In March 2000, Nevada Land entered into a series of option agreements with a unit of Duke Energy North America, spanning 3 years, for the sale of 480 acres of land for $455,000 ($948 per acre) and 2,896 acre-feet of permitted water rights for $347,000 ($120 per acre-foot). The value of water rights depends on many factors, including location, seniority, and whether or not the water is transferable. Permitted rights are less senior, and typically less valuable, than certificated water rights. On February 15, 2001, it was announced that the Washoe County Planning Commission had approved this site for a plant to generate electric power for the Truckee Meadows and surrounding communities. A Regional Planning Commission hearing is scheduled for March 2001.
One of the constraints on beginning to supply Harquahala Valley water to municipalities is the need for the water to be conveyed through the Central Arizona Project Aqueduct ("CAP"). The Arizona State Legislature has passed legislation which commits the CAP to convey up to 20,000 acre-feet per annum of Harquahala groundwater to cities and communities in Arizona as an assured municipal water supply. Vidler is able to supply this water and is meeting with communities and developers in the Phoenix metropolitan area, some of whom need to secure further water supply to support expected growth. Vidler expects to enter the first such agreement in 2001.
The water storage facility is strategically located adjacent to the Central Arizona Project aqueduct, a conveyance canal running from Lake Havasu to Phoenix and Tucson. We believe that proximity to the CAP is a competitive advantage, because it minimizes the cost of water conveyance.
Long Term Holdings - - equity income of $1.8 million, being PICO's share of the net income and other events affecting shareholders' equity in Jungfraubahn, HyperFeed and other companies which we account for under the equity method; - - realized losses of approximately $7.6 million, including a $4.6 million pre-tax loss on the sale of PICO's investment in Conex and a $2.5 million write-down of our investment in MKG Enterprises; - - an operating loss of $2.3 million from Conex prior to its sale and a $1.5 million operating loss from SISCOM; and - - other net costs of approximately $5.5 million.
Operating expenses were little changed over the three year period, at $1.5 million in 1998, $1.8 million in 1999, and $1.6 million in 2000.
Over the past three years, Vidler has sold water rights and related assets which were not essential to its strategy in Nevada and Arizona. In 1998, the Company sold the Sylvan Reservoir in Colorado for $550,000. In 1999, Vidler sold 300 acre-feet of priority water rights at Wet Mountain, Colorado for $270,000. In 2000, Vidler sold water rights and the related land and tunnel assets to the City of Golden, Colorado for $1 million. Due to the potential for significant capital outlays for repairs and maintenance, Vidler management decided to dispose of the land and tunnel assets in conjunction with the water rights, even though this resulted in a loss of $1.2 million being recognized on the sale of the land and tunnel assets. It is anticipated that lease or sale of the remaining Colorado water rights will result in a modest overall return.
Revenues for 2000 also included $509,000 from the sale of 3,691 acre-feet of water which Vidler had banked at Semitropic. This sale resulted in a gross profit of $342,000, which helped to offset fixed costs for depreciation and operations and maintenance at Semitropic.
Sequoia manages its business so as to have a combined ratio of less than 100% each year; however, this is not always achieved. Sequoia's combined ratio, determined on the basis of generally accepted accounting principles, for the past 3 years have been:
The largest component of other revenue is earned premiums, which were $1.9 million in 2000, $1.9 million in 1999, and negative $159,000 in 1998.
At December 31, 2000, the consolidated investment portfolio was showing a net unrealized loss of approximately $7 million after tax, compared to a net gain of $575,000 at December 31, 1999, and a $3.1 million net unrealized loss at December 31, 1998.
PICO is committed to maintaining Sequoia's capital and statutory surplus at a minimum of $7.5 million. At December 31, 2000, Sequoia had approximately $23.4 million in capital and statutory surplus. PICO also aims to maintain Sequoia's A.M. Best rating at or above its present "A-" (Excellent) level. At some time in the future, this may require the injection of additional capital.
Reserves are money that we set aside to pay insurance claims. We strive to establish a balance between maintaining adequate reserves to pay claims while at the same time using our cash resources to invest in new companies.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH, IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
We engage in various water rights acquisition, management, development, and sale and lease activities. Accordingly, our long-term future profitability will be primarily dependent on our ability to develop and sell or lease water and water rights, and will be affected by various factors, including timing of acquisitions, transportation arrangements, and changing technology. To the extent we possess junior or conditional water rights, such rights may be subordinated to superior water right holders in periods of low flow or drought.
Our profitability is significantly affected by changes in the market price of water. Water prices may in the future fluctuate widely and are affected by climatic, demographic and technologic factors affecting demand.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities." As amended, SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value and recognize changes in fair value in earnings for the period of change unless the derivative qualifies as an effective hedge that offsets certain exposure. As a result of this adoption, the Company recorded a transition adjustment in the first quarter of 2001 that decreased net income by approximately $1 million, net of a $500,000 tax benefit and increased other comprehensive income by the same amount (no effect on shareholders' equity). These adjustments will be reported as a cumulative effect of change in accounting principle. Future effects on net income will depend on market conditions.
Prior to the sale, on November 3, 1999, the Company increased its ownership of Conex from 66% to 83% through the redemption of its remaining preferred shares and conversion of intercompany loans into common stock. On August 2, 1999, the Company increased its ownership of Conex from 32% to 66% through the redemption of preferred shares, the proceeds from which were used to exercise warrants for common shares. The consolidated results of operations for the year ended December 31, 1999 reflect the consolidation of Conex for the period August 3 to December 31. Previous to consolidation, the investment was accounted for using the equity method. Consequently, the results of operations for the year ended December 31, 1999 include 32% of the losses in the unconsolidated affiliate for the period January 1 to August 2, 1999. The reported results in 2000 include Conex as a consolidated subsidiary until September 8, 2000. Conex's primary asset is a 60% sino-foreign joint venture that manufactures wheeled and tracked excavators in The People's Republic of China.
PICO Holdings 1999 Stock Option Plan. PICO is authorized to issue 10,665 shares of common stock pursuant to awards granted as non-qualified stock options and other similar stock-based awards. On January 1, 1999, PICO granted 10,665 non-qualified common stock options to an officer of the Company at an exercise price of $13.25 per share. The options were immediately vested and expire in 10 years.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2000, 1999 and 1998, respectively: no dividend yield for all years; risk-free interest rates are different for each grant ranging from 5% to 6.97%; the expected lives of options are estimated at 10 years, 10 years and 7 years, respectively; and a volatility of 51% for the 2000 grants, 54% for the 1999 grants, and 62% for the 1998 grants.