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MYR Group (NASDAQ:MYRG)

Q4 2012 Earnings Call

March 07, 2013 10:00 am ET

Executives

Philip A. Kranz - Vice President of Investor Relations

William A. Koertner - Chairman, Chief Executive Officer and President

Paul J. Evans - Chief Financial Officer, Vice President and Treasurer

Analysts

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

William D. Bremer - Maxim Group LLC, Research Division

Min Xu

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Steven Folse - Stifel, Nicolaus & Co., Inc., Research Division

Stephen Sanders - Stephens Inc., Research Division

Tristan Richardson

Operator

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.

Philip A. Kranz

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 p.m. 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 forth in yesterday's press release.

With that said, let me turn the call over to Bill Koertner.

William A. 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're very pleased to report that 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 5 years, we have grown our revenues organically at a compound annual growth rate of approximately 10%. We experienced year-over-year revenue growth in 4 of the last 5 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 5 years. The report predicts continued growth in transmission spending over the next 5 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 5 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 at 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, multiyear projects as well as smaller NERC reliability work on 69, 115, 138 and 161 kV 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 in the U.S. 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 [ph] 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.

Paul J. Evans

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 2012 from 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 higher 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 5 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 job and improvement -- and improved utilization of our fleet assets.

Fourth quarter 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 the 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. The 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, multiyear transmission projects. On a few of our large, multiyear transmission projects, our project scope included a significant amount of material and subcontractor work. As a result, our revenue and 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 2 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 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 the 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 and 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 flows through our quarterly 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 CapX2020 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, the 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 5 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 and against our peers. We believe this is an important measure and 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 funded debt and $155.3 million in availability under our credit facility. Our cash balance declined $14.2 million from December 31, 2011. This is 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 retain-ages 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'll turn the call back to Bill for a discussion on the overall industry.

William A. Koertner

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, 345kV 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 of 2010, we were selected as 1 of 2 alliance contractors to perform construction services on Group 1 transmission line projects for CapX2020 work in Minnesota. Currently, our crews are progressing on a 72-mile section of 345kV 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 CapEx work in the future under the scope of the Group 1 project's alliance 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 1 year. The project consists of 235 miles of 500kV 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 under way 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 consist 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 U.S., 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 electric -- 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 U.S. 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 use, 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 in 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 interregional planning and cost allocation 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 interregional big picture and could help foster the evolution 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 5 big utility systems in the 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 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.

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, a 30% increase for that period.

Northeast Utilities is the 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 5-year 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, PSE&G 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 & 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 5 years are aimed at strengthening their system to provide safe and reliable service well into the future.

I could go on and on citing 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 in this segment increased for the full year of 2012, they are still below historical levels, in part reflecting the strong competition in the market. Our C&I market focus continues to be health care, government office buildings, research centers, smart highway work, data centers, mining and wastewater treatment. These markets make 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Tahira Afzal of KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I guess the one question I have is on -- just on 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 sized to catching up with work that you have been booking so we can get an idea of how much growth we could get if this -- like the transmission that you're seeing a head start to materialize?

William A. Koertner

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

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

That's right.

William A. Koertner

And I'll 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 wrap 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 3 months, which ones start in 6 months or 9 months down the road. So we're trying to bid the work that best fits our resources. Today, both on the manpower 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 2 weeks. The equipment, we're very thankful that we made the decisions we did in the last 3 or 4 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.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Okay. And Bill, I mean, if I look at your book-to-bill on the T&D side, I knew you're excited to see where you are and where you've been. It still really this quarter picked up in [indiscernible] 1x, but it seems sort of 5 quarters below 1x and. I guess as you look at all these opportunities going forward, do you see book-to-bill recovery in that segment about 1x? And I know it's difficult to say on a quarterly basis but as you look out over this year?

William A. Koertner

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.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

All right, okay. And the second question is in regards to your C&I business. I think that's one that doesn't get enough attention. You've seen 2 quarters of 1.5x book-to-bill. And if I look at your '07, '08, these levels on the margin side, clearly there could be fairly low component [indiscernible] that market to double. So could you break down for us where you think that market is right now in terms of its recovery? And if you look back to the last piece and the pricing you've got, when do we start to see that as the -- potentially done for you?

William A. Koertner

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 as we'd like to see out there because there's still plenty of competition in that market, but we are seeing a lot opportunities for some big jobs that can fit our comfort zone. Health care remains really strong. The mining business in Arizona remains very strong with the 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.

Operator

Our next question comes from Jase Scott of Johnson Rice & Company.

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

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 an opportunity that is and what percentage of your revenue in '13 that could make up?

William A. Koertner

Sure. On the CapX work, one small project was completed last year by another contractor. There are 2 big projects that are currently under construction. We're performing work for both of those. We refer to them as the Brookings project and the Fargo project. About 1/3 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 La Crosse 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 are 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 or 122 miles, and we've got, again, roughly 1/4 or 1/3 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 V-plan work will come our way assuming we perform well and have a good safety record and satisfy the client. So we think both Kansas and Minnesota are great opportunities for us not only for 2013 but 2014, 2015.

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

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 deceiving here. But moving on to the margin in T&D, x the margin improvement from the storm work in the fourth quarter, you 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 there's going to be some seasonality in the first quarter, but could you help me in my thinking about that?

William A. Koertner

Sure. Well, certainly, we've telegraphed to you and others what the storm work meant in terms of margin improvement for us, and we would think it'd be wise to maybe factor that out of the long-term run rate. But in terms of taking just 1 year, like 2012, and saying, I'll 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 3 or 4 years and pull out the unusual items in each of those last 3 or 4 years and come up with an average that's based upon more than 1 year period of time.

Operator

Our next question is from Alex Rygiel of FBR Capital Markets.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

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

William A. Koertner

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 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.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

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 your sort of thinking about the margin profile in the second half of the year given the likelihood of start-up projects beginning?

William A. Koertner

Yes, certainly, there's always uncertainty out there, Alex. Not only will we be bringing up some more 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 CREZ work. And from what I have read, the -- all of the CREZ work is expected to be finished in 2013. There probably will -- 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 are in CREZ 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 CREZ and other things that wrap up, but this is not a simple business. You got to keep working at it every day.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

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

William A. Koertner

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

Operator

Our next question is from Andrew Wittmann of Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

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

William A. Koertner

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

Paul J. Evans

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

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. Just in terms of the subcontractor work, it looks like one of the [indiscernible] 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 a while. I think more recently, we've seen this transition to medium- and small-sized project, which, I guess, the question is, does that mean less subcontractor work? And then on a reported basis, is there maybe a somewhat upward bias to margins? Is it also just seeing less of that maybe in 2013? Maybe how should we think about that?

William A. Koertner

Well, let me start off and then Paul can jump in. Certainly, the smaller projects, particularly those that are kind of the NERC reliability work by traditional utilities, there is less likely to be a lot of material cost in that overall scope. Subcontract cost, that's very project or utility specific, whether they handle their own foundations and road building or whether they contract that to somebody like MYR. Now there are projects. We've bid on a number of wind farm jobs recently. The wind farms are performed, as you know, by nontraditional players that don't have purchasing departments. They don't necessarily have engineering department. So I think if we were to pick up some wind farm work, there's the possibility that there would be some material and subcontractor scope in those small- to medium-sized projects. So Paul, you have more to add in that?

Paul J. Evans

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?

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Right.

Paul J. Evans

I mean, 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.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Understand. Maybe strategically, Bill, you've been clearly investing in the capital base here for a number of years. So a pretty high level of spend last year has benefited you. Looking in '13, are you kind of more -- and I have to say maybe you're investing in 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 kind of vision there? And then Paul, what's the number? We saw that you said it's going to be down in '13, but, I guess, how down would be kind of helpful.

William A. Koertner

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, we -- we're not finding any cheap transmission equipment in any auctions, which 4 or 5 years ago we were picking up lots of good, used equipment at very attractive prices. Today, there are no deals in the markets. So we're forced and I think our competitors are forced to buy new, and we think we have -- we'll have good pricing from our manufacturers, but there are no steals to be had with this transmission equipment in today's market.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

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

Paul J. Evans

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 probably a safe number for your modeling.

Operator

Our next question is from William Bremer of Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

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

William A. Koertner

Well, it's hard to generalize, Bill, as we -- I know I've told you and others it's 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're trying to gravitate to those markets where we have a little better pricing opportunity. So I wouldn't say it's very -- any different than what we've seen in the last year or 18 months there in terms of averaging this all out. And again, it's very market specific.

William D. Bremer - Maxim Group LLC, Research Division

Okay. And then looking year-over-year, very, very nice growth year-over-year on C&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?

Paul J. Evans

I don't -- we don't actually break that out. I don't think we've ever discussed that as a stand-alone piece of business. [indiscernible]...

William A. Koertner

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 do station work in the future. But that's something we don't break out separately. And we consolidate that up through our Transmission and Distribution segment, but it is significant.

William D. Bremer - Maxim Group LLC, Research Division

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

Paul J. Evans

I think probably, 37.5% would be a good number.

Operator

Our next question comes from Craig Irwin of Wedbush.

Min Xu

This is Min Xu for Craig. Can you give us some color on impact of storm work on your corporation? I'm looking for an estimate of how much T&D revenue did not get recognized due to the storm work.

Paul J. Evans

Well, what I've said in the past, there's -- on the top line, it's not really -- the revenue, it's not really incremental, the storm work. Where we really see the benefit of storm work 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 their restoration services. That might be different than a few others. So top line, it's hard to sort of really say how much is incremental revenue, but it's easier to say what the incremental benefit is to margin.

Min Xu

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

Paul J. Evans

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

Min Xu

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

Paul J. Evans

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

Operator

[Operator Instructions] Our next question is from Dan Mannes of Avondale.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

A couple of quick follow-up questions. And first, Bill, thanks for the color on sort of -- on both ITC and CapX2020 because it does help bridge a little bit the challenge that I think the Street has with the backlog. But I was hoping to take it maybe another step further. 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 or crews and large project revenue, as you go through '13, '14 and '15? I mean, 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 sort of a need to replace a lot of work over the next 2 to 3 years?

William A. Koertner

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 of times a week for projects that are over a certain size threshold that, from a policy standpoint, we have to review. So we're -- we have a lot of work yet to find to complete 2013 and 2014.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

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

William A. Koertner

In terms of completed projects, no. But remember, with the CapX 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.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Understood. One other question on the bidding environment. Given the fact that you have been subbing out of lot historically on some of these 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?

William A. Koertner

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

Daniel J. Mannes - Avondale Partners, LLC, Research Division

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

William A. Koertner

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 -- 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 also affiliate with a big GC.

Operator

Our next question is from Noelle Dilts of Stifel.

Steven Folse - Stifel, Nicolaus & Co., Inc., Research Division

This is Steven on for Noelle actually. 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 CREZ work? Or was there some other distribution or other transmission work in there?

William A. Koertner

That was all CREZ work.

Stephen Sanders - Stephens Inc., Research Division

Okay. And then as far as strategy or replace that work, obviously you guys keep talking about robust bidding environment. But you specifically focus in the 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?

William A. Koertner

We think it's a terrific market and a good spot for us to be. I understand competitors may be 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 5 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.

Operator

Our next question is from Tristan Richardson of D.A. Davidson.

Tristan Richardson

I just got one question. Could you talk a little bit about the -- when referring to these major projects with multiple sections, could you just 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?

William A. Koertner

Sure. Well, we've already mobilized the equipment and the manpower and have them on the ground, have them run through our training. We've demonstrated our ability to meet the client's 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 led out, I think the incumbent has an advantage because you've got iron and people on the ground and you're already mobilized to do the work. So provided that you're providing a good service and doing -- meeting the client's expectation, you're -- definitely, it's yours to lose.

Tristan Richardson

And does that advantage give you a little bit of room on price versus a nonincumbent competitor?

William A. Koertner

Not necessarily. As these projects were bid, we put forth pricing to cover the overall project. So it wouldn't be an opportunity why you did segment 1 at a low price. We're not trying to bait and switch. We offered what we think is a good, reasonable price, and that price would extend to future segments if awarded to us.

Operator

We have a follow-up question from Craig Irwin of Wedbush.

Min Xu

This is Min Xu for Craig again. Can you give us a rough estimate? What percentage of CapX, ITC and SWIP projects are still not under contract?

William A. Koertner

Well, what we told you is generally about 1/3 of the Brookings and Fargo lines are under contract and that 25% to 1/3 is comparable on the V-plan in Kansas as to what's under contract and what's not.

Operator

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

William A. Koertner

Appreciate everybody being on the call this morning. We are quite proud of the year that we've -- we 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 I'm really proud of the effort our employees have put in, in 2012. And also appreciate the support of all of our partners. This would be 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.

Operator

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

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