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Executives

Rob Mcinnis – IR

Asim Ghosh - CEO

Alister Cowen – CFO

Rob Peabody – COO

Terrance Kutryk - VP of Midstream and Refined Products

Analysts

Andrew Potter - CIBC World Markets

Mark Polak - Scotia Capital

Greg Pardy - RBC Capital Market

Mike Dunn - First Energy Capital

Andrew Fairbanks - Bank of America

George Toriolia - UBS Securities

Husky Energy, Inc. (OTCQB:HUSKF) Q3 2010 Earnings Call November 4, 2010 12:00 PM ET

Operator

Hello, this is the conference call operator. Welcome to the Husky Energy third quarter 2010 conference call and webcast. As a reminder, all participates are on a listen only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I'd like to turn the conference over to Rob Mcinnis, Investor Relations. Please go ahead.

Rob Mcinnis

Thank you. Good morning everyone, and thank you for joining us today to discuss our 2010 third quarter results.

I’d like to take a second to introduce myself, my name is Rob Mcinnis, and I am the Manager of Investor Relations for Husky Energy. With me today are our CEO, Asim Ghosh; CFO, Alister Cowan; COO, Rob Peabody; and Vice President of Midstream and Refined Products, Terrance Kutryk.

In today’s, Asim's will provide an overview of Husky's strategic direction. Alister will discuss the Company's performance, and Rob will provide an update on the Upstream operations, while Terrance will provide an update on the Midstream and Downstream activities.

Please note that today's comments contain some forward-looking information, actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our quarterly release and in our annual filings, which are available on SEDAR, EDGAR and on our website.

I'll now turn the call over to Asim.

Asim Ghosh

Good morning and thanks for being [inaudible]. I guess before I get into the quarter I just want to recap very briefly to what we said when we released our second quarter results which was my first call with you guys.

I’ll basically, the simple theme I spelled out at that time was where I saw Husky was, we were long on long-term opportunities, but we needed to speaking to collect the facts that we were short of short-term opportunities.

In summary of the long-term opportunities we are extremely well positioned for the long-term whether our growth, which I identified as the Oil Sands, Canada’s Offshore East Coast properties and Southeast Asia. But we recognize that we needed to take action to stabilize our production in the short-term and that’s what comes through both organic and inorganic.

And if I now were to summarize the quarter, I would basically say from our perspective, we executed a solid quarter and delivered on the early milestones on the plan we chartered out for you. So, just get into some of the actions that we did take, so I’ll start with the acquisitions.

Again, I’ll refresh your memory on something that I said. I believe it was during the quarterly call, it might have been at subsequent analyst meetings, but we are not, as we execute our acquisition plan, interested in trading dollars for balance. In other words, I’m not interested in just getting production for the sake of headline production. We are interested in financially accretive production, acquisitions and offline attractive rate of return. And I believe [inaudible]. i.e. the way we can leverage our existing infrastructure, our existing human resources, and set the company up to the reposition of the rest of Canada with the results placed.

So to that point, we had announced that signed a purchase agreement in September to acquire natural gas properties in west central Alberta, which has about 65 million cubic feet per day of natural gas production, about 11,000 boe/pd. It’s adjacent to our – it is part of our whole perimeter gas operation, where we actually have an existing gas line. So both in terms of metrics and in terms of the basic quality of criteria we set out, it’s acquisition, banked on strategy.

I am unfortunately not in a position to comment on the purchase price, but I can assure you [inaudible] a rigorous set of criteria by evaluating these acquisitions. And this acquisition will earn us returns on part of some of the best gases those place that are out there. So it’s a underline theme of financial discipline that I hope you will continue to hear from us as we roll this canvas out.

Now, we are not done on this theme, by the way. We are looking at some other opportunities and we will move forward on those in a discipline manner, provided always that there meet our rigorous criteria, which I just outlined.

Now, the second thing is on the inorganic part. We talked of a measure of the reprioritizing our capital to meet our strategic needs both of shorter term production and of the [inaudible] critical mass as we inquisition the rest of Canada for results placed, so to that, we did increase our capital expenditure for the year from 3.1 billion to 4 billion.

A significant portion of that increase has been targeted at simulating projects that can deliver near-term production and the terms in excess of our RAC, and really by near-term I mean stuff that we will see results from the next 12 to 18 months, not in the next – I’m categorizing as 2 to 5 years as medium term, anything past 5 years as long-term. So really, I’m talking step backs in the next 12 to 18 months.

And very specifically, all of these increased investments that I’m talking of in this context are in a bread-and-butter option, rest in Canada, where we are with this portfolio of all heavy oil and gas assets. And Rob, later in the call will be telling you more about this investments.

The bottom line is that we have made significant improvements towards stabilizing production, and production was almost to a 9,000 barrels per day, from 2,400 barrels per day in the second quarter. But I’ll again emphasize we don’t want to overstate our case. This is the beginning of our journey, we are pleased that we met the early milestones, but we also recognize there’s more work to be done.

I would be in amiss, I guess, if I just spoke of short-term and did not tell you that we have not taken our eye off the fundamental longer-term task, that’s we are here, which is the growth pillars.

So while we have increased our focus on boosting the near-term production, we continue to make good progress on our mid-to-long-term growth opportunities, and again, Rob and Alister will provide more detail later in the call. But I just want to take a minute to update you on couple of our growth villages; Sunrise and Southeast Asia.

Sunrise, we made substantial progress on advancing the Sunrise Energy Project. We believe, based on our bid process so far, it remains on sanction for Project sanction in the fourth quarter of this year.

On Southeast Asia as well, we made substantial progress. We received a 20-year extension to the PSC in Madura, which is those of you who will be calling us after [inaudible] business, it’s offshore Indonesia. We also made progress in the Lihue Gas Development Project in South China, which is offshore China, and we are tendering the net installation contract for the project as we speak.

I think, I should speak to one of the points on Southeast Asia. We told you earlier in the year that the board is evaluating our Southeast Asia assets, it’s the best way to maximize shareholders value for the company. That is an important decision, a strategic decision for a company and the work of the board is still underway, and following when that rigorous review is done, we will be in a position to share the results with you. But, you recollect I said that there are pros to a separation, and that cons to a separation. So it’s a complex decision. We don’t have a decision yet but as soon as we do, we’ll be in a position to share that decision with you.

So as we move forward with our business plan, we remain focused on business fundamentals. I am very clear in my mind that this is not the only [inaudible]. This is, we are in this business together [inaudible] so therefore, I just want to refresh your minds on stuff that I’ve said in various meeting with some of you, on what drives up our thinking of the business.

We are not interested in trading balance for dollars; we are interested in financially accretive production, whether it’s organic or whether it’s through acquisitions. We are focused on capital productivity, and all of it within the context of safety.

I know this is a quarterly conference call, and we will have an opportunity to get into more detail very soon, so we are in the mist of vigorous planning processes for 2011, and out years. And I guess we have set up for an investor call which we’ve advised many of you on the first of December, and I do hope will be as many of you who can attend will be there so we’ll be able to give a fresh out more details on our direction, future at that time. But I just want to give you a reassurance that in all of our thinking, at the end of the day, capital productivity in the context of safety is what among rise.

On that note, I’ll hand you over to Alister to take a closer look at the quarter’s financial results.

Alister Cowen

Thanks, Asim. What I’m going to do is make a few comments of the highlights of the sub quarter, and then discuss the increase in the capital spending program for the year.

In looking at the overall results, we found they are solid achievement, particularly in light of the economic environment on the impact of the Enbridge Loan bridge. The results also did reflect our product mix, which as you know is approximately 70% oil and 30% natural gas.

During the quarter, production was 288.7000 boe/per day result from 276.2000 boe/per day in the sub quarter of 2009, slightly out from Q2 2010. This production was in line with our guidance that we laid out last month in the second quarter.

Our cash flow from operations in the third quarter was 811 million that was significantly higher than last year’s 452 million comparable to Q2 2010.

Net earnings 257 million were comparable to the last quarter, even with an estimated negative impact of 36 million after tax relating to the Enbridge shutdowns of lines 6A/6B.

When I look at our pricing, in upstream realized pricing improved slightly compared to last year and is comparable to Q2 2010. However, our realized pricing for medium and long-term production, without vastly affected by the significant increase in differential for most of the second, third quarter, as a result of the Enbridge shutdown.

And we do expect that there’s going to be some continuing, lingering pricing impact of our shutdown to the beginning of Q4. In our U.S. downstream business, the weak economic climate continues to impact market crack spreads with New York Harbor 3:2:1 at $8.62 per barrel in the quarter, compared with $10.44 per barrel in the second quarter of 2010.

Realize defining margins did improve slightly quarter-on-quarter, as a result of FIFO accounting impacts on crude oil and purchases notwithstanding the market price space.

On capital spending, as Asim noted earlier, we have increase in capital spending for 2010 to 4 billion from 3.1 billion. Now a majority of additional funds have been dedicated to our upstream organic projects and acquisitions that will deliver production over the next 18 months.

These are projects of oil, primarily heavy oil and liquids which gas resources. Well also provide more detail later in the call.

The acquisitions that we recently announced provide synergies with our immediate production and rates of return on par with some of best shale gas prices.

We did also make some strategic large acquisitions that provide the opportunity to expand our existing line through positions in those areas and that will allow us to create some additional volume from having a larger continuous position.

For funding, we have been and will continue to be financially disciplined. That’s the hallmark of Husky. Our dept to capital of 22% and debt to cash of 1.2 range remain below our targeted range and amongst the lowest of our peers. Our generated cash flow remains [inaudible] along with a strong liquidity position and lower leverage to continue to invest in production.

Finally, our Board of Director approved a costly dividend of $0.30 per share for the quarter.

Now, I’m going to hand you over to Rob.

Rob Peabody

Thanks, Alister. First, as always, I want to start with safety. We just completed an extensive series of plan turnarounds including the Sea Rose, the Upgrader and we’re just about finished with Lima. In total these involved an additional 4,000 working on our sites.

Turnaround require careful timing and execution and always involve tightened risk compared to normal operations. I’m pleased to say that with our strong focus on contractor selection and training, as well as strict adherence to process and procedures, this work scope has been done without any major incidents. This is also reflected in our recordable rate, which remains at our target of 1 for the year.

On the production side, I’d like to share with you where we are investing capital to boost short-term production. In accordance with the strategy that Asim talked about at the start of the call, and laid out in Q2, we have taken action to rebalance our portfolio from one that is long on long-term opportunities, but short on short.

In Western Canada, we have a rich inventory of heavy oil, oil resource and gas resource properties in our portfolio and plays such as horizontal multi-stage fracing are having a dramatic impact on our ability to economically retrieve more production from our resiovures.

Just to put some perspective on this opportunity, we have a heavy oil resource base in Whiteminster area, around 10 billion barrels in place. Using traditional coal-heavy oil production with sand or CHOPSS, we’ve recovered about 700 million barrels of this to date.

Using new technologies, such as horizontal wells and thermal processes, as well as CHOPS, we expect to potentially increase the recovery rate from 7 to about 12% for an incremental 500 million barrels

So we’re confident about our ability to create more value from heavy oil going forward and this is one of the areas where we’re investing additional funds this year.

To put some numbers on it, in 2010 we planned to drill 291 CHOPS wells compared to 175 CHOPS wells and 27 horizontal wells in 2009.

Looking at our gas resource lay activity, Husky continues to accelerate its resources play work. We have expanded exploration in development drilling in the natural gas liquids-rich area of Ancil [ph] and we drilled seven exploration wells during the third quarter, which five of these wells seem to be right on stream.

We’re also accelerating drilling the Bivouac and Galloway areas with an additional six Bivouac wells and four Galloway wells to be completed by the end of 2010. Production is expected to come online in 2011.

In terms of our oil resources, and valuation testing in Western Canada in the third quarter, three Viking wells were placed on production in Southwest Saskatchewan, eight Viking well were drill at Redwater, Ablerta. And an additional seven wells were planned at [inaudible] for the remainder of the year.

Additional oil resource play wells are planned in Southwest Saskatchewan, the Bakken in Southeast Saskatchewan and evaluation wells are underway in Alberta.

Looking at the East Coast now, we continue to ramp up our production in the third quarter at the North Amethyst Satellite oil field with the completion of the second horizontal producer. That well is now on stream, producing about 3,000 barrels a day without any water injection support.

An additional injection well will be on schedule – should be on stream in December and then we’ll be able to ramp up production from that second production well to about 20,000 barrels a day. Other wells are planned for North Amethyst with drilling continuing through 2010 and 2011. And it continues – North Amethyst continues to be a good story for Husky and we expect production to reach gross peak rates of around 37,000 barrels a day by the end of the year.

We also received regulatory approval and have already commenced drilling the first well on the two-well pilot project into the West White Rose reservoir during the quarter. These wells are drilled from the existing infrastructure at the main White Rose Field and information from these wells is going to help us develop the long-term development plan for West White Rose. But these initial – the initial production well will also come on stream in early 2011.

The impact on production of the activity I’ve just described about will become more [inaudible] mid-2011 and accelerate over an 18 to 24 month period.

Turning to 4Q production, there are just two events I want to give you a heads up on. The first of those being the October turnaround of the Sea Rose. That actually is already complete now. It was planned for 16 days and it was completed on schedule. The impact on the month of October’s production was about 10,000 barrels a day.

And then the second event is just we expect to close the Ram River acquisition sometime in the fourth quarter. And when we close that acquisition, that will add about 10,000 barrels a day to our production immediately.

So just turning back to some of the medium and long-term projects that Asim referred to earlier in the call as well, at the same time as we’ve been putting our effort on accelerating these near-term opportunities, we still are working on long-term opportunities.

In heavy oil, construction of the 8,000-barrel-per-day Pikes Peak Thermal heavy oil project is progressing on schedule and we expect first production in the first half of 2012.

In the quarter we also received approval for a Site D pilot project at Rush Lake and this is a follow up project to certify Pikes Peak in the next stage of our heavy oil thermal development.

On Sunrise, tenders for major engineering construction contracts for the project were received and are under review. We are focused on ensuring that the delivery of Sunrise will come in on budget. And to that end, our contract strategy is just to secure very high levels of lump-sum and unit rates within our key contracts. This removes the exposure to Husky for rates and productivity during project execution. And we’re making excellent progress in meeting that goal.

In addition, progress was made on Madura and Lee 1 as Asim described earlier. As you can see, it’s been a busy quarter on the development front.

Now, I’d like to turn you over to Terrance for an update on Midstream and Downstream.

Terrance Kutryk

Thank, Rob. As Alister mentioned earlier, a significant factor in our third quarter results were the effects of the Enbridge Pipeline disruptions. Now, notwithstanding those challenges, it was a healthy quarter for our segment with our Midstream business providing a means to mitigate some of the impacts to the company. And despite these issues, throughput was stable at 236.2000 barrels per day compared with 235.5000 barrels per day during the same period in 2009.

Now, without the disruption throughput would have been higher by approximately 12,000 barrels per day. Quarterly downstream earnings were reduced [inaudible] as a result of the Enbridge line.

In our Midstream segment, deployments were up again as planned five-year turnaround at the start of September. Now, this is the largest turnaround in the facility’s history and it was completed on budget and on schedule.

During the quarter, we also finalized agreements with Enbridge, Terra and Interpipline fund for pipeline dealing with terminal services for the first phase of the Sunrise Energy Project.

In the downstream, a 40-day turnaround recently commenced alignment as part of the five-year maintenance schedule that they have this facility and only but 1/3 of the refinery will be involved with a modest impact on closure volumes anticipated.

On the retail front we continue to make steady progress in conversion of 98 solutions in the Souther Ontario market over to the Husky brand and we have currently rebranded 73 of the sites with the remainder to be completed in the fourth quarter of the year.

At this time, I’d like to turn the call back to Asim for closing remarks.

Asim Ghosh

So just let me lay, again, summarize where we are in the quarter. There were a number of external challenges in the quarter, which you all mentioned and [inaudible]. And notwithstanding these factors, we executed a solid quarter. We stabilized production, we are on our way to executing our strategy to accelerate production both through acquisitions and through organic investments. And we have reprioritized our capital investment in the management portfolio both for production as also to gain critical mass on certain properties. And we have made progress in the balancing our medium to long term growth builders in the oil sands, the East Coast and in Southeast Asia.

The best description I can give of where we are is that the course that we set and what is on the way to deliver on the slope. Rob, do you want to open for Q&A now?

Rob Peabody

Sure. That concludes the opening part of the call. We’d be pleased to answer any questions you might have. I’ll give it back to the conference operator for questions from our participants staring with analysts and then from the media.

Question-and-Answer Session

Operator

Thank you, Sir. We will now begin the question-and-answer session. (Operator Instructions). Your first question is from Andrew Potter of CIBC. Please go ahead, sir.

Andrew Potter – CIBC World Markets

I’m just looking for a little bit more color on Lee 1 in terms of what are the next steps that we’re looking for here. I mean, it looks like you’re pretty far advanced in terms of defining the scope or the scale of the project. So a little bit more color in terms of what you’re seeing right now in terms of project costs and what you’re envisioning in terms of size for the first phase of the development?

Rob Peabody

Asim, you want to take that?

Asim Ghosh

Thanks. We’re currently completing all the work around those questions that you asked as [inaudible] on the remaining pieces of equipment. Once we do, we’ll tend to be in a much better position and once you get the project sanctioned.

Andrew Potter – CIBC World Markets

When do you expect that process to wrap up? Like, is this something we could see before yearend 2010, or is this more of a 2011 thing?

Asim Ghosh

Probably, you know, I would say probably more likely the beginning of 2011.

Andrew Potter – CIBC World Markets

Okay. And then just one other question just on the unconventional gas side. I just wanted to confirm that you [inaudible] shale well. I don’t know if you have any results you want to share o that.

Asim Ghosh

Rob can take that one.

Rob Peabody

That’s an interesting question. I think the answer to that is still confidential.

Andrew Potter – CIBC World Markets

All right. We’ll leave it there. Thanks.

Operator

The next question comes from Mark Polak of Scotia Capital. Please go ahead.

Mark Polak – Scotia Capital

Good morning, guys. First question on Sunrise, as we look for sanctions coming in this quarter, I think the most recent numbers we have there is $2 ½ billion or 60,000 barrels a day. Is that still a reasonable number for us to be thinking about on that project?

Asim Ghosh

Those are 2009 dollars, so I think we’ll actually get to announce that we’ll have to judge it from the benchmark of [inaudible]. But I would certainly say that you are in the ballpark.

We will be in a position to announce it, yes. We’re well into the quarter already, so you won’t have to hold your breath for too much longer

Mark Polak – Scotia Capital

That’s great. The other question I had was with the extension of the Madura PSC, would that allow you to move those resources back into the reserve’s category at year end? And can we expect a sanctioning on that sometime next year? I think in the past it was thought three to four years after government approval that would be coming on stream.

Terrence Kutryk

Yeah. I would say we would be looking at Madura and timing wise, we’re probably looking at 2014 for that to commence.

Mark Polak – Scotia Capital

Thanks a lot.

Operator

Our next question is from George Toriolia. Go ahead.

George Toriolia – UBS Securities

Thanks. The question is around the – you’ve talked about your focus on net term production growth. I’m just wondering if you can speak to broadly the types of opportunities you’re seeing that would allow you to both grow production and grow production in a profitable manner?

Asim Ghosh

Well, as I said, there’s two broad plants. There’s an acquisition plant, an acquisition that is strategically continuous. And there’s a – the old bread-and-butter of drilling new holes and trying new technologies. So those are the broad areas. Now, on the acquisition side, we already outlined a gas acquisition at very financially [inaudible] metrics. It is unfortunate that confidentiality agreements conclude me from giving you the specifics, but I would say, you know, as I said, it’s sort of par with the best shale gas place that are there. We are looking at a couple of other opportunities, which meet similarly attractive financial areas.

It is really not a simple broad rush answer, it is a whole bunch of very targeted high-return opportunities that we are looking at in terms of infills, in terms of applications of new technologies in heavy oil as we move from CHOPS so some horizontal wells in terms of new gas resources. That is my overall description of the quality services. I’ll let Rob speak.

Rob Peabody

Yes. I’ll just add a couple of points really, and that is I think the Western Canada, the basin is a mature conventional basin. But what we’re seeing in the Western Canada Basin, as I’m sure you’re all aware of, is new technologies that are really making a difference in terms of the – well, the returns you return and the opportunities available. And Husky has a good land position over the whole Western Canada Basin, clearly, and we have actually also been acquiring lands where we think there’s a lot of prospectively at the new technology. So you know, in broad categories, I mean, I do go back to [inaudible] their horizontal wells are new technology that we’ve only really been applying there for the last couple of years. They’re opening up new horizons, some of the thinner sands that you couldn’t get after with traditional CHOPS methodology but have extensive resources in those horizons. So we can apply that technology to earn good returns in Lloyd Minster.

Again, gas resource plays, our focus there – we feel we have a pretty good portfolio liquids rich gas resource plays in Western Canada, enough to keep us going for quite a while here. And our economic gas prices because of the liquids components, clearly we’d like to see higher gas prices going forward. So I mean, just that – that’s just a little more color on Asim’s point.

Asim Ghosh

Yeah. I just want to make one point. [Inaudible] on financial discipline. And one of the things that we have started doing as we start projects is we’re not simply looking at IRRs, but we are looking at return on capital deployed on a year-by-year basis. So I can get an IRR coming out of a hockey stick or I can get an IRR coming out of more immediate returns. So we have put our various projects in various baskets. So clearly, if I want to look at a long-term project like a Sunrise or [inaudible], I have to look at an IRR and I know I’ll have negative returns in year one and you know, maybe break even in year two on a Sunrise that might extend out two to three years on a break even, but on a – on the rest of what I call incremental activity, we want returns in the first year itself or at most in certain cases like horizontal drilling, in no more than year two.

And we’re starting to apply that financial discipline and are changing our planning purposes to reflect the demands of specific capital profiles.

Rob Peabody

And just to add one specific example about it, that’s one of the reasons why Ancil is very attractive to us as a gas resource play because the infrastructure is already in the area and we can tie it in quickly and bring production up quickly.

Asim Ghosh

So it’s a very – looking at some of these project, we are looking at – we’re demanding ROAs that are in the high-teens or in some cases even 20% at today’s pricing in the next couple of years. And remember, this is only part of our capital. I don’t want to mistake that we’re going to get that into our capital, but that’s not the intent either, but I just want you to get a sense of how we are approaching this.

George Toriolia – UBS Securities

Thanks a lot. And so when I look at the [inaudible] that you’re deploying, so it’s fair to say that we’ll see the returns on that capital in terms of production, growth and all that within the next 12 months so to speak?

Asim Ghosh

Well, you know, that capital is about half and half. Okay, about half of that is immediate back to you and about half of it is through fill out sort of gaping holes in a particularly existing land bank. And once we get that land bank complete, that gives us something to work with in terms of monetizing. So basically you’ve got to look at it half and half. Half of it is actually to [inaudible] out the portfolio, that gives us currency to work with in the future and then we can start the development we can whatever. I think we’ll have more color on that in the investor day presentation in the beginning of December.

George Toriolia – UBS Securities

Okay, thanks a lot.

Operator

The next question is from Greg Pardy of RBC Capital.

Greg Pardy – RBC Capital

Good morning. I just wanted to dig in a little bit more into Lee 1 and I guess to some extent just the gas and place numbers you’re talking 2.6 to 3. Is that still related to the greater Lee 1 area or is that somewhat more recent to some of the drilling you’ve done so far? I’m just curious.

Terrance Kutryk

Yeah, great. I’ll take that one. The ones that we had that were older were based on drilling . So as you know, over the last couple of years we have done extensive excavation [inaudible].

George Toriolia – UBS Securities

Okay, that’s great. And just to come back to the phase in terms of Sunshine, then just BP will fund the first 2 ½ billion of this. What are the next steps that you need to take and how much do you plan to talk about this? I think you’ve kind of answered in addressing Mark’s question, you’re sort of alluding that you’re talk about it on December 1, but what are the next steps we need to see to get more granularity on what the project looks like.

Terrance Kutryk

Well, I think the first immediate step is to complete the decision down to the [inaudible]. And then get the approval of the respective joint venture boards so there are two separate agreements. And then announce it to you guys.

Rob Peabody

Yeah, we’re just – I mean, that project is right at the starting line. I mean, clearly it’s in the announcements around midstream. We’ve got all the agreements in place in the midstream to support the project as Asim said, we’re very, very close to the award points on the Central facilities and the field facilities contracts. We have a very clear project schedule, so before the end of the year I expect to be able to share an extremely detailed schedule of just how the whole project will be executed.

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