash balance here and that is part of what we are factoring into the equation. What do we want to do with that cash and how much do we want to use it to pay down bonds? Do we want to refinance with bonds? Do we want to go and use some other mechanism?

We certainly have several opportunities open to us and it's really just determining what is the right one for us.

Dave, I would guess you do expect to be a free cash flow generator over the next six months.

Yes, that is what we are looking at.

Any idea how much free cash? Just to help us get an idea of what sort of cash balance you may be working with at the time when you look at what you do with this bond?

Do you want us to send you our entire business plan and full reports and --

I guess I am just getting (multiple speakers)

That would be difficult for me to give that to you right now.

Thanks for the insights, guys.

Let me just say, Matt, the business is in solid shape. We see good opportunities ahead so the timing for our refinancing is great at the present time. In broad terms we don't intend to refinance the lot, so we intend to do some portion of the bonds and keep some for another strategy.

Matt, just to clarify one more thing, you said it was CAD263 million. It's CAD263 million on maturity. If we were to do any refinance sooner than that we would have to look at addressing the swap issue so it's actually a little bit more than that. I think the number is closer to CAD280 million when you factor that in, if we were to do it today.

That is helpful, Dave. Thank you.

Greg McLeish, GMP Securities.

Great quarter. I was just wondering if you could maybe elaborate a bit more on new project development. As you have indicated, there are a lot of opportunities and there is also a number of announcements regarding SAGD. I am just wondering how you address that on the SAGD side.

We certainly see SAGD as being a big area of market for us. We have a division which is Heavy Construction & Mining so certainly it has done very well on the mining side over the last six, nine months. The bit that has gone down actually is the construction side of that business and we see that in itself ramping back up again.

A good example of the type of work that is available is a number of years ago, about three years ago, we did all the site preparation for CNRL's Horizon Project there. That is the same sort of size of work that is out there.

Great. You have a number of contracts that were coming up for renewal. Can you elaborate on the success of that or maybe just elaborate new business that you are winning or just sort of give us an order of magnitude there?

I don't think we had any particular contracts coming up for renewal. The only one that we did renew that did come up was the one that I mentioned in the statement there with Suncor. That involved us basically rolling over a contract but providing bigger trucks within that contract so giving them additional capacity.

We have been also winning a lot of work or undertaking a lot of additional work, let's say, under our contract on Shell's Albian and Jackpine mines. That has been a very strong revenue source for us. That is about it.

Okay. And just finally you did indicate that there would be some mines or some site service agreements or potentially some site service work on the Horizon Project. Is that starting to come into fruition or is that already going full bore or (multiple speakers) timing issue after you do some of the overburden?

David?

Actually on the Horizon Project we are seeing work that is starting to spin off on day-to-day activities, so site service work is increasing there with the overburden wrap up.

Great. I will get back in the queue. Thanks, guys.

The other place where we are back doing work is we are back on Syncrude's site as well doing work for them with their overburden removal.

Great. I didn't want to really touch on that too much so that is very positive. Great. Thanks, guys.

Bert Powell, BMO Capital Markets.

Thanks. Rod, this is the second quarter in a row where I think you guys have said lower equipment costs due to timing of repairs. Can you give us a sense of how to think about that? Are we going to see -- is there a bump coming one of these quarters as you play catch up?

I am just trying to understand what you mean by that statement.

It's Kevin Mather here. There are two things that have driven that, as David noted. The first was higher than anticipated equipment utilization. So in the last quarter we really got a lot more hours than we targeted out of our very large equipment, so that drove some of the over recovery.

We then realized some of the cost savings associated with improved service levels from our vendors, higher labor productivity, and our tire costs coming back in line. So we have adjusted our pricing of our equipment accordingly and we don't expect to see a significant over or under recoveries in the future.

Okay. So if I look at this quarter and given that in the heavy construction business that you had a pretty high percentage of recurring, that the equipment costs at this percentage of sales is a pretty good run rate until we get into more project costs in the mix?

Yes, I think that is a fair comment.

Okay. And then just in terms of the heavy construction business. If my memory serves there was some large trucks that I think you guys had out on rental. Suncor comes to mind but I might have that wrong. And I am just trying to understand how those are flowing through and affecting margins. Are those still deployed and what is the timing of those coming out of the fleet if that is a near-term event?

This is Chris Yellowega. We do have a number of trucks on rental with Suncor so they are using those fleets to supplement their own ore haul fleets. That is part of the contract that was renewed and we actually increased the size of those trucks to help Suncor a little bit further.

From that activity we are now working with Suncor on other projects and starting to work on using some of our own operated fleet on things they need done on a day-to-day basis.

Okay. What is the CapEx number that you guys think is reasonable for total, not worrying about what is included in rental versus cash expenditures for 2011?

I think we are currently assessing that as part of our budget process there, Bert, so we don't have the number finalized at the moment. We are looking at it right now.

We are certainly very mindful of the importance of generating good cash flow in this coming year and that is something that we are factoring in. But, again, we have to balance that against what we need to do to bring in some increased demand.

Okay, fair enough. Last question; Rod, just in terms of thoughts on timing and succession?

You mean of me or of the team?

No, Rod, I was referring to specifically you.

I have recently signed an agreement with the Board to extend for up to two years.

Okay. Thanks a lot.

(Operator Instructions) Theoni Pilarinos, Raymond James.

Most of my questions are answered; the only one outstanding was about your pipeline work. I am just wondering how far through those two projects you mentioned you are. Are you about halfway through or --?

We would be on the -- on both of those projects we would be more than halfway through. In this month we are cleaning up one and on the other one we are probably at about the 60% mark.

Okay, great. Thanks.

[Bill Highland], Ridgecrest Capital Partners.

Good morning. I was hoping you could talk a little bit more about the environmental potential. Maybe you could talk about how big has that business been historically if we looked at '08, '09? I am trying to get an idea of what the kind of work intensity could be going forward as these new rules come into play.

The sort of work that we are talking about that we see big potential on has been for the contractor fairly small over the last number of years because the types of tailings dams that have been put in place have been tailings dams that will last for 20 and 25 years. What the Alberta government has said is that they want the oil sands producers to reduce the footprint by starting and completing a damn over about a five-year period.

Now in order to do that it's going to require some pretty substantial earth moving type works to help them dry the material that is in the current dams to then move that into places where it can be consolidated with solid material and to build new and smaller dams for the future. We see it as a growing business that is coming, not one that has been around a lot in the past.

The area that we have done a lot of work in in the past has been on the reclamation. For example, if you go to Fort McMurray there is an area up there of Syncrude's reclamation which is the only area of Fort McMurray to date that has been actually signed off by the Alberta government as being fully reclaimed and handed back to the government. North American was one of the prime contractors that did the work for reclamation of that area.

Interesting. So I guess this would fall under the mining and construction, correct?

Yes.

Mining and construction, okay. And it has been a relatively insignificant part of your business historically, so it could require a more meaningful percentage of your equipment and could be a further growth engine. That is good to know.

Okay, appreciate it. Thank you.

Adam France, 1492 Capital Management.

Good morning. Thank you for taking my call, guys. Any issues in getting equipment? Any long delays, anything along those lines that could push projects out?

In terms of the equipment that we use, equipment deliveries are back to normalized levels again. So equipment deliveries range from pretty close to off-the-shelf to about six months delivery for the type of stuff that we get into. So, no, there is nothing that would delay any of our growth opportunities.

Okay, thank you.

Kalpesh Patel, Jefferies & Co.

Good morning, everyone. I wanted to know what is your relationship with Husky and your historical and current participation in Sunrise?

Our relationship with Husky is that we have done some pipeline work for them in the past. We laid a fairly major pipeline for them about two and a half, maybe three years ago. We also have a good relationship with the executive in Husky; they know us very well.

But for previous work done for them at Sunrise, we haven't done any.

Okay. And I guess the same question for ConocoPhillips and Surmont?

On the ConocoPhillips Surmont project we are in discussions with those folks as well as participating in bid work on the different types of projects that they have done and are doing what we normally do with developing our client relationship there.

So you are not on the site at all right now?

The site really isn't doing a lot of development work. That is starting to ramp up so they are doing bidding and planning work right now.

Okay. And you mentioned, I think, in your prepared remarks a second phase of a pipeline contract for Spectra. Is that right?

Yes, as part of the Maxhamish projects we are working on the South Maxhamish Loop and there is a north section to the project. We are expecting that work to be let in the next number of months and we are working with the client to try to secure that.

So what is, I guess, the size of that project? So you are saying in the next quarter it's going to be let?

Well, that actually remains to be seen from the client. It is on their plans to be doing that work this year, but we are in discussions with them really to determine the size and the plan going forward.

Okay, okay. But you are expecting within the next few months?

Yes.

Okay. And in terms of your SG&A, you guys have had great SG&A numbers this year. Do you see more improvement in there or is this kind of the level we can expect going forward?

I think this is more the level that we are going to try and aim for going forward. We would like to keep our G&A costs in and around about our run rate that you have seen for the last few quarters.

Okay, great. And one last question. Your thoughts on the pressure to [boo] from cost-plus pricing to fixed-price contracts?

Certainly the Pipeline division is largely working on contracts, not necessarily fixed-price, but certainly unit rate type contracts within the oil sands operations (inaudible) Piling and our Heavy Construction & Mining division. Again, the balance of unit price to cost-plus is probably pretty much the same now as it was a year ago.

In the actual dirt moving and that sort of stuff that we do, FOM-type work, if it's a very large contract then it will be unit price. But a lot of the work will be cost-plus because the client themselves doesn't actually know exactly what they want in the road that they want build or the culvert that they want cleaned out, etc.

Okay. Thank you and congrats on the great quarter.

Thank you.

Bert Powell, BMO Capital Markets.

David, just wanted to look at the lease expensive again. If I look at your disclosure it looks like the fourth-quarter lease expense would be about CAD15.3 million. Is that because leases are coming off or you haven't factored in what is anticipated?

In other words, if I look at the disclosure can I use my 2011 operating lease expense at CAD55 million, which would sort of look like CAD14 million a quarter, or is the CAD16.3 million we have got this quarter more indicative on a run rate basis?

I think it will be a little bit higher than that, Bert. I don't know the exact number off the top of my head just because we have some of these leases coming and it's starting in January.

Sorry, do you sit higher than the CAD15 million or higher than the CAD16.3 million?

I think it will be a little bit higher than the 16, not much. 16 is probably a reasonable number.

Okay. And then just lastly on the G&A, I know you folks in the past have had a lot of consultants and whatnot in there. I just want to understand the gains that you have made. Has that been -- just having those consultants come out and this is what is in the business? Or is there still that to come and what we have seen to date has really been savings that you guys have been able to put through the core G&A that is within your domain?

Yes, what we did actually about a year ago, if you recall, it was a combination of things. We did cut back on the consultants; we didn't need them as much going forward. But we also did a pretty significant review of our headcount and we saw several areas where we could look at reducing that headcount.

As we move forward we are going to keep a strong focus on that and be very mindful of our overhead and think very carefully before we start adding bodies. We don't think we need to go out and add substantial bodies again going forward.

We have put a lot of effort over the last couple of years in terms of addressing systems and processes. And we think we are in a good place today to leverage off of that effort that we did two years ago.

So there is no need in better times to have the consultants come back to finish up what was any unfinished business?

No. Anything else that we do in terms of further systems improvements or process improvements we would look to address that internally with our own people.

Okay, perfect. Thank you.

Thank you. There are no further questions in the queue at this time. I would like to turn the floor back over to management.

Excuse me, gentlemen. Greg McLeish, GMP Securities.

Just wondering if you could help me out with your unallocated equipment costs and what they might trend to in the fourth quarter.

We expect to keep that CAD13 million at the end of the year so we don't see any improvement or erosion of that CAD13 million of unallocated equipment costs.

Okay. And will that sort of -- is there any way of forecasting that through into 2011 or is that one of those numbers that just sort of --?

It shouldn't be material in any given year. I think that is probably the best way to do it. We tried to set up our charge-out rates and our budget structure such that we are recovering our equipment costs or very close to it.

Right. Thanks a lot, guys.

Tatiana Thibodeau, ClearBridge Advisors.

I missed most of the call so I apologize if you have covered this. I just had one quick clarification question.

On the pipeline side there is some mentioning of unfavorable weather conditions affecting your margins in the quarter. Can you just talk about what the impact of that was in the quarter and then how should we think about more normalized margins for those smaller pipeline contracts going forward?

Tatiana, this is Chris Yellowega. I think on those particular comments we had a project where it was very cold and also we had experienced a substantially warmer trend than we had planned for. And what that did is it slowed the equipment down and then -- when it was warm. And then when it cooled off it actually slowed down our productivity so we didn't have an opportunity to catch up.

So what happens is on this particular contract is we were schedule-driven so we had to increase the resources in order to achieve the schedule. And that, therefore, lowered our margins under the fixed price. It's not something I would expect to roll over into our other pipeline contracts. It was a combination of things on that one.

Project margins and pipeline have been declining through the year in terms of the bid and award margins. I wouldn't expect them to exceed low double digits for the foreseeable future.

How should we think about the revenue run rate from you observe right now?

I think we plan on a revenue run rate and pipeline of around CAD30 million to CAD40 million. We have said that before and I wouldn't say that we would be substantially different from that on an annualized basis.

Okay, thank you so much.

Todd Garman, Peters & Co.

Just a quick question on the Heavy Construction & Mining segment. You mentioned that there were -- one of the projects that you were working on was completed and executed on time. Were there any incentives awarded to the Company as a result of that execution and would do therefore expect them not to recur in the coming quarters?

Yes, we had actually a couple of projects that we bid on either a firm or a lump sum price and we performed substantially better than we expected. We had some weather help in those projects as well as some great execution. So those we would treat more as a one-off occurrence in terms of the real positive impact of margin. I wouldn't expect that to be a recurring thing.

Could you try to quantify or estimate what that impact might have been in the quarter?

No, I can't do that.

Okay, thanks.

Gentlemen, there are no further questions at this time.

Thank you very much.

Thank you. This concludes the North American Energy Partners conference call.