TMCnet News
TEJON RANCH CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements, including without limitation statements regarding strategic alliances, the almond, pistachio and grape industries, the future plantings of permanent crops, future yields, prices and water availability for our crops and real estate operations, future prices, production and demand for oil and other minerals, future development of our property, future revenue and income of our jointly-owned travel plaza and other joint venture operations, potential losses to the Company as a result of pending environmental proceedings, the adequacy of future cash flows to fund our operations, market value risks associated with investment and risk management activities and with respect to inventory, accounts receivable and our own outstanding indebtedness and other future events and conditions. In some cases these statements are identifiable through the use of words such as "anticipate", "believe", "estimate", "expect", "intend", "plan", "project", "target", "can", "could", "may", "will", "should", "would", and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth, and trends in our business and other characterizations of future events or circumstances are forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. These forward-looking statements are not a guarantee of future performances and are subject to assumptions and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance, or achievement implied by such forward- looking statements. These risks, uncertainties and important factors include, but are not limited to, weather, market and economic forces, availability of financing for land development activities, competition and success in obtaining various governmental approvals and entitlements for land development activities. No assurance can be given that the actual future results will not differ materially from the forward-looking statements that we make for a number of reasons including those described above in the section entitled, "Risk Factors" in this report and our Annual Report on Form 10-K. Overview We are a diversified real estate development and agribusiness company committed to responsibly using our land and resources to meet the housing, employment, and lifestyle needs of Californians and to create value for our shareholders. In support of these objectives, we have been investing in land planning and entitlement activities for new industrial and residential land developments and in infrastructure improvements within our active industrial development. Our prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that, at its most southerly border, is 60 miles north of Los Angeles and, at its most northerly border, is 15 miles east of Bakersfield. Our business model is designed to create value through the entitlement and development of land for commercial/industrial and resort/residential uses while at the same time protecting significant portions of our land for conservation purposes. We operate our business near one of the country's largest population centers, which is expected to continue to grow well into the future. We currently operate in four business segments: commercial/industrial real estate development; resort/residential real estate development; mineral resources; and farming. Our commercial/industrial real estate development segment generates revenues from building, grazing, and land lease activities, land and building sales, and ancillary land management activities. The primary commercial/industrial development is TRCC. The resort/residential real estate development segment is actively involved in the land entitlement and development process internally and through joint venture entities. Its revenues are generated through farming activities within the Centennial joint venture. Within our resort/residential segment, the three active developments are TMV, Centennial, and the Grapevine Development Area, or Grapevine. During the first quarter of 2013 we began land planning activities and the first steps of gathering information to prepare an environmental impact report to entitle Grapevine, which is an approximately 15,315-acre potential development area located on the San Joaquin Valley floor area of our lands, adjacent to TRCC. We are currently focusing on approximately 8,010 acres within Grapevine for a mixed use development to include housing, retail, and commercial components. Our mineral resources segment generates revenues from oil and gas royalty leases, rock and aggregate mining leases, a lease with National Cement and sales of water. The farming segment produces revenues from the sale of wine grapes, almonds, and pistachios. During 2014, the Company has continued to expand its water operations to not only manage water infrastructure and water assets but to also sell water on an annual basis to third parties as we did during the first quarter of 2014. We determined during the third quarter that water assets and activity fit most appropriately with our other resource assets and will now be included in the mineral resources segment. As a result of this, the Company has reclassified prior year amortization associated with the purchase of water contracts from corporate expenses into mineral resources expenses on the consolidated statements of operations to conform to the current year presentation. The Company has also reclassified current year income from water sales 23 -------------------------------------------------------------------------------- of $7,702,000 into mineral resources revenues and mineral resources expenses of $4,523,000 on the consolidated statements of operations from other income. For the first nine months of 2014 we had net income attributable to common stockholders of $3,739,000 compared to net income attributable to common stockholders of $4,991,000 for the first nine months of 2013. This decrease was primarily attributable to decreases in farming operating income resulting from declines in pounds sold across all crops, increases in corporate expenses resulting from an increase in stock compensation due to the reversal of stock compensation expense in 2013 and an increase in pension expense resulting mainly from pension settlements. This was partially offset by an increase in mineral resources operating income generated by sales of water. This Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative discussion of our results of operations. It contains the results of operations for each operating segment of the business and is followed by a discussion of our financial position. It is useful to read the business segment information in conjunction with Note 11 (Business Segments) of the Notes to Unaudited Consolidated Financial Statements. Critical Accounting Policies The preparation of our interim financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical if (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimates that are likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of long-lived assets, capitalization of costs, profit recognition related to land sales, stock compensation, and our defined benefit retirement plan. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year ended December 31, 2013. Please refer to that filing for a description of our critical accounting policies. Results of Operations Comparison of nine months ended September 30, 2014 to nine months ended September 30, 2013 Total revenues for the first nine months of 2014 were $36,708,000 compared to $32,363,000 for the first nine months of 2013. This increase of $4,345,000, or 13%, in total revenues is primarily attributable to an increase in mineral resources revenues mainly due to water sales and were partially offset by a decease in farming revenues resulting from a decrease in almond and pistachio sales. Commercial/industrial real estate segment revenues were $8,067,000 for the first nine months of 2014, a decrease of $322,000 or 4% compared to the first nine months of 2013. This decrease was primarily due to a $732,000 reduction in Calpine power plant percentage rent resulting from lower 2014 prices and to a one-time credit of $467,000 that is the result of an amendment to the lease executed in the second quarter of 2014 and retroactive to January 2013. The amendment is related to percentage rent paid by Calpine on the collection of greenhouse gas assessment taxes that are now included in the energy revenue component of the percentage rent. The percentage rent calculation has been modified to exclude these taxes that are collected by Calpine and passed on to the State of California. The retroactive amendment resulting in a credit of $467,000 will be applied over time through future earned percentage rent. Our expectations are that percentage rent from this lease will continue to range between $400,000 and $600,000 as it has traditionally done. The decrease in commercial/industrial segment revenues was also attributed to a $162,000 decrease in hunting and other ancillary revenues. This decrease was partially offset by a $593,000 increase in development fees related to the construction of the Outlets at Tejon. Commercial/industrial real estate segment expenses were $10,021,000 during the first nine months of 2014, an increase of $477,000 or 5% compared to the same period in 2013, primarily due to a $418,000 increase in general and administrative allocations in line with higher corporate expenses, a $235,000 decrease in costs capitalized to construction in progress as a result of increased activity within our joint ventures, such as the Tejon/Rock Outlet Center LLC, a $163,000 increase in professional services fees, and $114,000 higher employee compensation including stock compensation expense and bonus incentives associated with growth in this segment. These increases were partially offset by a $307,000 decrease in assessments from Tejon-Castac Water District, and a $136,000 decrease in marketing expense, as our marketing efforts have been directed to the Outlets at Tejon, where costs are shared with our joint venture partner. 24 -------------------------------------------------------------------------------- Resort/residential segment revenues were $786,000 during the first nine months of 2014, a decrease of $95,000, or 11%, compared to the same period in 2013 primarily due to a decrease in management fees from TMV. In July 2014, we purchased the remaining ownership interests in the joint venture from our partner. Additionally, ancillary hay revenues declined due to timing of sales. Resort/residential real estate expenses increased $134,000, or 6%, during the first nine months of 2014, compared to the same period in 2013 primarily due to a $119,000 increase in general and administrative expense allocations in line with increased corporate expenses. Employee compensation increased $112,000 mainly due to increased staffing in order to handle the TMV and Grapevine development and entitlement projects. These increases were partially offset by a $90,000 decrease in costs related to the ancillary hay crop at Centennial. Mineral resources segment revenues increased $6,746,000, or 84%, to $14,801,000 during the first nine months of 2014 compared to the same period in 2013. As noted earlier, management determined that our water resources will be managed within the mineral resources segment. Prior year water resource activity has been reclassified to this segment for comparability purposes. See Note 1 (Basis of Presentation) of the Notes to Unaudited Consolidated Financial Statements for further detail regarding these reclassifications. The $6,746,000 increase is primarily due to the sale of 6,250 acre feet of water sales totaling $7,702,000. During the first quarter of 2014, we determined we had excess water supply for our 2014 needs, and in the first half of 2014 we sold 6,250 acre-feet of the 6,693 acre-feet of 2014 water we purchased. Additionally, cement and rock and aggregate royalties increased $428,000 due to expanded production driven by new road construction. These increases were partially offset by a $845,000 decrease in oil royalty revenues resulting from a 11% drop in production due to lower production from older wells, the timing of six new wells coming on-line late in the second quarter and in the third quarter, and the timing of completion of the expansion of lessees' production facilities. The average price per barrel of oil decreased approximately 3% when compared to the same period of 2013 to approximately $99. Leasehold payments decreased $488,000 due to Sojitz Energy entering the drilling phase of their lease. Future revenues from Sojitz will be based on production. Mineral resources expenses increased $5,024,000, or 553%, to $5,932,000 during the first nine months of 2014 compared to the same period in 2013, primarily due to the sale of 6,250 acre feet of water with a respective cost of sales of $4,523,000 and an increase of $482,000 in water cost amortization associated with the Nickel water purchase in late 2013. Farming revenues decreased $1,984,000, or 13%, to $13,054,000 during the first nine months of 2014 compared to the same period in 2013. With the 2014 crop harvest nearing completion, preliminary production figures reflect a decrease in production across all crops resulting from various weather conditions such as a mild winter that reduced the tree and vine dormant time and early hot summer weather. Following are detailed variance explanations by crop. The $1,984,000 decrease is primarily due to a $1,385,000 decrease in almond revenues because of a 39% decrease in pounds sold. The decrease in pounds sold is mainly due to the lower 2013 crop carryover inventory compared to the prior year and a 16% decline in 2014 production. The decrease in pounds sold is partially offset by a 20% increase in average price and a $108,000 increase in price adjustments for previously sold crop. Pistachio revenues decreased $765,000 because of a 16% decrease in pounds sold, mainly due to a 10% decrease in 2014 crop production to date. The decrease in revenues related to pounds sold was partially offset by a 10% increase in price. Wine grape revenue increased $130,000 as the average price increased 17%, while tons sold dropped 5% when compared to same period in the prior year. Farming expenses declined $1,075,000, or 11%, to $8,585,000 during the first nine months of 2014 compared to the same period in 2013. The mild winter negatively affected the production across all crops. The $1,075,000 decrease is primarily due to a $632,000 reduction in almond cost of sales mainly due to a 39% drop in pounds sold resulting from lower 2013 crop carryover and lower 2014 production to date. Pistachio cost of sales decreased $629,000 due to the drop in pounds sold during the first nine months of 2014 when compared to 2013 due to a reduction in 2014 production. Wine grape cost of sales decreased $203,000 due to a 5% decline in tons sold. These decreases were partially offset by a $322,000 increase in fixed water costs resulting from adjustments received in the third quarter of 2013 from WRMWSD for prior year reconciliations for which we received approximately $1,100,000 cash refund during the fourth quarter of 2013. Corporate general and administrative costs increased $1,417,000, or 21%, to $8,288,000 during the first nine months of 2014 compared to the same period in 2013, primarily due to a $1,965,000 increase in stock compensation expense resulting mainly from the reversal of $2,271,000 in expense in 2013 for grants that would not vest upon the Chief Executive Officer's retirement at the end of 2013. Employee compensation, including incentive bonus accruals, increased $607,000 due to increased staffing and the assumption of the attainment of performance measures. Additionally, pension expense increased $562,000 during the first quarter of 2014 resulting mainly from pension settlements, including that of the recently retired Chief Executive Officer. These increases were partially offset by a $927,000 increase in general and administrative expense allocations to other departments, a $251,000 decrease in charitable donations mainly due to the $250,000 pledge to the Houchin Blood Bank in 25 -------------------------------------------------------------------------------- 2013 and a $167,000 decrease in professional services expenses as we incurred fees in the comparable prior period related to our warrant dividend program as well as an SEC comment letter. Investment income was $521,000 during the first nine months of 2014, a decrease of $208,000, or 29%, compared to the same period in 2013 primarily due to a smaller portfolio of marketable securities held as holdings matured or were sold. Our share of earnings from our joint ventures was $3,293,000, an increase of $373,000, or 13%, during the first nine months of 2014 when compared to the same period in 2013 primarily due to $343,000 higher net income from our TA/Petro joint venture as a result of higher gasoline sales and improving net operating margins. Comparison of three months ended September 30, 2014 to three months ended September 30, 2013 Total revenues for the third quarter of 2014 were $13,852,000 compared to $15,128,000 for the third quarter of 2013. This decrease of $1,276,000, or 8%, in total revenues is primarily attributable to a decrease in farming revenues resulting mainly from lower 2014 pistachio sales. This decrease was partially offset by an increase in almond and wine grape revenues resulting from improved market prices. Commercial/industrial real estate segment revenues decreased during the third quarter of 2014 by $270,000, or 10%, to $2,572,000 compared to the third quarter of 2013 primarily due to an $86,000 decrease in percentage rent from our Calpine lease resulting from a reduction in energy pricing and to a modification of percentage rent, as discussed above. Additionally, hunting and ancillary revenues decreased $184,000. Commercial/industrial real estate segment expenses increased $84,000, or 3%, to $3,374,000 during the third quarter of 2014 compared to the same period in 2013 primarily due to a $168,000 increase in general and administrative allocations, an $87,000 increase in employee compensation, including bonus incentives, associated with growth in this segment and the assumption of the attainment of performance goals. Professional services and fees increased $105,000 related to general business consulting. These increases were partially offset by a $258,000 decrease in assessments from the Tejon-Castac Water District. Resort/residential real estate segment revenues were $199,000 during the third quarter of 2014, a decrease of $211,000, or 51%, compared to the same period in 2013 primarily due to a $129,000 decrease in ancillary hay crop sales and a $63,000 decrease in management assessment fees as a result of the DMB TMV LLC membership buyout, as described above. The decrease in hay crop sales is due to the timing of sales. Resort/residential real estate segment expenses increased $135,000, or 17%, to $939,000 during the third quarter of 2014 compared to the same period in 2013 primarily due to an increase of $101,000 in ancillary crop cost of sales. Mineral resources revenues declined $31,000, or 1%, mainly due to a $74,000 decrease in oil royalties as a result of a 7% drop in price, partially offset by a small increase in production and improved gas royalties compared to the same period in 2013. Sand and rock aggregate royalties declined while cement production continued to increase for a $32,000 net increase for the quarter compared to the 2013 quarter. Exploration lease revenues declined $25,000 as Sojitz entered the drilling phase of their lease. Future revenues from Sojitz will be based on production. Mineral resources expenses increased $176,000, or 53%, to $505,000 during the third quarter of 2014 compared to the same period in 2013, primarily due to an increase of $160,000 in water cost amortization associated with the Nickel water purchase in late 2013. Farming revenues decreased $764,000, or 8%, to $8,688,000 during the third quarter of 2014 compared to the same period in 2013, primarily due to a $1,630,000 decrease in pistachio revenues mainly due to a 12% decline in pounds sold due to a 10% drop in production, which was partially offset by a slight increase in average price per pound. This decrease was partially offset by a $765,000 increase in almond revenues due to a 30% increase in price, partially offset by a 9% decrease in pounds sold resulting from 16% lower production. The decrease in this segment was also partially offset by a $130,000 improvement in wine grape revenues mainly from a 17% increase in price per ton that was partially offset by a 5% decrease in tons sold. Farming expenses decreased $509,000, or 8%, to $5,715,000 during the third quarter of 2014 compared to the same period in 2013, primarily due to a $655,000 decrease in pistachio cost of sales as pounds sold declined 12%, a $311,000 decrease in almond cost of sales due to a 9% decline in pounds sold, and a $200,000 decrease in wine grape cost of sales due to a 5% decrease in pounds sold. These decreases were partially offset by a $533,000 increase in 2014 fixed water costs resulting from adjustments received by WRMWSD during the third quarter of 2013 for prior year water reconciliations, for which we received approximately $1,100,000 cash refund during the fourth quarter of 2013. 26 -------------------------------------------------------------------------------- Corporate general and administrative expenses increased $196,000 to $2,932,000 during the third quarter of 2014 compared to the same period in 2013, primarily due to a $325,000 increase in employee compensation, including incentive bonuses and stock compensation due to increased staffing and the assumption of the attainment of performance goals. Other expenses increased approximately $168,000, including pension and professional fees. These increases were partially offset by a $298,000 increase in expenses allocated to other segments. Our share of earnings from our joint ventures was $1,707,000, an increase of $466,000, or 38%, during the third quarter of 2014 when compared to the same period in 2013 primarily due to a $255,000 increase in our share of the TRCC/Rock Outlet net income as the Outlets at Tejon opened for business in the third quarter of 2014. Improvements in net margins at TA/Petro also contributed to the third quarter 2014 improvements. General Outlook As we enter into the last quarter of 2014 we are seeing increased commercial retail activity within TRCC, with the Outlets at Tejon opening in August 2014. We expect this increase in retail activity to continue into 2015. Within the industrial market we are focusing our efforts on companies that have a California and western United States distribution model. The logistics operators currently located within our development have demonstrated success in serving all of California and the western region of the United States and we are building off of their success in our marketing efforts. We believe our development strategy fits within the logistics model that many companies are using, which favors larger single-site buildings rather than a number of decentralized smaller distribution centers. A possible disadvantage to our development strategy is our distance from the Port of Los Angeles in comparison to the traditional distribution centers east of Los Angeles. We expect that the commercial/industrial segment will continue to experience costs, net of amounts capitalized, primarily related to marketing costs, commissions, planning costs, and staffing costs as we continue forward with our development plans. Most of the expense incurred within our resort/residential segment will be focused on the achievement of entitlement for the Grapevine Development Area, Centennial, and activities necessary to prepare a development business plan for TMV. All of our crops are sensitive to the size of each year's world crop. Large crops in California and abroad can rapidly depress prices. During, the third quarter of 2014, our crop production decreased in comparison with the same period in the prior year due to the impact of weather as described earlier. Thus far, 2014 almond and pistachio production in California is down from prior years due to weather and drought issues. We have sufficient water for our crops so we have not been impacted by the drought as others have been. Prices received for many of our products are dependent upon prevailing market conditions and commodity prices. Therefore, we are unable to accurately predict revenue and we cannot pass on to our customers any cost increases caused by general inflation, except to the extent such inflation is reflected in market conditions and commodity prices. As a result of current changes in oil markets, we are anticipating reductions in the price of oil used to determine royalty income. We expect to see these lower prices begin to impact us during the fourth quarter of 2014. Depending on the level of production and timing of price declines, we estimate that we could see up to a $150,000 reduction in oil royalties during the fourth quarter of 2014. The operations of the Company are seasonal and future results of operations cannot be predicted based on quarterly results. Future real estate sales and leasing activity are dependent on market circumstances and specific opportunities and therefore are difficult to predict from period to period. For further discussion of the risks and uncertainties that could potentially adversely affect us, please refer to Part I, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, or Annual Report, and to Part I, Item 1A - "Risk Factors" of our Annual Report. We continue to be involved in various legal proceedings related to leased acreage. For a further discussion, please refer to Note 9 (Commitments and Contingencies) of the Notes to Unaudited Consolidated Financial Statements in this report. Income Taxes For the nine months ended September 30, 2014, the Company incurred a net income tax expense of $1,647,000 compared to a net income tax expense of $1,752,000 for the nine months ended September 30, 2013. These represent effective income tax rates of approximately 31% and 24% for the nine months ended September 30, 2014 and, 2013, respectively. The effective tax rate for the first nine months of 2014 is based on forecasted annual pre-tax income for 2014 and lower estimated oil depletion allowances as a result of the decrease in oil revenues compared to the same period in 2013. As of September 30, 2014 we had an income tax receivable of $1,530,000, which is included in prepaid expenses and other current assets. For September 30, 2013, we had an income tax payable of $835,000. The Company classifies interest and penalties incurred on tax payments as income tax expenses. During the first nine months of 2014, the Company had $13,600 income tax payments for the 2013 tax year. 27 -------------------------------------------------------------------------------- Cash Flow and Liquidity Our financial position allows us to pursue our strategies of land entitlement, development, farming, and conservation. Accordingly, we have established well-defined priorities for our available cash, including investing in core business segments to achieve profitable future growth. We have historically funded our operations with cash flows from operating activities, cash and investments, and short-term borrowings from our bank credit facilities, and long-term debt tied to revenue producing assets. In the past, we have also issued common stock and used the proceeds for capital investment activities. To enhance shareholder value, we will continue to make investments in our real estate segments to secure land entitlement approvals, build infrastructure for our developments, ensure adequate future water supplies, and provide funds for general land development activities. Within our farming segment, we will make investments as needed to improve efficiency and add capacity to its operations when it is profitable to do so. Our cash, cash equivalents and marketable securities totaled $50,866,000 at September 30, 2014, a decrease of $13,601,000, or 21%, from the corresponding amount at the end of 2013. Cash, cash equivalents and marketable securities decreased during the first nine months of 2014 due to property and equipment expenditures that included infrastructure development costs and investment in joint ventures. Additionally, during the third quarter we completed the purchase of DMB TMV LLC's interest in TMV LLC. These investments were partially offset by increased borrowing, cash from operations and net maturities of marketable securities. The following table shows our cash flow activities for the nine months ended September 30: (in thousands) 2014 2013 Operating activities $ 4,757 $ 5,025 Investing activities $ (31,101 ) $ (7,025 ) Financing activities $ 19,349 $ 3,863 During the first nine months of 2014, our operations provided $4,757,000 of cash primarily attributable to net income including adjustments for non-cash items offset by increases in crop receivables and reductions in payables. During the first nine months of 2013, our operations provided $5,025,000 of cash primarily attributable to operating results mainly from farming revenues, mineral resources revenues, and investment income. These increases in cash were partially offset by an increase in accounts receivable and a decrease in accounts payable. During the first nine months of 2014, investing activities used $31,101,000 of cash primarily as a result of a $9,632,000 investment in our unconsolidated joint ventures of which $8,500,000 was contributed to TRCC/Rock Outlet Center LLC joint venture and $1,112,000 was contributed to TMV prior to the DMB TMV LLC membership interest buyout. Additionally, investing activities used $16,953,000 in capital expenditures during the first nine months of 2014 consisting of $6,029,000 of investments in TRCC infrastructure, primarily associated with expansion of water systems and road infrastructure on land at TRCC-East, $4,464,000 related to the Grapevine Development Area for entitlement activities, $2,924,000 related to investments in water systems as well as crop development and $2,319,000 related to Centennial Founders LLC for entitlement activities. The remaining capital expenditures consisted of $1,217,000 related to ordinary capital expenditures such as farm equipment, property maintenance equipment, and IT equipment replacements. The Company also invested $10,000,000 in the asset purchase of DMB TMV LLC's membership interest in TMV LLC. These expenditures were partially offset by net proceeds of $5,889,000 from the sale and maturity of marketable securities. During the first nine months of 2013, investing activities used $7,025,000 of cash primarily as a result of $15,789,000 in capital expenditures, $2,899,000 net investment in our unconsolidated joint ventures. $473,000 net investment in marketable securities. These expenditures were partially offset by a $14,139,000 in reimbursement proceeds for public infrastructure costs through the communities facilities district, or CFD and $512,000 in reimbursements for outlet center costs incurred prior to the formation of the joint venture. Included in the $15,789,000 of capital expenditures during the first nine months of 2013 was $2,352,000 related to Centennial Founders LLC. The remaining capital expenditures consisted of $13,437,000 of investments in TRCC infrastructure, primarily associated with the development of an outlet center on land at TRCC-East and ordinary capital expenditures such as farm equipment replacements and crop development. We anticipate that the requirements of our capital investment programs for the remainder 2014 when compared to 2013 may increase when compared to the requirements for the second half of 2013. These estimated investments include approximately $3,000,000 of infrastructure development at TRCC-East. This new infrastructure is to support continued commercial retail and industrial development within TRCC-East and to expand water facilities to support future demand. We are also investing approximately $1,000,000 to complete development of new grape vineyards and begin removal of old vineyards and almonds as a part of a long-term farm management program to redevelop declining orchards and vineyards to maintain and improve future farm revenues. We expect to possibly invest up to an additional $3,500,000 for land planning and entitlement activities for the Grapevine Development Area and approximately $1,000,000 for TMV pre-development activities. We may potentially invest up to $1,000,000 throughout the remainder of 2014 in our various joint ventures, including Centennial Founders LLC 28 -------------------------------------------------------------------------------- and TRCC/Rock Outlet Center LLC. We will continue to add to our current water assets and water infrastructure as opportunities arise to help secure our ability to supply water to our real estate and farming activities and as an investment, since we believe that the cost of water in California will continue to increase and expect to invest up to $1,000,000 in water assets and infrastructure. We are also planning to invest approximately $250,000 in the replacement of operating equipment, such as farm equipment, and updates to our information technology systems. During the first nine months of 2014, financing activities provided $19,349,000 in cash mainly due to the timing of net borrowings on the Company's line-of-credit. This increase in the line-of-credit was partially offset by the payment of payroll taxes on vested stock grants and $8,000,000 in payments on the line-of-credit. At September 30, 2014, there was an outstanding balance of $20,200,000 on our line-of-credit, $10,000,000 of which was associated with the purchase of DMB TMV LLC's interest in TMV LLC. During the first nine months of 2013, financing activities provided $3,863,000 in cash, primarily as the result of entrance into a $4,750,000 debt agreement which was partially offset by payroll taxes on issuance of restricted stock grants and the repayment of long term debt for a building being leased to Starbucks. It is difficult to accurately predict cash flows due to the nature of our businesses and fluctuating economic conditions. Our earnings and cash flows will be affected from period to period by the commodity nature of our farming operations, the timing of sales and leases of property within our development projects, and the beginning of development within our residential projects. The timing of sales and leases within our development projects is difficult to predict due to the time necessary to complete the development process and negotiate sales or lease contracts. Often, the timing aspect of land development can lead to particular years or periods having more or less earnings than comparable periods. Based on our experience, we believe we will have adequate cash flows and funding sources over the next twelve months to fund internal operations. Capital Structure and Financial Condition At September 30, 2014, total capitalization at book value was $390,290,000 consisting of $64,518,000 of long-term debt and $325,772,000 of equity, resulting in a long term debt-to-total-capitalization ratio of approximately 16.5%. As described below, the Company is in the process of expanding its long-term debt, which will increase the debt-to-total-capitalization ratio in future quarters. We have a long-term revolving line of credit of $30,000,000 that, as of September 30, 2014, had an outstanding balance of $20,200,000. At the Company's option, the interest rate on this line of credit can float at 1.75% over a selected LIBOR rate or can be fixed at 1.50% above LIBOR for a fixed rate term. During the term of this credit facility (which matures in September 2019), we can borrow at any time and partially or wholly repay any outstanding borrowings and then re-borrow, as necessary. The outstanding balance on this revolving line of credit is the result of working capital needs and the $10,000,000 payment to DMB TMV LLC on July 15, 2014, as part of the purchase transaction. Under the terms of the line of credit, we must maintain tangible net worth, defined as total equity, including noncontrolling interest, plus debt less intangible assets, not less than $225,000,000 and liquid assets of not less than $25,000,000 including available borrowing on the line of credit. At September 30, 2014, our tangible net worth was $390,290,000 and liquid assets were $60,666,000, including the amount then available for borrowing under the line of credit. This line of credit is secured by a portion of our farm acreage. The outstanding long-term debt, less current portion of $241,000, is $64,277,000 at September 30, 2014. This debt is being used to provide long-term financing for commercial retail development within TRCC-West and financing for the purchase of DMB TMV LLC's interest in TMV LLC. The debt to DMB TMV LLC was permanently refinanced with a long-term note from Wells Fargo as described below. On October 13, 2014, TRC, entered into an Amended and Restated Credit Agreement, a Term Note and a Revolving Line of Credit Note with Wells Fargo, or collectively the New Credit FAcility. The New Credit Facility is for $100,000,000 and consists of a new $70,000,000 ten-year term note and a renewal of the current $30,000,000 revolving line of credit. The New Credit Facility amends and restates TRC's existing credit facility dated as of November 5, 2010 and extended on December 4, 2013. Funds from the term loan are being used to finance TRC's purchase of DMB TMV LLC's interest in TMV LLC as disclosed in the Current Report on Form 8-K on July 16, 2014. See Note 13 (Subsequent Events) of the Notes to Unaudited Consolidated Financial Statements for further detail regarding the Company's New Credit Facility. Our current and future capital resource requirements will be provided primarily from current cash and marketable securities, cash flow from on-going operations, proceeds from the sale of developed and undeveloped parcels, potential sales of assets, additional use of debt, proceeds from the reimbursement of public infrastructure costs through Community Facilities District bond debt (described below under "Off-Balance Sheet Arrangements"), and the issuance of common stock. During October 2012, we filed a shelf registration statement on Form S-3 that went effective in May 2013. Under the shelf registration statement, we may offer and sell in the future one or more offerings, consisting of common stock, preferred stock, debt securities, warrants or any combination of the foregoing. The shelf registration allows for efficient and timely access to capital markets and when combined with our other potential funding sources just noted, provides us with a variety of capital funding options that can then be used and appropriately matched to the funding need. 29 -------------------------------------------------------------------------------- On August 7, 2013, the Company announced that its Board of Directors declared a dividend of 3,000,000 warrants to purchase shares of Company common stock, par value $0.50 per share, or Warrants, to holders of record of Common Stock as of August 21, 2013, the Record Date. The Warrants were distributed to shareholders on August 28, 2013. Each Warrant entitles the holder to purchase one share of Common Stock at an initial exercise price of $40.00 per share and will be exercisable through August 31, 2016, subject to the Company's right to accelerate the expiration date under certain circumstances when the Warrants are in-the-money. Each holder of Common Stock as of the Record Date received a number of Warrants equal to the number of shares held multiplied by 0.14771, rounded to the nearest whole number. No cash or other consideration was paid in respect of any fractional Warrants that were rounded down. The Company issued the Warrants pursuant to a Warrant Agreement, dated as of August 7, 2013, between the Company, Computershare, Inc. and Computershare Trust Company, N.A., as warrant agent. Proceeds received from the exercise of the Warrants will be used to provide additional working capital for general corporate purposes, including development activities within the Company's industrial and residential projects and to continue its investments into water assets and water facilities. As noted above, at September 30, 2014, we had $50,866,000 in cash and securities and have $9,800,000 available on credit lines to meet any short-term liquidity needs. We continue to expect that substantial future investments will be required in order to develop our land assets. In order to meet these long-term capital requirements, we may need to secure additional debt financing and continue to renew our existing credit facilities. In addition to debt financing, we will use other capital alternatives such as joint ventures with financial partners, sales of assets, and the issuance of common stock. We will use a combination of the above funding sources to properly match funding requirements with the assets or development project being funded. There is no assurance in the future that we can obtain financing or that we can obtain financing at favorable terms. We believe we have adequate capital resources to fund our cash needs and our capital investment requirements as described earlier in the cash flow and liquidity discussions. Contractual Cash Obligations The following table summarizes our contractual cash obligations and commercial commitments as of September 30, 2014, to be paid over the next five years and thereafter: Payments Due by Period One Year or After 5 (In thousands) Total Less Years 2-3 Years 4-5 Years CONTRACTUAL OBLIGATIONS: Estimated water payments $ 286,248 $ 7,765 $ 15,942 $ 16,517 $ 246,024 DMB TMV LLC note 60,000 60,000 - - - Line of credit borrowings 20,200 20,200 - - - Cash contract commitments 9,893 7,684 1,138 - 1,071 Defined Benefit Plan 5,001 1,119 702 816 2,364 SERP 6,545 551 1,318 1,403 3,273 Tejon Ranch Conservancy 5,800 800 1,600 1,600 1,800 Interest on fixed rate debt 1,485 187 343 297 658 Long-term debt 4,518 59 499 543 3,417 Financing fees and interest 150 150 - - - Total contractual obligations $ 399,840 $ 98,515 $ 21,542 $ 21,176 $ 258,607 The categories above include purchase obligations and other long-term liabilities reflected on our balance sheet under GAAP. A "purchase obligation" is defined in Item 303(a)(5)(ii)(D) of Regulation S-K as "an agreement to purchase goods or services that is enforceable and legally binding on the registrant that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction." Based on this definition, the table above includes only those contracts that include fixed or minimum obligations. It does not include normal purchases, which are made in the ordinary course of business. On July 15, 2014, the Company acquired full ownership of TMV LLC. Outstanding contractual commitments for TMV LLC are now included as part of the cash contract commitments caption in the table above. On October 13, 2014 the Company finalized a New Credit Facility for $100,000,000. The New Credit Facility contains a $70,000,000 ten-year term loan and a $30,000,000 revolving line of credit. Since this transaction closed after the end of the 30 -------------------------------------------------------------------------------- quarter, we are not including the term loan in the table above. Funds from the term loan financed the payment of the DMB TMV LLC note in the above table. Please see Note 13 (Subsequent Events) of the Notes to Unaudited Consolidated Financial Statements for further detail. Our financial obligations to the Tejon Ranch Conservancy are prescribed in the Conservation Agreement. Our advances to the Tejon Ranch Conservancy are dependent on the occurrence of certain events and their timing, and are therefore subject to change in amount and period. The amounts included above are the minimum amounts we anticipate contributing through the year 2021. As discussed in Note 10 (Retirement Plans) of the Notes to Unaudited Consolidated Financial Statements, we have long-term liabilities for deferred employee compensation, including pension and supplemental retirement plans. Payments in the above table reflect estimates of future defined benefit plan contributions from the Company to the plan trust, estimates of payments to employees from the plan trust, and estimates of future payments to employees from the Company that are in the SERP program. We estimate that we will contribute approximately $600,000 to the pension plan over the next twelve months. Our cash contract commitments consist of contracts in various stages of completion related to infrastructure development within our industrial developments and entitlement costs related to our industrial and residential development projects. Also, included in the cash contract commitments are estimated fees earned during the second quarter of 2014 by a consultant, related to the entitlement of the Grapevine Development Area. The Company exited a consulting contract during the second quarter of 2014 related to the Grapevine Development and is obligated to pay an earned incentive fee at the time of successful receipt of project entitlements and at a value measurement date five-years after entitlements have been achieved for Grapevine. The final amount of the incentive fees will not be finalized until the future payment dates. The Company believes that net savings from exiting the contract over this future time period will more than offset the incentive payment costs. Our operating lease obligations are for office equipment, several vehicles, and a temporary trailer providing office space and average approximately $25,000 per month. At the present time, we do not have any capital lease obligations or purchase obligations outstanding. Estimated water payments include SWP contracts with Wheeler Ridge Maricopa Water Storage District, Tejon-Castac Water District, Tulare Water Storage, and Dudley-Ridge Water Storage District. These contracts for the supply of future water run through 2035. The Tulare Water Storage and Dudley-Ridge Water Storage District SWP contracts have now been transferred to AVEK for our use in the Antelope Valley. Future payments related to these contracts will be paid to AVEK beginning in 2014 and future years. In addition, as discussed in the Company's Annual Report on Form 10-K for the year ended December 31 2013 in Part I, Item 2 - Properties - Water Operations, in late 2013 we purchased the assignment of a contract to purchase water. The assigned water contract is with Nickel Family, LLC and obligates us to purchase 6,693 acre-feet of water starting in 2014 and running through 2044. Please refer to Note 4 (Long Term Water Assets) of the Notes to Unaudited Consolidated Financial Statements for additional information regarding water assets. Off-Balance Sheet Arrangements The following table shows contingent obligations we have with respect to certain bonds issued by the CFD: Amount of Commitment Expiration Per Period After 5 ($ in thousands) Total < 1 year 1 -3 Years 4 -5 Years Years OTHER COMMERCIAL COMMITMENTS: Standby letter of credit $ 5,426 $ 5,426 $ - $ - $ - Total other commercial commitments $ 5,426 $ 5,426 $ - $ - $ - TRPFFA, is a joint powers authority formed by Kern County and TCWD to finance public infrastructure within the Company's Kern County developments. TRPFFA created two CFDs, the West CFD and the East CFD. The West CFD has placed liens on 420 acres of the Company's land to secure payment of special taxes related to $28,620,000 of bond debt sold by TRPFFA for TRCC-West. The East CFD has placed liens on 1,931 acres of the Company's land to secure payments of special taxes related to $39,750,000 of bond debt sold by TRPFFA for TRCC-East. At TRCC-West, the West CFD has no additional bond debt approved for issuance. At TRCC-East, the East CFD has approximately $80,250,000 of additional bond debt authorized by TRPFFA. In connection with the sale of bonds there is a standby letter of credit for $5,426,000 related to the issuance of East CFD bonds. The standby letter of credit is in place to provide additional credit enhancement and cover approximately two years worth of interest on the outstanding bonds. This letter of credit will not be drawn upon unless the Company, as the largest landowner in the CFD, fails to make its property tax payments. As development occurs within TRCC-East there is a mechanism in the bond documents to reduce the amount of the letter of credit. The Company believes that the letter of credit will never be drawn 31-------------------------------------------------------------------------------- upon. This letter of credit is for a two-year period of time and will be renewed in two-year intervals as necessary. The annual cost related to the letter of credit is approximately $83,000. The Company maintains investments in joint ventures. The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting unless the venture is a variable interest entity, or VIE, and meets the requirements for consolidation. For a further discussion, please refer to Note 12 (Investment in Unconsolidated and Consolidated Joint Ventures) of the Notes to Unaudited Consolidated Financial Statements in this report. |