MYR Group Inc (MYRG) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to the MYR Group fourth-quarter 2012 earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Philip Kranz of Dresner. Please go ahead, sir.

Thank you, and good morning, everyone. I'd like to welcome you to the MYR Group conference call to discuss the Company's fourth-quarter and full-year results for 2012, which were reported yesterday. Joining us on today's call are Bill Koertner, President and Chief Executive Officer, and Paul Evans, Vice President and Chief Financial Officer. If you did not receive yesterday's press release, please contact Dresner Corporate Services at 312-726-3600 and we will send you a copy. Otherwise, you can go to www.myrgroup.com where a copy is available under the Investor Relations tab. Also a replay of today's call will be available until Wednesday, March 13, 2013 at 11.59 PM eastern time by dialing 855-859-2056 or 404-537-3406 and entering conference ID, 99440683.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to MYR Management as of this date and MYR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the Company's form 10-K for the year ended December 31, 2012 and in yesterday's press release.

Certain non-GAAP financial information will be discussed on the call today. A reconciliation of this non-GAAP information to the most comparable GAAP measure is set fourth in yesterday's press release. With that said, let me turn the call over to Bill Koertner.

Good morning, everyone. Welcome to our fourth-quarter and full-year 2012 conference call to discuss financial and operational results. I'll provide a brief summary of the fourth quarter and full year results before turning the call over to Paul Evans, our CFO, for a more detailed financial review. Following Paul's discussion, I will provide some additional information and an outlook for the industry.

We are very pleased to report the 2012 was a record year for us in terms of revenue and profitability. Revenue increased 28% over 2011, operating income increased 88% over 2011 and diluted earnings per share increased 84% over 2011 to $1.60 per share. In addition, strong project execution, high fleet utilization and increased storm restoration services in the fourth quarter resulted in increased revenue and significant increases in contract margin, EBITDA and earnings per share compared to the fourth quarter of last year.

Our success in 2012 was due to strong execution on projects of all sizes, across the country in both our T&D and C&I business segments. Our strong performance was driven by our labor productivity, project management and high fleet utilization. In addition, we performed more storm work than normal, which contributed to higher margins in our T&D business. Over the last five years, we have grown our revenues organically at a compound annual growth rate of approximately 10%. We experienced year-over-year revenue growth in four of the last five years. Looking forward, we remain bullish on the long-term outlook for both our business segments. Our optimism on our T&D business is based on our belief that the industry is still in the early stages of a major transmission building cycle.

In November of 2012, the North American Electric Reliability Corporation or NERC released its 2012 reliability assessment of the current electric transmission infrastructure in North America, as well as an outlook for the next five years. The report predicts continued growth in transmission spending over the next five years, despite projections of slower load growth. NERC expects transmission lines to be built at a rate of approximately 3,600 miles per year between 2012 and 2017, compared to 2,300 miles per annum built during the previous five years. Additionally, key industry sources like the Working Group For Investment in Reliable and Economic Electric System, or WIRES for short, and the Brattle Group estimate transmission spending in the range of $12 billion to $16 billion per year through 2030. We have posted copies or included links for the latest transmission spending reports from NERC and EEI on our website.

We expect bidding activity for transmission projects of all sizes to remain strong over the next several years. This includes large, high-voltage multi-year projects, as well as smaller NERC reliability work on 69, 115, 138 and 161 KB circuits. MYR remains steadfast in its approach as a disciplined bidder. We target projects that best fit our resources and capabilities while providing opportunities for realizing attractive contract margins. We saw a small increase in bidding activity in some of our electric distribution markets last year and expect that trend to continue. We believe a recovery in the overall economy and the US housing market over the next few years will provide additional stimulus for spending by our customers.

In addition, we believe many utilities cut back on their normal [feeder] hardening work during the recession. The pent up demand this created for distribution work, along with the continued trend towards outsourcing should benefit line contractors like MYR. Our C&I segment ended the year with record backlog. We expect that business to continue to improve as economic conditions strengthen in the markets we serve in the western part of the United States. Now, Paul will provide details on fourth-quarter and full-year 2012 financial results, and then I'll be back to provide some additional insight on current market conditions and our perspective for the future of MYR. After that, there will be an opportunity for you to ask questions. So with that, Paul, please begin.

Thank you, Bill, and good morning, everyone. Yesterday after the market closed, we announced our 2012 fourth-quarter and full-year results. As Bill mentioned, our revenues for the fourth quarter of 2012 were $247.8 million, which represented a $13.5 million increase over the same period in 2011. On a percentage basis, 2012 fourth-quarter revenues increased 5.8% over the 2011 fourth-quarter. From a segment standpoint and compared to the 2011 fourth quarter, T&D revenues increased $10.2 million to $203.6 million and C&I revenues increased $3.3 million to $44.1 million.

Focusing on the T&D segment, revenues were $149.8 million for transmission and $53.8 million for distribution in the fourth quarter of 2012. This compares to $156.4 million for transmission and $37.1 million for distribution for the fourth quarter of 2011. Transmission revenues decreased slightly in the fourth quarter of 2012, as compared to the fourth quarter of 2011, despite a significant amount of work being done on large transmission projects in both quarters. There was less subcontractor work being done in the fourth quarter of 2012 than in the same quarter last year, which resulted in less revenue in the quarter. Nearly all of the decrease in revenues caused by the decrease in subcontractor work was made up by increased revenues in the fourth quarter of 2012 for more man hours worked and equipment usage. Distribution revenues increased, primarily to an increase in storm work from Hurricane Sandy. Storm work contributed $24.5 million to T&D revenues in the fourth quarter of 2012 compared to $7.6 million in the fourth quarter of 2011.

Our C&I segment revenues increased by 8.2% to $44.1 million in the fourth quarter of 2012 from the fourth quarter 2011, primarily due to an increase in revenue on small- and medium-sized projects. Our overall gross profit in the fourth quarter of 2012 increased to $32.9 million from $24.6 million in the fourth quarter of 2011, and our gross profit as a percentage of revenues increased to 13.3% versus 10.5% in the fourth quarter of 2011. The increase in gross margin was primarily due to improved overall project margins on transmission and distribution projects, and was helped by improved margins on medium-sized C&I projects and high utilization of fleet assets. Storm work contributed approximately 100 basis points of the 280 basis point improvement in gross margin in the fourth quarter of 2012 versus the fourth quarter of 2011. On a sequential basis, our gross margin has increased in each of the last five quarters to 13.3% in the fourth quarter of 2012 from 9.4% in the third quarter of 2011, as our margins benefited from better execution on our jobs and improvement -- and improved utilization of our fleet assets.

Fourth quarter of 2012 SG&A expenses were $17.5 million compared to $15.6 million in the fourth quarter of 2011. The increase was primarily due to higher employee compensation and benefit costs resulting from an increase in profit-sharing and bonus expense. SG&A as a percentage of revenues increased to 7.1% in the fourth quarter of 2012 compared to 6.7% in the fourth quarter of 2011. Fourth quarter 2012 EBITDA increased to $22.3 million or $1.05 per diluted share from $14.8 million or $0.70 per diluted share in the fourth quarter of 2011. Our provision for income taxes increased to $5.7 million in the fourth quarter of 2012 compared to $3.4 million in the same quarter of 2011. Our effective tax rate of 36.8% was consistent with 36.9% in the fourth quarter of 2011. Fourth quarter 2012 net income was $9.8 million or $0.46 per diluted share compared to fourth-quarter 2011 net income of $5.9 million or $0.28 per diluted share.

Now shifting to our full-year 2012 results, revenues increased $218.6 million or 28% to $999 million compared to $780.4 million for the full year of 2011. From a segment standpoint, when compared to the full year of 2011, T&D revenues increased $206.7 million to $828.7 million, and C&I revenues increased $11.9 million to $170.2 million. Our transmission business has grown significantly over the last few years, and comprised 68% of our revenues in 2012 compared to 59.2% in 2011. In 2008, transmission revenues represented just 45.6% of our total revenues. This shift in business mix was mainly due to the increased activity in the transmission system upgrades over the last few years and our success in winning several large multi-year transmission projects.

On a few of our large multi-year transmission projects, our project scope included a significant amount of material and subcontractor work. As a result, our revenue contract costs in 2012 included higher than normal amounts of material and subcontractor work. The amount of subcontractor and material costs as a percentage of overall project cost is highly variable from project to project depending on the client and the individual projects. While transmission demand increased significantly over the last few years, resulting in higher transmission revenues for us, our C&I revenues in 2012 were flat compared to 2008 levels. And our distribution revenues in 2012 were slightly below 2008 levels, as those markets are still recovering from the economic issues over the last few years.

Gross margin for the full-year of 2012 was 11.9% compared to 11% for the full year of 2011. The stronger gross margins -- the stronger gross margin performance in 2012 was primarily due to an overall increase in contract margins on small- and medium-sized projects in both segments and improved utilization of our fleet assets. Meanwhile, full-year 2012 net income of $34.3 million represents an increase of 87.2% over full-year 2011 net income of $18.3 million. Diluted earnings per share improved to $1.60 per diluted share for the full year of 2012 from $0.87 per diluted share for the full year of 2011.

EBITDA increased to $80.7 million or $3.80 per diluted share for the full year of 2012 compared to $49.1 million or $2.34 per diluted share for 2011. The increase in EBITDA was primarily due to higher pretax income, as well as higher depreciation expense reflected our -- reflecting our continued investment in our fleet. We invested $37.2 million in property plant and equipment in 2012 compared to $42.3 million in 2011. We believe our strategy to invest in equipment and tooling will continue to result in better execution on current projects and help position us to capture additional business in the coming years.

Total backlog at December 31, 2012 was $497.6 million consisting of $375.7 million in the T&D segment and $121.9 million in C&I segment. Total backlog at December 31, 2012 increased $6.3 million compared to the $491.3 million reported at September 30, 2012. T&D backlog decreased $15.3 million or 3.9%, while C&I backlog increased $21.6 million or 21.6% period over period. Compared to December 31 2011, T&D backlog decreased $236.4 million or 38.6%, while C&I backlog increased $41.2 million or 51.2%. Several factors such as the timing of contract awards, the type and duration of contract, and the amount of subcontractor material costs and project scope can impact our backlog at any point in time. Our backlog only includes projects that have a signed contract or an agreed-upon work order to perform work on utility accepted terms and conditions. This may be different from how other companies report backlog.

As we have discussed on previous calls, some of our revenue never throws -- flows through our quarterly backdrop backlog reporting. This is because the award of the project, as well as the execution of the work can all take place within a quarter. In addition, we have some projects like the CAPX 2020 work in Minnesota and the ITC V-plan project in Kansas, which Bill will discuss later, where we anticipate performing work for several years to come. However, anticipated work is not included in our backlog due to the way individual line segments are bid and awarded by the customer and how we account for backlog.

Moving to the balance sheet, stockholders equity increased to $254.7 million at December 31, 2012 from $215.7 million at December 31, 2011. Over the past five years, we have organically grown our tangible net worth from $72.1 million to $197.5 million, which represents a 22.3% compounded annual growth rate. As Bill mentioned on last quarter's call, we compare our asset turnover ratio to prior periods against our peers. We believe this is an important measure that contributes to shareholder returns over the long term. Our return on equity for 2012 was 15.9% as compared to 9.5% for 2011. We believe ROE is one of the best financial measures because it relates net income to the equity that shareholders have invested in our Company. We also review other financial measures to track both our historical progress, as well as that of our peers. The measures that we most often review can be found in the press release filed yesterday, and also on our -- in our most recent investor presentation, which will be posted on our website shortly after concluding today's call.

At December 31, 2012 we had approximately $19.8 million in cash and cash equivalents, no outstanding funding debt and $155.3 million in availability under our credit facility. Our cash balance declined to $14.2 million from December 31, 2011. This was primarily due to our continued investment in fleet equipment and tooling, a $40.3 million increase in our accounts receivable, as a result of increased revenue and increased retainages on our large projects, and a payment of $10 million on our revolving debt. The decline was largely offset by an increase in cash from other operating activities.

As of December 31, 2012, we had approximately $19.7 million in letters of credit outstanding under the credit facility. We did not repurchase any shares in 2012 under our share repurchase program, which became effective on August 10, 2012. In conclusion, our 2012 results are up substantially from 2011 with solid execution on transmission and distribution work, and good improvement in our C&I segment. With our strong balance sheet, we believe we are well capitalized for further organic growth, as well as for possible strategic acquisitions. Now I will turn the call back to Bill for a discussion on the overall industry.

Thanks, Paul. Across the country, MYR Group's project teams continue to focus on executing work and managing contracts. Our estimating teams in both our T&D and C&I market segments see a steady flow of projects to evaluate and price. Specifically, with respect to transmission, we see plenty of opportunities for work at all voltage levels. This includes new lines, upgrades and associated substation work. I will take the opportunity to provide you with an update on some recent transmission-related project developments.

In October of last year, MYR was awarded a 32-point mile segment of ITC's V-plan project, a new 122-mile 345 kV transmission line designed to connect Eastern and Western Kansas. The completed line is scheduled to be in service in late 2014, and we expect to have the opportunity to perform additional sections as they become available. As you know, in December 2010, we were selected as one of two alliance contractors to perform construction services when Group 1 transmission line projects for CAPX2020 work in Minnesota. Currently, our crews are progressing on a 72-mile section of 345-kV transmission line for the Hampton to Brookings line, which is scheduled to wrap up late this spring. Our crews are also working on a 77-mile section of a 345 line for the Fargo to St. Cloud project; this has a scheduled completion date in 2014. We anticipate additional CAPX work in the future under the scope of the Group 1 project's clients agreement.

Meanwhile, the ON Line project, which is a joint venture between LS Power and NV Energy, restarted recently after a project suspension of nearly one year. Project consists of 235 miles of 500-kV line new construction from Ely, Nevada to Las Vegas. The original completion date was scheduled for November of 2012, but the project was delayed for most of last year due to wind vibration issues with the owner provided steel structures. A solution was identified in late 2012, allowing the project to move forward and a change order for the project disruption was agreed upon. The value of the change order was included in our backlog at the end of December. The project is now underway with a new substantial completion date of November 2013.

Our large projects group and regional district offices are busy responding to RFIs and RFPs for discrete projects, as well as alliance-type arrangements that consists of multi -- multiple projects over longer periods of time. As noted earlier, we monitor a variety of information sources on transmission spending projections and these sources point to a bright future in both the near- and long-term for service providers like MYR. Reliability assurance is a primary driver for transmission spending and is common among all transmission planning regions in the US where relatively little money was spent on new transmission and system upgrades from the period starting in the early 80s until about 2005. As you know, a big driver for transmission spending today was the passage of the Energy Policy Act of 2005. Implementation of mandatory NERC reliability standards has and is expected to continue to drive transmission investment for the repair and replacement of aging infrastructure across the country.

Reliability remains a priority even with a tepid electricity demand growth projections. The Energy Information Administration recently provided a preview of the 2013 Annual Energy Outlook scheduled for release this summer. The EEI is projected -- or EIA, excuse me -- is projecting an average increase in US electricity use of just 0.6% a year for industrial users and 0.7% for households through 2040. The link between electricity use and the economic growth has become less clear, in part, because of energy efficiency initiatives and the loss of manufacturing load across the country. With the slower pace of growth in electricity used, utilities are incented to redirect capital investments to transmission projects where the returns are often higher and more predictable than the returns available on the power supply and distribution sides of their businesses. A number of utilities are investing in high-voltage transmission lines because federal regulators are allowing them higher equity returns and construction work in progress or CWIP in rate base to encourage new investment in the nation's aging electric grid.

Additionally, the need for more transmission infrastructure to connect renewable power sources to load centers should continue as renewable energy portfolio standards continue to grow on a state-by-state basis. With 30 states and the District of Columbia having enforceable RPS or other mandated renewable capacity policies. Furthermore, we anticipate that the eventual implementation of FERC Order 1000 will promote more efficient and cost effective development of new transmission, and facilitate movement in new transmission development across the country for years to come. FERC Order 1000 compliance filings submitted in 2012 for each RTO have opened a forum for defining how the order will play out. Compliance filings for FERC Order 1000 inter-regional planning and cost application methodologies were originally due on April 11, 2013. After numerous utilities and planning authorities requested extensions, on February 26, FERC pushed back the deadline for transmission providers to July 10 of this year. The Order focuses on looking at the intraregional big picture, and could help foster the evolution of the -- of a national transmission grid into something similar to the interstate highway system.

We continue to see movement in new major projects across the country, in addition to a sizable number of projects that we have been tracking for several years. I would like to highlight five big utility systems in a northeast region benefiting from transmission expansion and upgrades. The first is the New York Power Authority. Governor Cuomo targeted an energy highway blueprint plan in October of last year, supporting $5.7 billion for incremental public and private spending on energy infrastructure throughout the state, with a good portion of that amount targeted for transmission spending. In December, the New York Power Authority approved a $726 million project for repair and improvements to its half-century old transmission system in Western, Central and Northern New York.

The National Grid is another utility operating in New York, as well as Massachusetts, Rhode Island and New Hampshire. The Grid has also announced that it is increasing its capital spending on transmission from $178 million this year to $233 million by 2017, an 30% increase for that period. Northeast Utilities is a third utility operating in the region with service areas in Connecticut, Massachusetts and New Hampshire. NU announced in November that it intends to spend $3.7 billion on transmission between 2013 and 2017. This represents a $700 million increase in five years spend from what was previously expected.

Fourth, we anticipate continued robust capital spending for at least the next several years by Public Service Enterprise Group, which operates in New Jersey. In its fourth quarter earnings call on February 21, PSENG announced plans for investments to strengthen its electric and gas distribution system, as well as the Company's transmission infrastructure. In addition to increased distribution capital program of up to $3.9 billion over the next 10 years, they have targeted an additional $1.5 billion to harden and improve the grid at its regulated electric transmission business. And a fifth and final example is Pennsylvania Power and Light. PPL said it expects to invest $968 million in 2013 to improve the reliability of its power delivery system. That includes roughly $616 million for transmission projects and $352 million for distribution upgrades. The investment of nearly $3.8 billion planned over the five years are aimed at strengthening their system to provide safe and reliable service well into the future.

I could go on and on sighting other examples of transmission spending plans in other regions of the country, but I think I will stop at the Northeast. Suffice to say, the outlook for transmission spending is equally bright in the Midwest, the Great Plains states, Texas, Louisiana and the Western United States. We expect some large project activity in the early part of 2013 with substantial increases later in 2013 and into 2014. As a major player on all of these markets we are optimistic about winning our fair share of these opportunities. While we saw an increase in bidding activities in some of our electric distribution markets, competition continues to remain strong.

Now, I'd like to shift over to our C&I business segment. As mentioned earlier on this call, our C&I segment ended the year with record backlog and we expect that business to continue to improve as economic conditions improve in the West. Nonetheless, excess capacity remains within the C&I industry as both large and small contractors pursue available work. Although our margins when this segment increased for the full year 2012, they are still below historical levels, in part reflecting the strong competition in the market. Our C&I market focus continues to be healthcare, government office buildings, research centers, smart highway work, data centers, mining and wastewater treatment. These markets makes us somewhat less susceptible to the slow economic recovery at the national level.

We are always focused on how we can create value for MYR shareholders. While we believe that MYR is one of the lowest cost and highest value providers in the industry, we continue to monitor and look for opportunities to improve our cost structure. We are committed to serving our clients with ever improving safety, high quality customer service and on-time execution. We believe that our cost structure, coupled with a steady focus on our markets, will position MYR to maximize its potential as greater numbers of T&D and C&I projects move forward.

That's it for now. As always, thank you for your interest and support. And now, I'd like to turn the session over for your comments and questions.

(Operator Instructions).

Our first question is from Tahira Afzal of KeyBanc. You may begin.

Good morning, gentlemen, and congratulations on a good quarter.

Good morning, Tahira.

Good morning.

The one question I have is on your transmission capacity. Clearly, you've been investing in that in 2012. Could you talk about where your capacity stands to take on incremental projects going forward? And whether all of those investments have really been tied to catching up with work that you have been booking? So we can get an idea of how much growth you could get if -- this lag of transmission that we're seeing ahead starts to materialize.

Sure. By transmission capacity, I assume you mean both the man power, as well as the equipment.

That's right.

Comment on both, we do have additional capacity today to take on additional transmission projects. We will have significantly more capacity later in the year as some of our projects begin to ramp up and we're trying to reflect that in our bidding strategy for projects. And are very focused on which ones start next month, which ones start in three months, which ones start in six months or nine months down the road. So, we're trying to bid the work that best fits our resources.

Today, both on the man power side, as well as the equipment side, resources are fairly snug. As I said, we have the ability to take on additional work even if it would start up in two weeks. The equipment, we're very thankful that we made the decisions we did in the last three or four years to upgrade our transmission fleet, and we feel we're one of the best-positioned contractors out there to do it. And in fact, have picked up some small amount of work because some of our competitors didn't have the transmission equipment to handle it. So we, again, are very thankful we made some of the decisions we did a few years ago.

Okay, and Bill, if I look at your book-to-bill on the T&D side, and try to see where you are and where you've been, it's still -- clearly, this quarter picked up in closer to one time. But, it's been quiet quarters below one time. And I guess as you look at all of these opportunities going forward, do you see book-to-bill recovering in that segment about one time? And I know it's difficult to say on a quarterly basis, but as you look out over this year?

Yes, you're right. It's difficult to project on a quarter-by-quarter basis, but we feel pretty good about looking at it from year-to-year, and would expect to see some improvement.

And the second question is in regards to your C&I business, I think that's one that doesn't get enough attention. We've seen two quarters of 1.5 times book-to-bill, and if I look at your '07, '08 [beach] levels on the margin side, clearly, there could be a fairly noticeable improvement if that market recovers. Could you break down for us where you think that market is right now in terms of its recovery? And if you look back at the last piece and the pricing you got, when we start to see that actually -- essentially, come in for you.

Okay. Well, we certainly are not satisfied with the margins in our C&I business, in spite of the fact that they have improved. We think further improvement is definitely possible. And we're seeing not perhaps as much work at we would like to see out there, because there's still plenty of competition in that market, but we are seeing a lot of opportunities for some big jobs that fit our comfort zone. Healthcare remains really strong, the Mining business in Arizona remains very strong with metal prices, so we feel good about that market, but we're not satisfied with the profits that we experienced in 2012, even though they are better.

Thank you very much.

Thank you. Our next question comes from Jase Scott of Johnson Rice and Company. You may begin.

Good morning, guys.

Good morning.

I'm just trying to get a size on you all's opportunity as far as the CAPX2020 and the ITC work that doesn't flow through the backlog. Could you give us any color there, as far as how big of an opportunity that is, and what percentage of your revenue in '13 that could make up?

Sure. On the CapEX work, one small project was completed last year by another contractor, there are two big projects that are currently under construction; we're performing work for both those. We refer to them as the Brookings Project and the Fargo Project. About one-third of that work has been contracted, and we are performing, as we reported earlier, big segments of that, but there's more than half of that work yet to come out.

The fourth project that makes up this Phase 1 is called the Lacrosse Project; that is something we expect to be bid here in the next couple of months. It's probably not quite as big as the Fargo and Brookings line, but it's still a significant piece of work. So I think there are plenty of opportunity for us in Minnesota, and I think there's some follow-on work with the utilities in that state, that because of the CAPX work, some other projects become feasible. So we are very high on Minnesota in terms of long-term market opportunities for MYR.

You mentioned the ITC work in Kansas. We, again, have a segment of that job under contract. I think the overall job is about 120 miles or 122 miles, and we've got, again, roughly one-quarter or one-third of that job under contract. We're mobilized on the job, we're moving a lot of material to the right-of-way, but it's still ramping up. And we're quite hopeful that all of that the V-plan work will come our way, assuming we perform well, and have a good safety record, and satisfy the client. So we think for both Kansas and Minnesota, are great opportunities for us not only for 2013, but 2014, 2015.

Right. No, I was just asking because when work doesn't flow through your backlog, it dilutes your book-to-bill, so the book-to-bill is a little bit deceiving here. But moving onto the margin in T&D, ex the margin improvement from the storm work in the fourth quarter, you all have been hovering around that 10% operating income margin for T&D. Do you think this is a good run rate assumption for '13? Or, I know that there's going to be some seasonality in the first quarter, but could you help me in my thinking about that?

Sure. Certainly, we've telegraphed to you and others that what the storm work meant in terms of margin improvement for us, and we would think it would be wise to maybe factor that out of the long-term runway. But in terms of taking just one year like 2012 and saying, pull out the benefit of the storm work, and then assume 2012 is a good run rate. We would suggest that maybe you look at the last three or four years, and pull out the unusual items in each of those last three or four years, and come up with an average that's based upon more than one year period of time.

Okay, thank you.

Thank you. Our next question is from Alex Rygiel of FBR Capital Markets. You may begin.

Good morning, Bill. Great quarter.

Thanks, Alex.

In past conference calls, you discussed possible strategic acquisitions and sort of looking to go vertically integrated in some instances. Is that still your position on the targets that you're looking at these days?

Yes, we'd consider that very viable for our Business. There are lots of smaller contractors that are being marketed by investment bankers. And we look at several every month, and in some cases, if it has a high degree of interest, we have discussions with the owners. So yes, that is a market that we -- I think vertically integrating our Company does make sense, if you can do it at the right price and the right company with the right management team.

And in your prepared remarks, you discussed -- or actually in the Q&A, you discussed that you would have some available -- or some capacity coming available in the second half of the year due to project completions, which is a great thing. But does that also raise the uncertainty with regards to thinking about the margin profile in the second half of the year, given the likelihood of startup projects beginning?

Yes, certainly, there's always uncertainty out there, Alex. Not only will we be bringing up some of our capacity as we complete jobs, our competitors have jobs that are completing, too, and they will be looking, like us, to find a home for that equipment, find a home for their people. One area is the work in Texas, the CRES work; from what I've read, all of the CRES work is expected to be finished in 2013. Probably going to be a little bit of carryover with some of the projects, but there's a whole bunch of iron operating in Texas.

And people working in Texas on CRES work, and all of the players in that market will be looking for homes for those people and equipment. So there's always uncertainty. We think there are plenty of other projects to fill in for CRES and other things that wrap up, but this is not a simple business. You've got to keep working at it every day.

That's great. It's too bad you couldn't find another $ 1 million in revenue to achieve the $1 billion mark, but great year.

Yes, whipping on Paul and Greg Wolf to try to find that, but we think the number we reported is the right number and -- but we got pretty close.

(laughter). You sure did. Good luck.

All right, thanks.

Thank you. Our next question is from Andrew Wittmann of Baird. You may begin.

Hey, you guys. Good morning.

Good morning, Andy.

So wanted to just dig in a little bit more on the margins and maybe actually looking at what's in the T&D backlog. Seen any changes in there, is there some benefit from some of the tightness that you'd seen in the past year? Or is it starting to head the other way recognizing the -- that capacity might be opening up as we head into the middle of the year for the industry?

Let me turn that over to Paul, and see if he can provide a little more color on it.

Andy, I think -- we certainly don't see our margin opportunity declining there. We think it will be consistent with what we've seen in 2012 going forward.

Okay. Just in terms of the subcontractor work, it looks like one of the dynamics as we go through your K. Clearly, I think '12 was a year of lots of subcontracting, probably more larger projects than you've done in awhile. I think more recently, we've seen this transition to medium- and small-sized projects. The question is, does that mean less subcontractor work? And on a reported basis, is there a somewhat upward bias to margins, is it also just seeing less of that in 2013? How should we think about that?

Let me start off and then Paul can jump in. Certainly, the smaller projects, particularly those that are the NERC reliability work by traditional utilities, there's less likely to be a lot of material cost in that overall scope. The subcontractor cost, that's very project or utilities specific, whether they handle their own foundations and road building, or whether they contract that to somebody like MYR.

There are projects -- we've bid on a number of wind farm jobs recently. And the wind farms are performed, as you know, by nontraditional players that don't have purchasing departments, they don't necessarily have engineering departments. So, I think if we were to pick up some wind farm work, there is the possibility that there would be some material and subcontractor scope in those small- to medium-sized projects. So Paul, do you want to add on that?

Well, Andy, I think the latter part of your question was, could this have an impact on our margins if projects that we take on going forward have less subcontractor and material revenues. Is that correct?

Right.

Typically, we think the highest value work that we do is around our people and our equipment, so in theory, you could say that it could provide for higher margins. But again, the challenge we have is every customer is different, every project is different, and so our next few projects that we pick up, whether big or small, might have subcontractors and materials in there, so we -- it's hard for us to predict that.

Understand. Maybe strategically, Bill, you've been clearly investing in the capital base here for a number of years. I'd say a pretty high level of spend last year has benefited you. Looking in '13, are you kind of more -- and I do say, maybe you were investing in the capital equipment ahead of the work. As you look into '13, are you kind of more investing in capital, in line with the work, or how should we think about your strategic vision there? And then Paul, what's the number? We saw that you said it's going to be down in '13, but how down would be kind of helpful. Thank you.

Well, in terms of capital for equipment and tooling, we would expect a level pretty comparable to what we spent last year. There are certain pieces of equipment that are very scarce in today's market. I said earlier in the call, we've actually picked up some small jobs because we had the specialty equipment, and a couple of our competitors didn't have the equipment. So everybody in the industry is running pretty close to the edge on some of the specialty equipment.

And certainly, the -- we're not finding any cheap transmission equipment in any auctions, which four or five years ago, we were picking up lots of good, used equipment at very attractive prices. Today, there are no deals in the market, so we're forced, and I think our competitors are forced to buy new. And we think we have good pricing from our manufacturers, but there are no steals to be had with this transmission equipment in today's market.

Great, thanks. And just one other quick clarification, you mentioned the bonuses in 4Q. And clearly, it was kind of a bump up in the run rate. Is something in the 15.5, 16.5 quarterly run rate the right number to be thinking about there, Paul, at least with this level of work that you're seeing today?

I think that's probably a good number. In the past, I've said $15 million is a good number, but probably $15 million to $16 million is a safe number for your modeling.

Thank you very much. Have a nice day.

Thank you. Our next question is from William Bremer of Maxim Group. You may begin.

Good morning, gentlemen. Nice quarter.

Good morning, Bill.

Good morning.

Can you give us an update on the current pricing environment right now? As capacity is getting taken out here and some larger projects are due to come up for bidding, how is the pricing at the current times?

It's hard to generalize, Bill. We, I know, told you and others that it's a very regional market-specific and time-specific. There are little niches of the country where we think we can get a little premium for our services, there are other areas that are highly competitive. Of course, we are trying to gravitate to those markets where we have a little better pricing opportunities. So I wouldn't say it's very -- any different than what we've seen in the last year or 18 months, in terms of averaging this all out. And again, it's very market-specific.

Okay, and then looking year-over-year, very nice growth year-over-year on T&D. Can you maybe give us a little inkling of the substation work that was done year-over-year, how much of an increase was substation work?

Hey, Bill. I don't -- we don't actually break that out. I don't think we've ever discussed that as a standalone piece of business.

I don't think we have, either. It has been substantial. We've done a couple of good-sized station jobs this year and expect to continue to station work in the future, but that's something we don't break out separately. We consolidate that up through our Transmission and Distribution segment, but it is significant.

Right, okay. And one for you, Paul, just a tax rate we should be utilizing for '13 and on. What's the current state there?

I think I'd -- probably 37.5% would be a good number.

Okay, great, gentlemen. Thank you.

Thank you. Our next question comes from Craig Irwin of Wedbush. You may begin.

Good morning, gentlemen. This is [Ming Hsu] for Craig. Thanks for taking my question. Can you give us some color on impact of storm work on your core operation? I'm looking for an estimate of how much T&D revenue did not get recognized due to the storm work. Thanks.

What I've said in the past is on the top line, it's not really the revenues -- they're not really incremental to storm work. Where we really see the benefit is our -- to our margins. So unlike some others in our space, when we do storm work, we take people off of other jobs that they're working on and we take them to those locations to do the restoration services. That might be different than a few others. So top line, it's hard to really say how much is incremental revenue, but it's easier to say what the incremental benefit is to margin.

So basically, I understand it's -- I'm looking for is the top line impact on your core revenue. If you don't do the storm work, you should be able to recognize more T&D revenue. Is that correct?

If those workers hadn't done storm work, they would have been working on other T&D projects.

Yes, that's the impact I'm looking for.

Yes, I don't have a number for that.

Okay, all right. Okay, that's fair. Thanks for the color.

Thank you. (Operator Instructions).

Our next question is from Dan Mannes of Avondale. You may begin.

Hey, good morning, Bill and Paul.

Good morning, Dan.

A couple quick follow-up questions, and first, Bill, thanks for the color on both ITC and CAPX2020, because it does help bridge a little bit the challenge that I think the Street has with backlog. But I was hoping to take it maybe another step farther, given what you already are working on and assuming you're able to maintain those jobs through completion, how much visibility do you have, at least on maintenance and crews and large project revenue as you go to '13, '14 and '15? Are you able to already be able to define where most of these people are going to be? Or even with that, do you see a need to replace a lot of work over the next two to three years?

We have a need to replace these jobs with lots of new jobs, and there are lots of new jobs out there that we're bidding. So we definitely don't have all of our revenues under contract for 2013. I think we got a good start with what we've got under contract, but we're aggressively bidding each week. Both Paul and I are involved in bid reviews a couple times a week for projects that are over a certain size threshold that from a policy standpoint, we have to review, so we have a lot of work yet to find to complete 2013 and 2014.

Okay. My follow-on there is then would -- and I'll focus on '13, and not to be too short-term oriented, but outside of Cross Texas, which I think finishes up in summer and Swift, which is close to the end of the year, do you have any other major project roll-offs this year?

In terms of completed projects, no. But remember, with the CapEX work, as well as the ITC work, we don't have other portions or other segments of those jobs under contract. So, we are very hopeful that we're going to get additional segments of that, but they're not under contract today.

Understood. One other question on the bidding environment. Given the fact that you have been subbing out a lot historically on some of these other bigger EPC jobs, have you considered or are you bidding in conjunction, or even potentially as a sub to a civil contractor as a way to maybe reduce your subcontractor risk?

We have looked -- different forms of agreements where we would participate with a civil contractor on jobs, on a lot of the really big jobs, there are lots of -- several contractors that are wanting to talk to people like MYR, so we wouldn't rule that out.

So from your perspective, that enables you to really focus on the part that you control and maybe get better -- and maybe have better margins, at least on the revenues you realize while maybe offloading some risk onto someone else?

Yes, that would be part of the consideration. Of course, we know how to build roads, we know how to dig foundations, we know how to subcontract for engineering services under us, material procurements under us, so we're not inclined to turn our fate entirely over to some big GC. It has to -- it's very project-specific. They need to bring something to the table, just like we need to bring something to the table, and we think we can act as prime on certain projects and do an exceptional job, but there are instances where it probably makes more sense to us affiliate with a big GC.

Got it. Thank you very much.

Thank you. Our next question is from Noelle Dilts of Stifel. You may begin.

Hi, this is [Stephen] on for Noelle, actually. How are you guys doing?

Good, Stephen.

Quick question, I saw in your guys' 10-K that CTT was the biggest customer during 2012, a little bit over 15% of revs. Was this all CRES work, or was there some other distribution or other transmission work in there?

It was all CRES work.

Okay, and then as far as strategy to replace that work, obviously, you guys keep talking about robust bidding environment, but you specifically focused on Northeast. And then I know one of your previous competitors is looking to exit that market. Do you expect that region to become a bigger focus for you in 2013 and beyond?

We think it's a terrific market and a good spot for us to be. I understand a competitor is maybe pulling back from that area, but we think it's a great place to be. A lot of opportunities, and the fact that I focused on that and cited five big utility systems spending money, that doesn't mean I think the Northeast is necessarily better than the Midwest or better than Texas or better than the West. I just wanted to give you some examples of utility systems across the country that are increasing their spending plans on transmission and in some cases, distribution.

Great, thank you.

Thank you. Our next question is from Tristan Richardson of DA Davidson. You may begin.

Good morning, guys. I've just got one question. Could you talk a little bit about the -- when referring to these major projects with multiple sections, could you talk a little bit about the advantage it gives you having performed previous sections of work, and when you look at competing for upcoming sections of the same project?

Sure. Well, we've already mobilized the equipment and the man power, and have them on the ground, have them run through our training. We've demonstrated our ability to meet the clients' schedule. So it's an advantage, whether we're the incumbent or if one of our competitors is an incumbent on a big project that's being let out and segmented. The incumbent has an advantage because you've got high earning people on the ground, and you're already mobilized do the work. So, provided you're providing a good service and doing -- meeting the clients' expectations, you definitely -- it's yours to lose.

And does that advantage give you a little bit of room on price, versus a non-incumbent competitor?

No, not necessarily. As these projects were bid, we put forth pricing to cover the overall project, so it wouldn't be an opportunity, while you did segment 1 at a low price -- we're not trying to bait and switch. We have offered what we think is a good, reasonable price, and that price would extend to future segments if awarded to us.

Okay. Thanks, guys, so much.

Thanks.

Thank you. We have a follow up question from Craig Irwin of Wedbush. You may begin.

Hey, guys. This is Ming Hsu for Craig again. Thanks for taking my follow-up question. Can you give us a rough estimate, what percentage of CAPX, ITC and Swift project still not under contract?

Well, what we told you as generally about one-third of the Brookings and Fargo lines are under contract. And that 25 to one-third is comparable on the B plan in Kansas, as to what's under contract and what's not.

All right, thanks.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to MYR Group for closing remarks.

Appreciate everybody being on the call this morning. We are quite proud of the year that we've completed. It took a lot of hard work on the part of the Management, as well as the folks with the wrenches in the field. We've worked a lot of overtime to achieve this, and have done it safely, and really proud of the effort our employees have put in 2012, and also appreciate the support of all of our partners. This would be cut subcontractors, material suppliers and last, I think, our shareholders for your continued support. So I don't have anything further. We look forward to getting on a call with you in May to discuss first quarter results, so that's all I have.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.