Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 SJW Corp. Financial Results Conference Call. My name is Danicelle and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Suzy Papazian, Corporate Secretary and Attorney. Please proceed.
Thank you, operator. Welcome to the Full Year and Fourth Quarter 2012 Financial Results Conference Call for SJW Corp. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; And James Lynch, Chief Financial Officer.
Before we begin today's presentation, I would like to remind you that yesterday's press release and this presentation may contain forward-looking statements. The statements are only projections and actual results may differ materially. For a discussion of factors that could cause actual results to be different from statements in the release and in this presentation, we refer you to the press release and to our most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission.
All forward-looking statements are made as of today, and SJW Corp. disclaims any duty to update or revise such statements. You will have the opportunity to ask questions at the end of the presentation. As a reminder, this webcast will be available until April 22, 2013. You can access the release and the webcast at the corporate website, www.sjwcorp.com.
I will now turn the call over to Rich.
W. Richard Roth
Thank you, Suzy. Welcome everyone and thank you for joining us. I'm Rich Roth, Chairman and CEO of SJW Corp. On the call with me today are Jim Lynch, Chief Financial Officer of SJW Corp.; and Palle Jensen, Senior Vice President of Regulatory Affairs. As Jim will discuss in further detail, SJW delivered solid results for the year as water usage rebounded and the company continued to manage expenses. Further, looking back at 2012, SJW made tangible and substantial progress that I believe will lead to a better, stronger and more sustainable company at every level.
Several short examples follow: San Jose Water Company invested nearly $100 million in utility plant during 2012, upgrading critical infrastructure and improving service levels. This directly correlates to an increase in rate base, which in turn should fuel earnings for many years to come. Since forming SJWTX, Inc., our Texas water and wastewater utility, doing business with Canyon Lake Water Service Company in 2005, we have made 8 contiguous acquisitions, growing our service area from approximately 150 to more than 240 square miles and added nearly 3,500 customers, a 47% growth in customer base since inception. With our strong portfolio of water supplies, a growing wastewater business and continued additions to customer base both through organic growth and acquisitions, we are very excited about the prospect of expanding our business in Texas.
SJW Land Company achieved major milestones by securing long-term leases with credit-worthy tenants for its Tennessee properties. SJW Land Company's entire developed real estate portfolio is now fully leased with quality tenants and making a positive contribution to consolidated cash flow. Additionally, SJW Land Company was able to sell, at a gain, properties in Florida in 2012 and Connecticut in early 2013 that were approaching the end of their leases. I'm now going to turn the call over to Jim to provide you with a review and analysis of the financial results. After Jim's remarks, I will address regulatory matters and provide additional perspective on key operational and business issues. Jim?
James Patrick Lynch
Thank you, Rich, and thank you to our listeners for joining us today on our call. As Rich mentioned, SJW Corp. experienced stronger operating results in 2012 compared to 2011. While our quarterly revenue was essentially flat when compared to the same period a year ago, annual revenue increased by approximately 9.4%. Both fourth quarter and the annual result benefited from the recognition of certain memorandum and balancing accounts totaling approximately $3.5 million. This compared to $5.7 million, recognized in the fourth quarter of 2011, related to our Mandatory Conservation Revenue Adjustment Memorandum account or our MCRAM.
The quarterly and annual revenue also benefited from higher water rates, which increased by 6.4% and 7.4%, respectively. The higher rates resulted in part from the pass-through of consecutive annual 9% and 8% increases imposed by our California wholesale water supplier, the Santa Clara Valley Water District. Customer demand in the fourth quarter was approximately 3.4% lower when compared to 2011. Customer demand for the quarter was influenced by colder, wetter weather in both our Northern California and Texas service areas compared to 2011. For the year, customer demand was 2.3% higher than 2011. The increase in demand was due to drier warmer weather in Northern California during the third quarter and more seasonal weather throughout the year in Texas versus 2011 when Texas drought conditions led to higher customer usage.
As is the case in the third quarter, our fourth quarter revenue and annual results were also significantly impacted by a lower availability of surface water in California. Surface water production was 576 million gallons during the fourth quarter of 2012 compared to 634 million gallons in the fourth quarter of 2011 and 2.4 billion gallons for the year ended 2012 compared to 5.1 billion gallons in 2011.
Each billion gallon reduction in surface water production resulted in additional purchased water cost of approximately $2.2 million. On a positive note, as a result of the heavier than normal December rains, our surface water supply stood at approximately 1.2 billion gallons at the end of 2012 compared to our 5-year average for this time of year of approximately 300 million gallons.
Revenue for the quarter was $62.4 million compared to $62.3 million for the fourth quarter of 2011. The change in revenue included $4 million due to rate increases, $3.5 million related to the recognition of certain memorandum and balancing accounts and $360,000 related to new customers. The increases were partially offset by $2.1 million due to a decrease in customer usage. Fourth quarter 2011 revenue included recognition of the $5.7 million MCRAM balance previously discussed. Water production cost for the quarter were $23.1 million, an increase of $815,000 over the fourth quarter of 2011. The increase included $1.3 million in higher cost of purchased water and groundwater extraction charges and $127,000 due to a decrease in available surface water supply. This was partially offset by a $585,000 decrease in customer usage.
Operating expenses, excluding water production costs, were $25.2 million in the fourth quarter compared to $23.5 million in the fourth quarter of 2011. The $1.7 million increase consisted of $785,000 in higher administrative and general expenses, primarily attributable to payroll and benefit costs, and $411,000 in higher maintenance costs. In addition, we incurred $327,000 in higher depreciation expenses related to new utility plant assets placed in service. Nonoperating income and expenses included $912,000 related to the recognition of a nonrefundable developer deposit and interest expense on long-term and mortgage debt during the quarter of $5 million. Net income for the quarter was $5.9 million or $0.31 per diluted earnings per share compared to $6.6 million or $0.35 diluted earnings per share for the fourth quarter of 2011.
Turning to our annual results, operating revenue increased $22.6 million to $261.5 million in 2012 compared to $238.9 million in 2011. The increase included $17.6 million in rate increases, $5.5 million due to higher customer usage and $3.5 million related to the recognition of certain memorandum and balancing accounts. In addition, we experienced $1.6 million in additional revenue from new customers and new lease revenue from real estate operations. Again, the revenue increases are being compared against a 2011 balance that includes the MCRAM. Residential and business demand was approximately 4.3% and 5% higher, respectively, than 2011 and 7.7% and 2.2% lower, respectively, than amounts authorized in 2012, which is the final year of our 2010 rate case.
Water production cost for the year were $107 million, an increase of $15.2 million compared to 2011. The increase included $6.7 million in higher cost for purchased water and groundwater extraction charges, $5.3 million due to a decrease in available surface water supply and $3.2 million due to increased customer usage. Operating expenses, excluding water production costs, were $99 million in 2012 compared to $92.5 million in 2011. The $6.5 million increase consisted of $3.7 million in higher administrative and general expenses primarily due to higher payroll and benefit cost and recycled water retrofit cost.
In addition, operating expenses included increases of $1.9 million due to higher depreciation expense and $782,000 in higher property and non-income taxes related to new utility plant assets placed in service. Nonoperating income and expenses included the previously discussed nonrefundable developer deposit and $910,000 in a gain on sale of our Florida warehouse property. Interest expense on long-term and mortgage debt for the year was $20.2 million and included a full year of expense incurred on our $50 million senior note issued in June of 2011.
Net income for the year was $22.4 million or $1.18 per diluted earnings per share compared to $20.9 million or $1.11 diluted earnings per share in 2011. We added a net $24.8 million in utility plant during the fourth quarter, bringing our total self-funded utility plant additions for the year to $99.6 million. As of December 31, 2012, our net investment in utility plant totaled $832 million.
In 2013, we plan on adding $104.6 million in new utility plant, including an estimated $10 million in connection with bonus depreciation provisions of the American Taxpayer Relief Act of 2012. Over the next 5 years, we expect to invest an estimated $566 million in new utility plant, subject to regulatory approval. In addition, we anticipate spending up to $73.5 million over the next 4 years on upgrades to our Montevina Water Treatment Plant. This is also subject to regulatory approval.
Turning to our Land Company operations. During the third quarter of 2012, the company made a decision to sell its warehouse building located in Windsor, Connecticut. In December, the company entered into a purchase and sale agreement for the property for $9.2 million. The sale closed on February 1, 2013. As discussed in our third quarter call, in October, we entered into a lease on the remainder of our Tennessee warehouse facility that commenced the following month. As Rich mentioned, all of our Land Company developed properties are now fully leased. With that, I'd like to turn the call back over to Rich.
W. Richard Roth
Thank you, Jim. In March of 2010, SJW's wholly owned subsidiary, Texas Water Alliance Limited, applied for groundwater production and transportation permits for 50,000 acre-feet of water to meet future water needs in Canyon Lake Water Service Company's service area and in the communities and water utilities in Central Texas Hill country. Years ago, SJW recognized that Central Texas regional surface water supplies were not only fully allocated but also susceptible to reductions during extended droughts and from ongoing endangered species losses. Further, with the reliability of certain groundwater supplies in question, it became clearly evident that a new long-term sustainable and high-quality water supply should be identified and developed for the region. In late January 2013, Texas Water Alliance Limited's permit application was unanimously approved by the groundwater district in Gonzales County, Texas. Groundwater permits issued by a Texas groundwater district represent a critical and essential step in the development of a regional water supply solution. TWA may now engage in substantive discussions with public agencies, public water systems and private commercial interests.
Turning our attention to regulatory affairs, SJW has several regulatory filings still pending, and I'd like to provide you with a brief update on the filings and their key elements. It is important to note that while the economic regulatory environments are more time-consuming, complex and challenging, they continue to be constructive. For example, more than 2 years after filing an application seeking authorization to upgrade our Montevina Water Treatment Plant, we have recently had constructive discussions with the commissions division of rate fare advocates, and it is our hope and expectation that we will be able to reach agreement on a regulatory concept allowing for the improvements and their recovery in rates.
The processing of San Jose Water Company's general rate case continues to be in a lull since the official submission of the case and closure of the evidence in process, which took place with the submission of legal briefs in August of 2012. Since the proposed decision is now delayed, SJWC applied for and was granted interim rates effective January 1, 2013. We are unable, at this time, to provide an accurate timeline for a general rate case decision.
As reported last quarter, due to the continued decline in the water cost of capital adjustment mechanism benchmark, that is the average interest rate in Moody's AA utility bond, a reduction in authorized return on equity from 9.99% to 9.43% was implemented effective January 1, 2013. This resulted in a rate reduction of 0.53% or 53 basis points, which we offset by applying an equivalent interim general rate case increase in order to alleviate the possible customer confusion resulting from several cascading rate adjustments. Interim rates became effective January 1, 2013 and any difference between with the interim rates and the rates approved in the general rate case will be tracked in a memorandum account for future refund or recovery.
The last quarter brought an important change at the California Public Utilities Commission. Carla Peterman of Sacramento was appointed to replace Commissioner Timothy Simon. Ms. Peterman has served as a member of the California Energy Commission since 2011 and also served on the Board of Directors for The Utility Reform Network, or TURN, from 2008 to 2011. We welcome Ms. Peterman to the commission and look forward to working with her to resolve the many water-related issues facing California's regulated water utilities.
In Texas, we received the long-awaited Proposal for Decision, or PFD, on our general rate case application, which was filed in October of 2010. A key element of the Texas filing was a request for a rate-base determination, which will provide a baseline for all future rate filings for our Texas facility. As far as I know, this would be a first for a Texas investor-owned water company. Comments and reply comments on the PFD have now been filed, and a final decision is expected sometime in the first quarter of 2013.
In summary, the greater regulatory complexity demands that SJW's operations, strategic planning and capital allocation be carried out with greater awareness, acuity and discipline, while we remain fortunate to have businesses and customers in regions with relatively strong fundamentals and economic stability. The social, political and economic changes that have occurred over the last several years continue to present challenges to SJW and require us to refine and diligently execute our business strategy.
Worth noting is the relatively recent enhanced public interest in and scrutiny of SJW and other investor-owned water companies. Across United States, media sources and special-interest groups are becoming increasingly critical of investor-owned utilities. The days of the silent service water utility are behind us and there is a greater need for transparency, accountability and proactive engagement with customers and other stakeholders. By utilizing traditional approaches, as well as leveraging new technologies, we have begun the process of engaging and educating stakeholders on the challenges facing all water systems.
Finally, in January, the SJW board authorized an approximate 3% increase in SJW's annual dividend to $0.73 per share. In addition to demonstrating a strong commitment to our shareholders, the increase also underscores the board's confidence in the company's business plan.
Thank you, all, for your continued interest and investment in SJW. And with that, I'd like to turn the call back to the operator for questions.
[Operator Instructions] And it appears we have no questions at this time, so I'll now turn the call back to Mr. Richard Roth for closing remarks.
W. Richard Roth
Thank you, operator, and thank you, everyone, for listening. We look forward to talking to you at the end of the first quarter.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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